10-K 1 d67382_10-k.htm ANNUAL REPORT

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

FORM 10-K

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

For the fiscal year ended December 31, 2005

Commission file number 000-24272

FLUSHING FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

Delaware	11-3209278

(State or other jurisdiction of incorporation or organization)	(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)

Securities registered pursuant to Section 12(b) of the Act:	None.

Securities registered pursuant to Section 12(g) of the Act:	Common Stock $0.01 par value (and
	associated Preferred Stock Purchase Rights).

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in rule 405 of the Securities Act. o Yes x No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. o Yes x No

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

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

As of June 30, 2005, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the voting stock held by non-affiliates of the registrant was $335,811,000. This figure is based on the closing price on that date on the Nasdaq National Market for a share of the registrant’s Common Stock, $0.01 par value, which was $18.40.

The number of shares of the registrant’s Common Stock outstanding as of February 28, 2006 was 19,424,859 shares.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Company’s definitive Proxy Statement for the Annual Meeting of Stockholders to be held on May 16, 2006 are incorporated herein by reference in Part III.

TABLE OF CONTENTS

			Page

PART I

Item 1.	Business			1

GENERAL

		Overview		1
		Market Area and Competition		2
		Lending Activities		2
		Loan Portfolio Composition		2
		Loan Maturity and Repricing		6
		Multi-Family Residential Lending		6
		Commercial Real Estate Lending		7
		One-to-Four Family Mortgage Lending - Mixed-Use Properties		7
		One-to-Four Family Mortgage Lending - Residential Properties		8
		Construction Loans		9
		Small Business Administration Lending		9
		Commercial Business and Other Lending		9
		Loan Approval Procedures and Authority		10
		Loan Concentrations		10
		Loan Servicing		10
		Asset Quality		10
		Loan Collection		10
		Delinquent Loans and Non-performing Assets		11
		Real Estate Owned		12
		Environmental Concerns Relating to Loans		12
		Allowance for Loan Losses		12
		Investment Activities		16
		General		16
		Mortgage-backed securities		17
		Sources of Funds		20
		General		20
		Deposits		20
		Borrowings		23
		Subsidiary Activities		24
		Personnel		25
		Omnibus Incentive Plan		25

FEDERAL, STATE AND LOCAL TAXATION

		Federal Taxation		25
		General		25
		Bad Debt Reserves		25
		Distributions		25
		Corporate Alternative Minimum Tax		26
		State and Local Taxation		26
		New York State and New York City Taxation		26
		Delaware State Taxation		26

REGULATION

		General	26
		Holding Company Regulation	27
		Investment Powers	28
		Real Estate Lending Standards	28
		Loans-to-One Borrower Limits	28
		Insurance of Accounts	29
		Qualified Thrift Lender Test	29
		Transactions with Affiliates	30
		Restrictions on Dividends and Capital Distributions	30
		Federal Home Loan Bank System	31
		Assessments	31
		Branching	31
		Community Reinvestment	31
		Brokered Deposits	31
		Capital Requirements	32
		General	32
		Tangible Capital Requirement	32
		Leverage and Core Capital Requirement	32
		Risk-Based Requirement	32
		Federal Reserve System	33
		Financial Reporting	33
		Standards for Safety and Soundness	33
		Gramm-Leach-Bliley Act	33
		USA Patriot Act	34
		Prompt Corrective Action	34
		Federal Securities Laws	34
		Available Information	35
Item 1A.		Risk Factors	35
		Effect of Interest Rates	35
		Lending Activities	35
		Competition	36
		Local Economic Conditions	36
		Legislation and Proposed Changes	37
		Certain Anti-Takeover Provisions	37
Item 1B.		Unresolved Staff Comments	37
Item 2.	Properties		38
Item 3.	Legal Proceedings		38
Item 4.	Submission of Matters to a Vote of Security Holders		38

PART II

Item 5.	Market for the Registrant’s Common Equity, Related Stockholder Matters
		and Issuer Purchases of Equity Securities	39
Item 6.	Selected Financial Data		40
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results
		of Operations	42
		General	42
		Overview	42
		Interest Rate Sensitivity Analysis	46
		Interests Rate Risk	48
		Analysis of Net Interest Income	48
		Rate/Volume Analysis	50
		Comparison of Operating Results for the Years Ended December 31, 2005 and 2004	50
		Comparison of Operating Results for the Years Ended December 31, 2004 and 2003	52
		Liquidity, Regulatory Capital and Capital Resources	54
		Critical Accounting Policies	56
		Contractual Obligations	56
		Impact of New Accounting Standards	57
Item 7A.		Quantitative and Qualitative Disclosures About Market Risk	58
Item 8.	Financial Statements and Supplementary Data		59
Item 9.	Changes in and Disagreements with Accountants on Accounting and
		Financial Disclosure	95
Item 9A.		Controls and Procedures	95
Item 9B.		Other Information	96

PART III

Item 10.		Directors and Executive Officers of the Registrant	96
Item 11.		Executive Compensation	96
Item 12.		Security Ownership of Certain Beneficial Owners and Management and
		Related Stockholder Matters	96
Item 13.		Certain Relationships and Related Transactions	97
Item 14.		Principal Accounting Fees and Services	97

PART IV

Item 15.		Exhibits, Financial Statement Schedules	97
		(a) 1. Financial Statements	97
		(a) 2. Financial Statement Schedules	97
		(a) 3. Exhibits Required by Securities and Exchange Commission Regulation S-K	98

SIGNATURES

POWER OF ATTORNEY

iii

CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS

Statements contained in this Annual Report on Form 10-K (this “Annual Report”) relating to plans, strategies, economic performance and trends, projections of results of specific activities or investments and other statements that are not descriptions of historical facts may be forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking information is inherently subject to risks and uncertainties, and actual results could differ materially from those currently anticipated due to a number of factors, which include, but are not limited to, factors discussed under the captions “Business — General — Allowance for Loan Losses” and “Business — General — Market Area and Competition” in Item 1 below, “Risk Factors” in Item 1A below, in “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Overview” in Item 7 below, and elsewhere in this Annual Report and in other documents filed by the Company with the Securities and Exchange Commission from time to time. 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.

PART I

Item 1. Business.

GENERAL

Overview

Flushing Financial Corporation (the “Holding Company”) is a Delaware corporation organized in May 1994 at the direction of Flushing Savings Bank, FSB (the “Bank”). The Bank was organized in 1929 as a New York State chartered mutual savings bank. In 1994, the Bank converted to a federally chartered mutual savings bank and changed its name from Flushing Savings Bank to Flushing Savings Bank, FSB. The Bank converted from a federally chartered mutual savings bank to a federally chartered stock savings bank on November 21, 1995, at which time the Holding Company acquired all of the stock of the Bank. The primary business of the Holding Company at this time is the operation of its wholly owned subsidiary, the Bank. The Bank owns three subsidiaries: Flushing Preferred Funding Corporation, Flushing Service Corporation, and FSB Properties Inc. The activities of the Holding Company are primarily funded by dividends, if any, received from the Bank. Flushing Financial Corporation’s common stock is traded on the NASDAQ National Market under the symbol “FFIC.”

The Holding Company also owns Flushing Financial Capital Trust I (the “Trust”), a special purpose business trust formed to issue capital securities. The Trust used the proceeds from the issuance of these capital securities, and the proceeds from the issuance of its common stock, to purchase junior subordinated debentures from the Holding Company. Since the Holding Company does not have sufficient equity at risk, as defined in FASB Interpretation No. 46R, effective January 1, 2004, the Trust is no longer included in the consolidated financial statements.

Unless otherwise disclosed, the information presented in this Annual Report reflects the financial condition and results of operations of the Holding Company, the Bank and the Bank’s subsidiaries on a consolidated basis (collectively, the “Company”). At December 31, 2005, the Company had total assets of $2.4 billion, deposits of $1.4 billion and stockholders’ equity of $176.5 million.

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) mortgage loan surrogates such as mortgage-backed securities; and (3) U.S. government securities, corporate fixed-income securities and other marketable securities. The Bank also originates certain other loans, including construction loans, Small Business Administration (“SBA”) loans and other small business and consumer loans. The Bank’s revenues are derived principally from interest on its mortgage and other loans and mortgage-backed securities portfolio, and interest and dividends on other investments in its securities portfolio. The Bank’s primary sources of funds are deposits, Federal Home Loan Bank of New York (“FHLB-NY”) borrowings, repurchase agreements, principal and interest payments on loans, mortgage-backed and other securities, proceeds from sales of securities and, to a lesser extent, proceeds from sales of loans. As a federal savings bank, the Bank’s primary regulator is the Office of Thrift Supervision (“OTS”). The

Bank’s deposits are insured to the maximum allowable amount by the Federal Deposit Insurance Corporation (“FDIC”). Additionally, the Bank is a member of the Federal Home Loan Bank (“FHLB”) system.

In addition to operating the Bank, the Holding Company invests primarily in U.S. government securities, mortgage-backed securities, and corporate securities. The Holding Company also holds a note evidencing a loan that it made to an employee benefit trust established by the Holding Company for the purpose of holding shares for allocation or distribution under certain employee benefit plans of the Holding Company and the Bank (the “Employee Benefit Trust”). The funds provided by this loan enabled the Employee Benefit Trust to acquire 2,328,750 shares, or 8% of the common stock issued in our initial public offering.

On December 21, 2005, the Company announced the signing of a definitive agreement to acquire Atlantic Liberty Financial Corporation (“Atlantic Liberty”), and its subsidiary Atlantic Liberty Savings, FA, based in Brooklyn, New York. Under the terms of the agreement, Atlantic Liberty’s shareholders may elect to receive $24.00 in cash, 1.43 Holding Company shares per Atlantic Liberty share owned, or a combination thereof, subject to aggregate allocation to all Atlantic Liberty’s shareholders of 65% stock / 35% cash. The transaction has an aggregate value of approximately $41.9 million, based on the Holding Company’s share price at the close of business on December 20, 2005.

Atlantic Liberty operates two branches in prime areas of Brooklyn, New York. As of December 31, 2005, Atlantic Liberty had total assets of $177.0 million, loans of $121.3 million, deposits of $103.9 million and shareholders’ equity of $28.4 million. The Holding Company expects the transaction to be accretive to both earnings per share and tangible book value per share. The transaction will provide the Bank with a presence on Montague Street and on Avenue J in Brooklyn, two highly attractive markets.

On November 18, 2003, the Board of Directors declared a three-for-two split of the Holding Company’s common stock in the form of a 50% stock dividend, which was paid on December 15, 2003. Each stockholder received one additional share for every two shares of common stock held at the record date, December 1, 2003. Cash was paid in lieu of fractional shares and no dividend was paid on shares held in treasury. Share and per share data for prior years in this Annual Report have been adjusted to reflect this stock dividend.

Market Area and Competition

The Bank is a community oriented savings institution offering a wide variety of financial services to meet the needs of the communities it serves. The Bank’s main office is in Flushing, New York, located in the Borough of Queens. It currently operates out of its main office and eight branch offices, located in the New York City Boroughs of Queens, Brooklyn, and Manhattan, and in Nassau County, New York. The Bank maintains its executive offices in Lake Success in Nassau County, New York. Substantially all of the Bank’s mortgage loans are secured by properties located in the New York City metropolitan area. During the last three years, real estate values in the New York City metropolitan area have been relatively stable or increasing, which has favorably impacted the Bank’s asset quality. See “— Asset Quality” and “Risk Factors – Local Economic Conditions” included in Item 1A of this Annual Report. There can be no assurance that the stability of these economic factors will continue.

For a discussion of the Company’s business strategies, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Overview — Management Strategy” included in Item 7 of this Annual Report.

Lending Activities

Loan Portfolio Composition. The Bank’s loan portfolio consists primarily of mortgage loans secured by multi-family residential, commercial real estate, one-to-four family mixed-use property, one-to-four family residential property, and construction loans. In addition, the Bank also offers SBA loans, other small business loans and consumer loans. Substantially all the Bank’s mortgage loans are secured by properties located within the Bank’s market area. At December 31, 2005, the Bank had gross loans outstanding of $1,879.9 million (before the allowance for loan losses and net deferred costs).

Beginning in late 2001, the Bank shifted its focus from originating one-to-four family residential property mortgage loans to the origination of multi-family residential, commercial real estate and one-to-four family mixed-use property mortgage loans. These loans generally have higher yields than one-to-four family residential properties, and include prepayment penalties that the Bank collects if the loans pay in full prior to the contractual maturity. From December 31, 2001 to December 31, 2005, multi-family residential mortgage loans increased $418.4 million, or 113.2%, commercial real estate mortgage loans increased $184.7 million, or 86.1%, one-to-four family mixed-use property mortgage loans increased $368.0 million, or 335.1%, while one-to-four family residential property mortgage loans decreased $217.4 million, or 61.8%. The Bank expects to continue this emphasis through marketing and by maintaining competitive interest rates and origination fees. The Bank’s marketing efforts include frequent contacts with mortgage brokers and other professionals who serve as referral sources. From time-to-time, the Bank may purchase loans from mortgage bankers and other financial institutions. Loans purchased comply with the Bank’s underwriting standards.

Fully underwritten one-to-four family residential mortgage loans generally are considered by the banking industry to have less risk than other types of loans. Multi-family residential, commercial real estate and one-to-four family mixed-use property mortgage loans generally have higher yields than one-to-four family residential property mortgage loans and shorter terms to maturity, but typically involve higher principal amounts and generally expose the lender to a greater risk of credit loss than one-to-four family residential property mortgage loans. The Bank’s increased emphasis on multi-family residential, commercial real estate and one-to-four family mixed-use property mortgage loans has increased the overall level of credit risk inherent in the Bank’s loan portfolio. The greater risk associated with multi-family residential, commercial real estate and one-to-four family mixed-use property mortgage loans could require the Bank to increase its provision for loan losses and to maintain an allowance for loan losses as a percentage of total loans in excess of the allowance currently maintained by the Bank. To date, the Bank has not experienced significant losses in its multi-family residential, commercial real estate and one-to-four family mixed-use property mortgage loan portfolios, and has determined that, at this time, additional provisions are not required.

The Bank’s mortgage loan portfolio consists of adjustable rate mortgage (“ARM”) loans and fixed-rate mortgage loans. Interest rates charged by the Bank on loans are affected primarily by the demand for such loans, the supply of money available for lending purposes, the rate offered by the Bank’s competitors and the creditworthiness of the borrower. Many of those factors are, in turn, affected by regional and national economic conditions, and the fiscal, monetary and tax policies of the federal government.

In general, consumers show a preference for ARM loans in periods of high interest rates and for fixed-rate loans when interest rates are low. In periods of declining interest rates, the Bank may experience refinancing activity in ARM loans, as borrowers show a preference to lock-in the lower rates available on fixed-rate loans. In the case of ARM loans originated by the Bank, volume and adjustment periods are affected by the interest rates and other market factors as discussed above as well as consumer preferences. The Bank has not in the past, nor does it currently, originate ARM loans that provide for negative amortization.

The Bank’s lending activities are subject to federal and state laws and regulations. See “— Regulation.”

The following table sets forth the composition of the Bank’s loan portfolio at the dates indicated.

	At December 31,

	2005						2004						2003						2002						2001

	Amount			Percent of Total			Amount			Percent of Total			Amount			Percent of Total			Amount			Percent of Total			Amount			Percent of Total

	*(Dollars in thousands)*
Mortgage Loans:
Multi-family residential	$	788,071			41.92	%	$	646,922			42.61	%	$	541,837			42.53	%	$	452,663			38.54	%	$	369,651			34.45	%
Commercial real estate		399,081			21.23			334,048			22.00			290,332			22.79			257,054			21.88			214,410			19.98
One-to-four family -
mixed-use property		477,775			25.42			332,805			21.92			226,225			17.76			170,499			14.51			109,809			10.23
One-to-four family -
residential (1)		134,641			7.17			151,737			10.00			178,474			14.01			262,944			22.38			351,992			32.81
Co-operative apartment (2)		2,161			0.11			3,132			0.21			3,729			0.29			5,205			0.44			6,601			0.62
Construction		49,522			2.63			31,460			2.07			23,622			1.85			17,827			1.52			13,807			1.29

Gross mortgage loans		1,851,251			98.48			1,500,104			98.81			1,264,219			99.23			1,166,192			99.27			1,066,270			99.38

Small Business Administration
loans		9,239			0.49			5,633			0.37			4,931			0.39			4,301			0.37			3,911			0.36

Commercial business and other
loans		19,362			1.03			12,505			0.82			4,894			0.38			4,185			0.36			2,814			0.26

Gross loans		1,879,852			100.00	%		1,518,242			100.00	%		1,274,044			100.00	%		1,174,678			100.00	%		1,072,995			100.00	%

Unearned loan fees and deferred
costs, net		8,409						4,798						2,030						1,463						787

Less: Allowance for loan losses		(6,385	)					(6,533	)					(6,553	)					(6,581	)					(6,585	)

Loans, net	$	1,881,876					$	1,516,507					$	1,269,521					$	1,169,560					$	1,067,197


(1)	One-to-four family residential mortgage loans also include home equity and condominium loans. At December 31, 2005, gross home equity loans totaled $17.2 million and condominium loans totaled $10.1 million.

(2)	Consists of loans secured by shares representing interests in individual co-operative units that are generally owner occupied.

The following table sets forth the Bank’s loan originations (including the net effect of refinancings) and the changes in the Bank’s portfolio of loans, including purchases, sales and principal reductions for the years indicated:

	For the years ended December 31,

*(In thousands)*	2005		2004		2003


Mortgage Loans

At beginning of year	$	1,500,104	$	1,264,219	$	1,166,192

Mortgage loans originated:
Multi-family residential		222,065		203,741		188,242
Commercial real estate		103,090		92,526		89,134
One-to-four family mixed-use property		186,700		136,804		85,336
One-to-four family residential		13,186		17,699		17,412
Co-operative apartment		—		302		35
Construction		46,414		25,923		18,884

Total mortgage loans originated		571,455		476,995		399,043

Mortgage loans purchased:
Multi-family residential		1,009		—		—
One-to-four family mixed-use property		—		—		190
One-to-four family residential		—		—		592

Total mortgage loans purchased		1,009		—		782

Less:
Principal reductions		217,199		233,327		288,916
Mortgage loan sales		4,118		7,783		12,882
Mortgage loan foreclosures		—		—		—

At end of year	$	1,851,251	$	1,500,104	$	1,264,219


SBA, Commercial Business & Other Loans

At beginning of year	$	18,138	$	9,825	$	8,486

Loans originated:
SBA loans		12,249		4,781		5,626
Small business loans		12,410		11,642		2,561
Other loans		1,537		2,172		3,982

Total other loans originated		26,196		18,595		12,169

Less:
Sales		6,630		2,472		4,065
Repayments		8,940		7,794		6,650
Charge-offs		163		16		115

At end of year	$	28,601	$	18,138	$	9,825

Loan Maturity and Repricing. The following table shows the maturity of the Bank’s commercial mortgage loan, construction loan and non-mortgage loan portfolios at December 31, 2005. Scheduled repayments are shown in the maturity category in which the payments become due.

*(In thousands)*	Commercial Mortgage Loans		Construction		SBA		Commercial Business and Other		Total


Amounts due within one year	$	43,742	$	44,461	$	1,976	$	8,989	$	99,168

Amounts due after one year:
One to two years		37,802		4,833		970		6,421		50,026
Two to three years		35,249		228		886		2,015		38,378
Three to five years		66,636		—		1,454		924		69,014
Over five years		215,652		—		3,953		1,013		220,618

Total due after one year		355,339		5,061		7,263		10,373		378,036

Total amounts due	$	399,081	$	49,522	$	9,239	$	19,362	$	477,204


Sensitivity of loans to changes in
interest rates - loans due
after one year:
Fixed rate loans	$	83,202	$	3,358	$	54	$	8,974	$	95,588
Adjustable rate loans		272,137		1,703		7,209		1,399		282,448

Total loans due after one year	$	355,339	$	5,061	$	7,263	$	10,373	$	378,036

Multi-Family Residential Lending. Loans secured by multi-family residential properties were $788.1 million, or 41.92% of gross loans, at December 31, 2005. The Bank’s multi-family residential mortgage loans had an average principal balance of $487,000 at December 31, 2005, and the largest multi-family residential mortgage loan held in the Bank’s portfolio had a principal balance of $12.6 million. The Bank offers both fixed-rate and adjustable rate multi-family residential mortgage loans, with maturities up to 30 years.

In underwriting multi-family residential mortgage loans, the Bank reviews the expected net operating income generated by the real estate collateral securing the loan, the age and condition of the collateral, the financial resources and income level of the borrower and the borrower’s experience in owning or managing similar properties. The Bank typically requires debt service coverage of at least 125% of the monthly loan payment. Multi-family residential mortgage loans can be made up to 80% of the appraised value or the purchase price of the property, whichever is less. The Bank generally relies on the income generated by the property as the primary means by which the loan is repaid. However, personal guarantees may be obtained for additional security from these borrowers. The Bank typically orders an environmental report on its multifamily and commercial real estate loans.

Loans secured by multi-family residential property generally involve a greater degree of risk than residential mortgage loans and carry larger loan balances. The increased credit risk is a result of several factors, including the concentration of principal in a smaller number of loans and borrowers, the effects of general economic conditions on income producing properties and the increased difficulty in evaluating and monitoring these types of loans. Furthermore, the repayment of loans secured by multi-family residential property is typically dependent upon the successful operation of the related property. If the cash flow from the property is reduced, the borrower’s ability to repay the loan may be impaired. Loans secured by multi-family residential property also may involve a greater degree of environmental risk. The Bank seeks to protect against this risk through obtaining an environmental report. See “—Asset Quality — REO.”

The Bank’s fixed-rate multi-family mortgage loans are originated for terms up to 15 years and are competitively priced based on market conditions and the Bank’s cost of funds. The Bank originated and purchased $44.3 million, $23.9 million and $57.8 million of fixed-rate multi-family mortgage loans in 2005, 2004 and 2003, respectively. At December 31, 2005, $213.4 million, or 27.1%, of the Bank’s multi-family mortgage loans consisted of fixed rate loans.

originate ARM loans at an initial rate lower than the index as a result of a discount on the spread for the initial adjustment period. Multi-family adjustable-rate mortgage loans generally are not subject to limitations on interest rate increases either on an adjustment period or aggregate basis over the life of the loan. The Bank originated and purchased multi-family ARM loans totaling $178.8 million, $179.8 million and $130.5 million during 2005, 2004 and 2003, respectively. At December 31, 2005, $574.7 million, or 72.9%, of the Bank’s multi-family mortgage loans consisted of ARM loans.

Commercial Real Estate Lending. Loans secured by commercial real estate were $399.1 million, or 21.23% of the Bank’s gross loans, at December 31, 2005. The Bank’s commercial real estate mortgage loans are secured by improved properties such as office buildings, hotels/motels, nursing homes, small business facilities, strip shopping centers, warehouses, and, to a lesser extent, religious facilities. At December 31, 2005, the Bank’s commercial real estate mortgage loans had an average principal balance of $714,000, and the largest of such loans, which was secured by a multi-tenant shopping center, had a principal balance of $11.9 million. Commercial real estate mortgage loans are generally originated in a range of $100,000 to $6.0 million. Commercial real estate mortgage loans are generally offered at adjustable rates tied to a market index for terms of five to 15 years, with adjustment periods from one to five years. Commercial real estate mortgage loans are also made at fixed interest rates for terms of seven, 10 or 15 years.

In underwriting commercial real estate mortgage loans, the Bank employs the same underwriting standards and procedures as are employed in underwriting multi-family residential mortgage loans.

Commercial real estate mortgage loans generally carry larger loan balances than one-to-four family residential mortgage loans and involve a greater degree of credit risk for the same reasons applicable to multi-family loans.

The Bank’s fixed-rate commercial mortgage loans are originated for terms up to 15 years and are competitively priced based on market conditions and the Bank’s cost of funds. The Bank originated $17.7 million, $22.1 million and $37.0 million of fixed-rate commercial mortgage loans in 2005, 2004 and 2003, respectively. At December 31, 2005, $103.4 million, or 25.9%, of the Bank’s commercial mortgage loans consisted of fixed rate loans.

The Bank offers ARM loans with adjustment periods of one to five years and for terms of up to 15 years. Interest rates on ARM loans currently offered by the Bank are adjusted at the beginning of each adjustment period based upon a fixed spread above the FHLB-NY corresponding Regular Advance Rate. From time to time, the Bank may originate ARM loans at an initial rate lower than the index as a result of a discount on the spread for the initial adjustment period. Commercial adjustable-rate mortgage loans generally are not subject to limitations on interest rate increases either on an adjustment period or aggregate basis over the life of the loan. The Bank originated commercial ARM loans totaling $85.4 million, $70.5 million and $52.1 million during 2005, 2004 and 2003, respectively. At December 31, 2005, $295.7 million, or 74.1%, of the Bank’s commercial mortgage loans consisted of ARM loans.

One-to-Four Family Mortgage Lending – Mixed-Use Properties. The Bank offers mortgage loans secured by one-to-four family mixed-use properties. These properties contain up to four residential dwelling units and a commercial unit. The Bank offers both fixed-rate and adjustable-rate one-to-four family mixed-use property mortgage loans with maturities of up to 30 years and a general maximum loan amount of $750,000. Loan originations generally result from applications received from mortgage brokers and mortgage bankers, existing or past customers, and persons who respond to Bank marketing efforts and referrals. One-to-four family mixed-use property mortgage loans were $477.8 million, or 25.42% of gross loans, at December 31, 2005.

During the three-year period ended December 31, 2005, the Bank focused its origination efforts with respect to one-to-four family mortgage loans on mixed-use properties. The primary income-producing units of these properties are the residential dwelling units. One-to-four family mixed-use property mortgage loans generally have a higher interest rate than residential mortgage loans. One-to-four family mixed-use property mortgage loans also have a higher degree of risk than residential mortgage loans, as repayment of the loan is usually dependent on the income produced from renting the residential units and the commercial unit. At December 31, 2005, one-to-four family mixed-use property mortgage loans amounted to $477.8 million, as compared to $332.8 million at December 31, 2004, $226.2 million at December 31, 2003 and $170.5 million at December 31, 2002, representing an increase of $307.3 million during the three-year period.

In underwriting one-to-four family mixed-use property mortgage loans, the Bank employs the same underwriting standards as are employed in underwriting multi-family residential mortgage loans.

The Bank’s fixed-rate one-to-four family mixed-use property mortgage loans typically are originated for a term of 15 years and are competitively priced based on market conditions and the Bank’s cost of funds. The Bank originated and purchased $39.4 million, $22.4 million and $26.7 million of fixed-rate one-to-four family mixed-use property

mortgage loans in 2005, 2004 and 2003, respectively. At December 31, 2005, $132.5 million, or 27.7%, of the Bank’s one-to-four family mixed-use property mortgage loans consisted of fixed rate loans.

The Bank offers ARM loans with adjustment periods typically of five years and for terms of up to 30 years. Interest rates on ARM loans currently offered by the Bank are adjusted at the beginning of each adjustment period based upon a fixed spread above the FHLB-NY corresponding Regular Advance Rate. From time to time, the Bank may originate ARM loans at an initial rate lower than the index as a result of a discount on the spread for the initial adjustment period. One-to-four family mixed-use property adjustable-rate mortgage loans generally are not subject to limitations on interest rate increases either on an adjustment period or aggregate basis over the life of the loan. The Bank originated and purchased one-to-four family mixed-use property ARM loans totaling $147.3 million, $114.4 million and $58.8 million during 2005, 2004 and 2003, respectively. At December 31, 2005, $345.3 million, or 72.3%, of the Bank’s one-to-four family mixed-use property mortgage loans consisted of ARM loans.

One-to-Four Family Mortgage Lending – Residential Properties. The Bank offers mortgage loans secured by one-to-four family residential properties, including townhouses and condominium units. For purposes of the description contained in this section, one-to-four family residential mortgage loans, co-operative apartment loans and home equity loans are collectively referred to herein as “residential mortgage loans.” The Bank offers both fixed-rate and adjustable-rate residential mortgage loans with maturities of up to 30 years and a general maximum loan amount of $750,000. Loan originations generally result from applications received from mortgage brokers and mortgage bankers, existing or past customers, and referrals. Residential mortgage loans were $136.8 million, or 7.3% of gross loans, at December 31, 2005.

During the three-year period ended December 31, 2005, interest rates on residential mortgage loans declined, and, at times, were at their lowest levels in over 40 years. As a result of the low interest rates available, the Bank’s existing borrowers have been refinancing their higher costing residential mortgage loans at the current lower rates. The Bank did not actively pursue this refinancing market, but instead focused on higher-yielding mortgage loan products. As a result, the Bank’s portfolio of residential mortgage loans has declined over the three-year period.

The Bank generally originates residential mortgage loans in amounts up to 80% of the appraised value or the sale price, whichever is less. The Bank may make residential mortgage loans with loan-to-value ratios of up to 90% of the appraised value of the mortgaged property; however, private mortgage insurance is required whenever loan-to-value ratios exceed 80% of the appraised value of the property securing the loan.

The Bank originates residential mortgage loans to self-employed individuals within the Bank’s local community without verification of the borrower’s level of income, provided that the borrower’s stated income is considered reasonable for the borrower’s type of business. These loans involve a higher degree of risk as compared to the Bank’s other fully underwritten residential mortgage loans as there is a greater opportunity for self-employed borrowers to falsify or overstate their level of income and ability to service indebtedness. This risk is mitigated by the Bank’s policy to limit the amount of one-to-four family residential mortgage loans to 80% of the appraised value of the property or the sale price, whichever is less. The Bank believes that its willingness to make such loans is an aspect of its commitment to be a community-oriented bank. The Bank originated $2.1 million and $3.4 million in loans of this type during 2004 and 2003, respectively. The Bank did not originate any of these loans during 2005.

The Bank’s fixed-rate residential mortgage loans typically are originated for terms of 15 and 30 years and are competitively priced based on market conditions and the Bank’s cost of funds. The Bank originated and purchased $0.1 million, $3.6 million and $2.7 million of 15-year fixed-rate residential mortgage loans in 2005, 2004 and 2003, respectively. The Bank also originated and purchased $4.1 million of 30-year fixed rate residential mortgage loans in 2003. The Bank did not originate or purchase any 30-year fixed rate residential mortgages in 2005 and 2004. These loans have been retained to provide flexibility in the management of the Company’s interest rate sensitivity position. At December 31, 2005, $79.4 million, or 58.1%, of the Bank’s residential mortgage loans consisted of fixed rate loans.

The Bank offers ARM loans with adjustment periods of one, three, five, seven or ten years. Interest rates on ARM loans currently offered by the Bank are adjusted at the beginning of each adjustment period based upon a fixed spread above the average yield on United States treasury securities, adjusted to the U.S. Treasury constant maturity index as published weekly by the Federal Reserve Board. From time to time, the Bank may originate ARM loans at an initial rate lower than the U.S. Treasury constant maturity index as a result of a discount on the spread for the initial adjustment period. ARM loans generally are subject to limitations on interest rate increases of 2% per adjustment period and an aggregate adjustment of 6% over the life of the loan. The Bank originated and purchased adjustable rate residential mortgage loans totaling $13.1 million, $14.4 million and $11.3 million during 2005, 2004 and 2003, respectively. At December 31, 2005, $57.4 million, or 41.9%, of the Bank’s residential mortgage loans consisted of ARM loans.

The retention of ARM loans in the Bank’s portfolio helps reduce the Bank’s exposure to interest rate risks. However, in an environment of rapidly increasing interest rates, it is possible for the interest rate increase to exceed the maximum aggregate adjustment on one-to-four family residential ARM loans and negatively affect the spread between the Bank’s interest income and its cost of funds.

ARM loans generally involve credit risks different from those inherent in fixed-rate loans, primarily because if interest rates rise, the underlying payments of the borrower rise, thereby increasing the potential for default. However, this potential risk is lessened by the Bank’s policy of originating one-to-four family residential ARM loans with annual and lifetime interest rate caps that limit the increase of a borrower’s monthly payment.

Home equity loans are included in the Bank’s portfolio of residential mortgage loans. These loans are offered as adjustable-rate “home equity lines of credit” on which interest only is due for an initial term of 10 years and thereafter principal and interest payments sufficient to liquidate the loan are required for the remaining term, not to exceed 30 years. These loans also may be offered as fully amortizing closed-end fixed-rate loans for terms up to 15 years. All home equity loans are made on one-to-four family residential and condominium units, which are owner-occupied, and are subject to an 80% loan-to-value ratio computed on the basis of the aggregate of the first mortgage loan amount outstanding and the proposed home equity loan. They are generally granted in amounts from $25,000 to $300,000. The Loan Committee approves loans in excess of $300,000. The underwriting standards for home equity loans are substantially the same as those for residential mortgage loans. At December 31, 2005, home equity loans totaled $17.2 million, or 0.91%, of gross loans.

Construction Loans. The Bank’s construction loans primarily have been made to finance the construction of one-to-four family residential properties, multi-family residential properties and residential condominiums. The Bank also, to a limited extent, finances the construction of commercial real estate. The Bank’s policies provide that construction loans may be made in amounts up to 70% of the estimated value of the developed property and only if the Bank obtains a first lien position on the underlying real estate. In addition, the Bank generally requires personal guarantees on all construction loans. Construction loans are generally made with terms of two years or less. Advances are made as construction progresses and inspection warrants, subject to continued title searches to ensure that the Bank maintains a first lien position. Construction loans outstanding at December 31, 2005 totaled $49.5 million, or 2.63%, of gross loans.

Construction loans involve a greater degree of risk than other loans because, among other things, the underwriting of such loans is based on an estimated value of the developed property, which can be difficult to ascertain in light of uncertainties inherent in such estimations. In addition, construction lending entails the risk that the project may not be completed due to cost overruns or changes in market conditions.

Small Business Administration Lending. These loans are extended to small businesses and are guaranteed by the SBA to a maximum of 85% of the loan balance for loans with balances of $150,000 or less, and to a maximum of 75% of the loan balance for loans with balances greater than $150,000. The maximum amount the SBA can guarantee is $1,500,000. All SBA loans are underwritten in accordance with SBA Standard Operating Procedures and the Bank generally obtains personal guarantees and collateral, where applicable, from SBA borrowers. Typically, SBA loans are originated at a range of $50,000 to $1.5 million with terms ranging from three to 25 years. SBA loans are generally offered at adjustable rates tied to the prime rate (as published in the Wall Street Journal) with adjustment periods of one to three months. The Bank generally sells the guaranteed portion of the SBA loan in the secondary market and retains the servicing rights on these loans, collecting a servicing fee of approximately 1%. At December 31, 2005, SBA loans totaled $9.2 million, representing 0.49% of gross loans.

Commercial Business and Other Lending. The Bank originates other loans for business, personal, or household purposes. Total commercial business and other loans outstanding at December 31, 2005 amounted to $19.4 million, or 1.03% of gross loans. Business loans are personally guaranteed by the owners, and may also be secured by additional collateral, including equipment and inventory. The maximum loan size for a business loan is $2,000,000, with a maximum term of 25 years. Consumer loans generally consist of passbook loans and overdraft lines of credit. Generally, unsecured consumer loans are limited to amounts of $5,000 or less for terms of up to five years. The Bank offers credit cards to its customers through a third party financial institution and receives an origination fee and transactional fees for processing such accounts, but does not underwrite or finance any portion of the credit card receivables.

The underwriting standards employed by the Bank for consumer and other loans include a determination of the applicant’s payment history on other debts and assessment of the applicant’s ability to meet payments on all of his or her obligations. In addition to the creditworthiness of the applicant, the underwriting process also includes a comparison of

the value of the collateral, if any, to the proposed loan amount. Unsecured loans tend to have higher risk, and therefore command a higher interest rate.

Loan Approval Procedures and Authority. The Bank’s Board-approved lending policies establish loan approval requirements for its various types of loan products. The Bank’s Residential Mortgage Lending Policy (which applies to all one-to-four family mortgage loans, including residential and mixed-use property) establishes authorized levels of approval. One-to-four family mortgage loans that do not exceed $500,000 require two signatures for approval, one of which must be from the President, Executive Vice President or a Senior Vice President (collectively, “Authorized Officers”) and the other from a Senior Underwriter, Manager, Underwriter or Junior Underwriter in the Residential Mortgage Loan Department (collectively, “Loan Officers”). For one-to-four family mortgage loans from $500,000 to $750,000, three signatures are required for approval, at least two of which must be from the Authorized Officers, and the other one may be a Loan Officer. The Loan Committee, the Executive Committee or the full Board of Directors also must approve one-to-four family mortgage loans in excess of $750,000. Pursuant to the Bank’s Commercial Real Estate Lending Policy, all loans secured by commercial real estate and multi-family residential properties, must be approved by the President or the Executive Vice President upon the recommendation of the Commercial Loan Department Officer. Such loans in excess of $700,000 also require Loan or Executive Committee or Board approval. In accordance with the Bank’s Business Loan Policy, all business loans up to $100,000, SBA loans up to $500,000 and taxi medallion loans up to $650,000 must be approved by the Business Loan Committee, and by the Management Loan Committee. Business loans in excess of $100,000 up to $500,000, and SBA loans in excess of $500,000 up to $1,500,000, must be approved by the Management Loan Committee and the Loan Committee of the Bank’s Board of Directors. Commercial business and other loans require two signatures for approval, one of which must be from an Authorized Officer. The Bank’s Construction Loan Policy requires that the Loan or Executive Committee or the Board of Directors of the Bank must approve all construction loans. Any loan, regardless of type, that deviates from the Bank’s written loan policies must be approved by the Loan or Executive Committee or the Bank’s Board of Directors.

For all loans originated by the Bank, upon receipt of a completed loan application, a credit report is ordered and certain other financial information is obtained. An appraisal of the real estate intended to secure the proposed loan is required. An independent appraiser designated and approved by the Bank currently performs such appraisals. The Bank’s staff appraiser reviews the appraisals. The Bank’s Board of Directors annually approves the independent appraisers used by the Bank and approves the Bank’s appraisal policy. It is the Bank’s policy to require borrowers to obtain title insurance and hazard insurance on all real estate first mortgage loans prior to closing. Borrowers generally are required to advance funds on a monthly basis together with each payment of principal and interest to a mortgage escrow account from which the Bank makes disbursements for items such as real estate taxes and, in some cases, hazard insurance premiums.

Loan Concentrations. The maximum amount of credit that the Bank can extend to any single borrower or related group of borrowers generally is limited to 15% of the Bank’s unimpaired capital and surplus. Applicable law and regulations permit an additional amount of credit to be extended, equal to 10% of unimpaired capital and surplus, if the loan is secured by readily marketable collateral, which generally does not include real estate. See “Regulation.” However, it is currently the Bank’s policy not to extend such additional credit. At December 31, 2005, the Bank had no loans in excess of the maximum dollar amount of loans to one borrower that the Bank was authorized to make. At that date, the three largest concentrations of loans to one borrower consisted of loans secured by a combination of commercial real estate and multi-family income producing properties with an aggregate principal balance of $23.7 million, $21.0 million and $18.7 million for each of the three borrowers, respectively.

Loan Servicing. At December 31, 2005, the Bank was servicing $12.4 million of mortgage loans and $14.5 million of SBA loans for others. The Bank’s policy is to retain the servicing rights to the mortgage and SBA loans that it sells in the secondary market. In order to increase revenue, management intends to continue this policy.

Asset Quality

Loan Collection. When a borrower fails to make a required payment on a loan, the Bank takes a number of steps to induce the borrower to cure the delinquency and restore the loan to current status.

In the case of mortgage loans, we personally contact the borrower after the loan becomes 30 days delinquent. At that time we attempt to make arrangements with the borrower to either bring the loan to current status or begin making payments according to an agreed upon schedule. For the majority of delinquent loans, the borrower is able to bring the loan current within a reasonable time. When the borrower has indicated that he/she will be unable to bring the loan current, or due to other circumstances which, in our opinion, indicate the borrower will be unable to bring the loan

current within a reasonable time, or if we deem the collateral value to have been impaired, we classify the loan as non-performing. All loans classified as non-performing, which includes all loans past due ninety days or more, are classified as non-accrual unless there is, in management’s opinion, compelling evidence the borrower will bring the loan current in the immediate future. At December 31, 2005, there was one loan pass due 90 days or more and still accruing interest.

Each non-performing loan is reviewed on an individual basis. Upon classifying a loan as non-performing, we review available information and conditions that relate to the status of the loan, including the estimated value of the loan’s collateral and any legal considerations that may affect the borrower’s ability to continue to make payments to the Bank. We then decide, based upon the available information, if we will consider the sale of the loan or retention of the loan. If we retain the loan, we may continue to work with the borrower to collect the amounts due or start foreclosure proceedings. If a foreclosure action is instituted and the loan is not brought current, paid in full, or refinanced before the foreclosure sale, the real property securing the loan generally is sold at foreclosure or by the Bank as soon thereafter as practicable.

Once we decide to sell a loan, we determine what we would consider to be adequate consideration to be obtained when that loan is sold, based on the facts and circumstances related to that loan. We will then contact investors and brokers, seeking interest in purchasing the loan. We have been successful in finding buyers for our non-performing loans offered for sale that are willing to pay what we consider to be adequate consideration. Terms of the sale include cash due upon closing of the sale, no contingencies or recourse to the Bank, servicing is released to the buyer and time is of the essence. These sales usually close within a reasonably short time period.

We implemented this strategy of selling non-performing loans during 2003. This has allowed the Bank to optimize its return by quickly converting its non-performing loans to cash, which can then be reinvested in earning assets. This strategy also allows the Bank to avoid lengthy and costly legal proceedings that may occur with non-performing loans. The Bank sold eleven delinquent mortgage loans totaling $3.1 million, eleven delinquent mortgage loans totaling $4.3 million, and sixteen delinquent mortgage loans totaling $6.1 million during the years ended December 31, 2005, 2004 and 2003, respectively. The Bank did not realize a gain or loss on any of these mortgage loan sales. There can be no assurances that the Bank will continue this strategy in future periods, or if continued, we will be able to find buyers to pay adequate consideration.

On mortgage loans or loan participations purchased by the Bank, for which the seller retains the servicing rights, the Bank receives monthly reports with which it monitors the loan portfolio. Based upon servicing agreements with the servicers of the loans, the Bank relies upon the servicer to contact delinquent borrowers, collect delinquent amounts and initiate foreclosure proceedings, when necessary, all in accordance with applicable laws, regulations and the terms of the servicing agreements between the Bank and its servicing agents. At December 31, 2005, the Bank held $1.4 million of loans that were serviced by others.

In the case of commercial business or other loans, the Bank generally sends the borrower a written notice of non-payment when the loan is first past due. In the event payment is not then received, additional letters and phone calls generally are made in order to encourage the borrower to meet with a representative of the Bank to discuss the delinquency. If the loan still is not brought current and it becomes necessary for the Bank to take legal action, which typically occurs after a loan is delinquent 45 days or more, the Bank may attempt to repossess personal or business property that secures an SBA loan, commercial business loan or consumer loan.

Delinquent Loans and Non-performing Assets. The Bank generally discontinues accruing interest on delinquent loans when a loan is 90 days past due or foreclosure proceedings have been commenced, whichever first occurs. At that time, previously accrued but uncollected interest is reversed from income. Loans in default 90 days or more as to their maturity date but not their payments, however, continue to accrue interest as long as the borrower continues to remit monthly payments.

The following table sets forth information regarding all non-accrual loans and loans which are 90 days or more delinquent and still accruing, at the dates indicated. During the years ended December 31, 2005, 2004 and 2003, the amounts of additional interest income that would have been recorded on non-accrual loans, had they been current, totaled $103,000, $50,000 and $34,000, respectively. These amounts were not included in the Bank’s interest income for the respective periods.

	At December 31,

*(Dollars in thousands)*	2005			2004			2003			2002			2001

Non-accrual loans:
Multi-family residential	$	861		$	—		$	—		$	—		$	225
Commercial real estate		—			—			—			2,537			—
One-to-four family mixed-use property		—			—			—			—			309
One-to-four family residential		960			659			525			816			1,649
Co-operative apartment		—			—			—			20			20
Construction		—			—			—			—			—

Total non-accrual mortgage loans		1,821			659			525			3,373			2,203
Other non-accrual loans		101			252			157			219			117

Total non-accrual loans		1,922			911			682			3,592			2,320
Loans 90 days or more delinquent
and still accruing		530			—			—			—			—

Total non-performing loans		2,452			911			682			3,592			2,320
Foreclosed real estate		—			—			—			—			93
Investment securities		—			—			—			700			—

Total non-performing assets	$	2,452		$	911		$	682		$	4,292		$	2,413

Troubled debt restructurings	$	—		$	—		$	—		$	—		$	—

Non-performing loans to gross loans		0.13	%		0.06	%		0.05	%		0.31	%		0.22	%
Non-performing assets to total assets		0.10	%		0.04	%		0.04	%		0.26	%		0.16	%

Real Estate Owned (REO). The Bank aggressively markets any REO properties, when and if, they are acquired through foreclosure. At December 31, 2005, 2004 and 2003, the Bank did not own any such properties.

Environmental Concerns Relating to Loans. The Bank currently obtains environmental reports in connection with the underwriting of commercial real estate loans, and typically obtains environmental reports in connection with the underwriting of multi-family loans. For all other loans, the Bank obtains environmental reports only if the nature of the current or, to the extent known to the Bank, prior use of the property securing the loan indicates a potential environmental risk. However, the Bank may not be aware of such uses or risks in any particular case, and, accordingly, there is no assurance that real estate acquired by the Bank in foreclosure is free from environmental contamination or that, if any such contamination or other violation exists, the Bank will not have any liability therefor.

Allowance for Loan Losses

The Bank has established and maintains on its books an allowance for loan losses that is designed to provide reserves for 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 experiences, trends in the volume of non-accrual loans and regional and national economic conditions. Management reviews the quality of loans and reports to the Loan Committee of the Board of Directors on a monthly basis. The determination of the amount of the allowance for loan losses includes estimates that are susceptible to significant changes due to changes in appraised values of collateral, national and regional economic conditions and other factors. 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 also are taken into account in determining the appropriate amount of the allowance.

The determination of the amount of the allowance for loan losses includes a review of loans on which full collectibility is not reasonably assured. The primary risk element considered by management with respect to each one-to-four family residential, co-operative apartment, SBA, commercial business and consumer loan is any current

delinquency on the loan. The primary risk elements considered with respect to commercial real estate, multi-family residential and one-to-four family mixed-use property mortgage loans are the financial condition of the borrower, the sufficiency of the collateral (including changes in the value of the collateral) and the record of payment.

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. During the five-year period ended December 31, 2005, the Bank incurred total net charge-offs of $336,000. This reflects a significant improvement over the loss experience of the 1990s. In addition, the regional economy has improved since 2001, including significant increases in real estate values. As a result of these improvements, and despite the increase in the loan portfolio and shift to loans with greater risk, the Bank has not considered it necessary to provide a provision for loan losses during any of the years in the five-year period ended December 31, 2005. Management has concluded that, during this time period, the allowance was sufficient to absorb losses inherent in the loan portfolio.

The Bank’s determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the OTS and the FDIC, which can require the establishment of additional general allowances or specific loss allowances or require charge-offs. Such authorities may require the Bank to make additional provisions to the allowance based on their judgments about information available to them at the time of their examination. An OTS policy statement provides guidance for OTS examiners in determining whether the levels of general valuation allowances for savings institutions are adequate. The policy statement requires that if a savings institution’s general valuation allowance policies and procedures are deemed to be inadequate, the general valuation allowance would be compared to certain ranges of general valuation allowances deemed acceptable by the OTS depending in part on the savings institution’s level of classified assets.

Management of the Bank believes that the current allowance for loan losses is adequate in light of current economic conditions, the composition of its loan portfolio and other available information and the Board of Directors concurs in this belief. Accordingly, the Bank did not record a provision for loan losses for the years ended December 31, 2005, 2004 and 2003. At December 31, 2005, the total allowance for loan losses was $6.4 million, representing 260.39% of each of non-performing loans and non-performing assets, compared to 717.29% for both of these ratios at December 31, 2004. The Bank continues to monitor and, as necessary, modify the level of its allowance for loan losses in order to maintain the allowance at a level which management considers adequate to provide for probable loan losses based on available information.

Many factors may require additions to the allowance for loan losses in future periods beyond those currently revealed. These factors include future adverse changes in economic conditions, changes in interest rates and changes in the financial capacity of individual borrowers (any of which may affect the ability of borrowers to make repayments on loans), changes in the real estate market within the Bank’s lending area and the value of collateral, or a review and evaluation of the Bank’s loan portfolio in the future. The determination of the amount of the allowance for loan losses includes estimates that are susceptible to significant changes due to changes in appraised values of collateral, national and regional economic conditions, interest rates and other factors. In addition, the Bank’s increased emphasis on multi-family residential, commercial real estate and one-to-four family mixed-use property mortgage loans can be expected to increase the overall level of credit risk inherent in the Bank’s loan portfolio. The greater risk associated with these loans, as well as construction loans, could require the Bank to increase its provisions for loan losses and to maintain an allowance for loan losses as a percentage of total loans that is in excess of the allowance currently maintained by the Bank. Provisions for loan losses are charged against net income. See “—Lending Activities” and “—Asset Quality.”

The following table sets forth changes in, and the balance of, the Bank’s allowance for loan losses.

	At and for the years ended December 31,

*(Dollars in thousands)*	2005			2004			2003			2002			2001


Balance at beginning of year	$	6,533		$	6,553		$	6,581		$	6,585		$	6,721

Provision for loan losses		—			—			—			—			—

Loans charged-off:
Multi-family residential		—			—			—			—			(2	)
Commercial real estate		—			—			—			—			—
One-to-four family mixed-use property		—			—			—			—			—
One-to-four family residential		—			—			—			—			(1	)
Co-operative apartment		—			—			—			—			—
Construction		—			—			—			—			—
Other		(164	)		(28	)		(155	)		(12	)		(146	)

Total loans charged-off		(164	)		(28	)		(155	)		(12	)		(149	)

Recoveries:
Mortgage loans		3			3			125			3			6
Other loans		13			5			2			5			7

Total recoveries		16			8			127			8			13

Net charge-offs		(148	)		(20	)		(28	)		(4	)		(136	)

Balance at end of year	$	6,385		$	6,533		$	6,553		$	6,581		$	6,585


Ratio of net charge-offs during the year to average loans outstanding during the year		0.01	%		0.00	%		0.00	%		0.00	%		0.01	%
Ratio of allowance for loan losses to gross loans at end of the year		0.34	%		0.43	%		0.51	%		0.56	%		0.61	%
Ratio of allowance for loan losses to non-performing loans at the end of the year		260.39	%		717.29	%		960.86	%		183.23	%		283.85	%
Ratio of allowance for loan losses to non-performing assets at the end of the year		260.39	%		717.29	%		960.86	%		153.34	%		272.94	%

The following table sets forth the Bank’s allocation of its allowance for loan losses to the total amount of loans in each of the categories listed at the dates indicated. The numbers contained in the “Amount” column indicate the allowance for loan losses allocated for each particular loan category. The numbers contained in the column entitled “Percentage of Loans in Category to Total Loans” indicate the total amount of loans in each particular category as a percentage of the Bank’s loan portfolio.

	At December 31,

	2005					2004					2003				2002				2001

Loan Category	Amount		Percent of Loans in Category to Total loans			Amount		Percent of Loans in Category to Total loans				Amount	Percent of Loans in Category to Total loans			Amount	Percent of Loans in Category to Total loans			Amount	Percent of Loans in Category to Total loans

*(Dollars in thousands)*
Mortgage Loans:

Multi-family residential	$	1,216		41.92	%	$	1,010		42.61	%	$	1,251	42.53	%	$	1,286	38.54	%	$	982	34.45	%

Commercial real estate		1,272		21.23			1,715		22.00			2,740	22.79			2,807	21.88			3,007	19.98

One-to-four family mixed-use property		1,544		25.42			1,494		21.92			803	17.76			550	14.51			431	10.23

One-to-four family residential		524		7.17			718		10.00			684	14.01			965	22.38			1,439	32.81

Co-operative apartment		161		0.11			207		0.21			127	0.29			119	0.44			109	0.62

Construction		64		2.63			55		2.07			56	1.85			52	1.52			34	1.29

Gross mortgage loans		4,781		98.48			5,199		98.81			5,661	99.23			5,779	99.27			6,002	99.38

Small Business Administration loans		964		0.49			663		0.37			553	0.39			499	0.37			418	0.36

Commercial business and other loans		640		1.03			671		0.82			339	0.38			303	0.36			165	0.26

Total loans	$	6,385		100.00	%	$	6,533		100.00	%	$	6,553	100.00	%	$	6,581	100.00	%	$	6,585	100.00	%

Investment Activities

General. The investment policy of the Company, which is approved by the Board of Directors, is designed primarily to manage the interest rate sensitivity of its overall assets and liabilities, to generate a favorable return without incurring undue interest rate and credit risk, to complement the Bank’s lending activities and to provide and maintain liquidity. In establishing its investment strategies, the Company considers its business and growth strategies, the economic environment, its interest rate risk exposure, its interest rate sensitivity “gap” position, the types of securities to be held, and other factors. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Overview—Management Strategy” in Item 7 of this Annual Report.

Federally chartered savings institutions have authority to invest in various types of assets, including U.S. government obligations, securities of various federal agencies, mortgage-backed and mortgage-related securities, certain certificates of deposit of insured banks and savings institutions, certain bankers acceptances, reverse repurchase agreements, loans of federal funds, and, subject to certain limits, corporate securities, commercial paper and mutual funds. The Company primarily invests in mortgage-backed securities, U. S. government obligations, and mutual funds which purchase these same instruments. These types of investments have limited credit risk as they are backed by the full faith and credit of the U. S. Government.

The Investment Committee of the Bank and the Company meets quarterly to monitor investment transactions and to establish investment strategy. The Board of Directors reviews the investment policy on an annual basis and investment activity on a monthly basis.

The Company classifies its investment securities as available for sale. Unrealized gains and losses (other than unrealized losses considered other than temporary) for available-for-sale securities are excluded from earnings and included in Accumulated Other Comprehensive Income (a separate component of equity), net of taxes. At December 31, 2005, the Company had $337.8 million in securities available for sale which represented 14.4% of total assets. These securities had an aggregate market value at December 31, 2005 that was approximately 1.9 times the amount of the Company’s equity at that date. The cumulative balance of unrealized net losses on securities available for sale was $5.0 million, net of taxes, at December 31, 2005. As a result of the magnitude of the Company’s holdings of securities available for sale, changes in interest rates could produce significant changes in the value of such securities and could produce significant fluctuations in the equity of the Company. See Note 5 of Notes to Consolidated Financial Statements, included in Item 8 of this Annual Report. The Company may from time to time sell securities and realize a loss if the proceeds of such sale may be reinvested in loans or other assets offering more attractive yields.

At December 31, 2005, the Company’s investment in Shay Assets Management, Inc. mutual funds was $19.8 million, or 11.2% of the Company’s equity. There are no other issuer’s securities, excluding government agencies, that either alone, or together with any investments in the securities of any affiliate(s) of such issuer, exceeded 10% of the Company’s equity.

The table below sets forth certain information regarding the amortized cost and market values of the Company’s and Bank’s securities portfolio, interest bearing deposits and federal funds sold, at the dates indicated. Securities available for sale are recorded at market value. See Note 5 of Notes to Consolidated Financial Statements, included in Item 8 of this Annual Report.

	At December 31,

	2005				2004				2003

	Amortized Cost		Market Value		Amortized Cost		Market Value		Amortized Cost		Market Value

	*(In thousands)*
Securities available for sale
Bonds and other debt securities:
U.S. government and agencies	$	10,942	$	10,911	$	12,866	$	12,868	$	27,621	$	27,784
Corporate debentures		—		—		—		—		1,000		1,035

Total bonds and other debt securities		10,942		10,911		12,866		12,868		28,621		28,819

Mutual funds		20,296		19,767		20,600		20,352		20,003		19,873

Equity securities:
Common stock		619		619		779		1,416		243		1,384
Preferred stock		5,493		5,270		5,600		5,480		6,211		6,240

Total equity securities		6,112		5,889		6,379		6,896		6,454		7,624

Mortgage-backed securities:
FNMA		152,412		147,802		217,278		215,657		256,705		255,858
REMIC and CMO		91,369		89,561		89,416		89,164		103,838		103,932
FHLMC		57,470		55,735		78,453		78,094		95,794		95,524
GNMA		7,789		8,096		12,043		12,714		22,901		24,079

Total mortgage-backed securities		309,040		301,194		397,190		395,629		479,238		479,393

Total securities available for sale		346,390		337,761		437,035		435,745		534,316		535,709


Interest-bearing deposits and Federal funds sold		4,396		4,396		1,186		1,186		6,927		6,927


Total	$	350,786	$	342,157	$	438,221	$	436,931	$	541,243	$	542,636

Mortgage-backed securities. At December 31, 2005, the Company had $301.2 million invested in mortgage-backed securities, of which $24.8 million was invested in adjustable-rate mortgage-backed securities. The mortgage loans underlying these adjustable-rate securities generally are subject to limitations on annual and lifetime interest rate increases. The Company anticipates that investments in mortgage-backed securities may continue to be used in the future to supplement mortgage-lending activities. Mortgage-backed securities are more liquid than individual mortgage loans and may be used more easily to collateralize obligations of the Bank.

The following table sets forth the Company’s mortgage-backed securities purchases, sales and principal repayments for the years indicated:

	For the years ended December 31,

	2005			2004			2003

	*(In thousands)*
Balance at beginning of year	$	395,629		$	479,393		$	319,255

Purchases of mortgage-backed securities		29,627			53,649			396,742

Amortization of unearned premium, net of accretion of unearned discount		(1,219	)		(1,851	)		(2,976	)

Net change in unrealized losses on mortgage-backed securities available for sale		(6,285	)		(1,716	)		(7,178	)

Sales of mortgage-backed securities		(28,643	)		(15,634	)		(36,027	)

Principal repayments received on mortgage-backed securities		(87,915	)		(118,212	)		(190,423	)

Net (decrease) increase in mortgage-backed securities		(94,435	)		(83,764	)		160,138


Balance at end of year	$	301,194		$	395,629		$	479,393

While mortgage-backed securities carry a reduced credit risk as compared to whole loans, such securities remain subject to the risk that a fluctuating interest rate environment, along with other factors such as the geographic distribution of the underlying mortgage loans, may alter the prepayment rate of such mortgage loans and so affect both the prepayment speed and value of such securities. The Company does not own any derivative instruments that are extremely sensitive to changes in interest rates.

The table below sets forth certain information regarding the amortized cost, estimated fair value, annualized weighted average yields and maturities of the Company’s debt and equity securities at December 31, 2005. The stratification of balances is based on stated maturities. Equity securities are shown as immediately maturing, except for preferred stocks with stated redemption dates, which are shown in the period they are scheduled to be redeemed. Assumptions for repayments and prepayments are not reflected for mortgage-backed securities. The Company carries these investments at their estimated fair value in the consolidated financial statements.

	One year or Less				One to Five Years				Five to Ten Years				More than Ten Years					Total Securities

	Amor- tized Cost		Weigh- ted Average Yield		Amor- tized Cost		Weigh- ted Average Yield		Amor- tized Cost		Weigh- ted Average Yield		Amor- tized Cost		Weigh- ted Average Yield			Average Remain- ing Years to Maturity	Amor- tized Cost		Esti- mated Fair Value		Weigh- ted Ave- rage Yield

	*(Dollars in thousands)*
Securities available for sale

Bonds and other debt securities:
U.S. government and agencies	$	—	—	%	$	4,998	3.00	%	$	5,944	4.15	%	$	—		—	%	5.44	$	10,942	$	10,911	3.62	%

Total bonds and other debt securities		—	—			4,998	3.00			5,944	4.15			—		—		5.44		10,942		10,911	3.62


Mutual funds		20,296	4.12			—	—			—	—			—		—		N/A		20,296		19,767	4.12

Equity securities:
Common stock		619	7.80			—	—			—	—			—		—		N/A		619		619	7.80
Preferred stock		4,813	5.63			180	7.48			—	—			500		9.75		N/A		5,493		5,270	6.07

Total equity securities		5,432	5.88			180	7.48			—	—			500		9.75		N/A		6,112		5,889	6.25

Mortgage-backed securities:
FNMA		—	—			4,281	4.61			5,364	5.77			142,767		4.82		16.21		152,412		147,802	4.85
REMIC and CMO		—	—			—	—			1,279	4.08			90,090		4.63		19.07		91,369		89,561	4.62
FHLMC		—	—			11,859	4.02			727	5.89			44,884		4.57		14.88		57,470		55,735	4.47
GNMA		—	—			—	—			—	—			7,789		7.33		22.57		7,789		8,096	7.33

Total mortgage-backed securities		—	—			16,140	4.18			7,370	5.49			285,530		4.79		16.97		309,040		301,194	4.77


Interest-bearing deposits		4,396	3.97			—	—			—	—			—		—		N/A		4,396		4,396	3.97


Total securities	$	30,124	4.41	%	$	21,318	3.93	%	$	13,314	4.89	%	$	286,030		4.80	%	16.57	$	350,786	$	342,157	4.71	%

Sources of Funds

General. Deposits, FHLB-NY borrowings, repurchase agreements, principal and interest payments on loans, mortgage-backed and other securities, and proceeds from sales of loans and securities are the Company’s primary sources of funds for lending, investing and other general purposes.

Deposits. The Bank offers a variety of deposit accounts having a range of interest rates and terms. The Bank’s deposits principally consist of savings accounts, money market accounts, demand accounts, NOW accounts and certificates of deposit. The Bank has a relatively stable retail deposit base drawn from its market area through its nine full service offices. The Bank seeks to retain existing depositor relationships by offering quality service and competitive interest rates, while keeping deposit growth within reasonable limits. It is management’s intention to balance its goal to maintain competitive interest rates on deposits while seeking to manage its cost of funds to finance its strategies.

The Bank’s core deposits, consisting of passbook accounts, NOW accounts, money market accounts, and non-interest bearing demand accounts, are typically more stable and lower costing than other sources of funding. However, the flow of deposits into a particular type of account is influenced significantly by general economic conditions, changes in prevailing money market and other interest rates, and competition. The Bank has seen an increase in its deposits in each of the past three years. During 2003, the nation’s economy began to expand, with the growth continuing in 2004 and 2005. Despite the improvement in the stock market during 2004 and 2005, the Bank saw an increase in it’s due to depositors during 2005 of $171.5 million. The Federal Reserve began increasing short-term interest rates in the second half of 2004, and continued increasing short-term rates throughout 2005. The Bank has responded by increasing interest rates paid on savings, money market and certificate of deposit accounts. While new deposits were obtained at rates that were higher than the weighted average cost of existing deposits, the Bank believes that by extending the term of new deposits it is better protected against future interest rate increases. The cost of deposits increased to 2.95% in the fourth quarter of 2005 from 2.48% in the fourth quarter of 2004. While we are unable to predict the direction of future interest rate changes, if interest rates continue to rise during 2006, the result will be continued increases in the Company’s cost of deposits, and narrowing the Company’s net interest margin.

Included in deposits are certificates of deposit with a balance of $100,000 or more totaling $255.3 million, $165.6 million and $124.2 million at December 31, 2005, 2004 and 2003, respectively.

The Bank utilizes brokered deposits as an additional funding source, with $31.3 million at December 31, 2005. Brokered deposits are marketed through national brokerage firms to their customers in $1,000 increments. The Bank maintains only one account for the total deposit amount, while the detailed records of owners are maintained by the brokerage firms. The Depository Trust Company is used as the clearing house, maintaining each deposit under the name of CEDE & Co. The deposits are transferable just like a stock or bond investment and the customer can open the account with only a phone call, just like buying a stock or bond. This provides a large deposit for the Bank at a lower operating cost since the Bank only has one account to maintain versus several accounts with multiple interest and maturity checks.

Unlike non-brokered deposits, where the deposit amount can be withdrawn with a penalty for any reason, including increasing interest rates, a brokered deposit can only be withdrawn in the event of the death, or court declared mental incompetence, of the depositor. This allows the Bank to better manage the maturity of its deposits. Currently, the rates offered by the Bank for brokered deposits are comparable to that offered for retail certificates of deposit of similar size and maturity.

The following table sets forth the distribution of the Bank’s deposit accounts at the dates indicated and the weighted average nominal interest rates on each category of deposits presented.

	At December 31,

	2005								2004								2003

	Amount		Percent of Total Deposits			Weighted Average Nominal Rate			Amount		Percent of Total Deposits			Weighted Average Nominal Rate			Amount		Percent of Total Deposits			Weighted Average Nominal Rate

	*(Dollars in thousands)*

Savings accounts	$	273,753		18.66	%		1.45	%	$	216,772		16.77	%		0.50	%	$	216,988		18.55	%		0.50	%
NOW accounts (1)		42,029		2.87			0.50			48,463		3.75			0.50			42,809		3.66			0.50
Demand accounts (1)		58,678		4.00			—			49,540		3.83			—			41,397		3.54			—
Mortgagors’ escrow deposits		19,423		1.32			0.21			16,473		1.27			0.24			11,334		0.97			0.40

Total		393,883		26.85			1.07			331,248		25.62			0.41			312,528		26.72			0.43


Money market accounts		175,247		11.94			2.47			258,235		19.98			1.88			263,621		22.53			1.96

Certificate of deposit accounts with original maturities of:
Less than 6 Months		2,684		0.18			0.74			5,302		0.41			0.75			7,343		0.63			0.95
6 to less than 12 Months		66,965		4.56			3.20			35,147		2.72			1.24			48,970		4.19			1.45
12 to less than 30 Months		412,527		28.11			3.50			312,173		24.15			2.60			244,640		20.91			2.51
30 to less than 48 Months (3)		59,623		4.06			3.41			72,499		5.61			3.36			68,914		5.89			3.72
48 to less than 72 Months (4)		292,380		19.94			4.52			224,491		17.36			4.89			196,001		16.75			5.08
72 Months or more		63,978		4.36			4.95			53,702		4.15			4.96			27,892		2.38			4.38

Total certificate of deposit accounts		898,157		61.21			3.90			703,314		54.40			3.51			593,760		50.75			3.48


Total deposits (2)	$	1,467,287		100.00	%		2.97	%	$	1,292,797		100.00	%		2.39	%	$	1,169,909		100.00	%		2.32	%


(1)	Weighted average nominal rate as of the year end date equals the stated rate offered.

(2)	Included in the above balances are IRA and Keogh deposits totaling $170.9 million, $162.9 million and $144.3 million at December 31, 2005, 2004 and 2003, respectively.

(3)	Includes brokered deposits of $11.5 million, with a maturity of 36 months at December 31, 2005.

(4)	Includes brokered deposits of $19.8 million, with maturities ranging from 48 to 60 months at December 31, 2005.

The following table presents by various rate categories, the amount of time deposit accounts outstanding at the dates indicated, and the years to maturity of the certificate accounts outstanding at December 31, 2005.

							At December 31, 2005
	At December 31,
							Within One Year		One to Three Years		Thereafter		Total
	2005		2004		2003		Within One Year		One to Three Years		Thereafter		Total

	*(In thousands)*

Interest rate:
1.99% or less	$	70,762	$	121,676	$	153,206	$	60,981	$	9,781	$	—	$	70,762
2.00% to 2.99%		20,044		62,457		87,296		13,440		6,258		346		20,044
3.00% to 3.99%		336,757		297,300		170,966		252,007		55,107		29,643		336,757
4.00% to 4.99% (1)		379,327		118,212		82,245		155,911		99,099		124,317		379,327
5.00% to 5.99%		83,925		42,772		32,260		4,643		16,357		62,925		83,925
6.00% to 6.99%		3,007		35,874		43,332		2,718		289		—		3,007
7.00% to 7.99%		4,335		25,023		24,455		370		3,965		—		4,335

Total	$	898,157	$	703,314	$	593,760	$	490,070	$	190,856	$	217,231	$	898,157

(1) Includes brokered deposits of $31.3 million at December 31, 2005.

The following table presents by remaining maturity categories the amount of certificate of deposit accounts with balances of $100,000 or more at December 31, 2005 and their annualized weighted average interest rates.

	Amount		Weighted Average Rate

	*(Dollars in thousands)*
Maturity Period:
Three months or less	$	36,418		3.21	%
Over three through six months		22,551		3.43
Over six through 12 months		96,788		4.09
Over 12 months		99,574		4.53

Total	$	255,331		4.08	%

The above table does not include brokered deposits of $31.3 million with a weighted average rate of 4.56%.

The following table presents the deposit activity, including mortgagors’ escrow deposits, of the Bank for the periods indicated.

	For the year ended December 31,

	2005		2004		2003

	(In thousands)
Net deposits	$	139,833	$	93,916	$	130,563
Interest credited on deposits		34,657		28,972		27,521

Net increase in deposits	$	174,490	$	122,888	$	158,084

The following table sets forth the distribution of the Bank’s average deposit accounts for the years indicated, the percentage of total deposit portfolio, and the average interest cost of each deposit category presented. Average balances for all years shown are derived from daily balances.

	For the years ended December 31,

	2005								2004								2003

	Average Balance		Percent of Total Deposits			Average Cost			Average Balance		Percent of Total Deposits			Average Cost			Average Balance		Percent of Total Deposits			Average Cost

	*(Dollars in thousands)*
Savings accounts	$	241,121		17.98	%		0.92	%	$	218,336		17.43	%		0.50	%	$	217,435		19.62	%		0.74	%

NOW accounts		43,133		3.22			0.50			44,103		3.52			0.50			40,483		3.65			0.63

Demand accounts		52,017		3.88			—			45,093		3.60			—			36,054		3.25			—

Mortgagors’ escrow deposits		27,337		2.04			0.21			20,482		1.64			0.24			15,018		1.36			0.40

Total		363,608		27.12			0.69			328,014		26.19			0.42			308,990		27.88			0.62

Money market accounts		228,818		17.06			2.27			279,952		22.36			1.83			229,141		20.67			2.08

Certificate of deposit accounts		748,747		55.82			3.60			644,328		51.45			3.49			570,208		51.45			3.65

Total deposits	$	1,341,173		100.00	%		2.58	%	$	1,252,294		100.00	%		2.31	%	$	1,108,339		100.00	%		2.48	%

Borrowings. Although deposits are the Bank’s primary source of funds, the Bank also uses borrowings as an alternative and cost effective source of funds for lending, investing and other general purposes. The Bank is a member of, and is eligible to obtain advances from, the FHLB-NY. Such advances generally are secured by a blanket lien against the Bank’s mortgage portfolio and the Bank’s investment in the stock of the FHLB-NY. In addition, the Bank may pledge mortgage-backed securities to obtain advances from the FHLB-NY. See “— Regulation — Federal Home Loan Bank System.” The maximum amount that the FHLB-NY will advance for purposes other than for meeting withdrawals fluctuates from time to time in accordance with the policies of the FHLB-NY. The Bank also enters into repurchase agreements with broker-dealers and the FHLB-NY. These agreements are recorded as financing transactions and the obligations to repurchase are reflected as a liability in the Company’s consolidated financial statements. In addition, the Trust issued $20.0 million of floating rate capital securities in July 2003, which were also reflected as a liability in the Company’s consolidated financial statements through December 31, 2003. The Trust had invested the proceeds of the issuance of the capital securities and its common stock in $20.6 million of junior subordinated debentures issued by the Holding Company. Effective January 1, 2004, the Trust was deconsolidated, and the consolidated financial statements include the junior subordinated debentures from that date forward. The average cost of borrowed funds was 4.33%, 4.01% and 4.70% for 2005, 2004 and 2003, respectively. The average balances of borrowed funds were $683.0 million, $580.6 million and $524.9 million for the same years, respectively.

The following table sets forth certain information regarding the Company’s borrowed funds at or for the periods ended on the dates indicated.

	At or for the years ended December 31,

	2005			2004			2003

	*(Dollars in thousands)*
Securities Sold with the Agreement to Repurchase
Average balance outstanding	$	210,174		$	194,610		$	121,338
Maximum amount outstanding at any month
end during the period		213,900			213,900			163,900
Balance outstanding at the end of period		178,900			213,900			163,900
Weighted average interest rate during the period		4.25	%		4.23	%		5.20	%
Weighted average interest rate at end of period		4.43			4.22			4.21

FHLB-NY Advances
Average balance outstanding	$	452,246		$	365,321		$	383,533
Maximum amount outstanding at any month
end during the period		524,198			399,240			429,251
Balance outstanding at the end of period		490,191			350,217			394,242
Weighted average interest rate during the period		4.23	%		3.82	%		4.52	%
Weighted average interest rate at end of period		4.40			3.90			3.74

Other Borrowings
Average balance outstanding	$	20,619		$	20,619		$	20,000
Maximum amount outstanding at any month
end during the period		20,619			20,619			20,000
Balance outstanding at the end of period		20,619			20,619			20,000
Weighted average interest rate during the period		7.21	%		5.13	%		5.07	%
Weighted average interest rate at end of period		7.80			5.72			4.80

Total Borrowings
Average balance outstanding	$	683,039		$	580,550		$	524,871
Maximum amount outstanding at any month
end during the period		758,717			614,749			578,142
Balance outstanding at the end of period		689,710			584,736			578,142
Weighted average interest rate during the period		4.33	%		4.01	%		4.70	%
Weighted average interest rate at end of period		4.51			4.08			3.91

Subsidiary Activities

At December 31, 2005, the Holding Company had two wholly owned subsidiaries: the Bank and the Trust. In addition, the Bank had three wholly owned subsidiaries: FSB Properties, Inc. (“Properties”), Flushing Preferred Funding Corporation (“FPFC”) and Flushing Service Corporation.

(a) Properties was formed in 1976 under the Bank’s New York State leeway investment authority. The original purpose of Properties was to engage in joint venture real estate equity investments. The Bank discontinued these activities in 1986. The last joint venture in which Properties was a partner was dissolved in 1989. The last remaining property acquired by the dissolution of these joint ventures was disposed of in 1998.

(b) FPFC was formed in 1997 as a real estate investment trust for the purpose of acquiring, holding and managing real estate mortgage assets. FPFC also provides an additional vehicle for access by the Company to the capital markets for future opportunities.

Personnel

At December 31, 2005, the Bank had 203 full-time employees and 61 part-time employees. None of the Bank’s employees are represented by a collective bargaining unit, and the Bank considers its relationship with its employees to be good. At the present time, the Holding Company only employs certain officers of the Bank. These employees do not receive any extra compensation as officers of the Holding Company.

Omnibus Incentive Plan

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. As of December 31, 2005, there are 219,086 shares available under the full value award plan and 751,912 shares under the non-full value plan. The Company has applied the shares previously authorized by stockholders under the 1996 Stock Option Incentive Plan and the 1996 Restricted Stock Incentive Plan for use under the non-full value and full value plans, respectively, for future awards under the Omnibus Plan. All grants and awards under the 1996 Stock Option Incentive Plan and 1996 Restricted Stock Incentive Plan prior to the effective date of the Omnibus Plan remain outstanding as issued. The Company will continue to maintain separate pools of available shares for full value as opposed to non-full value awards, except that shares can be moved from the non-full value pool to the full value pool on a 3-for-1 basis. The exercise price per share of a stock option grant may not be less than the fair market value of the common stock of the Company 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. The Omnibus Plan increased the annual grants to each non-employee director to 3,600 restricted stock units, while eliminating grants of stock options for non-employee directors. Prior to the approval of the 2005 Omnibus Plan non-employee directors were annually granted 1,687 restricted stock unit awards and 14,850 stock options. This change is expected to provide an expense benefit beginning in 2006 when we will be required to expense stock options grants.

For additional information concerning this plan, see “Note 9 of Notes to Consolidated Financial Statements” in Item 8 of this Annual Report.

FEDERAL, STATE AND LOCAL TAXATION

The following discussion of tax matters is intended only as a summary and does not purport to be a comprehensive description of the tax rules applicable to the Company.

Federal Taxation

General. The Company reports its income using a calendar year and the accrual method of accounting. The Company is subject to the federal tax laws and regulations which apply to corporations generally, as well as, since the enactment of the Small Business Job Protection Act of 1996 (the “Act”), those governing the Bank’s deductions for bad debts, described below.

Bad Debt Reserves. Prior to the enactment of the Act, which was signed into law on August 20, 1996, savings institutions which met certain definitional tests primarily relating to their assets and the nature of their business (“qualifying thrifts”), such as the Bank, were allowed deductions for bad debts under methods more favorable than those granted to other taxpayers. Qualifying thrifts could compute deductions for bad debts using either the specific charge off method of Section 166 of the Internal Revenue Code (the “Code”) or the reserve method of Section 593 of the Code. Section 1616(a) of the Act repealed the Section 593 reserve method of accounting for bad debts by qualifying thrifts, effective for taxable years beginning after 1995. Qualifying thrifts that are treated as large banks, such as the Bank, are required to use the specific charge off method, pursuant to which the amount of any debt may be deducted only as it actually becomes wholly or partially worthless.

Distributions. To the extent that the Bank makes “non-dividend distributions” to stockholders that are considered to result in distributions from its pre-1988 reserves or the supplemental reserve for losses on loans (“excess distributions”), then an amount based on the amount distributed will be included in the Bank’s taxable income. Non-dividend distributions include distributions in excess of the Bank’s current and post-1951 accumulated earnings and profits, as calculated for federal income tax purposes, distributions in redemption of stock and distributions in partial or complete liquidation. The amount of additional taxable income resulting from an excess distribution is an amount that when reduced by the tax attributable to the income is equal to the amount of the excess distribution. Thus, slightly more than one and one-half times the amount of the excess distribution made would be includable in gross income for federal income tax purposes, assuming a 35% federal corporate income tax rate. See “Regulation — Restrictions on Dividends

and Capital Distributions” for limits on the payment of dividends by the Bank. The Bank does not intend to pay dividends or make non-dividend distributions described above that would result in a recapture of any portion of its pre-1988 bad debt reserves.

Corporate Alternative Minimum Tax. The Code imposes an alternative minimum tax on corporations equal to the excess, if any, of 20% of alternative minimum taxable income (“AMTI”) over a corporation’s regular federal income tax liability. AMTI is equal to taxable income with certain adjustments. Generally, only 90% of AMTI can be offset by net operating loss carrybacks and carryforwards.

State and Local Taxation

New York State and New York City Taxation. The Company is subject to the New York State Franchise Tax on Banking Corporations in an annual amount equal to the greater of (1) 7.5% of “entire net income” allocable to New York State during the taxable year or (2) the applicable alternative minimum tax. The alternative minimum tax is generally the greater of (a) 0.01% of the value of assets allocable to New York State with certain modifications, (b) 3% of “alternative entire net income” allocable to New York State or (c) $250. Entire net income is similar to federal taxable income, subject to certain modifications, including that net operating losses arising during any taxable year prior to January 1, 2001 cannot be carried back or carried forward, and net operating losses arising during any taxable year beginning on or after January 1, 2001 cannot be carried back. Alternative entire net income is equal to entire net income without certain deductions which are allowable in the calculation of entire net income. The Company also is subject to a similarly calculated New York City tax of 9% on income allocated to New York City (although net operating losses cannot be carried back or carried forward regardless of when they arise) and similar alternative taxes. In addition, the Company is subject to a tax surcharge at a rate of 17% of the New York State Franchise Tax that is attributable to business activity carried on within the Metropolitan Commuter Transportation District. This tax surcharge is assessed as if the New York State Franchise tax is imposed at a 9% rate.

Notwithstanding the repeal of the federal income tax provisions permitting bad debt deductions under the reserve method, New York State has enacted legislation maintaining the preferential treatment of additional loss reserves for qualifying real property and non-qualifying loans of qualifying thrifts for both New York State and New York City tax purposes. Calculation of the amount of additions to reserves for qualifying real property loans is limited to the larger of the amount derived by the percentage of taxable income method or the experience method. For these purposes, the applicable percentage to calculate the bad debt deduction under the percentage of taxable income method is 32% of taxable income, reduced by additions to reserves for non-qualifying loans, except that the amount of the addition to the reserve cannot exceed the amount necessary to increase the balance of the reserve for losses on qualifying real property loans at the close of the taxable year to 6% of the balance of the qualifying real property loans outstanding at the end of the taxable year. Under the experience method, the maximum addition to a loan reserve generally equals the amount necessary to increase the balance of the bad debt reserve at the close of the taxable year to the greater of (1) the amount that bears the same ratio to loans outstanding at the close of the taxable year as the total net bad debts sustained during the current and five preceding taxable years bears to the sum of the loans outstanding at the close of those six years, or (2) the balance of the bad debt reserve at the close of the “base year,” or, if the amount of loans outstanding has declined since the base year, the amount which bears the same ratio to the amount of loans outstanding at the close of the taxable year as the balance of the reserve at the close of the base year. For these purposes, the “base year” is the last taxable year beginning before 1988. The amount of additions to reserves for non-qualifying loans is computed under the experience method. In no event may the additions to reserves for qualifying real property loans be greater than the larger of the amount determined under the experience method or the amount which, when added to the additions to reserves for non-qualifying loans, equal the amount by which 12% of the total deposits or withdrawable accounts of depositors of the Bank at the close of the taxable year exceeds the sum of the Bank’s surplus, undivided profits and reserves at the beginning of such year.

Delaware State Taxation. As a Delaware holding company not earning income in Delaware, the Company is exempt from Delaware corporate income tax but is required to file an annual report with and pay an annual franchise tax to the State of Delaware.

REGULATION

General

The Holding Company is registered with the OTS as a savings and loan holding company and is subject to OTS regulations, examinations, supervision and reporting requirements. In addition, the OTS has enforcement authority over the Company and any non-savings institution subsidiaries it may form or acquire. Among other things, this authority permits the OTS to restrict or prohibit activities that it determines may pose a serious risk to the Bank. As a publicly owned company, the Company is required to file certain reports with the Securities and Exchange Commission (“SEC”)

under federal securities laws. The Bank is a member of the FHLB System. The Bank is subject to extensive regulation by the OTS, as its chartering agency, and the FDIC, as the insurer of the Bank’s deposits. The Bank is also subject to certain regulations promulgated by the other federal agencies. The Bank must file reports with the OTS and the FDIC concerning its activities and financial condition, in addition to obtaining regulatory approvals prior to entering into certain transactions such as mergers with or acquisitions of other savings institutions. The Bank is subject to periodic examinations by the OTS and the FDIC to examine whether the Bank is in compliance with various regulatory requirements. This regulation and supervision establishes a comprehensive framework of activities in which an institution can engage and is intended primarily to ensure the safe and sound operation of the Bank for the protection of the insurance fund and depositors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of an adequate allowance for possible loan losses for regulatory purposes. Any change in such regulation, whether by the OTS, the FDIC, other federal agencies or the United States Congress, could have a material adverse impact on the Company, the Bank and their operations.

The activities of federal savings institutions are governed primarily by the Home Owners’ Loan Act, as amended (“HOLA”) and, in certain respects, the Federal Deposit Insurance Act (“FDIA”). Most regulatory functions relating to deposit insurance and to the administration of conservatorships and receiverships of insured institutions are exercised by the FDIC. The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”), among other things, requires that federal banking regulators intervene promptly when a depository institution experiences financial difficulties, mandated the establishment of a risk-based deposit insurance assessment system, and required imposition of numerous additional safety and soundness operational standards and restrictions. FDICIA and the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (“FIRREA”) each contain provisions affecting numerous aspects of the operations and regulations of federal savings banks, and these laws empower the OTS and the FDIC, among other agencies, to promulgate regulations implementing their provisions.

Set forth below is a brief description of certain laws and regulations which relate to the regulation of the Bank and the Company. The description does not purport to be a comprehensive description of applicable laws, rules and regulations and is qualified in its entirety by reference to applicable laws, rules and regulations.

Holding Company Regulation

The Company is a unitary savings and loan holding company within the meaning of the HOLA. As such, the Company is required to register with the OTS and is subject to OTS regulations, examinations, supervision and reporting requirements. In addition, the OTS has enforcement authority over the Company and any non-savings institution subsidiaries it may form or acquire. Among other things, this authority permits the OTS to restrict or prohibit activities that it determines may pose a serious risk to the Bank. See “—Restrictions on Dividends and Capital Distributions.”

HOLA prohibits a savings and loan holding company, directly or indirectly, or through one or more subsidiaries, from (1) acquiring another savings institution or holding company thereof, without prior written approval of the OTS; (2) acquiring or retaining, with certain exceptions, more than 5% of a non-subsidiary savings institution, a non-subsidiary holding company, or a non-subsidiary company engaged in activities other than those permitted by HOLA; or (3) acquiring or retaining control of a depository institution that is not federally insured. In evaluating applications by holding companies to acquire savings institutions, the OTS will consider the financial and managerial resources and future prospects of the company and institution involved, the effect of the acquisition on the risk to the insurance funds, the convenience and needs of the community, and the impact of any competitive factors that may be involved.

As a unitary savings and loan holding company, the Company currently is not restricted as to the types of business activities in which it may engage, provided that the Bank continues to meet the qualified thrift lender (“QTL”) test. See “—Qualified Thrift Lender Test.” Upon any non-supervisory acquisition by the Company of another savings association or savings bank, the Company would become a multiple savings and loan holding company (if the acquired institution is held as a separate subsidiary) and would be subject to extensive limitations on the types of business activities in which it could engage. HOLA limits the activities of a multiple savings and loan holding company and its non-insured institution subsidiaries primarily to activities permissible for bank holding companies under Section 4(c)(8) of the Bank Holding Company Act, subject to the prior approval of the OTS, and activities authorized by OTS regulation.

The OTS is prohibited from approving any acquisition that would result in a multiple savings and loan holding company controlling savings institutions in more than one state, subject to two exceptions: (1) emergency acquisitions authorized by the FDIC and (2) the acquisition of a savings institution in another state if the laws of the state of the target savings institution specifically permit such acquisitions. Under New York law, reciprocal interstate acquisitions are authorized for savings and loan holding companies and savings institutions. Certain states do not authorize interstate

acquisitions under any circumstances; however, federal law authorizing acquisitions in supervisory cases preempts such state law.

Federal law generally provides that no “person” acting directly or indirectly or through or in concert with one or more other persons, may acquire “control,” as that term is defined in OTS regulations, of a federally insured savings institution without giving at least 60 days’ written notice to the OTS and providing the OTS an opportunity to disapprove the proposed acquisition. Such acquisitions of control may be disapproved if it is determined, among other things, that (1) the acquisition would substantially lessen competition; (2) the financial condition of the acquiring person might jeopardize the financial stability of the savings institution or prejudice the interests of its depositors; or (3) the competency, experience or integrity of the acquiring person or the proposed management personnel indicates that it would not be in the interest of the depositors or the public to permit the acquisition of control by such person.

Investment Powers

The Bank is subject to comprehensive regulation governing its investments and activities. Among other things, the Bank may invest in (1) residential mortgage loans, mortgage-backed securities, education loans and credit card loans in an unlimited amount, (2) non-residential real estate loans up to 400% of total capital, (3) commercial business loans up to 20% of total assets (however, amounts over 10% of total assets must be used only for small business loans) and (4) in general, consumer loans and highly rated commercial paper and corporate debt securities in the aggregate up to 35% of total assets. In addition, the Bank may invest up to 3% of its total assets in service corporations, an unlimited percentage of its assets in operating subsidiaries (which may only engage in activities permissible for the Bank itself) and under certain conditions may invest in finance subsidiaries. Other than investments in service corporations, operating subsidiaries, finance subsidiaries and certain government-sponsored enterprises, such as FHLMC and FNMA, the Bank generally is not permitted to make equity investments. See “— General — Investment Activities.” A service corporation in which the Bank may invest is permitted to engage in activities that a federal savings bank may conduct directly, other than taking deposits, as well as certain activities pre-approved by the OTS, which include providing certain support services for the institution; originating, investing in, selling, purchasing, servicing or otherwise dealing with specified types of loans and participations (principally loans that the parent institution could make); specified real estate activities, including limited real estate development; securities brokerage services; certain insurance brokerage activities; and other specified investments and services.

Real Estate Lending Standards

FDICIA requires each federal banking agency to adopt uniform regulations prescribing standards for extensions of credit which are either (1) secured by real estate, or (2) made for the purpose of financing the construction of improvements on real estate. In prescribing these standards, the banking agencies must consider the risk posed to the deposit insurance funds by real estate loans, the need for safe and sound operation of insured depository institutions and the availability of credit. The OTS and the other federal banking agencies adopted uniform regulations, effective March 19, 1993. The OTS regulation requires each savings association to establish and maintain written internal real estate lending standards consistent with safe and sound banking practices and appropriate to the size of the institution and the nature and scope of its real estate lending activities. The policy must also be consistent with accompanying OTS guidelines, which include maximum loan-to-value ratios for the following types of real estate loans: raw land (65%), land development (75%), nonresidential construction (80%), improved property (85%) and one-to-four family residential construction (85%). Owner-occupied one-to-four family mortgage loans and home equity loans do not have maximum loan-to-value ratio limits, but those with a loan-to-value ratio at origination of 90% or greater are to be backed by private mortgage insurance or readily marketable collateral. Institutions are also permitted to make a limited amount of loans that do not conform to the proposed loan-to-value limitations so long as such exceptions are appropriately reviewed and justified. The guidelines also list a number of lending situations in which exceptions to the loan-to-value standard are justified.

Loans-to-One Borrower Limits

The Bank generally is subject to the same loans-to-one borrower limits that apply to national banks. With certain exceptions, total loans and extensions of credit outstanding at one time to one borrower (including certain related entities of the borrower) may not exceed, for loans not fully secured, 15% of the Bank’s unimpaired capital and unimpaired surplus, plus, for loans fully secured by readily marketable collateral, an additional 10% of the Bank’s unimpaired capital and unimpaired surplus. At December 31, 2005, the largest amount the Bank could lend to one borrower was approximately $25.0 million, and at that date, the Bank’s largest aggregate amount of loans-to-one borrower was $23.7 million, all of which were performing according to their terms. See “— General — Lending Activities.”

Insurance of Accounts

The deposits of the Bank are insured up to $100,000 per depositor (as defined by federal law and regulations) by the FDIC. Approximately 93.11% of the Bank’s deposits are presently insured by the FDIC under the Bank Insurance Fund (“BIF”). The remainder are insured by the FDIC under the Savings Association Insurance Fund (“SAIF”). The deposits insured under the SAIF are a result of those acquired in the acquisition of New York Federal Savings Bank in 1997. As insurer, the FDIC is authorized to conduct examinations of, and to require reporting by, insured institutions. It also may prohibit any insured institution from engaging in any activity the FDIC determines by regulation or order to pose a serious threat to the insurance funds. The FDIC also has the authority to initiate enforcement actions where the OTS has failed or declined to take such action after receiving a request to do so from the FDIC.

The FDIC utilizes a risk-based deposit insurance assessment system. Under this system, the FDIC assigns each institution to one of three capital categories — “well capitalized,” “adequately capitalized” and “undercapitalized” — which are defined in the same manner as the regulations establishing the prompt corrective action system under Section 38 of FDIA, as discussed below. These three categories are then divided into three subcategories which reflect varying levels of supervisory concern. The matrix so created results in nine assessment risk classifications. As of December 31, 2005, the annual FDIC assessment rate for BIF and SAIF member institutions varied from 0.00% to 0.27% per annum per $100 of deposits. At December 31, 2005, the Bank’s annual assessment rate was 0.00%. The Bank’s assessment rate in effect from time to time will depend upon the capital category and supervisory subcategory to which the Bank is assigned by the FDIC. In addition, the FDIC is authorized to increase federal deposit insurance assessment rates for BIF and SAIF members to the extent necessary to protect the BIF and SAIF and, under current law, would be required to increase such rates to $0.23 per $100 of deposits if the BIF or SAIF reserve ratio falls below the required 1.25%. Any increase in deposit insurance assessment rates, as a result of a change in the category or subcategory to which the Bank is assigned or the exercise of the FDIC’s authority to increase assessment rates generally, could have an adverse effect on the earnings of the Bank.

On February 8, 2006, as part of the Deficit Reduction Act of 2005, the Federal Deposit Insurance Reform Act of 2005 (“Deposit Act”) was enacted. The Deposit Act requires the FDIC to merge the BIF and SAIF into a new Deposit Insurance Fund (“DIF”) no later than July 1, 2006. The FDIC is also required to propose regulations to implement the Deposit Act’s provisions. These regulations must be finalized by November 5, 2006. Other major provisions of the Deposit Act include: (1) maintaining basic deposit insurance coverage at $100,000, and increasing deposit insurance coverage to $250,000 for certain retirement accounts, with increases for inflation each five years beginning in 2011, (2) giving the FDIC flexibility to manage the insurance fund by setting the designated reserve ratio between 1.15% and 1.50% (thereby eliminating the 1.25% trigger), (3) requiring all banks to be assessed premiums, (4) providing a one-time assessment credit of $4.7 billion to banks and savings institutions in existence on December 31, 1996, that capitalized the FDIC in the 1990s to offset future premiums under a new risk-based assessment system, and (5) imposing a cap on the growth of the insurance fund by requiring a premium dividend to institutions when certain levels of the DIF are exceeded.

Under the FDIA, insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. The management of the Bank does not know of any practice, condition or violation that might lead to termination of deposit insurance.

On September 30, 1996, as part of an omnibus appropriations bill, the Deposit Insurance Funds Act of 1996 (the “Funds Act”) was enacted. The Funds Act requires BIF institutions, beginning January 1, 1997, to pay a portion of the interest due on the Finance Corporation (“FICO”) bonds issued in connection with the savings and loan association crisis in the late 1980s, and requires BIF institutions to pay their full pro rata share of the FICO payments starting the earlier of January 1, 2000 or the date at which no savings institution continues to exist. The Bank was required, as of January 1, 2000, to pay its full pro rata share of the FICO payments. The FICO assessment rate is subject to change. The Bank paid $179,000, $178,000 and $166,000 for its share of the interest due on FICO bonds in 2005, 2004 and 2003, respectively.

Qualified Thrift Lender Test

Institutions regulated by the OTS are required to meet a QTL test to avoid certain restrictions on their operations. FDICIA and applicable OTS regulations require such institutions to maintain at least 65% of their portfolio assets (total assets less intangibles, properties used to conduct the institution’s business and liquid assets not exceeding 20% of total assets) in “qualified thrift investments” on a monthly average basis in nine of every 12 months. Qualified thrift investments constitute primarily residential mortgage loans and related investments, including certain mortgage-backed and mortgage-related securities. A savings institution that fails the QTL test must either convert to a bank charter or, in general, it will be prohibited from: (1) making an investment or engaging in any new activity not permissible for a

national bank, (2) paying dividends not permissible under national bank regulations and (3) establishing any new branch office in a location not permissible for a national bank in the institution’s home state. One year following the institution’s failure to meet the QTL test, any holding company parent of the institution must register and be subject to supervision as a bank holding company. In addition, beginning three years after the institution failed the QTL test, the institution would be prohibited from retaining any investment or engaging in any activity not permissible for a national bank. At December 31, 2005, the Bank had maintained more than 65% of its “portfolio assets” in qualified thrift investments in at least nine of the preceding 12 months. Accordingly, on that date, the Bank had met the QTL test.

Under the Economic Growth and Paperwork Reduction Act of 1996 (“Regulatory Paperwork Reduction Act”), Congress modified and expanded investment authority under the QTL test. The Regulatory Paperwork Reduction Act amendments permit federal thrifts to invest in, sell, or otherwise deal in education and credit card loans without limitation and raised from 10% to 20% of total assets the aggregate amount of commercial, corporate, business, or agricultural loans or investments that may be made by a thrift, subject to a requirement that amounts in excess of 10% of total assets be used only for small business loans. In addition, the Regulatory Paperwork Reduction Act defines “qualified thrift investment” to include, without limit, education, small business, and credit card loans; and removes the 10% limit on personal, family, or household loans for purposes of the QTL test. The legislation also provides that a thrift meets the QTL test if it qualifies as a domestic building and loan association under the Code.

Transactions with Affiliates

Transactions between the Bank and any related party or “affiliate” are governed by Sections 23A and 23B of the Federal Reserve Act. An affiliate is generally any company or entity which controls, is controlled by or is under common control with the Bank, including the Company, the Trust, the Bank’s subsidiaries, and any other qualifying subsidiary of the Bank or the Company that may be formed or acquired in the future. Generally, Sections 23A and 23B (1) limit the extent to which the Bank or its subsidiaries may engage in “covered transactions” with any one affiliate to an amount equal to 10% of the Bank’s capital stock and surplus, and impose an aggregate limit on all such transactions with all affiliates to an amount equal to 20% of such capital stock and surplus, and (2) require that all such transactions be on terms substantially the same, or at least as favorable, to the Bank or subsidiary as those provided to a non-affiliate. The term “covered transaction” includes the making of loans, purchase of assets, issuance of a guarantee and other similar types of transactions. Each loan or extension of credit to an affiliate by the Bank must be secured by collateral with a market value ranging from 100% to 130% (depending on the type of collateral) of the amount of credit extended. In addition, the Bank may not (1) loan or otherwise extend credit to an affiliate, except to any affiliate which engages only in activities which are permissible for bank holding companies under Section 4(c) of the Bank Company Act, or (2) purchase or invest in any stocks, bonds, debentures, notes or similar obligations of any affiliates, except subsidiaries of the Bank.

In addition, the Bank is subject to Regulation O promulgated under Sections 22(g) and 22(h) of the Federal Reserve Act. Regulation O requires that loans by the Bank to a director, executive officer or to a holder of more than 10% of the Common Stock, and to certain affiliated interests of any such insider, may not, in the aggregate, exceed the Bank’s loans-to-one borrower limit. Loans to insiders and their related interests must also be made on terms substantially the same as offered, and follow credit underwriting procedures that are not less stringent than those applied, in comparable transactions to other persons. Prior Board approval is required for certain loans. In addition, the aggregate amount of extensions of credit by the Bank to all insiders cannot exceed the institution’s unimpaired capital and unimpaired surplus. These laws place additional restrictions on loans to executive officers of the Bank.

The Bank is in compliance with these regulations.

Restrictions on Dividends and Capital Distributions

The Bank is subject to OTS limitations on capital distributions, which include cash dividends, stock redemptions or repurchases, cash-out mergers, interest payments on certain convertible debt and some other distributions charged to the Bank’s capital account. In general, the applicable regulation permits specified levels of capital distributions by a savings institution that meets at least its minimum capital requirements, so long as the OTS is provided with at least 30 days’ advance notice and has no objection to the distribution.

Under OTS capital distribution regulations, an institution is not required to file an application with, or to provide a notice to, the OTS if neither the institution nor the proposed capital distribution meets any of the criteria for any such application or notice as provided below. An institution will be required to file an application with the OTS if the institution is not eligible for expedited treatment by the OTS; if the total amount of all its capital distributions for the applicable calendar year exceeds the net income for that year to date plus the retained net income (net income less capital distributions) for the preceding two years; if it would not be at least adequately capitalized following the distribution; or if its proposed capital distribution would violate a prohibition contained in any applicable statute, regulation, or

agreement between the association and the OTS. By contrast, only notice to the OTS is required for an institution that is not required to file an application as provided in the preceding sentence, if it would not be well capitalized following the distribution; if the association’s proposed capital distribution would reduce the amount of or retire any part of its common or preferred stock or retire any part of debt instruments such as notes or debentures included in capital under OTS regulations; or if the association is a subsidiary of a savings and loan holding company. The Bank is a subsidiary of a savings and loan holding company and, therefore, is subject to the 30-day advance notice requirement. As of December 31, 2005, the Bank had $33.7 million in retained earnings available to distribute to the Holding Company in the form of cash dividends.

Federal Home Loan Bank System

In connection with converting to a federal charter, the Bank became a member of the FHLB-NY, which is one of 12 regional FHLB’s governed and regulated by the Federal Housing Finance Board. Each FHLB serves as a source of liquidity for its members within its assigned region. It is funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB System. It makes loans to members (i.e., advances) in accordance with policies and procedures established by its Board of Directors.

As a member, the Bank is mandated to purchase and maintain membership stock in the FHLB-NY based on the asset size of the Bank. In addition, for all borrowing activity, the Bank is required to purchase shares of FHLB-NY non-marketable capital stock at par. Pursuant to this requirement, at December 31, 2005, the Bank was required to maintain $29.6 million of FHLB-NY stock. The Bank was in compliance with this requirement at that time.

Assessments

Savings institutions are required by OTS regulations to pay assessments to the OTS to fund the operations of the OTS. The general assessment, paid on a semi-annual basis, as determined from time to time by the Director of the OTS, is computed upon the savings institution’s total assets, including consolidated subsidiaries, as reported in the institution’s latest quarterly thrift financial report. Based on the average balance of the Bank’s total assets for the year ended December 31, 2005, the Bank’s OTS assessments were $361,000 for that period.

Branching

OTS regulations permit federally chartered savings institutions to branch nationwide to the extent allowed by federal statute. This permits federal savings associations to geographically diversify their loan portfolios and lines of business. The OTS authority preempts any state law purporting to regulate branching by federal savings institutions.

Community Reinvestment

Under the Community Reinvestment Act (“CRA”), as implemented by OTS regulations, the Bank has an obligation, consistent with its safe and sound operation, to help meet the credit needs of its entire community, including low and moderate income neighborhoods located in the community. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution’s discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. The CRA requires the OTS, in connection with its examination of a savings institution, to assess the institution’s record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by the institution. The methodology used by the OTS for determining an institution’s compliance with the CRA focuses on three tests: (a) a lending test, to evaluate the institution’s record of making loans in its service areas; (b) an investment test, to evaluate the institution’s record of investing in community development projects, affordable housing, and programs benefiting low or moderate income individuals and businesses; and (c) a service test, to evaluate the range of the institution’s services and the delivery of services through its branches, ATMs, and other offices. The Bank received a CRA rating of “Satisfactory” in its most recent completed CRA examination, which was completed as of November 5, 2004. Institutions that receive less than a satisfactory rating may face difficulties in securing approval for new activities or acquisitions. The CRA requires all institutions to make public disclosure of their CRA ratings.

Brokered Deposits

The FDIC has promulgated regulations implementing the FDICIA limitations on brokered deposits. Under the regulations, well-capitalized institutions are not subject to brokered deposit limitations, while adequately capitalized institutions are able to accept, renew or roll over brokered deposits only with a waiver from the FDIC and subject to restrictions on the interest rate which can be paid on such deposits. Undercapitalized institutions are not permitted to accept brokered deposits and may not solicit deposits by offering an effective yield that exceeds by more than 75 basis points the prevailing effective yields on insured deposits of comparable maturity in the institution’s normal market area or in the market area in which such deposits are being solicited. Pursuant to the regulation, the Bank, as a well-

capitalized institution, may accept brokered deposits. At December 31, 2005, the Bank had $31.3 million in brokered deposit accounts.

Capital Requirements

General. The Bank is required to maintain minimum levels of regulatory capital. Since FIRREA, capital requirements established by the OTS generally must be no less stringent than the capital requirements applicable to national banks. The OTS also is authorized to impose capital requirements in excess of these standards on a case-by-case basis.

Any institution that fails any of its applicable capital requirements is subject to possible enforcement actions by the OTS or the FDIC. Such actions could include a capital directive, a cease and desist order, civil money penalties, the establishment of restrictions on the institution’s operations and the appointment of a conservator or receiver. The OTS’ capital regulation provides that such actions, through enforcement proceedings or otherwise, could require one or more of a variety of corrective actions. See “—Prompt Corrective Action.”

The OTS’ capital regulations create three capital requirements: a tangible capital requirement, a leverage and core capital requirement and a risk-based capital requirement. At December 31, 2005, the Bank’s capital levels exceeded applicable OTS capital requirements. The three OTS capital requirements are described below.

Tangible Capital Requirement. Under current OTS regulations, each savings institution must maintain tangible capital equal to at least 1.50% of its adjusted total assets (as defined by regulation). Tangible capital generally includes common stockholders’ equity and retained income, and certain non-cumulative perpetual preferred stock and related income. In addition, all intangible assets, other than a limited amount of purchased mortgage servicing rights, must be deducted from tangible capital. At December 31, 2005, the Bank had $3.9 million in goodwill which was classified as an intangible asset. The Bank had no purchased mortgage servicing rights. At that date, the Bank’s tangible capital ratio was 7.14%.

In calculating adjusted total assets, adjustments are made to total assets to give effect to the exclusion of certain assets from capital and to appropriately account for the investments in and assets of both includable and non-includable subsidiaries.

Leverage and Core Capital Requirement. The current OTS requirement for leverage and core capital (commonly referred to as core capital) ranges between 3% and 5% of adjusted total assets. Savings institutions that receive the highest supervisory rating for safety and soundness are required to maintain a minimum core capital ratio of 3%, while the capital floor for all other savings institutions generally ranges from 4% to 5%, as determined by the OTS on a case by case basis. Core capital includes common stockholders’ equity (including retained income), non-cumulative perpetual preferred stock and related surplus. At December 31, 2005, the Bank’s core capital ratio was 7.14%.

OTS regulations limit the amount of servicing assets, together with purchased credit card receivables, includable in core capital to 100% of such capital, subject to limitations on fair value. At December 31, 2005, the Bank had $211,000 in capitalized mortgage servicing rights and no purchased credit card receivables.

Risk-Based Requirement. The risk-based capital standard adopted by the OTS requires savings institutions to maintain a minimum ratio of total capital to risk-weighted assets of 8%. Total capital consists of core capital, defined above, and supplementary capital but excludes the effect of recognizing deferred taxes based upon future income after one year. Supplementary capital consists of certain capital instruments that do not qualify as core capital, and general valuation loan and lease loss allowances up to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be used to satisfy the risk-based requirement only in an amount equal to the amount of core capital. In determining the risk-based capital ratios, total assets, including certain off-balance sheet items, are multiplied by a risk weight based on the risks inherent in the type of assets. The risk weights assigned by the OTS for significant categories of assets are (1) 0% for cash and securities issued by the federal government or unconditionally backed by the full faith and credit of the federal government; (2) 20% for securities (other than equity securities) issued by federal government sponsored agencies and mortgage-backed securities issued by, or fully guaranteed as to principal and interest by, the FNMA or the FHLMC, except for those classes with residual characteristics or stripped mortgage-related securities; (3) 50% for prudently underwritten permanent one-to-four family first lien mortgage loans and certain qualifying multi-family mortgage loans not more than 90 days delinquent and having a loan-to-value ratio of not more than 80% at origination unless insured to such ratio by an insurer approved by the FNMA or the FHLMC; and (4) 100% for all other loans and investments, including consumer loans, home equity loans, commercial loans, and one-to-four family residential real estate loans more than 90 days delinquent, and all repossessed assets or assets more than 90 days past due. At December 31, 2005, the Bank’s risk-based capital ratio was 12.12%. Risk-based capital excludes the effect of recognizing deferred taxes based upon future income after one year.

Federal Reserve System

The Federal Reserve Board requires all depository institutions to maintain reserves against their transaction accounts (primarily NOW and checking accounts) and non-personal time deposits. At December 31, 2005, the Bank was in compliance with these requirements.

The balances maintained to meet the reserve requirements imposed by the Federal Reserve Board may be used to satisfy liquidity requirements imposed by the OTS. Because required reserves must be maintained in the form of vault cash or a non-interest-bearing account at a Federal Reserve Bank directly or through another bank, the effect of this reserve requirement is to reduce an institution’s earning assets. The amount of funds necessary to satisfy this requirement has not had a material effect on the Bank’s operations.

As a creditor and financial institution, the Bank is also subject to additional regulations promulgated by the FRB, including, without limitation, regulations implementing requirements of the Truth in Savings Act, the Expedited Funds Availability Act, the Equal Credit Opportunity Act and the Truth in Lending Act.

Financial Reporting

The Bank is required to submit independently audited annual reports to the FDIC and the OTS. These publicly available reports must include (a) annual financial statements prepared in accordance with generally accepted accounting principles and such other disclosure requirements as required by the FDIC or the OTS and (b) a report, signed by the Bank’s chief executive officer and chief financial officer which contains statements about the adequacy of internal controls and compliance with designated laws and regulations, and attestations by independent auditors related thereto. The Bank is required to monitor the foregoing activities through an independent audit committee.

Standards for Safety and Soundness

The FDIA, as amended by the FDICIA and the Riegle Community Development and Regulatory Improvement Act of 1994 (the “Community Development Act”), requires each federal bank regulatory agency to establish safety and soundness standards for institutions under its authority. On July 10, 1995, the federal banking agencies, including the OTS, jointly released Interagency Guidelines Establishing Standards for Safety and Soundness and published a final rule establishing deadlines for submission and review of safety and soundness compliance plans. The guidelines, among other things, require savings institutions to maintain internal controls, information systems and internal audit systems that are appropriate to the size, nature and scope of the institution’s business. The guidelines also establish general standards relating to loan documentation, credit underwriting, interest rate risk exposure, asset growth, and compensation, fees and benefits. Savings institutions are required to maintain safeguards to prevent the payment of excessive compensation to an executive officer, employee, director or principal shareholder. The OTS may determine that a savings institution is not in compliance with the safety and soundness guidelines and, upon doing so, may require the institution to submit an acceptable plan to achieve compliance with the guidelines. An institution must submit an acceptable compliance plan to the OTS within 30 days of receipt or request for such a plan. Failure to submit or implement a compliance plan may subject the institution to regulatory actions. Management believes that the Bank currently meets the standards adopted in the interagency guidelines.

Additionally, under FDICIA, as amended by the Community Development Act, federal banking agencies are required to establish standards relating to asset quality and earnings that the agencies determine to be appropriate. Effective October 1, 1998, the federal banking agencies, including the OTS, adopted guidelines relating to asset quality and earnings which require insured institutions to maintain systems, consistent with their size and the nature and scope of their operations, to identify problem assets and prevent deterioration in those assets as well as to evaluate and monitor earnings and insure that earnings are sufficient to maintain adequate capital and reserves.

Gramm-Leach-Bliley Act

The Gramm-Leach-Bliley Act (the “Modernization Act”) was signed into law on November 12, 1999. Among other things, the Modernization Act permits qualifying bank holding companies to affiliate with securities firms and insurance companies and engage in other activities that are financial in nature or complementary thereto, as determined by the Federal Reserve Board. Subject to certain limitations, a national bank may, through a financial subsidiary, engage in similar activities. The Modernization Act also prohibits the creation or acquisition of new unitary savings and loan holding companies that are affiliated with non-banking firms, but “grandfathers” existing savings and loan holding companies, such as the Company. Grandfathered companies retain the existing powers available to unitary savings and loan holding companies. See “— Holding Company Regulation.” Certain business combinations which were impermissible prior to the effective date of the Modernization Act are now possible. Management believes the Modernization Act has led to some consolidation in the financial services industry and could lead to further consolidation, which, if completed, would likely result in an increase in the service offerings of our competitors. We

cannot assure you that the Modernization Act will not result in further changes in the competitive environment in the Bank’s market area or otherwise impact the Bank or the Holding Company.

In addition, the Modernization Act calls for heightened privacy protection of customer information gathered by financial institutions. The OTS has enacted regulations implementing the privacy protection provisions of the Modernization Act. Under the regulations, each financial institution is to (1) adopt procedures to protect customers’ “non-public personal information”, (2) disclose its privacy policy, including identifying to customers others with whom it shares “non-public personal information”, at the time of establishing the customer relationship and annually thereafter, and (3) provide its customers with the ability to “opt-out” of having the financial institution share their personal information with affiliated third parties. The regulations became effective on November 13, 2000, with compliance voluntary prior to July 1, 2001. Management has reviewed and amended our privacy protection policy and believes we are in compliance with these regulations.

USA Patriot Act

On October 26, 2001, following the September 11, 2001 attacks, President Bush signed the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT) Act of 2001 (the “Patriot Act”) to enhance protections against money laundering and criminal laws against terrorist activities, and give law enforcement authorities greater investigative powers. Among other things, the Patriot Act (1) requires financial institutions that administer, maintain or manage private bank accounts or correspondent accounts for foreign persons to establish due diligence policies; (2) prohibits correspondent accounts with foreign shell banks; (3) permits sharing of information among financial institutions, regulators and law enforcement regarding persons engaged in terrorist or money laundering activities; (4) requires financial institutions to verify customer identification at account opening; (5) requires financial institutions to report suspicious activities; and (6) requires financial institutions to establish an anti-money laundering compliance program.

Provisions under the Patriot Act became effective at varying times. The U. S. Treasury Department, the Federal Reserve and other federal bank regulatory agencies have issued regulations implementing the provisions of the Patriot Act. Management believes we are in compliance with these regulations.

Prompt Corrective Action

Under Section 38 of the FDIA, as added by the FDICIA, each appropriate banking agency is required to take prompt corrective action to resolve the problems of insured depository institutions that do not meet minimum capital ratios. Such action must be accomplished at the least possible long-term cost to the appropriate deposit insurance fund.

The federal banking agencies, including the OTS, adopted substantially similar regulations to implement Section 38 of the FDIA. Under the regulations, an institution is deemed to be (1) “well capitalized” if it has total risk-based capital ratio of 10% or more, has a Tier 1 risk-based capital ratio of 6% or more, has a leverage capital ratio of 5% or more and is not subject to any order or final capital directive to meet and maintain a specific capital level for any capital measure, (2) “adequately capitalized” if it has a total risk-based capital ratio of 8% or more, a Tier 1 risk-based capital ratio of 4% or more and a leverage capital ratio of 4% or more (3% under certain circumstances) and does not meet the definition of “well capitalized,” (3) “undercapitalized” if it has a total risk-based capital ratio that is less than 8%, a Tier 1 risk-based capital ratio that is less than 4% or a leverage capital ratio that is less than 4% (3% under certain circumstances), (4) “significantly undercapitalized” if it has a total risk-based capital ratio that is less than 6%, a Tier 1 risk-based capital ratio that is less than 3% or a leverage capital ratio that is less than 3%, and (5) “critically undercapitalized” if it has a ratio of tangible equity to total assets that is equal to or less than 2%. Section 38 of the FDIA and the regulations promulgated thereunder also specify circumstances under which a federal banking agency may reclassify a well capitalized institution as adequately capitalized and may require an adequately capitalized institution or an undercapitalized institution to comply with supervisory actions as if it were in the next lower category (except that the FDIC may not reclassify a significantly undercapitalized institution as critically undercapitalized). At December 31, 2005, the Bank met the criteria to be considered a “well capitalized” institution.

Federal Securities Laws

The Company’s Common Stock is registered with the SEC under Section 12(g) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The Company is subject to the information and reporting requirements, regulations governing proxy solicitations, insider trading restrictions and other requirements applicable to companies whose stock is registered under the Exchange Act.

Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act of 2002 (the “2002 Act”), enacted on July 30, 2002, aims to increase the reliability of financial information by, among other things, (1) heightening accountability of Chief Executive Officers and Chief Financial Officers to issue accurate financial statements, (2) increasing the authority and

independence of corporate audit committees, (3) creating a new regulatory entity to oversee the activities of accountants that audit public companies, (4) prohibiting activities and relationships that may compromise the independence of auditors, (5) increasing required financial statement disclosures, and (6) providing tough new penalties for issuing noncompliant financial statements and for other violations related to securities laws.

In furtherance of the 2002 Act, the SEC has issued new rules. Compliance with these new rules, and the related corporate governance rules adopted by NASDAQ with the approval of the SEC, has, and will continue to, increase costs to the Company, including, but not limited to, fees to our independent accountants, consultants, legal fees and Board service fees, and may require additions to staff. To date, compliance with the 2002 Act has not had a material effect on the Company results of operations. We cannot assure you that compliance with the 2002 Act and its regulations will not have a material effect on the business or operations of the Company in the future.

AVAILABLE INFORMATION

We make available free of charge on or through our web site at www.flushingsavings.com our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.

Item 1A. Risk Factors.

In addition to the other information contained in this Annual Report, the following factors and other considerations should be considered carefully in evaluating the Holding Company, the Bank and their business.

Effect of Interest Rates

Like most financial institutions, the Company’s results of operations depends to a large degree on its net interest income. When interest-bearing liabilities mature or reprice more quickly than interest-earning assets, a significant increase in market interest rates could adversely affect net interest income. Conversely, a significant decrease in market interest rates could result in increased net interest income. As a general matter, the Company seeks to manage its business to limit its overall exposure to interest rate fluctuations. However, fluctuations in market interest rates are neither predictable nor controllable and may have a material adverse impact on the operations and financial condition of the Company. Additionally, in a rising interest rate environment, a borrower’s ability to repay adjustable rate mortgages can be negatively affected as payments increase at repricing dates.

Prevailing interest rates also affect the extent to which borrowers repay and refinance loans. In a declining interest rate environment, the number of loan prepayments and loan refinancings may increase, as well as prepayments of mortgage-backed securities. Call provisions associated with the Company’s investment in U.S. government agency and corporate securities may also adversely affect yield in a declining interest rate environment. Such prepayments and calls may adversely affect the yield of the Company’s loan portfolio and mortgage-backed and other securities as the Company reinvests the prepaid funds in a lower interest rate environment. However, the Company typically receives additional loan fees when existing loans are refinanced, which partially offset the reduced yield on the Company’s loan portfolio resulting from prepayments. In periods of low interest rates, the Company’s level of core deposits also may decline if depositors seek higher-yielding instruments or other investments not offered by the Company, which in turn may increase the Company’s cost of funds and decrease its net interest margin to the extent alternative funding sources are utilized. An increasing interest rate environment would tend to extend the average lives of lower yielding fixed rate mortgages and mortgage-backed securities, which could adversely affect net interest income. In addition, depositors tend to open longer term, higher costing certificate of deposit accounts which could adversely affect the Bank’s net interest income if rates were to subsequently decline. Additionally, adjustable rate mortgage loans and mortgage-backed securities generally contain interim and lifetime caps that limit the amount the interest rate can increase or decrease at repricing dates. Significant increases in prevailing interest rates may significantly affect demand for loans and the value of bank collateral. See “— Local Economic Conditions.”

Lending Activities

Multi-family residential, commercial real estate and one-to-four family mixed use property mortgage loans, the increased origination of which is part of management’s strategy, and construction loans, are generally viewed as exposing the lender to a greater risk of loss than fully underwritten one-to-four family residential mortgage loans and typically involve higher principal amounts per loan. Repayment of multi-family residential, commercial real estate and one-to-four family mixed-use property mortgage loans generally is dependent, in large part, upon sufficient income from the property to cover operating expenses and debt service. Repayment of construction loans is contingent upon the successful completion and operation of the project. Changes in local economic conditions and government regulations,

which are outside the control of the borrower or lender, also could affect the value of the security for the loan or the future cash flow of the affected properties.

In addition, the Bank, from time-to-time, originates one-to-four family residential mortgage loans without verifying the borrower’s level of income. These loans involve a higher degree of risk as compared to the Bank’s other fully underwritten one-to-four family residential mortgage loans. These risks are mitigated by the Bank’s policy to limit the amount of one-to-four family residential mortgage loans to 80% of the appraised value or sale price, whichever is less, as well as charging a higher interest rate than when the borrower’s income is verified. These loans are not as readily saleable in the secondary market as the Bank’s other fully underwritten loans, either as whole loans or when pooled or securitized.

There can be no assurance that the Bank will be able to successfully implement its business strategies with respect to these higher-yielding loans. In assessing the future earnings prospects of the Bank, investors should consider, among other things, the Bank’s level of origination of one-to-four family residential mortgage loans (including loans originated without verifying the borrowers income), the Bank’s emphasis on multi-family residential, commercial real estate and one-to-four family mixed-use property mortgage loans, and the greater risks associated with such loans. See “Business — Lending Activities” in Item 1 of this Annual Report.

Competition

The Bank faces intense and increasing competition both in making loans and in attracting deposits. The Bank’s market area has a high density of financial institutions, many of which have greater financial resources, name recognition and market presence than the Bank, and all of which are competitors of the Bank to varying degrees. Particularly intense competition exists for deposits and in all of the lending activities emphasized by the Bank. The Bank’s competition for loans comes principally from commercial banks, other savings banks, savings and loan associations, mortgage banking companies, insurance companies, finance companies and credit unions. Management anticipates that competition for mortgage loans will continue to increase in the future. The Bank’s most direct competition for deposits historically has come from other savings banks, commercial banks, savings and loan associations and credit unions. In addition, the Bank faces competition for deposits from products offered by brokerage firms, insurance companies and other financial intermediaries, such as money market and other mutual funds and annuities. Consolidation in the banking industry and the lifting of interstate banking and branching restrictions have made it more difficult for smaller, community-oriented banks, such as the Bank, to compete effectively with large, national, regional and super-regional banking institutions. Notwithstanding the intense competition, the Bank has been successful in increasing its loan portfolios and deposit base. However, no assurances can be given that the Bank will be able to continue to increase its loan portfolios and deposit base, as contemplated by management’s current business strategy.

Local Economic Conditions

The Company’s operating results are affected by national and local economic and competitive conditions, including changes in market interest rates, the strength of the local economy, government policies and actions of regulatory authorities. During 2005, the nation’s economy was generally considered to be expanding. Yet world events, particularly the “War on Terror” and the level of oil prices, continued to have an effect on the economic recovery. These economic conditions can result in borrowers defaulting on their loans, or withdrawing their funds on deposit at the Bank to meet their financial obligations. While we have not seen a significant increase in delinquent loans, and have seen an increase in deposits, we cannot predict the effect of these economic conditions on the Company’s financial condition or operating results.

A decline in the local economy, national economy or metropolitan area real estate market could adversely affect the financial condition and results of operations of the Company, including through decreased demand for loans or increased competition for good loans, increased non-performing loans and loan losses and resulting additional provisions for loan losses and for losses on real estate owned. Although management of the Bank believes that the current allowance for loan losses is adequate in light of current economic conditions, many factors could require additions to the allowance for loan losses in future periods above those currently maintained. These factors include: (1) adverse changes in economic conditions and changes in interest rates that may affect the ability of borrowers to make payments on loans, (2) changes in the financial capacity of individual borrowers, (3) changes in the local real estate market and the value of the Bank’s loan collateral, and (4) future review and evaluation of the Bank’s loan portfolio, internally or by regulators. The amount of the allowance for loan losses at any time represents good faith estimates that are susceptible to significant changes due to changes in appraisal values of collateral, national and regional economic conditions, prevailing interest rates and other factors. See “Business — General — Allowance for Loan Losses” in Item 1 of this Annual Report.

Legislation and Proposed Changes

From time to time, legislation is enacted or regulations are promulgated that have the effect of increasing the cost of doing business, limiting or expanding permissible activities or affecting the competitive balance between banks and other financial institutions. Proposals to change the laws and regulations governing the operations and taxation of banks and other financial institutions are frequently made in Congress, in the New York legislature and before various bank regulatory agencies. No prediction can be made as to the likelihood of any major changes or the impact such changes might have on the Bank or the Company. For a discussion of regulations affecting the Company, see “Business —Regulation” and “Business—Federal, State and Local Taxation” in Item 1 of this Annual Report.

Certain Anti-Takeover Provisions

On September 17, 1996, the Holding Company adopted a Stockholder Rights Plan (the “Rights Plan”) designed to preserve long-term values and protect stockholders against stock accumulations and other abusive tactics to acquire control of the Holding Company. Under the Rights Plan, each stockholder of record at the close of business on September 30, 1996 received a dividend distribution of one right to purchase from the Holding Company one-three-hundred-thirty-seventh-and-one-half of a share of a new series of junior participating preferred stock at a price of $64, subject to certain adjustments. The rights will become exercisable only if any person or group acquires 15% or more of the Holding Company’s common stock (“Common Stock”) or commences a tender or exchange offer which, if consummated, would result in that person or group owning at least 15% of the Common Stock (the “acquiring person or group”). In such case, all stockholders other than the acquiring person or group will be entitled to purchase, by paying the $64 exercise price, Common Stock (or a common stock equivalent) with a value of twice the exercise price. In addition, at any time after such event, and prior to the acquisition by any person or group of 50% or more of the Common Stock, the Board of Directors may, at its option, require each outstanding right (other than rights held by the acquiring person or group) to be exchanged for one share of Common Stock (or one common stock equivalent). The rights expire on September 30, 2006.

The Rights Plan, as well as certain provisions of the Holding Company’s certificate of incorporation and bylaws, the Bank’s federal stock charter and bylaws, certain federal regulations and provisions of Delaware corporation law, and certain provisions of remuneration plans and agreements applicable to employees and officers of the Bank may have anti-takeover effects by discouraging potential proxy contests and other takeover attempts, particularly those which have not been negotiated with the Board of Directors. The Rights Plan and those other provisions, as well as applicable regulatory restrictions, may also prevent or inhibit the acquisition of a controlling position in the Common Stock and may prevent or inhibit takeover attempts that certain stockholders may deem to be in their or other stockholders’ interest or in the interest of the Holding Company, or in which stockholders may receive a substantial premium for their shares over then current market prices. The Rights Plan and those other provisions may also increase the cost of, and thus discourage, any such future acquisition or attempted acquisition, and would render the removal of the current Board of Directors or management of the Holding Company more difficult.

Item 1B. Unresolved Staff Comments.

None.

Item 2. Properties.

The Bank conducts its business through nine full-service offices. The Company’s executive offices are located in Lake Success, in Nassau County, NY.

Office

Leased or
Owned

Date Leased
or Acquired

Lease
Expiration Date

Net Book Value at
December 31, 2005

Corporate Headquarters

1979 Marcus Avenue, Suite E140

Lake Success, N.Y. 11042

Leased

2004

3/31/2015

1,312,088

Main Office Branch

144-51 Northern Boulevard

Flushing, N.Y. 11354

Owned

1972

N/A

2,261,296

Broadway Branch

159-18 Northern Boulevard

Flushing, N.Y. 11358

Owned

1962

N/A

728,886

Auburndale Branch

188-08 Hollis Court Boulevard

Flushing, N.Y. 11358

Owned

1991

N/A

734,683

Springfield Branch

61-54 Springfield Boulevard

Bayside, N.Y. 11364

Leased

1991

11/30/2006

93,926

Bay Ridge Branch

7102 Third Avenue

Brooklyn, N.Y. 11209

Owned

1991

N/A

343,051

Irving Place Branch

33 Irving Place

New York, N.Y. 10003

Leased

1991

11/30/2011

144,239

New Hyde Park Branch

661 Hillside Avenue

New Hyde Park, N.Y. 11040

Leased

1971

12/31/2011

231,850

Kissena Branch

44-43 Kissena Boulevard

Flushing, N.Y. 11355

Leased

2000

4/30/2010

278,539

Bell Boulevard Branch (1)

42-11 Bell Boulevard

Bayside, N.Y. 11361

Leased

2005

11/30/2020

298,273

Astoria Branch

31-16 30th Avenue

Astoria, N.Y. 11102

Leased

2003

10/31/2013

811,031

Total premises and equipment, net

7,237,862

(1) New location currently under renovation - Spring 2006 opening anticipated

The Holding Company neither owns nor leases any property but instead uses the premises and equipment of the Bank.

Item 3. Legal Proceedings.

The Bank is involved in various legal actions arising in the ordinary course of its business which, in the aggregate, involve amounts which are believed by management to be immaterial to the financial condition, results of operations and cash flows of the Bank.

Item 4. Submission of Matters to a Vote of Security Holders.

None.

PART II

Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Flushing Financial Corporation Common Stock is traded on the NASDAQ National Market^® under the symbol “FFIC”. As of December 31, 2005, the Company had approximately 674 shareholders of record, not including the number of persons or entities holding stock in nominee or street name through various brokers and banks. The Company’s stock closed at $15.57 on December 30, 2005. The following table shows the high and low sales price of the Common Stock during the periods indicated. Such prices do not necessarily reflect retail markups, markdowns, or commissions. See Note 11 of Notes to Consolidated Financial Statements in Item 8 of this Annual Report for dividend restrictions.

	2005						2004

	High		Low		Dividend		High		Low		Dividend

First Quarter	$	20.23	$	17.17	$	0.10	$	19.50	$	17.57	$	0.08
Second Quarter		18.75		15.55		0.10		18.93		16.35		0.09
Third Quarter		19.65		15.87		0.10		19.19		16.48		0.09
Fourth Quarter		17.52		13.95		0.10		21.50		18.80		0.09

The following table sets forth information regarding the shares of common stock repurchased by the Company during the quarter ended December 31, 2005.

	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Program	Maximum Number of Shares that May Yet Be Purchased Under the Plans or Program

October 1 to October 31, 2005		11,700	$	15.62	11,700		774,650
November 1 to November 30, 2005		—		—	—		774,650
December 1 to December 31, 2005		156		16.20	—		774,650

Total		11,856	$	15.63	11,700		774,650

During the quarter ended December 31, 2005, the Company purchased 156 common shares from employees, at an average cost of $16.20, to satisfy tax obligations due from the employees upon vesting of restricted stock awards.

The current common stock repurchase program was approved by the Company’s Board of Directors on August 17, 2004. This repurchase program 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. Stock repurchases under this program will be made from time to time, on the open market or in privately negotiated transactions, at the discretion of the management of the Company.

Item 6. Selected Financial Data.

At or for the years ended December 31,	2005			2004			2003			2002			2001

	*(Dollars in thousands, except per share data)*
Selected Financial Condition Data
Total assets	$	2,353,208		$	2,058,044		$	1,910,751		$	1,652,958		$	1,487,529
Loans, net		1,881,876			1,516,507			1,269,521			1,169,560			1,067,197
Securities available for sale		337,761			435,745			535,709			358,984			305,539
Real estate owned, net		—			—			—			—			93
Deposits		1,467,287			1,292,797			1,169,909			1,011,825			828,582
Borrowed funds		689,710			584,736			578,142			493,164			513,435
Stockholders’ equity		176,467			160,653			146,762			131,386			133,387
Book value per share (1)(2)	$	9.07		$	8.35		$	7.61		$	6.95		$	6.59

Selected Operating Data
Interest and dividend income	$	132,439		$	118,724		$	112,339		$	106,906		$	101,899
Interest expense		64,229			52,233			52,176			54,564			59,702

Net interest income		68,210			66,491			60,163			52,342			42,197
Provision for loan losses		—			—			—			—			—

Net interest income after provision
for loan losses		68,210			66,491			60,163			52,342			42,197
Non-interest income:
Net (losses) gains on sales of securities
and loans		(45	)		206			329			(4,158	)		321
Other income		6,692			5,737			5,956			5,667			5,737

Total non-interest income		6,647			5,943			6,285			1,509			6,058
Non-interest expense		36,264			35,389			31,226			27,621			24,457

Income before income tax provision		38,593			37,045			35,222			26,230			23,798
Income tax provision		15,051			14,396			13,544			9,967			8,869

Net income	$	23,542		$	22,649		$	21,678		$	16,263		$	14,929

Basic earnings per share (2)(3)	$	1.34		$	1.30		$	1.27		$	0.93		$	0.81
Diluted earnings per share (2)(3)	$	1.31		$	1.25		$	1.22		$	0.90		$	0.78
Dividends declared per share (2)	$	0.40		$	0.35		$	0.28		$	0.24		$	0.21
Dividend payout ratio		29.9	%		26.9	%		22.0	%		25.7	%		25.4	%


(Footnotes on the following page)

At or for the years ended December 31,


Selected Financial Ratios and Other Data

Performance ratios:
Return on average assets	1.07	%	1.13	%	1.21	%	1.03	%	1.06	%
Return on average equity	14.27		14.97		15.93		12.57		11.52
Average equity to average assets	7.47		7.56		7.57		8.22		9.19
Equity to total assets	7.50		7.81		7.68		7.95		8.97
Interest rate spread	3.03		3.30		3.37		3.32		2.89
Net interest margin	3.24		3.49		3.56		3.55		3.20
Non-interest expense to average assets	1.64		1.77		1.74		1.76		1.74
Efficiency ratio	48.03		48.79		47.00		47.41		50.06
Average interest-earning assets to average interest-bearing liabilities	1.07	x	1.07	x	1.06	x	1.06	x	1.07	x

Regulatory capital ratios: (4)
Tangible capital	7.14	%	7.89	%	8.00	%	7.74	%	7.32	%
Core capital	7.14		7.89		8.00		7.74		7.32
Total risk-based capital	12.12		14.01		15.12		14.27		13.58

Asset quality ratios:
Non-performing loans to gross loans (5)	0.13	%	0.06	%	0.05	%	0.31	%	0.22	%
Non-performing assets to total assets (6)	0.10		0.04		0.04		0.26		0.16
Net charge-offs to average loans	0.01		—		—		—		0.01
Allowance for loan losses to gross loans	0.34		0.43		0.51		0.56		0.61
Allowance for loan losses to total non-performing assets (6)	260.39		717.29		960.86		153.34		272.94
Allowance for loan losses to total non-performing loans (5)	260.39		717.29		960.86		183.23		283.85

Full-service customer facilities	9		10		11		10		10


(1)	Calculated by dividing stockholders’ equity of $176.5 million and $160.7 million at December 31, 2005 and 2004, respectively, by 19,465,844 and 19,232,248 shares outstanding at December 31, 2005 and 2004, respectively.

(2)	Per share data has been adjusted for the three-for-two stock split distributed on December 15, 2003 in the form of a stock dividend.

(3)	The shares held in the Company’s Employee Benefit Trust are not included in shares outstanding for purposes of calculating earnings per share. Unvested restricted stock and unvested restricted stock unit awards are not included in basic earnings per share calculations, but are included in diluted earnings per share calculations.


(4)	The Bank exceeded all minimum regulatory capital requirements during the periods presented.

(5)	Non-performing loans consist of non-accrual loans and loans delinquent 90 days or more that are still accruing.

(6)	Non-performing assets consist of non-performing loans, real estate owned and non-performing investment securities.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

General

Flushing Financial Corporation (“Holding Company”), a Delaware corporation, is the parent holding company for Flushing Savings Bank, FSB (“Bank”), a federally chartered stock savings bank. The Bank was organized in 1929 as a New York State chartered mutual savings bank. In 1994, the Bank converted to a federally chartered mutual savings bank and changed its name from Flushing Savings Bank to Flushing Savings Bank, FSB. The Bank converted to a federally chartered stock savings bank in 1995. As a federal savings bank, the Bank’s primary regulator is the Office of Thrift Supervision (“OTS”). The Bank’s deposits are insured to the maximum allowable amount by the Federal Deposit Insurance Corporation (“FDIC”). The Bank owns three subsidiaries: Flushing Preferred Funding Corporation, Flushing Service Corporation, and FSB Properties Inc.

The Holding Company also owns a special purpose business trust, Flushing Financial Capital Trust I (“Trust”). During 2002, the Trust issued $20.0 million of floating rate capital securities. The Trust invested the proceeds from the sale of the capital securities, and the issuance of its common stock, in $20.6 million of junior subordinated debentures issued by the Holding Company. Prior to 2004, the Trust was included in the consolidated financial statements. Effective January 1, 2004, the Trust is no longer included in the consolidated financial statements as the Holding Company does not have sufficient equity at risk, as defined in FASB Interpretation No. 46R.

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. Management views the Company as operating as a single unit, a community savings bank. Therefore, segment information is not provided.

Michael J. Hegarty, President and Chief Executive Officer, retired effective June 30, 2005. Mr. Hegarty had served in these positions since October 1998. He has continued on as a member of the Board of Directors of the Holding Company and the Bank. John R. Buran, who joined the Company in January 2001 as Executive Vice President and Chief Operating Officer, succeeded Mr. Hegarty as President and Chief Executive Officer.

Overview

The Company’s principal business is attracting retail deposits from the general public and investing those deposits together with funds generated from operations and borrowings, primarily in (1) originations and purchases of multi-family residential, commercial real estate and one-to-four family (focusing on mixed-use properties – properties that contain both residential dwelling units and commercial units) mortgage loans; (2) mortgage loan surrogates such as mortgage-backed securities; and (3) U.S. government and federal agency backed securities, corporate fixed-income securities and other marketable securities. The Company also originates certain other loans, including construction loans, Small Business Administration loans, other small business loans and 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 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.

Management Strategy. Management’s strategy is to continue the Bank’s focus as an institution serving consumers and businesses in its local markets. In furtherance of this objective, the Company intends to (1) continue its emphasis on the origination of multi-family residential, commercial real estate and one-to-four family mixed-use property mortgage loans, (2) maintain asset quality, (3) manage deposit growth and maintain a low cost of funds, (4) cross selling to its lending and deposit customers, (5) manage interest rate risk, (6) explore new business opportunities, and (7) manage capital. There can be no assurance that the Company will be able to effectively implement this strategy. The Company’s strategy is subject to change by the Board of Directors.

	Multi-Family Residential, Commercial Real Estate and One-to-Four Family Lending. In recent years, the Company has emphasized the origination of higher-yielding mortgage loan products. Market interest rates on mortgage loans began to rise during 2005. As a result, the Bank saw a reduction in borrowers seeking to refinance their mortgages, as compared to the prior three years. The Company has focused its origination efforts on higher-yielding multi-family residential, commercial real estate and one-to-four family mixed-use property mortgage loans. The Company expects to continue this emphasis on higher-yielding mortgage loan products.

	The following table shows loan originations and purchases during 2005, and loan balances as of December 31, 2005.

	Loan Originations and Purchases		Loan Balances December 31, 2005

	*(Dollars in thousands)*
Multi-family residential	$	223,074	$	788,071	41.92	%
Commercial real estate		103,090		399,081	21.23
One-to-four family — mixed-use property		186,700		477,775	25.42
One-to-four family — residential		13,186		134,641	7.17
Construction		46,414		49,522	2.63
Co-operative apartment		—		2,161	0.11
Small Business Administration		12,249		9,239	0.49
Commercial Business and Other		13,947		19,362	1.03

Total	$	598,660	$	1,879,852	100.00	%


	The Company’s increased emphasis on multi-family residential, commercial real estate and one-to-four family mixed-use property mortgage loans has increased the overall level of credit risk inherent in the Company’s loan portfolio. The greater risk associated with multi-family, commercial real estate and one-to-four family mixed-use property mortgage loans could require the Company to increase its provisions for loan losses and to maintain an allowance for loan losses as a percentage of total loans in excess of the allowance currently maintained by the Company. To date, the Company has not experienced significant losses in its multi-family residential, commercial real estate and one-to-four family mixed-use property mortgage loan portfolios, and has determined that, at this time, additional provisions are not required.

	Maintain Asset Quality. By adherence to its strict underwriting standards the Bank has been able to minimize net losses from impaired loans with net charge-offs of $148,000 and $20,000 for the years ended December 31, 2005 and 2004, respectively. The Company has maintained the strength of its loan portfolio, as evidenced by the Company’s ratio of its allowance for loan losses to non-performing loans of 260.39% and 717.29% at December 31, 2005 and 2004, respectively. The Company seeks to maintain its loans in performing status through, among other things, strict collection efforts, and consistently monitoring non-performing assets in an effort to return them to performing status. To this end, management reviews the quality of loans and reports to the Loan Committee of the Board of Directors of the Bank on a monthly basis. From time to time, the Company has sold and may continue to make sales of delinquent mortgage loans. The Bank sold eleven delinquent mortgage loans totaling $3.1 million and eleven delinquent mortgage loans totaling $4.3 million during the years ended December 31, 2005 and 2004, respectively. The terms of these loan sales included cash due upon closing of the sale, no contingencies or recourse to the Bank, servicing is released to the buyer and time is of the essence. The Bank did not incur any gains or losses in connection with these sales. There can be

	no assurances that the Bank will continue this strategy in future periods, or if continued, we will be able to find buyers to pay adequate consideration. Non-performing assets amounted to $2.5 million and $0.9 million at December 31, 2005 and 2004, respectively. Non-performing assets as a percentage of total assets were 0.10% and 0.04% at December 31, 2005 and 2004, respectively.

	Managing Deposit Growth and Maintaining Low Cost of Funds. The Company has a relatively stable retail deposit base drawn from its market area through its nine full-service offices. Although the Company seeks to retain existing deposits and maintain depositor relationships by offering quality service and competitive interest rates to its customers, the Company also seeks to keep deposit growth within reasonable limits and its strategic plan. The Company may also obtain deposits through brokers. Management intends to balance its goal to maintain competitive interest rates on deposits while seeking to manage its overall cost of funds to finance its strategies. The Company generally relies on its deposit base as its principal source of funding. However, the Bank is a member of the FHLB-NY, which provides it with a source of borrowing. In addition, the Bank utilizes reverse purchase agreements, established with other financial institutions. These borrowings help the Company fund asset growth and increase net interest income. During 2005, the Company realized an increase in due to depositors of $171.5 million and an increase in borrowed funds of $105.0 million.

	Cross Selling to its Lending and Deposit Customers. The Company has a significant portion of its lending and deposit customers who do not have both their loans and deposits with the Bank. The Bank intends to focus on obtaining additional deposits from its lending customers, and originating additional loans with its deposit customers. Product offerings will be expanded to provide the services these customers are seeking. Employees have been identified who have been assigned the responsibility to pursue obtaining these additional deposits and loans by coordinating efforts between lending and deposit gathering departments.

	Managing Interest Rate Risk. The Company seeks to manage its interest rate risk by actively reviewing the repricing and maturities of its interest rate sensitive assets and liabilities. The mix of loans originated by the Company (fixed or ARM) is determined in large part by borrowers’ preferences and prevailing market conditions. The Company seeks to manage the interest rate risk of the loan portfolio by actively managing its security portfolio and borrowings. By adjusting the mix of fixed and adjustable rate securities, as well as the maturities of the securities, the Company has the ability to manage the combined interest rate sensitivity of its assets. See “- Interest Rate Sensitivity Analysis.” Additionally, the Company seeks to balance the interest rate sensitivity of its assets by managing the maturities of its liabilities. During 2005, in response to the low interest rate environment, the Bank extended the maturity of borrowings as they matured, and focused on attracting longer-term certificates of deposit and brokered deposits. Management believes that the interest-rate exposure of the Company has been reduced by implementing these strategies.

	Exploring New Business Opportunities. The Company has in the past increased growth through acquisitions of financial institutions and branches of other financial institutions, and will continue to pursue growth through acquisitions that are, or are expected to be within a reasonable time frame, accretive to earnings, as well as evaluating the feasibility of opening additional branches. In December 2005, the Company announced the purchase of Atlantic Liberty Financial Corporation, which will enhance our franchise with two additional branches in Brooklyn and increase our assets by approximately $177 million. The transaction is expected to be completed near the end of the second quarter of 2006, subject to the approval of the shareholders of Atlantic Liberty and regulatory authorities. This transaction is expected to be accretive to both earnings per share and tangible book value per share. The Company has in the past opened new branches. The Company will open a new branch in Bayside, Queens in the spring of 2006. We plan to continue to seek and review potential acquisition opportunities that complement our current business, are consistent with our strategy to build a bank that is focused on the unique personal and small business banking needs of the multi-ethnic communities we serve, and will be accretive to earnings.

	Managing Capital. The Bank faces several minimum capital requirements imposed by the OTS. These requirements limit the dividends the Bank is allowed to pay to the Holding Company, and can limit the annual growth of the Bank. As part of the Company’s strategy to find ways to best utilize its available capital, during 2005, Flushing Financial Corporation continued its stock repurchase programs by repurchasing 144,700 shares of its common stock. At December 31, 2005, 774,650 shares remain to be repurchased under the current stock repurchase program. The Company had 1,050 shares held in treasury and 19,465,844 shares outstanding at December 31, 2005.

Common Stock Split. On November 18, 2003, the Board of Directors of the Company declared a three-for-two stock split of the Company’s common stock in the form of a 50% stock dividend, which was paid on December 15, 2003. Each stockholder received one additional share for every two shares of the Company’s common stock held at the

record date, December 1, 2003. Cash was paid in lieu of fractional shares. The Company issued 6,430,058 shares of its common stock, of which 1,011,660 shares had been held as treasury stock. Share and per share amounts in this Annual Report have been restated to reflect this three-for-two stock split paid on December 15, 2003

Trends and Contingencies. The Company’s operating results are significantly affected by national and local economic and competitive conditions, including changes in market interest rates, the strength of the local economy, government policies and actions of regulatory authorities. As interest rates began to rise during 2005, we remained strategically focused on the origination of multi-family residential, commercial real estate and one-to-four family mixed-use property mortgage loans. As a result of this strategy, we were able to continue to achieve a higher yield on our mortgage portfolio than we would have otherwise experienced.

Prevailing interest rates affect the extent to which borrowers repay and refinance loans. In a declining interest rate environment, the number of loan prepayments and loan refinancings tends to increase, as do prepayments of mortgage-backed securities. Call provisions associated with the Company’s investment in U.S. government agency and corporate securities may also adversely affect yield in a declining interest rate environment. Such prepayments and calls may adversely affect the yield of the Company’s loan portfolio and mortgage-backed and other securities as the Company reinvests the prepaid funds in a lower interest rate environment. However, the Company typically receives additional loan fees when existing loans are refinanced, which partially offsets the reduced yield on the Company’s loan portfolio resulting from prepayments. In periods of low interest rates, the Company’s level of core deposits also may decline if depositors seek higher-yielding instruments or other investments not offered by the Company, which in turn may increase the Company’s cost of funds and decrease its net interest margin to the extent alternative funding sources are utilized. By contrast, an increasing interest rate environment would tend to extend the average lives of lower yielding fixed rate mortgages and mortgage-backed securities, which could adversely affect net interest income. In addition, depositors tend to open longer term, higher costing certificate of deposit accounts which could adversely affect the Bank’s net interest income if rates were to subsequently decline. Additionally, adjustable rate residential mortgage loans and mortgage-backed securities generally contain interim and lifetime caps that limit the amount the interest rate can increase at re-pricing dates.

During 2005, the Federal Reserve continued to increase short term interest rates. However, longer term interest rates remained relatively stable. As a result, the yield curve flattened to the point where there was little difference between the rate on overnight funds and the rate on ten year bonds. This flattening of the yield curve compressed the Company’s net interest margin, as there was a decline in the spread between the rate the Company received on loans originated compared to the rate paid on new deposits. However, since demand remained strong for our higher-yielding loan products, we grew our loan portfolio $365.4 million. We funded this growth with principal payments received on our securities portfolio, deposit growth, and borrowings. At December 31, 2005, we had loans in process of $179.4 million.

For the year ended December 31, 2005, certificates of deposit increased $194.8 million, while lower costing deposits decreased $23.3 million. To fund the strong demand for our loan products, the growth in deposits was augmented by an increase in borrowed funds of $105.0 million during 2005. The cost of funds rose to 3.49% in the fourth quarter of 2005 from 3.00% in the fourth quarter of 2004.

As a result of the growth in our higher-yielding loan portfolio, and the decrease in the lower-yielding securities portfolios, the yield on our total interest-earning assets increased 7 basis points during 2005 from 2004. However, primarily as a result of the interest rate increases by the Federal Reserve, the cost of our total interest-bearing liabilities increased 34 basis points. This resulted in a decrease in our interest rate spread of 27 basis points to 3.03% for the year ended December 31, 2005 from 3.30% for the year ended December 31, 2004. The net interest rate margin decreased 25 basis points to 3.24% for the year ended December 31, 2005 from 3.49% for the year ended December 31, 2004. The net interest margin declined to 3.08% in the fourth quarter of 2005 from 3.35% in the fourth quarter of 2004.

We are unable to predict the direction of future interest rate changes. However, since short-term interest rates have increased without a corresponding increase in long-term interest rates, we may continue to see reductions in our net interest margin. In addition, the cost of our existing deposit accounts, and the cost of obtaining new funds, may continue to increase. Approximately 43% of the Company’s certificates of deposit accounts and borrowed funds reprice or mature during the next year, which may result in an increase in the cost of our interest-bearing liabilities. Also, in an increasing interest rate environment, mortgage loans and mortgage-backed securities with lower rates do not usually prepay as quickly. A reduction in the level of our mortgagors refinancing their loans would reduce prepayment penalties we receive, resulting in a reduction in the yield on our mortgage portfolio and net interest income. In a rising interest rate environment, this has resulted in our cost of funds increasing more than the yield on our interest-earning assets.

During 2005, the nation’s economy was generally considered to be expanding. Yet, world events, particularly the “War on Terror” and the level of oil prices, continued to have an effect on the economic recovery. These economic conditions can result in borrowers defaulting on their loans, or withdrawing their funds on deposit at the Bank to meet their financial obligations. While we have not seen a significant increase in delinquent loans, and have seen an increase in deposits, we cannot predict the effect of these economic conditions on the Company’s financial condition or operating results.

Interest Rate Sensitivity Analysis

A financial institution’s exposure to the risks of changing interest rates may be analyzed, in part, by examining the extent to which its assets and liabilities are “interest rate sensitive” and by monitoring the institution’s interest rate sensitivity “gap.” An asset or liability is said to be interest rate sensitive within a specific time period if it will mature or reprice within that time period. The interest rate sensitivity gap is defined as the difference between the amount of interest-earning assets maturing or repricing within a specific time period and the amount of interest-bearing liabilities maturing or repricing within that time period. A gap is considered positive when the amount of interest-earning assets maturing or repricing exceeds the amount of interest-bearing liabilities maturing or repricing within the same period. A gap is considered negative when the amount of interest-bearing liabilities maturing or repricing exceeds the amount of interest-earning assets maturing or repricing within the same period. Accordingly, a positive gap may enhance net interest income in a rising rate environment and reduce net interest income in a falling rate environment. Conversely, a negative gap may enhance net interest income in a falling rate environment and reduce net interest income in a rising rate environment.

The table below sets forth the amounts of interest-earning assets and interest-bearing liabilities outstanding at December 31, 2005 which are anticipated by the Company, based upon certain assumptions, to reprice or mature in each of the future time periods shown. Except as stated below, the amount of assets and liabilities shown which reprice or mature during a particular period was determined in accordance with the earlier of the term to repricing or the contractual terms of the asset or liability. Prepayment assumptions for mortgage loans and mortgage-backed securities are based on the Bank’s experience and industry averages, which generally range from 6% to 25%, depending on the contractual rate of interest and the underlying collateral. Money Market accounts opened with promotional rates are shown in the time period they are scheduled to reprice. The remaining Money Market accounts and Savings accounts were assumed to have a withdrawal or “run-off” rate of 30% and 20%, respectively, based on the Bank’s experience. While management believes that these assumptions are indicative of actual prepayments and withdrawals experienced by the Company, there is no guarantee that these trends will continue in the future.


	Interest Rate Sensitivity Gap Analysis at December 31, 2005

	Three Months And Less			More Than Three Months To One Year			More Than One Year To Three Years			More Than Three Years To Five Years			More Than Five Years To Ten Years			More Than Ten Years			Total

	*(Dollars in thousands)*

Interest-Earning Assets
Mortgage loans	$	144,034		$	282,652		$	610,976		$	602,894		$	175,918		$	34,777		$	1,851,251
Other loans		15,079			4,495			7,090			924			1,013			—			28,601
Short-term securities (1)		4,396			—			—			—			—			—			4,396
Securities available for sale:
Mortgage-backed securities		13,913			43,734			102,998			59,624			36,892			44,033			301,194
Other		24,972			4,967			184			—			5,944			500			36,567

Total interest-earning assets		202,394			335,848			721,248			663,442			219,767			79,310			2,222,009


Interest-Bearing Liabilities
Savings accounts		13,688			41,064			109,504			109,497			—			—			273,753
NOW accounts		—			—			—			—			—			42,029			42,029
Money market accounts		39,177			64,825			68,395			2,850			—			—			175,247
Certificate of deposit accounts		119,403			370,667			190,856			175,098			42,133			—			898,157
Mortgagors’ escrow deposits		—			—			—			—			—			19,423			19,423
Borrowed funds		110,626			75,021			363,963			140,073			27			—			689,710

Total interest-bearing liabilities (2)	$	282,894		$	551,577		$	732,718		$	427,518		$	42,160		$	61,452		$	2,098,319


Interest rate sensitivity gap	$	(80,500	)	$	(215,729	)	$	(11,470	)	$	235,924		$	177,607		$	17,858		$	123,690
Cumulative interest-rate sensitivity gap	$	(80,500	)	$	(296,229	)	$	(307,699	)	$	(71,775	)	$	105,832		$	123,690
Cumulative interest-rate sensitivity gap as a percentage of total assets		-3.42	%		-12.59	%		-13.08	%		-3.05	%		4.50	%		5.26	%
Cumulative net interest-earning assets as a percentage of interest-bearing liabilities		71.54	%		64.50	%		80.37	%		96.40	%		105.20	%		105.89	%


(1)	Consists of interest-earning deposits and federal funds sold.

(2)	Does not include non-interest bearing demand accounts totaling $58.7 million at December 31, 2005.

Certain shortcomings are inherent in the method of analysis presented in the foregoing table. For example, although certain assets and liabilities may have similar estimated maturities or periods to repricing, they may react in differing degrees to changes in market interest rates and may bear rates that differ in varying degrees from the rates that would apply upon maturity and reinvestment or upon repricing. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets, such as ARM loans, have features that restrict changes in interest rates on a short-term basis and over the life of the asset. Further, in the event of a significant change in the level of interest rates, prepayments on loans and mortgage-backed securities, and deposit withdrawal or “run-off” levels, would likely deviate materially from those assumed in calculating the above table. In the event of an interest rate increase, some borrowers may be unable to meet the increased payments on their adjustable-rate debt. The interest rate sensitivity analysis assumes that the nature of the Company’s assets and liabilities remains static. Interest rates may have an effect on customer preferences for deposits and loan products. Finally, the maturity and repricing characteristics of many assets and liabilities as set forth in the above table are not governed by contract but rather by management’s best judgment based on current market conditions and anticipated business strategies.

Interest Rate Risk

The Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America, which requires 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 operations 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) 300 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 ratio, focusing on a rate shock up or down of 200 basis points. The OTS uses the change in Net Portfolio Value Ratio to measure the interest rate sensitivity of the Company. 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 December 31, 2005. Various estimates regarding prepayment assumptions are made at each level of rate shock. Actual results could differ significantly from these estimates. At December 31, 2005, the Company is within the guidelines established by the Board of Directors for each interest rate level.

	Projected Percentage Change In
												Net Portfolio Value Ratio
Change in Interest Rate	Net Interest Income						Net Portfolio Value					Net Portfolio Value Ratio

	2005			2004			2005			2004		2005			2004

-300 basis points		4.91	%		-19.13	%		24.57	%		-14.13%		10.79	%		8.82	%
-200 basis points		5.00			-6.71			17.20			-6.47		10.36			9.69
-100 basis points		4.37			-1.25			9.93			-0.95		9.92			10.39
Base interest rate		—			—			—			—		9.23			10.67
+100 basis points		-3.27			-2.85			-11.28			-7.12		8.39			10.16
+200 basis points		-6.57			-6.94			-23.10			-17.38		7.46			9.29
+300 basis points		-11.62			-12.30			-36.27			-28.48		6.35			8.27

Analysis of Net Interest Income

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 the Consolidated Statements of Income for the years ended December 31, 2005, 2004 and 2003, 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 that are considered adjustments to yields.

	For the year ended December 31,

	2005							2004							2003

	Average Balance		Interest		Yield/ Cost			Average Balance		Interest		Yield/ Cost			Average Balance		Interest		Yield/ Cost

	*(Dollars in thousands)*
Interest-earning assets:
Mortgage loans, net (1)(2)	$	1,687,701	$	114,319		6.77	%	$	1,376,685	$	97,367		7.07	%	$	1,198,720	$	92,922		7.75	%
Other loans, net (1)(2)		23,136		1,531		6.62			12,742		787		6.18			8,647		554		6.41

Total loans, net		1,710,837		115,850		6.77			1,389,427		98,154		7.06			1,207,367		93,476		7.74

Mortgage-backed securities		353,364		14,949		4.23			447,209		18,516		4.14			416,851		16,998		4.08
Other securities		39,149		1,523		3.89			52,621		1,836		3.49			50,274		1,699		3.38

Total securities		392,513		16,472		4.20			499,830		20,352		4.07			467,125		18,697		4.00

Interest-earning deposits and federal funds sold		3,586		117		3.26			18,066		218		1.21			16,708		166		0.99

Total interest-earning assets		2,106,936		132,439		6.29			1,907,323		118,724		6.22			1,691,200		112,339		6.64

Other assets		100,726							95,231							106,564

Total assets	$	2,207,662						$	2,002,554						$	1,797,764


Interest-bearing liabilities:
Deposits:
Passbook accounts	$	241,121		2,225		0.92		$	218,336		1,092		0.50		$	217,435		1,611		0.74
NOW accounts		43,133		216		0.50			44,103		221		0.50			40,483		257		0.63
Money market accounts		228,818		5,199		2.27			279,952		5,122		1.83			229,141		4,758		2.08
Certificate of deposit accounts		748,747		26,960		3.60			644,328		22,487		3.49			570,208		20,835		3.65

Total due to depositors		1,261,819		34,600		2.74			1,186,719		28,922		2.44			1,057,267		27,461		2.60
Mortgagors’ escrow accounts		27,337		57		0.21			20,482		50		0.24			15,018		60		0.40

Total interest-bearing deposits		1,289,156		34,657		2.69			1,207,201		28,972		2.40			1,072,285		27,521		2.57
Borrowed funds		683,039		29,572		4.33			580,550		23,261		4.01			524,871		24,655		4.70

Total interest-bearing liabilities		1,972,195		64,229		3.26			1,787,751		52,233		2.92			1,597,156		52,176		3.27

Non interest-bearing demand deposits		52,017							45,093							36,054
Other liabilities		18,499							18,415							28,486

Total liabilities		2,042,711							1,851,259							1,661,696
Equity		164,951							151,295							136,068

Total liabilities and equity	$	2,207,662						$	2,002,554						$	1,797,764


Net interest income / net interest rate spread (3)			$	68,210		3.03	%			$	66,491		3.30	%			$	60,163		3.37	%


Net interest-earning assets / net interest margin (4)	$	134,741				3.24	%	$	119,572				3.49	%	$	94,044				3.56	%


Ratio of interest-earning assets to interest-bearing liabilities						1.07	X						1.07	X						1.06	X


(1)	Average balances include non-accrual loans.

(2)	Loan interest income includes loan fee income (which includes net amortization of deferred fees and costs, late charges, and prepayment penalties) of approximately $4.2 million, $4.6 million and $4.8 million for the years ended December 31, 2005, 2004 and 2003, respectively.

(3)	Interest rate spread represents the difference between the average rate on interest-earning assets and the average cost of interest-bearing liabilities.

(4)	Net interest margin represents net interest income before the provision for loan losses divided by average interest-earning assets.

Rate/Volume Analysis

The following table presents the impact of changes in interest rates and in the volume of interest-earning assets and interest-bearing liabilities on the Company’s interest income and interest expense during the periods indicated. Information is provided in each category with respect to (1) changes attributable to changes in volume (changes in volume multiplied by the prior rate), (2) changes attributable to changes in rate (changes in rate multiplied by the prior volume) and (3) the net change. The changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate.

	Increase (Decrease) in Net Interest Income

	Year Ended December 31, 2005 Compared to Year Ended December 31, 2004									Year Ended December 31, 2004 Compared to Year Ended December 31, 2003

	Due to									Due to

	Volume			Rate			Net			Volume		Rate			Net

	*(Dollars in thousands)*
Interest-Earning Assets:
Mortgage loans, net	$	21,225		$	(4,273	)	$	16,952		$	13,040	$	(8,595	)	$	4,445
Other loans, net		684			60			744			254		(21	)		233
Mortgage-backed securities		(3,961	)		394			(3,567	)		1,263		255			1,518
Other securities		(507	)		194			(313	)		81		56			137
Interest-earning deposits and federal funds sold		(270	)		169			(101	)		14		38			52

Total interest-earning assets		17,171			(3,456	)		13,715			14,652		(8,267	)		6,385


Interest-Bearing Liabilities:
Deposits:
Passbook accounts		125			1,008			1,133			7		(526	)		(519	)
NOW accounts		(5	)		—			(5	)		21		(57	)		(36	)
Money market accounts		(1,031	)		1,108			77			979		(615	)		364
Certificate of deposit accounts		3,744			729			4,473			2,600		(948	)		1,652
Mortgagors’ escrow accounts		14			(7	)		7			18		(28	)		(10	)
Other borrowed funds		4,346			1,965			6,311			2,454		(3,848	)		(1,394	)

Total interest-bearing liabilities		7,193			4,803			11,996			6,079		(6,022	)		57

Net change in net interest income	$	9,978		$	(8,259	)	$	1,719		$	8,573	$	(2,245	)	$	6,328

Comparison of Operating Results for the Years Ended December 31, 2005 and 2004

General. Diluted earnings per share increased 4.8% to $1.31 for the year ended December 31, 2005 from $1.25 for the year ended December 31, 2004. Net income increased $0.9 million, or 3.9%, to $23.5 million for the year ended December 31, 2005 from $22.6 million for the year ended December 31, 2004. This was due to a $1.7 million increase in net interest income, partially offset by an increase in the net loss from the sale of securities of $0.5 million and a charge in the third quarter of 2005 of $0.5 million, $0.3 million on an after-tax basis or $0.02 per diluted share, for expenses incurred in connection with our terminated negotiations to acquire another financial institution. The negotiations were terminated after several months as the parties were unable to come to agreement on terms. The year ended December 31, 2004 included charges of $1.1 million, $0.7 million on an after-tax basis or $0.04 per diluted share, related to the retirement of an executive, the relocation of various departments as a result of the move of our executive offices to Nassau County, and the additional expenses incurred for initial compliance with the provisions of the Sarbanes-Oxley Act. In addition, 2004 also included a charge of $1.1 million, $0.7 million on an after-tax basis or $0.04 per diluted share, for compensation expense for certain of the Company’s restricted stock awards and supplemental retirement benefits.

Return on average assets declined to 1.07% for the year ended December 31, 2005 from 1.13% for the year ended December 31, 2004. Return on average equity decreased to 14.27% for the year ended December 31, 2005 from 14.97% for the year ended December 31, 2004.

Interest Income. Interest income increased $13.7 million, or 11.6%, to $132.4 million for the year ended December 31, 2004 from $118.7 million for the year ended December 31, 2004. This is the result of a $199.6 million increase in the average balance of interest-earning assets during 2005 compared to 2004. The average balance of the higher-yielding mortgage loan portfolio increased $311.0 million, while the average balance of the lower-yielding

securities portfolios declined $107.3 million. In addition, the average balance of interest-earning deposits declined $14.5 million. The yield on the mortgage loan portfolio decreased 30 basis points to 6.77% during 2005 from 7.07% during 2004. This decrease is due to the average rate on new loans originated during the year being below the average rate on both the mortgage loan portfolio and loans which were paid-in-full. This decrease has been partially offset by prepayment penalties that have been collected. Interest income included $4.1 million and $4.3 million in prepayment penalties collected during the years ended December 31, 2005 and 2004, respectively. Our focus on the origination of higher-yielding multi-family residential and commercial real estate mortgage loans, along with the origination of one-to-four family mixed-use property mortgage loans, allowed us to maintain a higher yield on our mortgage loan portfolio than we would have otherwise experienced. The yield on interest-earning assets increased seven basis points to 6.29% during 2005 from 6.22% during 2004, primarily due to the increase in the average balance of the higher-yielding mortgage loan portfolio combined with the decrease in the lower-yielding securities portfolios. Excluding prepayment penalties from interest income, the yield on loans would have been 6.53% and 6.76%, and the yield on total interest-earning assets would have been 6.09% and 6.00%, in each case, for the years ended December 31, 2005 and 2004, respectively.

The interest income from securities decreased $3.9 million, as the average balances declined $107.3 million for the year ended December 31, 2005 to $392.5 million, partially offset by a 13 basis point increase in the yield to 4.20% during 2005 from 4.07% during 2004. The decrease in the average balance of the securities portfolio is a result of the Bank’s current strategy to reduce the lower-yielding securities portfolio and shift these funds to the higher-yielding mortgage loan portfolio. Interest income from interest-earning deposits and federal funds sold declined due to the decrease in the average balance during 2005 compared to 2004, partially offset by an increase in the yield of 205 basis points for the year ended December 31, 2005 compared to the year ended December 31, 2004.

Interest Expense. Interest expense increased $12.0 million to $64.2 million, or 23.0%, for the year ended December 31, 2005, from $52.2 million for the year ended December 31, 2004. An increase of $184.4 million in the average balance of interest-bearing liabilities was combined with a 34 basis point rise in the cost of interest-bearing liabilities to 3.26% for the year ended December 31, 2005 from 2.92% for the year ended December 31, 2004. The increase in the cost of interest-bearing liabilities was attributed to an increase in the average balances of certificates of deposit, borrowed funds and savings accounts of $104.4 million, $102.5 million and $22.8 million, respectively, combined with an 11 basis point, 32 basis point and 42 basis point increase in their respective costs.

Net Interest Income. Net interest income for the year ended December 31, 2005 totaled $68.2 million, an increase of $1.7 million, or 2.6%, from $66.5 million for 2004. The net interest spread declined 27 basis points to 3.03% for 2005 from 3.30% in 2004, as the yield on interest-earning assets increased seven basis points while the cost of interest-bearing liabilities increased 34 basis points. The net interest margin declined 25 basis points to 3.24% for the year ended December 31, 2005 from 3.49% for the year ended December 31, 2004. Excluding prepayment penalty income, the net interest margin would have been 3.04% and 3.26% for the years ended December 31, 2005 and 2004, respectively.

Provision for Loan Losses. There was no provision for loan losses for the years ended December 31, 2005 and 2004. 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, and an improvement in local economic conditions and real estate values. As a result of these improvements, and despite the growth in the loan portfolio, primarily in multi-family residential, commercial, and one-to-four family mixed-use property mortgage loans, no adjustment to the allowance for loan losses was deemed necessary for the years ended December 31, 2005 and 2004. The ratio of non-performing loans to gross loans was 0.13% at December 31, 2005 compared to 0.06% at December 31, 2004. The allowance for loan losses as percentage of non-performing loans was 260.39% and 717.29% at December 31, 2005 and 2004, respectively. The ratio of allowance for loan losses to gross loans was 0.34% and 0.43% at December 31, 2005 and 2004, respectively. The Company experienced net charge-offs of $148,000 and $20,000 for the years ended December 31, 2005 and 2004, respectively.

Non-Interest Income. Non-interest income increased $0.7 million, or 11.8%, to $6.6 million for the year ended December 31, 2005, as compared to $5.9 million for same period in 2004. The increase was primarily attributed to increases of $0.3 million in gains on the sale of loans originated for sale, $0.7 million in dividends received on FHLB-NY stock, and $0.2 million in loan fee income (primarily due to an increase in miscellaneous fees collected at the time mortgage loans paid-in-full prior to their maturity), partially offset by an increase of $0.5 million in the net loss on the sale of securities. During the fourth quarter of 2005, $29.9 million of securities with an average yield of 3.23% were

sold, with the proceeds invested in $29.6 million of securities with an average yield of 5.58%. This resulted in a net loss from the sale of these securities of $0.6 million. The increased yield on the securities we purchased should allow us to recover the loss incurred within one year.

Non-Interest Expense. Non-interest expense was $36.3 million for the year ended December 31, 2005, an increase of $0.9 million, or 2.5%, from $35.4 million for the year ended December 31, 2004. The increase from the prior year period is attributed to: $0.5 million in occupancy and equipment primarily due to a full year of operating expenses for the Company’s executive offices which were relocated in the third quarter of 2004; $0.3 million in audit and exam fees related to the increased compliance requirements of the Sarbanes-Oxley Act; $0.5 million for legal expenses recorded in the third quarter in connection with the terminated negotiations to acquire another financial institution; $0.4 million in advertising costs for campaigns to attract new deposits; $0.4 million in data processing expense; $0.4 in employee pension and health benefits: $0.2 million for the cost of certain restricted stock unit awards granted in the current period as the participants had no risk of forfeiture; and $0.3 million in board of director fees due to the increases in the size of the board of directors and the number of meetings. The increased cost of restricted stock units in the current period compared to the prior period is due to the increased level of the awards to non-employee directors. The 2005 Omnibus Incentive Plan, approved at the annual stockholders meeting, increased annual grants to each non-employee director to 3,600 restricted stock units, while eliminating grants of stock options for non-employee directors. This will provide an expense benefit beginning in 2006 when we will be required to expense stock option grants. These increases were offset by decreases in salaries and employee benefits and other operating expenses of $0.9 million and $0.2 million, respectively, due to the 2004 adjustment to amortization of compensation expense for certain of the Company’s restricted stock awards and supplemental retirement benefits, and $0.2 million and $0.8 million, recorded in the second and fourth quarters of 2004, respectively, to reflect amounts due under retirement agreements with the former Chief Financial Officer and former Chief Executive Officer, respectively. Management continues to monitor expenditures resulting in efficiency ratios of 48.0% and 48.8% for years ended December 31, 2005 and 2004, respectively.

Income Tax Provisions. Income tax expense for the year ended December 31, 2005 increased $0.7 million to $15.1 million, compared to $14.4 million for the year ended December 31, 2004. This increase is primarily attributed to the increase of $1.5 million in income before income taxes. The effective tax rate was 39.0% for the year ended December 31, 2005 compared to 38.9% for the year ended December 31, 2004.

Comparison of Operating Results for the Years Ended December 31, 2004 and 2003

General. Diluted earnings per share increased 2.5% to $1.25 for the year ended December 31, 2004 from $1.22 for the year ended December 31, 2003. Net income increased $1.0 million, or 4.5%, to $22.6 million for the year ended December 31, 2004 from $21.7 million for the year ended December 31, 2003. This was due to a $6.3 million increase in net interest income, partially offset by an increase in non-interest expense of $4.2 million. As a result of the increased net income before income taxes, there was a $0.9 million increase in income tax expense. The increase in non-interest expense included $1.1 million in expense recorded in the first quarter of 2004, relating to an adjustment of compensation expense for certain of the Company’s restricted stock awards and supplemental retirement benefits to reflect that certain participants under these plans had reached, or were close to reaching, retirement eligibility, at which time awards fully vest. Although this adjustment related to prior periods, the amount of the charge attributable to any prior year would not have been material to the Company’s financial condition or results of operations as reported for that year. Non-interest expense also includes $0.2 million and $0.8 million, recorded in the second and fourth quarters of 2004, respectively, to reflect amounts due under retirement agreements with the former Chief Financial Officer and former Chief Executive Officer, respectively. In addition, non-interest expense in 2004 included $0.4 million of costs incurred to comply with the Sarbanes-Oxley Act of 2002.

Return on average assets declined to 1.13% for the year ended December 31, 2004 from 1.21% for the year ended December 31, 2003. Return on average equity decreased to 14.97% for the year ended December 31, 2004 from 15.93% for the year ended December 31, 2003.

Interest Income. Interest income increased $6.4 million, or 5.7%, to $118.7 million for the year ended December 31, 2004 from $112.3 million for the year ended December 31, 2003. This increase was primarily the result of a $216.1 million increase in the average balance of interest-earning assets during 2004 compared to 2003. The average balance of loans, securities and interest-earning deposits increased $182.1 million, $32.7 million and $1.4 million, respectively.

The yield on interest-earning assets declined 42 basis points to 6.22% during 2004 from 6.64% during 2003. Interest and fees on loans increased $4.7 million primarily as a result of the increase in the average balance. The yield on loans decreased 68 basis points to 7.06% during 2004 from 7.74% during 2003. Our focus on the origination of higher-

yielding multi-family residential and commercial real estate mortgage loans, along with the origination of one-to-four family mixed-use property mortgage loans, allowed us to maintain a higher yield on our loan portfolio than we would have otherwise experienced, despite the declining interest rate environment during the prior three years, the effect of which further lowered the yield on assets during 2004. The Bank’s existing borrowers had been refinancing their higher costing mortgage loans at the then current lower rates, which resulted in a decrease in the yield of the mortgage portfolio. This decrease had been partially offset by prepayment penalties that had been collected. Interest income included $4.3 million and $4.6 million in prepayment penalties collected during the years ended December 31, 2004 and 2003, respectively. A decrease in refinancing activity would result in a decrease in prepayment penalties collected by the Bank, and would result in a decrease in the yield on the mortgage portfolio. The Bank experienced a decline in refinancing activity during the fourth quarter of 2004 as compared to both the first three quarters of 2004 and the fourth quarter of 2003. Excluding prepayment penalties from interest income, the yield on loans would have been 6.76% and 7.37%, and the yield on total interest-earning assets would have been 6.00% and 6.37%, in each case, for the years ended December 31, 2004 and 2003, respectively.

The increase in interest income from securities was due to a $32.7 million increase in the average balance for the year ended December 31, 2004 to $499.8 million, combined with a seven basis point increase in the yield to 4.07% during 2004 from 4.00% during 2003. The increase in the average balance of the securities portfolio, while increasing net interest income, reduced the yield on total interest-earning assets. The increase in interest income from interest-earning deposits and federal funds sold was due to an increase in their average balance and yield during 2004 compared to 2003.

Interest Expense. Interest expense was $52.2 million for the year ended December 31, 2004, the same as for the year ended December 31, 2003. The increase of $190.6 million in the average balance of interest-bearing liabilities was offset by a 35 basis point decline in the cost of interest-bearing liabilities to 2.92% for the year ended December 31, 2004 from 3.27% for the year ended December 31, 2003. The decrease in the cost of funds was primarily due to the declining interest rate environment experienced during the prior three years, the effect of which further lowered the cost of funds during 2004. This was coupled with an increase in the average balance of lower costing core deposits.

The average balance for due to depositors increased $129.5 million to $1,186.7 million for 2004. The cost of these deposits decreased 16 basis points to 2.44% during 2004, as decreases in cost were seen in all categories of deposits due to the declining interest rate environment experienced during the prior three years, the effect of which further lowered the cost of funds during 2004. The average balance for borrowed funds increased $55.7 million to $580.6 million for 2004 from $524.9 million for 2003. The cost of borrowed funds decreased 69 basis points to 4.01% during 2004.

Net Interest Income. Net interest income for the year ended December 31, 2004 totaled $66.5 million, an increase of $6.3 million, or 10.5%, from $60.2 million for 2003. The net interest spread declined seven basis points to 3.30% for 2004 from 3.37% in 2003, as the yield on interest-earning assets declined 42 basis points while the cost of interest-bearing liabilities declined 35 basis points. The net interest margin declined seven basis points to 3.49% for the year ended December 31, 2004 from 3.56% for the year ended December 31, 2003. Excluding prepayment penalty income, the net interest margin would have been 3.26% and 3.29% for the years ended December 31, 2004 and 2003, respectively.

Provision for Loan Losses. There was no provision for loan losses for the years ended December 31, 2004 and 2003. The ratio of non-performing loans to gross loans was 0.06% at December 31, 2004 compared to 0.05% at December 31, 2003. The allowance for loan losses as percentage of non-performing loans was 717.29% and 960.86% at December 31, 2004 and 2003, respectively. The ratio of allowance for loan losses to gross loans was 0.43% and 0.51% at December 31, 2004 and 2003, respectively. The Company experienced net charge-offs of $20,000 and $28,000 for the years ended December 31, 2004 and 2003, respectively.

Non-Interest Income. Non-interest income for the year ended December 31, 2004 decreased $0.3 million to $5.9 million from $6.3 million for the year ended December 31, 2003. Loan fees increased $0.1 million to $1.9 million for the year ended December 31, 2004 from $1.8 million for the year ended December 31, 2003, primarily due to an increase in miscellaneous fees collected at the time mortgage loans paid-in-full prior to their maturity date. Dividends received on FHLB-NY stock decreased $0.5 million to $0.4 million for the year ended December 31, 2004 from $0.9 million for the year ended December 31, 2003. The FHLB-NY had suspended payment of dividends in the fourth quarter of 2003, but resumed payment of dividends in the first quarter of 2004 at a reduced level. The year ended December 31, 2004 also included an impairment write-down of $0.1 million on an investment in an equity mutual fund, as management had determined that the decline in market value of the fund was other than temporary.

Non-Interest Expense. Non-interest expense for the year ended December 31, 2004 totaled $35.4 million, representing an increase of $4.2 million, or 13.3%, from the year ended December 31, 2003. Salaries and employee benefits and other operating expenses increased $0.9 million and $0.2 million, respectively, as a result of the adjustment to amortization of compensation expense for certain of the Company’s restricted stock awards and supplemental retirement benefits during the first quarter of 2004. The second quarter of 2004 included the expensing of $0.4 million for certain restricted stock unit awards at the time of grant as the participants had no risk of forfeiture, and the retirement payment of $0.2 million to the Chief Financial Officer. In addition, the fourth quarter of 2004 includes the accrual of $0.8 million payable to the Company’s President upon his retirement effective June 30, 2005. Professional service fees increased $0.4 million due to costs incurred to comply with the Sarbanes-Oxley Act. The remaining increase from the prior year period was primarily attributable to the Bank’s continued focus on expanding its current product offerings to enhance its ability to serve its customers, including increases in personnel to provide these services, and, in 2004, a full year of operating expenses for the branch in Astoria, Queens, which was opened in the fourth quarter of 2003. The year ended December 31, 2004 also included the costs associated with relocating and occupying new executive offices in Lake Success, NY, which was completed in the third quarter of 2004. Management continues to monitor expenditures resulting in an efficiency ratio of 48.8 percent and 47.0 percent for the year ended December 31, 2004 and 2003, respectively.

Income Tax Provisions. Income tax expense for the year ended December 31, 2004 increased $0.9 million to $14.4 million, compared to $13.5 million for the year ended December 31, 2003. This increase was primarily attributed to the increase of $1.8 million in income before income taxes. The effective tax rate was 38.9% for the year ended December 31, 2004 compared to 38.5% for the year ended December 31, 2003.

Liquidity, Regulatory Capital and Capital Resources

The Company’s primary sources of funds are deposits, borrowings, principal and interest payments on loans, mortgage-backed and other securities, proceeds from sales of securities and, to a lesser extent, proceeds from sales of loans. Deposit flows and mortgage prepayments, however, are greatly influenced by general interest rates, economic conditions and competition. At December 31, 2005, the Bank had an approved overnight line of credit of $75.8 million with the FHLB-NY. In total, as of December 31, 2005, the Bank may borrow up to $804.1 million from the FHLB-NY in Federal Home Loan advances and overnight lines of credit. As of December 31, 2005, the Bank had borrowed $480.2 million in FHLB-NY advances, and had $10.0 million outstanding under the overnight line of credit. In addition, the Holding Company has $20.6 million in junior subordinated debentures (which are included in Borrowed Funds) and the Bank had $178.9 million in repurchase agreements to fund lending and investment opportunities. (See Note 7 of Notes to Consolidated Financial Statements in Item 8 of this Annual Report.) Management believes their available sources of funds are sufficient to fund current operations.

The Company’s most liquid assets are cash and cash equivalents, which include cash and due from banks, overnight interest-earning deposits and federal funds sold with original maturities of 90 days or less. The level of these assets is dependent on the Company’s operating, financing, lending and investing activities during any given period. At December 31, 2005, cash and cash equivalents totaled $26.8 million, an increase of $12.1 million from December 31, 2004. The Company also held marketable securities available for sale with a carrying value of $337.8 million at December 31, 2005.

At December 31, 2005, the Company had commitments to extend credit (principally real estate mortgage loans) of $56.2 million and open lines of credit for borrowers (principally construction loan and home equity loan lines of credit) of $73.1 million. Since generally all of the loan commitments are expected to be drawn upon, the total loan commitments approximate future cash requirements, whereas the amounts of lines of credit may not be indicative of the Company’s future cash requirements. The loan commitments generally expire in ninety days, while construction loan lines of credit mature within eighteen months and home equity loan lines of credit mature within ten years. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.

The Company’s total interest and operating expenses in 2005 were $64.2 million and $36.3 million, respectively. Certificates of deposit accounts which are scheduled to mature in one year or less as of December 31, 2005 totaled $490.1 million.

The Company maintains three postretirement benefit plans for its employees: a noncontributory defined benefit pension plan, a contributory medical plan, and a noncontributory life insurance plan. The Company also maintains a noncontributory defined benefit plan for certain of its non-employee directors. The employee pension plan is the only plan which the Company has funded. During 2005, the Company contributed $1.0 million to the employee pension plan, and incurred cash expenditures of $0.2 million for the medical and life insurance plans and $0.1 million for the non-

employee director plan. The Company expects to pay similar amounts for these plans in 2006. (See Note 10 of Notes to Consolidated Financial Statements in Item 8 of this Annual Report.)

The amounts reported in the Company’s financial statements are obtained from reports prepared by independent actuaries, and are based on significant assumptions. The most significant assumption is the discount rate used to determine the accumulated postretirement benefit obligation (“APBO”) for these plans. The APBO is the present value of projected benefits that employees and retirees have earned to date. The discount rate is a single rate at which the liabilities of the plans are discounted into today’s dollars and could be effectively settled or eliminated. The discount rate used is based on the Citigroup Pension Liability Index, and reflects a rate which could be earned on bonds over a similar period that the Company anticipates the plans’ liabilities will be paid. An increase in the discount rate would reduce the APBO, while a reduction in the discount rate would increase the APBO. During the past several years, when interest rates have been at historically low levels, the discount rate used for the Company’s plans has declined from 7.25% for 2001 to 5.63% for 2005. This decline in the discount rate has resulted in an increase in the Company’s APBO.

The Company’s actuaries use several other assumptions that could have a significant impact on the Company’s APBO and periodic expense for these plans. These assumptions include, but are not limited to, the rate of increase in future compensation levels, expected rate of return on plan assets, future increases in medical and life insurance premiums, turnover rates of employees, and life expectancy. The accounting standards for postretirement plans involve mechanisms that serve to limit the volatility of earnings by allowing changes in the value of plan assets and benefit obligations to be amortized over time when actual results differ from the assumptions used, there are changes in the assumptions used, or there are plan amendments. At December 31, 2005, the Company’s employee pension plan has a $5.1 million unrecognized loss, medical and life insurance plans have a $0.6 million unrecognized gain, and non-employee directors plan has a net $0.6 million unrecognized loss, due to experience different from what had been estimated and changes in actuarial assumptions. The employee and non-employee directors pension plans’ unrecognized losses are primarily attributed to the reduction in the discount rate over the past several years. The medical and insurance plans’ unrecognized gain is attributed to a reduction in medical premiums. In addition, the non-employee directors pension plan and the medical and life insurance plans have unrecognized past service liabilities of $0.7 million and $0.1 million, respectively, due to plan amendments in prior years.

The decline in the discount rate and the reduction in medical premiums are the only significant changes made to the assumptions used for these plans for each of the years in the three years ended December 31, 2005. During this time period, the actual return on the employee pension plan’s assets has approximated the assumed return used to determine the periodic pension expense.

The market value of the assets of the Company’s employee pension plan is $15.0 million at December 31, 2005, which is $1.0 million less than the projected benefit obligation. The Company does not anticipate a change in the market value of these assets which would have a significant effect on liquidity, capital resources, or results of operations.

During 2005, funds provided by the Company’s operating activities amounted to $25.5 million. These funds, together with $271.8 million provided by financing activities, were utilized to fund net investing activities of $285.2 million. Funds provided by financing activities were primarily the result of growth in due to depositors of $171.5 million and net borrowings of $105.0 million. Principal payments and calls on loans and securities provided additional funds. The primary investment activity of the Company is the origination of loans, and the purchase of mortgage-backed securities. During 2005, the Bank had loan originations and purchases of $598.7 million. In addition during 2005, the Company purchased $30.4 million of mortgage-backed and other securities.

At the time of the Bank’s conversion from a federally chartered mutual savings bank to a federally chartered stock savings bank, the Bank was required by the OTS to establish a liquidation account which is reduced as and to the extent that eligible account holders reduce their qualifying deposits. The balance of the liquidation account at December 31, 2005 was $3.6 million. In the unlikely event of a complete liquidation of the Bank, each eligible account holder will be entitled to receive a distribution from the liquidation account. The Bank is not permitted to declare or pay a dividend or to repurchase any of its capital stock if the effect would be to cause the Bank’s regulatory capital to be reduced below the amount required for the liquidation account. Unlike the Bank, the Holding Company is not subject to OTS regulatory restrictions on the declaration or payment of dividends to its stockholders, although the source of such dividends could depend upon dividend payments from the Bank. The Holding Company is subject, however, to the requirements of Delaware law, which generally limit dividends to an amount equal to the excess of its net assets (the amount by which total assets exceed total liabilities) over its stated capital or, if there is no such excess, to its net profits for the current and/or immediately preceding fiscal year.

Regulatory Capital Position. Under OTS capital regulations, the Bank is required to comply with each of three separate capital adequacy standards: tangible capital, leverage and core capital and total risk-based capital. Such classifications are used by the OTS and other bank regulatory agencies to determine matters ranging from each

institution’s semi-annual FDIC deposit insurance premium assessments, to approvals of applications authorizing institutions to grow their asset size or otherwise expand business activities. At December 31, 2005 and 2004, the Bank exceeded each of the three OTS capital requirements. (See Note 12 of Notes to Consolidated Financial Statements included in Item 8 of this Annual Report.)

Critical Accounting Policies

The Company’s accounting policies are integral to understanding the results of operations and statement of financial condition. These policies are described in the Notes to Consolidated Financial Statements. Several of these policies require management’s judgment to determine the value of the Company’s assets and liabilities. The Company has established detailed written policies and control procedures to ensure consistent application of these policies. The accounting policy that requires significant management valuation judgment is determining the allowance for loan losses.

An allowance for loan losses is provided to absorb probable estimated losses inherent in the loan portfolio. Management reviews the adequacy of the allowance for loan losses by reviewing all impaired loans on an individual basis. The remaining portfolio is evaluated based on 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. Judgment is required to determine how many years of historical loss experience are to be included when reviewing historical loss experience. A full credit cycle must be used, or loss estimates may be inaccurate. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revisions as more information becomes available.

Notwithstanding the judgment required in assessing the components of the allowance for loan losses, the Company believes that the allowance for loan losses is adequate to cover losses inherent in the loan portfolio. The policy has been applied on a consistent basis for all periods presented in the Consolidated Financial Statements.

Contractual Obligations

	Payments Due By Period

	Total		Less Than 1 Year		1 - 3 Years		3 - 5 Years		More Than 5 Years

	*(In thousands)*
Borrowed funds	$	689,710	$	130,000	$	370,000	$	168,900	$	20,810
Deposits		1,467,287		1,059,200		190,856		175,098		42,133
Loan commitments		129,278		129,278		—		—		—
Capital lease obligations		—		—		—		—		—
Operating lease obligations		15,041		1,603		3,564		3,657		6,217
Purchase obligations		3,859		2,459		702		438		260
Pension and other postretirement benefits		7,204		1,287		806		946		4,165
Deferred compensation plans		4,626		301		477		328		3,520

Total	$	2,317,005	$	1,324,128	$	566,405	$	349,367	$	77,105

The Company has significant obligations that arise in the normal course of business. The Company finances its assets with deposits and borrowed funds. The Company also uses borrowed funds to manage its interest-rate risk. The Company has the means to refinance these borrowings as they mature through its financing arrangements with the FHLB-NY and its ability to arrange repurchase agreements with broker-dealers and the FHLB-NY. (See Notes 6 and 7 of Notes to Consolidated Financial Statements in Item 8 of this Annual Report.)

The Company focuses its balance sheet growth on the origination of mortgage loans. At December 31, 2005, the Bank had commitments to extend credit and lines of credit of $129.3 million for mortgage and other loans. These loans will be funded through principal and interest payments received on existing mortgage loans and mortgage-backed securities, growth in customer deposits, and, when necessary, additional borrowings. (See Note 13 of Notes to Consolidated Financial Statements in Item 8 of this Annual Report.)

At December 31, 2005, the Bank has nine branches, five of which are leased. The table above also includes the lease obtained in connection with the planned opening of a new branch office in 2006. The Bank leases its branch locations primarily when it is not the sole tenant. While the Bank will consider purchasing its future branch locations, the decision may rest on the availability of suitable locations and the availability of properties. In addition, the Bank leases its executive offices.

The Bank has outsourced its data processing, loan servicing and check processing functions. The Bank has determined that this is the most cost effective method for obtaining these services. These arrangements are usually volume dependent and have varying terms. The contracts for these services usually include annual increases based on the increase in the consumer price index. The amounts shown above for purchase obligations represent the current term and volume of activity of these contracts. The Bank expects to renew these contracts as they expire.

The amounts shown for pension and other postretirement benefits reflect the Company’s employee and directors’ pension plans, the supplemental retirement benefits of its president, and amounts due under its plan for medical and life insurance benefits for retired employees. The amount shown in the “Less Than 1 Year” column represents the Company’s current estimate for these benefits, some of which are based on information supplied by actuaries. The amounts shown in columns reflecting periods over one year represent the Company’s current estimate based on the past year’s actual disbursements and information supplied by actuaries, but do not include an estimate for the employee pension plan as we do not currently have an estimate for this plan. The amounts do not include an increase for possible future retirees or increases in health plan costs. The amount shown in the “More Than 5 Years” column represents the amount required to increase the total amount to the projected benefit obligation of the directors’ plan and the medical and life insurance benefit plans, since these are unfunded plans. (See Note 10 of Notes to Consolidated Financial Statements in Item 8 of this Annual Report.)

The Bank provides a non-qualified deferred compensation plan for officers who have achieved the level of at least vice president. In addition to the amounts deferred by the officers, the Bank matches 50% of their contributions, generally up to a maximum of 5% of the officers’ salary. These plans generally require the deferred balance to be credited with earnings at a rate earned by certain mutual funds. Employees do not receive a distribution from these plans until their employment is terminated. The amounts shown in the columns for less than five years represent the estimate of the amounts the Bank will contribute to a rabbi trust with respect to matching contributions under these plans, and the amounts to be paid from the rabbi trust to two executives who have retired. The amount shown in the “More Than 5 Years” column represents the current accrued liability for these plans, adjusted for the activity in the columns for less than five years. This expense is provided in the Consolidated Statements of Income, and the liability has been provided in the Consolidated Statements of Financial Condition.

Impact of New Accounting Standards

In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 123R (revised 2004), “Share Based Payment.” This statement revises FASB Statement No. 123, “Accounting for Stock Based Compensation”, and supersedes APB Opinion No. 25 “Accounting for Stock Issued to Employees” and its related implementation guidance. This statement establishes fair value as the measurement objective in accounting for share-based payment arrangements and requires all entities to apply a fair-value-based measurement method in accounting for share-based payment transactions with employees. It requires that a public entity measure 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 will be 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. The provisions of this statement are effective for the first interim or annual reporting period that begins after June 15, 2005. On April 12, 2005, the U.S. Securities and Exchange Commission issued a release which changed the implementation date to the beginning of the next fiscal year after June 15, 2005. The effect on future earnings as a result of the adoption of this statement will primarily be dependent on the level of future grants of stock options awarded by the Company. While management is unable to determine the actual effect the adoption of this statement will have on its diluted earnings per share, management estimates, based on prior year grants, that the effect on annual diluted earnings per share will be in the range of $0.02 and $0.04 per diluted share.

In December 2003, the American Institute of Certified Public Accountants issued Statement of Position No. 03-3, “Accounting for Certain Loans or Debt Securities Acquired in a Transfer” (“SOP 03-3”). SOP 03-3 requires acquired impaired loans, for which it is probable that the investor will be unable to collect all contractually required payments receivable, to be recorded at the present value of amounts expected to be received, and prohibits carrying over or creating a valuation allowance in the initial accounting for these loans. SOP 03-3 also limits the yield that may be accreted to income. SOP 03-3 applies to the purchase of an individual loan, a pool of loans, a group of loans, and loans acquired in a business combination. SOP 03-3 was effective for loans acquired in fiscal years beginning after December 31, 2004. The adoption of SOP 03-3 in the first quarter of 2005 did not have a material effect on the Company’s results of operations or financial condition.

and reporting of a change in accounting principle. SFAS No. 154 applies to all voluntary changes in accounting principle and to changes required by an accounting pronouncement when the pronouncement does not include specific transition provisions. SFAS No. 154 requires retrospective application of changes in accounting principle to prior periods’ financial statements unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. APB Opinion No. 20 previously required that most voluntary changes in accounting principle be recognized by including the cumulative effect of the change in net income for the period of the change in accounting principle. SFAS No. 154 carries forward without change the guidance contained in APB Opinion No. 20 for reporting the correction of an error in previously issued financial statements and a change in accounting estimate. SFAS No. 154 also carries forward the guidance in APB Opinion No. 20 requiring justification of a change in accounting principle on the basis of preferability. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005, with early adoption permitted. Adoption of SFAS No. 154 is not expected to have a material impact on the Company’s results of operations or financial condition.

On November 3, 2005, the FASB issued FASB Staff Position (FSP) Nos. FAS 115-1 and FAS 124-1, “The Meaning of Other-Than-Temporary Impairment and Its Application.” This FSP addresses the determination as to when an investment is considered impaired, whether that impairment is other than temporary, and the measurement of an impairment loss. This FSP also includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. The guidance in this FSP amends SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” and No. 124, “Accounting for Certain Investments Held by Not-for-Profit Organizations,” and APB Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock.” This FSP is effective for reporting periods beginning after December 15, 2005. The adoption of this FSP did not have a material effect on the Company’s results of operations or financial condition.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

This information is contained in the section captioned “Interest Rate Risk” on page 48 and in Notes 13 and 14 of the Notes to Consolidated Financial Statements in Item 8 of this Annual Report.

Item 8. Financial Statements and Supplementary Data.

Consolidated Statements of Financial Condition

	December 31, 2005			December 31, 2004

	(Dollars in thousands, except per share data)
Assets
Cash and due from banks	$	26,754		$	14,661
Securities available for sale:
Mortgage-backed securities (including assets pledged of $198,415 and $230,400 at December 31, 2005 and 2004, respectively)		301,194			395,629
Other securities		36,567			40,116
Loans		1,888,261			1,523,040
Less: Allowance for loan losses		(6,385	)		(6,533	)

Net loans		1,881,876			1,516,507
Interest and dividends receivable		10,554			8,868
Bank premises and equipment, net		7,238			7,558
Federal Home Loan Bank of New York stock		29,622			22,261
Bank owned life insurance		26,526			25,399
Goodwill		3,905			3,905
Other assets		28,972			23,140

Total assets	$	2,353,208		$	2,058,044


Liabilities
Due to depositors:
Non-interest bearing	$	58,678		$	49,540
Interest-bearing		1,389,186			1,226,784
Mortgagors’ escrow deposits		19,423			16,473
Borrowed funds		510,810			370,836
Securities sold under agreements to repurchase		178,900			213,900
Other liabilities		19,744			19,858

Total liabilities		2,176,741			1,897,391


Commitments and contingencies (Note 13)

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; 19,466,894 shares and 19,456,696 shares issued at December 31, 2005 and, 2004, respectively; 19,465,844 shares and 19,232,248 shares outstanding at December 31, 2005 and 2004, respectively)		195			195
Additional paid-in capital		39,635			37,187
Treasury stock, at average cost (1,050 shares and 224,448 shares at December 31, 2005 and 2004, respectively)		(12	)		(3,893	)
Unearned compensation		(4,159	)		(5,117	)
Retained earnings		146,068			133,290
Accumulated other comprehensive loss, net of taxes		(5,260	)		(1,009	)

Total stockholders’ equity		176,467			160,653


Total liabilities and stockholders’ equity	$	2,353,208		$	2,058,044

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

Consolidated Statements of Income

	For the years ended December 31,

	2005			2004			2003

	*(In thouasands, except per share data)*
Interest and dividend income
Interest and fees on loans	$	115,850		$	98,154		$	93,476
Interest and dividends on securities:
Interest		16,098			19,963			18,445
Dividends		374			389			252
Other interest income		117			218			166

Total interest and dividend income		132,439			118,724			112,339

Interest expense
Deposits		34,657			28,972			27,521
Other interest expense		29,572			23,261			24,655

Total interest expense		64,229			52,233			52,176

Net interest income		68,210			66,491			60,163
Provision for loan losses		—			—			—

Net interest income after provision for loan losses		68,210			66,491			60,163

Non-interest income
Loan fee income		2,162			1,924			1,768
Banking services fee income		1,454			1,588			1,600
Net gain on sale of loans held for sale		583			306			323
Net gain on sale of loans		19			—			—
Net (loss) gain on sale of securities		(647	)		(100	)		6
Federal Home Loan Bank of New York stock dividends		1,163			441			891
Bank owned life insurance		1,127			1,157			1,264
Other income		786			627			433

Total non-interest income		6,647			5,943			6,285

Non-interest expense
Salaries and employee benefits		17,096			18,403			16,011
Occupancy and equipment		4,170			3,653			3,055
Professional services		4,489			3,497			2,954
Data processing		2,290			1,892			1,928
Depreciation and amortization of premises and equipment		1,553			1,487			1,232
Other operating expenses		6,666			6,457			6,046

Total non-interest expense		36,264			35,389			31,226

Income before income taxes		38,593			37,045			35,222

Provision for income taxes
Federal		11,896			11,454			10,499
State and local		3,155			2,942			3,045

Total provision for income taxes		15,051			14,396			13,544

Net income	$	23,542		$	22,649		$	21,678


Basic earnings per share	$	1.34		$	1.30		$	1.27
Diluted earnings per share	$	1.31		$	1.25		$	1.22

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

Consolidated Statements of Changes in Stockholders’ Equity

	For the years ended December 31,

	2005			2004			2003

	*(Dollars in thouasands, except per share data)*
Common Stock
Balance, beginning of year	$	195		$	193		$	139
Issuance upon the exercise of stock options (10,198, 166,095 and 32,610 common shares for the years ended December 31, 2005, 2004 and 2003, respectively)		—			2			—
Stock dividend (6,430,058 common shares; 1,011,660 common shares funded from Treasury in 2003)		—			—			54

Balance, end of year		195			195			193


Additional Paid-In Capital
Balance, beginning of year		37,187			32,783			47,208
Award of common shares released from Employee Benefit Trust (46,212, 35,779 and 37,287 common shares for the years ended December 31, 2005, 2004 and 2003, respectively)		616			585			522
Surrender of restricted stock awards (124,650 common shares for the year ended December 31, 2004) which were replaced by restricted stock units		—			(227	)		—
Restricted stock awards (16,874 and 81,783 common shares for the years ended December 31, 2004 and 2003, respectively)		—			44			156
Shares issued upon vesting of restricted stock unit awards (200 and 1,687 common shares for the years ended December 31, 2005 and 2004, respectively)		—			2			—
Forefeiture of restricted stock awards (2,400 and 2,025 common shares for the years ended December 31, 2005 and 2004)		(4	)		(2	)		—
Options exercised (10,198, 166,095 and 32,610 common shares for the years ended December 31, 2005, 2004 and 2003, respectively)		84			858			147
Tax benefit from compensation expense in excess of that recognized for financial reporting purposes		1,752			3,144			3,331
Stock dividend (6,430,058 common shares; 1,011,660 common shares funded from Treasury in 2003)		—			—			(18,581	)

Balance, end of year		39,635			37,187			32,783

Continued

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

Consolidated Statements of Changes in Stockholders’ Equity (continued)

	For the years ended December 31,

	2005			2004			2003

	*(Dollars in thouasands, except per share data)*
Treasury Stock
Balance, beginning of year	$	(3,893	)	$	—		$	(21,733	)
Purchases of common shares outstanding (144,700, 520,600 and 336,700 shares for the years ended December 31, 2005, 2004 and 2003, respectively)		(2,567	)		(9,337	)		(6,899	)
Issuance for options exercised (329,968, 394,668 and 548,984 common shares for the years ended December 31, 2005, 2004 and 2003, respectively)		5,777			6,329			9,661
Purchase of common shares to fund options exercised (7,570 common shares for the year ended December 31, 2004)		—			(147	)		—
Surrender of restricted stock awards (124,650 common shares for the year ended December 31, 2004) which were replaced by restricted stock units		—			(1,177	)		—
Shares issued upon vesting of restricted stock unit awards (69,181 and 44,077 common shares for the years ended December 31, 2005 and 2004 respectively)		1,216			607			—
Restricted stock awards (16,874 and 54,525 common shares for the years ended December 31, 2004 and 2003, respectively)		—			293			949
Repurchase of restricted stock awards to satisfy tax obligations (28,651, 25,222 and 20,559 common shares for the years ended December 31, 2005, 2004 and 2003, respectively)		(518	)		(436	)		(430	)
Forfeiture of restricted stock awards (2,400, 2,025 and 4,190 common shares for the years ended December 31, 2005, 2004 and 2003, respectively)		(27	)		(25	)		(71	)
Stock dividend		—			—			18,523

Balance, end of year		(12	)		(3,893	)		—


Unearned Compensation
Balance, beginning of year		(5,117	)		(7,373	)		(7,825	)
Surrender of restricted stock awards (124,650 common shares for the year ended December 31, 2004) which were replaced by restricted stock units		—			564			—
Release of shares from Employee Benefit Trust (204,492, 182,601 and 149,073 common shares for the years ended December 31, 2005, 2004 and 2003, respectively)		696			622			508
Restricted stock awards (16,874 and 81,783 common shares for the years ended December 31, 2004 and 2003, respectively)		—			(337	)		(1,105	)
Forfeiture of restricted stock awards (2,400, 2,025 and 6,285 common shares for the years ended December 31, 2005, 2004 and 2003, respectively)		31			27			71
Restricted stock award expense		231			1,380			978

Balance, end of year		(4,159	)		(5,117	)		(7,373	)

Continued

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

Consolidated Statements of Changes in Stockholders’ Equity (continued)

	For the years ended December 31,

	2005			2004			2003

	*(Dollars in thouasands, except per share data)*
Retained Earnings
Balance, beginning of year	$	133,290		$	120,683		$	109,208
Net income		23,542			22,649			21,678
Stock options exercised (329,968, 394,668 and 821,075 common shares for the years ended December 31, 2005, 2004 and 2003, respectively)		(3,439	)		(3,759	)		(5,351	)
Shares issued upon vesting of restricted stock units (68,981 and 42,390 common shares for the years ended December 31, 2005 and 2004, respectively)		(298	)		(156	)		—
Cash dividends declared and paid ($0.40, $0.35 and $0.28 per common share for the years ended December 31, 2005, 2004 and 2003, respectively)		(7,027	)		(6,127	)		(4,852	)

Balance, end of year		146,068			133,290			120,683


Accumulated Other Comprehensive (Loss) Income, Net of Taxes
Balance, beginning of year		(1,009	)		476			4,389
Adjustment required to recognize minimum pension liability, net of taxes of approximately $28, ($9) and $22 for the years ended December 31, 2005, 2004 and 2003, respectively		(38	)		7			(22	)
Change in net unrealized loss on securities available for sale, net of taxes of approximately $3,379, $1,229 and $3,311 for the years ended December 31, 2005, 2004 and 2003, respectively		(4,608	)		(1,553	)		(3,888	)
Less: Reclassification adjustment for losses (gains) included in net income, net of taxes of approximately ($252), ($39) and $3 for the years ended December 31, 2005, 2004 and 2003, respectively		395			61			(3	)

Balance, end of year		(5,260	)		(1,009	)		476


Total Stockholders’ Equity	$	176,467		$	160,653		$	146,762


Comprehensive Income
Net income	$	23,542		$	22,649		$	21,678
Other comprehensive income, net of tax Minimum pension (liability) benefit		(38	)		7			(22	)
Unrealized losses on securities		(4,213	)		(1,492	)		(3,891	)

Comprehensive income	$	19,291		$	21,164		$	17,765

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

Consolidated Statements of Cash Flows

	For the years ended December 31,

	2005			2004			2003

	(In thousands)
Operating Activities

Net income	$	23,542		$	22,649		$	21,678
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of bank premises and equipment		1,553			1,487			1,232
Impairment write-down of investment securities		—			89			—
Net loss (gain) on sales of securities		647			11			(6	)
Net gain on sales of loans held for sale		(583	)		(306	)		(323	)
Net gain on sales of loans		(19	)		—			—
Origination of loans held for sale		(6,630	)		(5,916	)		(13,442	)
Proceeds from sale of loans held for sale		7,259			6,222			13,765
Amortization of unearned premium, net of accretion of unearned discount		1,584			1,920			3,430
Deferred income tax provision (benefit)		2,021			(678	)		1,845
Deferred compensation		(2,576	)		481			736
Net (decrease) increase in other assets and liabilities		(2,799	)		746			(1,767	)
Unearned compensation		1,544			2,587			2,008

Net cash provided by operating activities		25,543			29,292			29,156


Investing Activities

Purchases of bank premises and equipment		(1,233	)		(2,665	)		(2,223	)
Net (purchase) redemption of Federal Home Loan Bank of New York shares		(7,361	)		2,201			(2,249	)
Purchases of securities available for sale		(30,384	)		(104,336	)		(440,073	)
Proceeds from sales and calls of securities available for sale		29,248			78,822			62,391
Proceeds from maturities and prepayments of securities available for sale		89,839			121,346			190,423
Net originations and repayments of loans		(368,442	)		(250,884	)		(105,379	)
Proceeds from sale of delinquent loans		3,088			4,339			6,090
Purchases of loans		(1,009	)		—			(789	)
Proceeds from sale of loans		1,030			—			—

Net cash used in investing activities		(285,224	)		(151,177	)		(291,809	)

Continued

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

Consolidated Statements of Cash Flows (continued)

	For the years ended December 31,

	2005			2004			2003

	(In thousands)
Financing Activities

Net increase in non-interest bearing deposits	$	9,138		$	8,143		$	6,110
Net increase in interest bearing deposits		162,402			109,606			150,452
Net increase in mortgagors’ escrow deposits		2,950			5,139			1,522
Net (repayments) proceeds of short-term borrowed funds		(10,000	)		(5,000	)		25,000
Proceeds from long-term borrowings		170,000			110,000			170,000
Repayment of long-term borrowings		(55,026	)		(99,025	)		(110,022	)
Purchases of treasury stock		(3,085	)		(9,773	)		(7,333	)
Proceeds from issuance of common stock upon exercise of stock options		2,422			3,283			4,457
Cash dividends paid		(7,027	)		(6,127	)		(4,852	)

Net cash provided by financing activities		271,774			116,246			235,334


Net increase (decrease) in cash and cash equivalents		12,093			(5,639	)		(27,319	)
Cash and cash equivalents, beginning of year		14,661			20,300			47,619

Cash and cash equivalents, end of year	$	26,754		$	14,661		$	20,300


Supplemental Cash Flow Disclosure
Interest paid	$	62,909		$	51,961		$	52,513
Income taxes paid		13,538			11,534			9,403
Non-cash activities
Securities sale transaction, not yet settled		319			—			—

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

Notes to Consolidated Financial Statements
For the years ended December 31, 2005, 2004 and 2003

1. Nature of Operations

Flushing Financial Corporation (the “Holding Company”), a Delaware business corporation, is a savings and loan holding company organized at the direction of its subsidiary, Flushing Savings Bank, FSB (the “Bank”), in connection with the Bank’s conversion from a mutual to capital stock form of organization. The Holding Company and its direct and indirect wholly-owned subsidiaries, the Bank, Flushing Preferred Funding Corporation, Flushing Service Corporation and FSB Properties Inc. are collectively herein referred to as the “Company.”

The Company’s principal business is attracting retail deposits from the general public and investing those deposits together with funds generated from operations and borrowings, primarily in (1) originations and purchases of multi-family income-producing property loans, commercial real estate loans and one-to-four family residential mortgage loans (focusing on mixed-use properties – properties that contain both residential dwelling units and commercial units); (2) mortgage loan surrogates such as mortgage-backed securities and; (3) U.S. government and federal agency backed securities, corporate fixed-income securities and other marketable securities. The Company also originates certain other loans, including construction loans, Small Business Administration loans, other small business loans and consumer loans. The Bank conducts its business through nine full-service banking offices, six of which are located in Queens County, one in Nassau County, one in Kings County (Brooklyn), and one in New York County (Manhattan), New York.

2. Summary of Significant Accounting Policies

The accounting and reporting policies of the Company follow generally accepted accounting principles in the United States of America (“GAAP”). The policies which materially affect the determination of the Company’s financial position, results of operations and cash flows are summarized below.

Principles of consolidation:

The accompanying consolidated financial statements include the accounts of Flushing Financial Corporation and the following direct and indirect wholly-owned subsidiaries of the Holding Company: the Bank, Flushing Preferred Funding Corporation (“FPFC”), Flushing Service Corporation (“FSC”) and FSB Properties Inc. (“Properties”). FPFC is a real estate investment trust formed to hold a portion of the Bank’s mortgage loans to facilitate access to capital markets. FSC was formed to market insurance products and mutual funds. Properties is an inactive subsidiary whose purpose was to manage real estate properties and joint ventures. Flushing Financial Capital Trust I (“Trust”), a special purpose business trust formed to issue capital securities, was included in the consolidated financial statements through December 31, 2003. Effective January 1, 2004, the Trust was deconsolidated to comply with FASB Interpretation No. 46R. All significant inter-company accounts and transactions have been eliminated in consolidation.

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

Cash and cash equivalents:

For the purpose of reporting cash flows, the Company defines cash and due from banks, overnight interest-earning deposits and federal funds sold with original maturities of 90 days or less as cash and cash equivalents.

Securities available for sale:

Securities are classified as available for sale when management intends to hold the securities for an indefinite period of time or when the securities may be utilized for tactical asset/liability purposes and may be sold from time to time to effectively manage interest rate exposure and resultant prepayment risk and liquidity needs. Premiums and discounts are amortized or accreted, respectively, using the level-yield method. Realized gains and losses on the sales of securities are determined using the specific identification method. Unrealized gains and losses (other than unrealized losses considered other than temporary which are recognized in the Consolidated Statements of Income) on securities available for sale are excluded from earnings and reported as accumulated other comprehensive income, net of taxes. In estimating other-than-temporary impairment losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, if applicable, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

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 collectibility of such income. 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.

Allowance for loan losses:

The Company maintains an allowance for loan losses at an amount, which, in management’s judgment, is adequate to absorb probable estimated losses inherent in the loan portfolio. Management’s judgment in determining the adequacy of the allowance is based on evaluations of the collectibility of loans. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revisions as more information becomes available. In assessing the adequacy of the Company’s allowance for loan losses, management considers 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 Board of Directors reviews and approves management’s evaluation of the adequacy of the allowance for loan losses on a quarterly basis.

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.

Loans held for sale:

Loans held for sale are initially recorded at the principal amount outstanding net of deferred origination costs and fees and any premiums or discounts. Loans held for sale are carried at the lower of adjusted cost or market, which is computed by the aggregate method (unrealized losses are offset by unrealized gains). Net unrealized losses are recognized through a valuation allowance by charges to income. The Company did not have any loans held for sale as of December 31, 2005 and 2004.

Bank owned life insurance:

Bank owned life insurance (“BOLI”) represents life insurance on the lives of certain employees who have provided positive consent allowing the Bank to be the beneficiary of such policies. Increases in the cash value of the policies, as well as proceeds received, are recorded in other non-interest income, and are not subject to income taxes.

Real estate owned:

Real estate owned consists of property acquired by foreclosure. These properties are carried at the lower of carrying amount or fair value (which is based on appraised value with certain adjustments) less estimated costs to sell (hereinafter defined as fair value). This determination is made on an individual asset basis. If the fair value is less than the carrying amount, the deficiency is recognized as a valuation allowance. Further decreases to fair value will be recorded in this valuation allowance through a provision for losses on real estate owned. The Company utilizes estimates of fair value to determine the amount of its valuation allowance. Actual values may differ from those estimates. The Company had no real estate owned as of or during the years ended December 31, 2005, 2004 and 2003.

Bank premises and equipment:

Bank premises and equipment are stated at cost, less depreciation accumulated on a straight-line basis over the estimated useful lives of the related assets (3 to 40 years). Leasehold improvements are amortized on a straight-line basis over the

term of the related leases or the lives of the assets, whichever is shorter. Maintenance, repairs and minor improvements are charged to non-interest expense in the period incurred.

Federal Home Loan Bank Stock:

The Federal Home Loan Bank of New York (“FHLB-NY”) has assigned to the Bank a mandated membership stock purchase, based on the Bank’s asset size. In addition, for all borrowing activity, the Bank is required to purchase shares of FHLB-NY non-marketable capital stock at par. Such shares are redeemed by FHLB-NY at par with reductions in the Bank’s borrowing levels. The Bank carries this investment at historical cost.

Securities sold under agreements to repurchase:

Securities sold under agreements to repurchase are accounted for as collateralized financing and are carried at amounts at which the securities will be subsequently reacquired as specified in the respective agreements. Interest incurred under these agreements is included in other interest expense.

Goodwill:

Upon the adoption of Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets”, on January 1, 2002, the company no longer amortizes goodwill, but rather performs annual tests for impairment as of the end of each year. These annual impairment tests have not resulted in recognizing an impairment in goodwill.

Income Taxes:

Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between book and tax bases of the various balance sheet assets and liabilities, and gives current recognition to changes in tax rates and laws.

Stock compensation plans:

SFAS No. 123, “Accounting for Stock-Based Compensation”, establishes a fair value based method of accounting for employee stock compensation plans. Under this method, compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. However, it also allows an entity to continue to measure compensation cost for those plans using the intrinsic value based method of accounting prescribed by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.” Under this method, no compensation expense is recognized for stock options granted since they have no intrinsic value at the time of grant. The Company has elected to continue with the accounting methodology in Opinion No. 25. Accordingly, no compensation cost has been recognized for options granted under the Stock Option Plan. Had compensation cost for the Company’s Stock Option Plan been determined based on the fair value at the grant dates, consistent with the method prescribed by SFAS No. 123, the Company’s net income and earnings per share would have been as indicated in the table below. However, the present impact of SFAS No. 123 may not be representative of the effect on income in future years because the options vest over several years and additional option grants may be made each year.

	2005			2004			2003

	*(Dollars in thousands, except per share data)*
Net income, as reported	$	23,542		$	22,649		$	21,678
Add: Stock-based compensation expense included in reported net income, net of related tax effects		908			1,272			734
Deduct: Total stock-based compensation expense determined under fair value based method for all awards, net of related tax effects		(1,559	)		(3,062	)		(1,447	)

Pro forma net income	$	22,891		$	20,859		$	20,965

Basic earnings per share:
As reported	$	1.34		$	1.30		$	1.27
Pro forma	$	1.30		$	1.20		$	1.23

Diluted earnings per share:
As reported	$	1.31		$	1.25		$	1.22
Pro forma	$	1.27		$	1.15		$	1.18

The year ended December 31, 2005 includes a charge to earnings on an after-tax basis of $0.4 million, or $0.02 per diluted share, for restricted stock unit awards granted in 2005. The year ended December 31, 2004 includes a charge to

earnings on an after-tax basis of $0.2 million, or $0.01 per diluted share, for restricted stock unit awards granted in 2004. In addition to the previously mentioned charge, the year ended December 31, 2004 includes a charge to earnings, on an after-tax basis, of $0.5 million or $0.03 per diluted share, related to an adjustment of compensation expense for certain restricted stock awards made in prior periods. These charges reflect that certain participants under these plans have reached, or are close to reaching, retirement eligibility, at which time such awards fully vest. These amounts are included above in stock-based compensation expense.

In addition, the year ended December 31, 2004 includes, in the deduction for stock-based compensation determined under the fair value method, a net after tax charge of $0.8 million or $0.04 per diluted share, related to an adjustment of compensation expense using the fair value method for stock option grants awarded during prior periods. In addition to the previously mentioned deduction, the year ended December 31, 2004 includes, in the deduction for stock-based compensation determined under fair value method, a net after tax charge of $0.4 million or $0.02 per diluted share, related to certain stock option grants awarded granted in June 2004. These deductions reflect that certain participants under these plans had reached, or were close to reaching, retirement eligibility, at which time such awards fully vest.

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model. The weighted average assumptions used for grants made in 2005, 2004 and 2003 are as follows:

	2005 Grants	2004 Grants	2003 Grants

Dividend yield	2.24%	2.04%	1.97%
Expected volatility	21.48%	24.49%	28.82%
Risk-free interest rate	3.87%	4.29%	2.87%
Expected option life	7 Years	7 Years	7 Years

Earnings per share:

Basic earnings per share for the years ended December 31, 2005, 2004 and 2003 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 portions of restricted stock and restricted stock unit awards during the period. The shares held in the Company’s Employee Benefit Trust are not included in shares outstanding for purposes of calculating earnings per share.

Earnings per share has been computed based on the following, for the years ended December 31:

	2005		2004		2003

	(In thousands, except per share data)
Net income, as reported	$	23,542	$	22,649	$	21,678
Divided by:
Weighted average common shares outstanding		17,555		17,429		17,023
Weighted average common stock equivalents		446		663		747

Total weighted average common shares outstanding and common stock equivalents		18,001		18,092		17,770

Basic earnings per share	$	1.34	$	1.30	$	1.27
Diluted earnings per share	$	1.31	$	1.25	$	1.22

Common stock equivalents that are anti-dilutive are not included in the computation of diluted earnings per share. Options to purchase 291,625 shares, at an average exercise price of $18.03, 35,750 shares, at an average exercise price of $19.94, and 900 shares, at an average exercise price of $14.70, were not included in the computation of diluted earnings per share for 2005, 2004 and 2003, respectively. Unvested restricted stock and restricted stock unit awards of 92,825 shares, at an average market price on the date of grant of $18.20, 17,874 shares, at an average market price on the date of grant of $19.94, and 450 shares, at an average market price on the date of grant of $14.70 were not included in the computation of diluted earnings per share for 2005, 2004 and 2003, respectively.

3. Loans

The composition of loans is as follows at December 31:

	2005		2004

	*(In thousands)*
Multi-family residential	$	788,071	$	646,922
Commercial real estate		399,081		334,048
One-to-four family — mixed-use property		477,775		332,805
One-to-four family — residential		134,641		151,737
Co-operative apartments		2,161		3,132
Construction		49,522		31,460
Small Business Administration		9,239		5,633
Commercial business and other		19,362		12,505

Gross loans		1,879,852		1,518,242
Unearned loan fees and deferred costs, net		8,409		4,798

Total loans	$	1,888,261	$	1,523,040

The total amount of loans on non-accrual status and loans classified as impaired was $1,922,000 and $2,452,000, respectively, at December 31, 2005. The total amount of loans on non-accrual status and loans classified as impaired was $911,000 and $682,000 for both classifications at December 31, 2004 and 2003, respectively. The portion of the allowance for loan losses allocated to impaired loans was $231,000 (3.6%), $165,000 (2.5%) and $133,000 (2.0%) at December 31, 2005, 2004 and 2003, respectively. The portion of the impaired loan amount above 100% of the loan-to-value ratio is charged off. The average balance of impaired loans was $1,802,000, $2,605,000 and $1,892,000 for 2005, 2004 and 2003, respectively.

The following is a summary of interest foregone on non-accrual loans for the years ended December 31:

	2005		2004		2003

	*(In thousands)*
Interest income that would have been recognized had the loans performed
in accordance with their original terms	$	158	$	76	$	105
Less: Interest income included in the results of operations		55		26		71

Foregone interest	$	103	$	50	$	34

The following are changes in the allowance for loan losses for the years ended December 31:

	2005			2004			2003

	*(In thousands)*
Balance, beginning of year	$	6,533		$	6,553		$	6,581
Provision for loan losses		—			—			—
Charge-offs		(164	)		(28	)		(155	)
Recoveries		16			8			127

Balance, end of year	$	6,385		$	6,533		$	6,553

4. Bank Premises and Equipment, Net

Bank premises and equipment are as follows at December 31:

	2005		2004

	*(In thousands)*
Land	$	801	$	801
Building and leasehold improvements		4,668		4,885
Equipment and furniture		12,287		11,562

Total		17,756		17,248
Less: Accumulated depreciation and amortization		10,518		9,690

Bank premises and equipment, net	$	7,238	$	7,558

5. Debt and Equity Securities

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

The Company did not hold any trading securities or securities held-to-maturity during the years ended December 31, 2005, 2004 and 2003. Securities available for sale are recorded at estimated fair value based on dealer quotations where available. Actual values may differ from estimates provided by outside dealers. Securities classified as held-to-maturity would be stated at cost, adjusted for amortization of premium and accretion of discount using the level-yield method.

The amortized cost and estimated fair value of the Company’s securities, classified as available for sale at December 31, 2005 are as follows:

	Amortized Cost		Estimated Fair Value		Gross Unrealized Gains		Gross Unrealized Losses

	(In thousands)
U.S. government agencies	$	10,942	$	10,911	$	—	$	31

Mutual funds		20,296		19,767		—		529

Other		6,112		5,889		21		244

Total other securities		37,350		36,567		21		804

FNMA		152,412		147,802		222		4,832

REMIC and CMO		91,369		89,561		19		1,827

FHLMC		57,470		55,735		81		1,816

GNMA		7,789		8,096		307		—

Total mortgage-backed securities		309,040		301,194		629		8,475

Total securities available for sale	$	346,390	$	337,761	$	650	$	9,279

The following table shows the Company’s available for sale securities gross unrealized losses and estimated fair value, aggregated by category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2005.

	Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses
	Total				Less than 12 months				12 months or more


	(In thousands)
U. S. government agencies	$	4,967	$	31	$	4,967	$	31	$	—	$	—
Mutual funds		19,767		529		—		—		19,767		529
Other		4,334		244		4,334		244		—		—

Total other securities		29,068		804		9,301		275		19,767		529

FNMA		134,450		4,832		28,594		479		105,856		4,353
REMIC and CMO		78,681		1,827		40,170		447		38,511		1,380
FHLMC		50,447		1,816		12,796		264		37,651		1,552

Total mortgage-backed securities		263,578		8,475		81,560		1,190		182,018		7,285

Total securities available for sale	$	292,646	$	9,279	$	90,861	$	1,465	$	201,785	$	7,814

The unrealized loss on the Company’s investment in a U.S. government agency note was caused by interest rate increases. This note was issued by the FHLB-NY, and is rated AAA. It is expected that the security would not be settled at a price less than the amortized cost of the Company’s investment. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company has the ability and intent to hold this investment until a recovery of fair value, which may be maturity, the Company does not consider this investment to be other-than-temporarily impaired at December 31, 2005.

The unrealized losses on the Company’s investment in mutual funds were caused by interest rate increases. These funds invest in adjustable-rate mortgage-backed securities and short term government and government agency backed notes. The changes in their market value reflect the changes in interest rates. These funds are rated AAA. It is expected that the securities would not be settled at a price less than the amortized cost of the funds’, and therefore the Company’s, investment. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company has the ability and intent to hold these investments in the funds until a recovery of fair value, which may be maturity of the underlying securities, the Company does not consider these investments to be other-than-temporarily impaired at December 31, 2005.

The unrealized loss on the Company’s investment in other securities was caused by interest rate increases. This is an investment in a preferred stock which pays a fixed dividend rate, and is traded on the NYSE. Its pricing reflects the changes in interest rates. As rates increased during 2005, the price of the stock declined. This stock is rated in one of the top categories by two rating agencies. This preferred stock does not have a mandatory call, but does have call dates at the option of the issuer. The issuer may not call the security at less than par. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company has the ability and intent to hold this investment until a recovery of fair value, the Company does not consider this investment to be other-than-temporarily impaired at December 31, 2005.

The unrealized losses on the Company’s investment in mortgage-backed securities were caused by interest rate increases. These securities were either issued by a government sponsored entity (FNMA or FHLMC) or were privately issued and carry a rating of AAA. It is expected that the securities would not be settled at a price less than the amortized cost of the Company’s investment. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company has the ability and intent to hold these investments until a recovery of fair value, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired at December 31, 2005.

The amortized cost and estimated fair value of the Company’s securities, classified as available for sale at December 31, 2005, 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		Estimated Fair Value

	(In thousands)
Due in one year or less	$	25,728	$	24,972
Due after one year through five years		5,178		5,151
Due after five years through ten years		5,944		5,944
Due after ten years		500		500

Total other securities		37,350		36,567
Mortgage-backed securities		309,040		301,194

Total securities available for sale	$	346,390	$	337,761

The amortized cost and estimated fair value of the Company’s securities classified as available for sale at December 31, 2004 were as follows:

	Amortized Cost		Estimated Fair Value		Gross Unrealized Gains		Gross Unrealized Losses

	(In thousands)
U.S. government agencies	$	12,866	$	12,868	$	2	$	—
Mutual funds		20,600		20,352		—		248
Other		6,379		6,896		681		164

Total other securities		39,845		40,116		683		412

FNMA		217,278		215,657		947		2,568
REMIC and CMO		89,416		89,164		178		430
FHLMC		78,453		78,094		343		702
GNMA		12,043		12,714		671		—

Total mortgage-backed securities		397,190		395,629		2,139		3,700

Total securities available for sale	$	437,035	$	435,745	$	2,822	$	4,112

	Total				Less than 12 months				12 months or more

	Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses

	(In thousands)
Mutual funds	$	19,338	$	248	$	13,815	$	188	$	5,523	$	60
Other		4,491		164		4,491		164		—		—

Total other securities		23,829		412		18,306		352		5,523		60

FNMA		167,198		2,568		97,649		770		69,549		1,798
REMIC and CMO		61,639		430		61,639		430		—		—
FHLMC		47,776		702		30,452		89		17,324		613

Total mortgage-backed securities		276,613		3,700		189,740		1,289		86,873		2,411

Total securities available for sale	$	300,442	$	4,112	$	208,046	$	1,641	$	92,396	$	2,471

For the year ended December 31, 2005, gross gains of $508,000 and losses of $1,155,000 were realized on sales of securities available for sale. For the year ended December 31, 2004, gross gains of $318,000 and losses of $329,000 were realized on sales of securities available for sale. In addition, an impairment write-down of $89,000 was recorded during the year ended December 31, 2004. For the year ended December 31, 2003, gross gains of $547,000 and losses of $541,000 were realized on sales of securities available for sale.

6. Deposits

Total deposits at December 31, 2005 and 2004, and the weighted average rate on deposits at December 31, 2005, are as follows:

	2005		2004

	(Dollars in thousands)
Interest-bearing deposits:
Certificate of deposit accounts	$	898,157	$	703,314	3.90	%
Savings accounts		273,753		216,772	1.45
Money market accounts		175,247		258,235	2.47
NOW accounts		42,029		48,463	0.50

Total interest-bearing deposits		1,389,186		1,226,784
Non-interest bearing demand deposits		58,678		49,540

Total due to depositors		1,447,864		1,276,324
Mortgagors’ escrow deposits		19,423		16,473	0.21

Total deposits	$	1,467,287	$	1,292,797

The aggregate amount of time deposits with denominations of $100,000 or more was $255,331,000 and $165,647,000 at December 31, 2005 and 2004, respectively. The Bank utilizes brokered deposits as an additional funding source. The aggregate amount of brokered deposits was $31,310,000 at December 31, 2005.

Interest expense on deposits is summarized as follows for the years ended December 31:

	2005		2004		2003

	(Dollars in thousands)
Certificate of deposit accounts	$	26,960	$	22,487	$	20,835
Savings accounts		2,225		1,092		1,611
Money market accounts		5,199		5,122		4,758
NOW accounts		216		221		257

Total due to depositors		34,600		28,922		27,461
Mortgagors’ escrow deposits		57		50		60

Total interest expense on deposits	$	34,657	$	28,972	$	27,521

Scheduled remaining maturities of certificate of deposit accounts are summarized as follows for the years ended December 31:

	(In thousands)
	2005		2004

Within 12 months	$	490,070	$	266,047
More than 12 months to 24 months		107,613		216,933
More than 24 months to 36 months		83,243		70,752
More than 36 months to 48 months		51,919		69,151
More than 48 months to 60 months		123,179		49,854
More than 60 months		42,133		30,577

Total certificate of deposit accounts	$	898,157	$	703,314

7. Borrowed Funds and Securities Sold Under Agreements to Repurchase

Borrowed funds and securities sold under agreements to repurchase are summarized as follows at December 31:

	2005				2004

		Amount	Weighted Average Rate			Amount	Weighted Average Rate

		*(Dollars in thousands)*
Repurchase agreements - adjustable rate:
Due in 2010	$	—	—	%	$	25,000	2.16	%

Repurchase agreements - fixed rate:
Due in 2005		—	—			20,900	4.01
Due in 2006		35,000	3.00			53,000	3.67
Due in 2007		60,000	5.25			60,000	5.25
Due in 2008		20,000	3.89			20,000	3.89
Due in 2009		35,000	5.08			35,000	5.08
Due in 2010		28,900	4.07			—	—

Total repurchase agreements - fixed rate		178,900	4.43			188,900	4.49

Total repurchase agreements		178,900	4.43			213,900	4.22

FHLB-NY advances - adjustable rate:
Due in 2006		10,000	4.54			10,000	2.92
Due in 2007		35,000	5.06			35,000	3.03

Total FHLB-NY advances - adjustable rate		45,000	4.95			45,000	3.01

FHLB-NY advances - fixed rate:
Due in 2005		—	—			40,000	1.96
Due in 2006		85,000	4.25			40,000	4.64
Due in 2007		90,000	4.04			75,000	4.03
Due in 2008		165,000	4.06			70,000	3.48
Due in 2009		55,000	3.79			30,000	3.07
Due in 2010		50,000	6.56			50,000	6.56
Due in 2011		191	7.34			217	7.34

Total FHLB-NY advances - fixed rate		445,191	4.34			305,217	4.03

Total FHLB-NY advances		490,191	4.40			350,217	3.90

Junior subordinated debentures - adjustable rate
Due in 2032		20,619	7.80			20,619	5.72

Total borrowings	$	689,710	4.51		$	584,736	4.08	%

Borrowed funds which have call provisions are summarized as follows at December 31, 2005:

	Amount

	*(Dollars in thousands)*
FHLB-NY advances - fixed rate	$	25,000	6.15	%	7/13/2007	On Demand
Repurchase agreements - fixed rate		50,000	5.64		12/18/2007	On Demand
Repurchase agreements - fixed rate		25,000	5.52		7/22/2009	On Demand
Repurchase agreements - fixed rate		10,900	4.18		3/15/2010	3/15/2007
Repurchase agreements - fixed rate		18,000	4.00		4/19/2010	4/19/2007

As part of the Company’s strategy to finance investment opportunities and manage its cost of funds, the Company enters into repurchase agreements with broker-dealers and the FHLB-NY. These agreements are recorded as financing transactions and the obligations to repurchase are reflected as a liability in the consolidated financial statements. The securities underlying the agreements were delivered to the broker-dealers or the FHLB-NY who arranged the transaction. The securities remain registered in the name of the Company and are returned upon the maturity of the agreement. The Company retains the right of substitution of collateral throughout the terms of the agreements. All the repurchase agreements are collateralized by mortgage-backed securities. Information relating to these agreements at or for the years ended December 31 is as follows:

	2005			2004

	(Dollars in thousands)
Book value of collateral	$	198,415		$	230,400
Estimated fair value of collateral		198,415			230,400
Average balance of outstanding agreements during the year		210,174			194,610
Maximum balance of outstanding agreements at a month end during the year		213,900			213,900
Average interest rate of outstanding agreements during the year		4.25	%		4.23	%

Pursuant to a blanket collateral agreement with the FHLB-NY, advances are secured by all of the Bank’s stock in the FHLB-NY, certain qualifying mortgage loans, mortgage-backed and mortgage-related securities, and other securities not otherwise pledged in an amount at least equal to 110% of the advances outstanding.

The Holding Company also has a trust formed under the laws of the State of Delaware for the purpose of issuing capital and common securities and investing the proceeds thereof in $20.6 million of junior subordinated debentures of the Holding Company. On July 11, 2002, the Trust issued $20.0 million of floating rate capital securities. The capital securities have a maturity date of October 7, 2032, are callable at par on July 7, 2007 and every quarter thereafter, and pay cumulative cash distributions at a floating per annum rate of interest, reset quarterly, equal to 3.65% over 3-month LIBOR, with an initial rate of 5.51%. The rate was 7.80% at December 31, 2005. A rate cap of 12.50% is effective through October 7, 2007. The Holding Company has guaranteed the payment of the Trust’s obligations under these capital securities. The terms of the junior subordinated debentures are the same as those of the capital securities issued by the Trust. Prior to 2004, the Trust was included in the consolidated financial statements of the Company. Effective January 1, 2004, the Trust was deconsolidated. The consolidated financial statements now include the junior subordinated debentures of the Holding Company.

8. Income Taxes

Flushing Financial Corporation files consolidated Federal and combined New York State and New York City income tax returns with its subsidiaries, with the exception of the Trust and FPFC, which file separate Federal, New York State and New York City income tax returns as a trust and real estate investment trust, respectively. A deferred tax liability is recognized on all taxable temporary differences and a deferred tax asset is recognized on all deductible temporary differences and operating losses and tax credit carry-forwards. A valuation allowance is recognized to reduce the potential deferred tax asset if it is “more likely than not” that all or some portion of that potential deferred tax asset will not be realized. The Company must also take into account changes in tax laws or rates when valuing the deferred income tax amounts it carries on its Consolidated Statements of Financial Condition.

The Company’s annual tax liability for New York State and New York City was the greater of a tax based on “entire net income”, “alternative entire net income”, “taxable assets” or a minimum tax. For the years ended December 31, 2005 and 2004, the Company’s state tax was based on “entire net income”, and for the year ended December 31, 2003, the Company’s state tax was based on “alternative entire net income.” For the year ended December 31, 2004, the Company’s city tax was based on “entire net income”, and for the years ended December 31, 2005 and 2003, the Company’s state tax was based on “alternative entire net income.”

Income tax provisions (benefits) are summarized as follows for the years ended December 31:

	2005		2004			2003

	(In thousands)
Federal:
Current	$	10,989	$	12,197		$	9,679
Deferred		907		(743	)		820

Total federal tax provision		11,896		11,454			10,499

State and Local:
Current		2,041		2,877			2,020
Deferred		1,114		65			1,025

Total state and local tax provision		3,155		2,942			3,045

Total income tax provision	$	15,051	$	14,396		$	13,544

The income tax provision in the Consolidated Statements of Income has been provided at effective rates of 39.0%, 38.9% and 38.5% for the years ended December 31, 2005, 2004 and 2003, respectively. The effective rates differ from the statutory federal income tax rate as follows for the years ended December 31:

	2005					2004					2003

	(Dollars in thousands)
Taxes at federal statutory rate	$	13,508		35.0	%	$	12,966		35.0	%	$	12,328		35.0	%
Increase (reduction) in taxes resulting from:
State and local income tax, net of Federal income tax benefit		2,051		5.3			1,912		5.2			1,979		5.6
Other		(508	)	(1.3	)		(482	)	(1.3	)		(763	)	(2.1	)

Taxes at effective rate	$	15,051		39.0	%	$	14,396		38.9	%	$	13,544		38.5	%

The components of the income taxes attributable to income from operations and changes in equity are as follows for the years ended December 31:

	2005			2004			2003

	(In thousands)
Income from operations	$	15,051		$	14,396		$	13,544
Equity:
Change in fair value of securities available for sale		(3,127	)		(1,190	)		(3,314	)
Adjustment required to recognize minimum pension liability		(28	)		9			(22	)
Compensation expense for tax purposes in excess of that recognized for financial reporting purposes		(1,752	)		(3,144	)		(3,331	)

Total income taxes	$	10,144		$	10,071		$	6,877

The components of the net deferred tax asset are as follows at December 31:

	2005		2004

	(In thousands)
Deferred tax asset:
Postretirement benefits	$	1,574	$	2,808
Impairment write-down		—		39
Unrealized losses on securities available for sale		3,676		549
Minimum pension liability		262		234
Other		722		532

Deferred tax asset		6,234		4,162

Deferred tax liability:
Allowance for loan losses		722		277
Depreciation		106		128
Other		519		4

Deferred tax liability		1,347		409

Net deferred tax asset included in other assets	$	4,887	$	3,753

The Company has recorded a net deferred tax asset of $4,887,000. This represents the anticipated net federal, state and local tax benefits expected to be realized in future years upon the utilization of the underlying tax attributes comprising this balance. The Company has reported taxable income for federal, state, and local tax purposes in each of the past three years. In management’s opinion, in view of the Company’s previous, current and projected future earnings trend, it is more likely than not that the net deferred tax asset will be fully realized. Accordingly, no valuation allowance was deemed necessary for the net deferred tax asset at December 31, 2005 and 2004.

9. Benefit Plans

Defined Contribution Plans:

The Company maintains a profit sharing plan and the Bank maintains a 401(k) plan. Both plans are tax-qualified defined contribution plans which cover substantially all employees. Annual contributions are at the discretion of the Company’s Board of Directors, but not to exceed the maximum amount allowable under the Internal Revenue Code. Currently, annual matching contributions under the Bank’s 401(k) plan equal 50% of the employee’s contributions, up to a maximum of 3% of the employee’s compensation. Contributions to the profit sharing plan are determined at the end of each year. Contributions by the Bank into the 401(k) plan vest 20% per year over a five-year period beginning after the employee has completed one year of service. Contributions into the profit sharing plan vest 20% per year over the employee’s first five years of service. Compensation expense recorded by the Company for these plans amounted to $868,000, $805,000 and $738,000 for the years ended December 31, 2005, 2004 and 2003, respectively.

The Bank provides a non-qualified deferred compensation plan as an incentive for officers who have achieved the level of at least vice president. In addition to the amounts deferred by the officers, the Bank matches 50% of their contributions, generally up to a maximum of 5% of the officers’ salary. The Bank had also provided an additional non-contributory deferred compensation plan for its former president in the amount of 10% of his salary. Compensation expense recorded by the Company for these plans amounted to $172,000, $201,000 and $189,000 for the years ended December 31, 2005, 2004 and 2003, respectively.

Employee Benefit Trust:

An Employee Benefit Trust (“EBT”) has been established to assist the Company in funding its benefit plan obligations. In connection with the Bank’s conversion to a federal stock savings bank in 1995, the EBT borrowed $7,928,000 from the Company and used $7,000 of cash received from the Bank to purchase 2,328,750 shares of the common stock of the Company. The loan will be repaid principally from the Company’s discretionary contributions to the EBT and dividend payments received on common stock held by the EBT, or may be forgiven by the Company, over a period of 30 years. At December 31, 2005, the loan had an outstanding balance of $3,639,000, bearing a fixed interest rate of 6.22% per annum. The loan obligation of the EBT is considered unearned compensation and, as such, is recorded as a reduction of the Company’s stockholders’ equity. Both the loan obligation and the unearned compensation are reduced by the amount of loan repayments made by the EBT or forgiven by the Company. Shares purchased with the loan proceeds are held in a suspense account for contribution to specified benefit plans as the loan is repaid or forgiven. Shares released from the suspense account are used solely for funding matching contributions under the Bank’s 401(k) plan and contributions to the Company’s profit-sharing plan. Since annual contributions are discretionary with the Company or dependent upon

employee contributions, compensation payable under the EBT cannot be estimated. For the years ended December 31, 2005, 2004 and 2003, the Company funded $773,000, $707,000 and $649,000, respectively, of employer contributions to the 401(k) and profit sharing plans from the EBT.

The shares held in the suspense account are pledged as collateral and are reported as unallocated EBT shares in stockholders’ equity. As shares are released from the suspense account, the Company reports compensation expense equal to the current market price of the shares, and the shares become outstanding for earnings per share computations. The EBT shares are as follows at December 31:

	2005			2004

Shares owned by Employee Benefit Trust, beginning balance		1,743,278			1,779,057
Shares released and allocated		(46,212	)		(35,779	)

Shares owned by Employee Benefit Trust, ending balance		1,697,066			1,743,278

Market value of unallocated shares	$	26,423,318		$	34,970,157

Omnibus Incentive Plan:

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. The Company has applied the shares previously authorized by stockholders 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 December 31, 2005, there are 219,086 shares available for full value awards and 751,912 shares available for non-full value awards. All grants and awards under the 1996 Restricted Stock Incentive Plan and the 1996 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 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. The Omnibus Plan increased the annual grants to each outside director to 3,600 restricted stock units, while eliminating grants of stock options for outside directors. Prior to the approval of the 2005 Omnibus Plan, outside directors were annually granted 1,687 restricted stock unit awards and 14,850 stock options. This change is expected to provide an expense benefit beginning in 2006 when we will be required to expense stock options grants.

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 to a full value award. The Omnibus Plan will allow the Company to transfer shares from the non-full value pool to the full value pool on a 3-for-1 basis, but does not allow the transfer of shares from the full value pool to the non-full value pool. The following table summarizes certain activity for shares available for full value awards, for the years ended December 31:



Shares available for future full value awards at beginning of year	309,815		373,125		417,768
Full value awards	(125,200	)	(91,657	)	(81,783	)
Shares repurchased to satisfy tax withholding obligations	28,651		25,222		30,855
Forfeitures	5,820		3,125		6,285

Shares available for future full value awards at end of year	219,086		309,815		373,125

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:

			Weighted Average Exercise Price

Balance outstanding December 31, 2002	2,907,699		$	7.14
Granted	268,050		$	13.55
Exercised	(853,685	)	$	5.22
Forfeited	(27,795	)	$	9.00

Balance outstanding December 31, 2003	2,294,269		$	8.58
Granted	237,450		$	17.75
Exercised	(560,763	)	$	6.12
Forfeited	(5,705	)	$	13.49

Balance outstanding December 31, 2004	1,965,251		$	10.38
Granted	123,725		$	17.88
Exercised	(340,166	)	$	7.12
Forfeited	(17,017	)	$	9.38

Balance outstanding December 31, 2005	1,731,793		$	11.56

Shares available for future non-full value awards at December 31, 2005	751,912

The following table summarizes information about the non-full value awards at December 31, 2005:

	Options Outstanding				Options Exercisable

Exercise Price	Number Outstanding		Weighted Average Remaining Contractual Life		Number Exercisable		Weighted Average Exercise Price

$ 4.81		155,348		0.4 years		155,348	$	4.81
$5.00-$10.00		366,735		3.6 years		339,735	$	6.73
$10.01-$15.00		851,435		6.4 years		636,365	$	12.06
$15.01-$20.00		358,275		8.8 years		250,475	$	17.60

$4.81-$20.00		1,731,793		5.8 years		1,381,923	$	10.94

There were 1,299,516 options exercisable at a weighted average exercise price of $8.82 at December 31, 2004 and 1,391,494 options were exercisable at a weighted average exercise price of $6.66 at December 31, 2003.

10. Pension and Other Postretirement Benefit Plans

Employee Pension Plan:

The Bank has a funded noncontributory defined benefit pension plan covering substantially all of its employees (the “Retirement Plan”). The benefits are based on years of service and the employee’s compensation during the three consecutive years out of the final ten years of service that produces the highest average. The Bank’s funding policy is to contribute annually the amount recommended by the Retirement Plan’s actuary. Contributions are intended to provide not only for the benefits attributed to service to date but also for those expected to be earned in the future. The Bank’s Retirement Plan invests in diversified equity and fixed-income funds, which are independently managed by a third party. The Company uses a September 30 measurement date for the Retirement Plan.

The following table sets forth, for the Retirement Plan, the change in benefit obligation and assets, and for the Company, the amounts recognized in the Consolidated Statements of Financial Condition at December 31:

	2005			2004

	(In thousands)
Change in benefit obligation:
Projected benefit obligation at beginning of year	$	14,006		$	12,843
Service cost		587			621
Interest cost		843			788
Actuarial loss		1,173			275
Benefits paid		(600	)		(521	)

Projected benefit obligation at end of year		16,009			14,006

Change in plan assets:
Market value of assets at beginning of year		13,039			11,612
Actual return on plan assets		1,575			1,089
Employer contributions		976			859
Benefits paid		(600	)		(521	)

Market value of plan assets at end of year		14,990			13,039

Funded status		(1,019	)		(967	)
Unrecognized net loss from past experience different from that assumed and effects of changes in assumptions		5,139			4,464

Prepaid pension cost included in other assets	$	4,120		$	3,497

Assumptions used to determine the Retirement Plan’s benefit obligations were:



Weighted average discount rate	5.63	%	6.13	%
Rate of increase in future compensation levels	3.00	%	3.25	%
Expected long-term rate of return on assets	8.50	%	8.50	%

The amounts shown above as prepaid pension costs are the only amounts recognized in the Consolidated Statements of Financial Condition at December 31, 2005 and 2004. The accumulated benefit obligation for the Retirement Plan was $14,149,000 and $12,398,000 at December 31, 2005 and 2004, respectively.

The components of the net pension expense for the Retirement Plan are as follows for the years ended December 31:

	2005			2004			2003

	(In thousands)
Service cost	$	587		$	621		$	554
Interest cost		843			788			754
Amortization of past service liability		—			(13	)		(24	)
Amortization of unrecognized loss		161			81			18
Expected return on plan assets		(1,238	)		(1,166	)		(1,087	)

Net pension expense	$	353		$	311		$	215

Assumptions used to develop periodic pension benefit expense for the Retirement Plan for the years ended December 31 were:



Weighted average discount rate	6.13	%	6.25	%	6.50	%
Rate of increase in future compensation levels	3.25	%	3.50	%	4.00	%
Expected long-term rate of return on assets	8.50	%	9.00	%	8.50	%

The long-term rate-of-return on assets assumption was set based on historical returns earned by equities and fixed income securities, adjusted to reflect expectations of future returns as applied to the Retirement Plan’s target allocation of asset classes. Equities and fixed income securities were assumed to earn real rates of return in the ranges of 5-9% and 2-6%, respectively. The long-term inflation rate was estimated to be 3%. When these overall return expectations are

applied to the Retirement Plan’s target allocation, the expected rate of return is determined to be 8.50%, which is roughly the midpoint of the range of expected return.

The Retirement Plan’s weighted average asset allocations at December 31, by asset category, were:



Equity securities	72%	69%
Debt securities	28%	31%

Retirement Plan assets are invested in six diversified investment funds of the RSI Retirement Trust (the “RSI Trust”), a no load series open-end mutual fund. In addition, a small portion of the assets (less than 1.0%) is invested in RS Group common stock. The investment funds include four equity mutual funds and two bond mutual funds, each with its own investment objectives, investment strategies and risks, as detailed in the RSI Trust’s prospectus. The RSI Trust has been given discretion by the Plan Sponsor to determine the appropriate strategic asset allocation versus plan liabilities, as governed by the RSI Trust’s Statement of Investment Objectives and Guidelines (the “Guidelines”).

The long-term investment objective is to be invested 65% in equity securities (equity mutual funds) and 35% in debt securities (bond mutual funds). If the plan’s current liability is underfunded under the Guidelines, the bond fund portion may be temporarily increased up to 50% in order to lessen asset value volatility. When the plan’s current liability is no longer underfunded, the bond fund portion generally will be decreased back to 35%. The plan’s current liability is measured based on current service and compensation levels with no projections into the future. Asset rebalancing is performed at least annually, with interim adjustments made when the investment mix varies more than 5% from the target (i.e., a 10% target range).

The investment goal is to achieve investment results that will contribute to the proper funding of the Retirement Plan by exceeding the rate of inflation over the long-term. Performance volatility is also monitored. Risk/volatility is further managed by the distinct investment objectives of each of the RSI Trust’s funds and the diversification within each fund.

The Bank expects to contribute $0.9 million to its Retirement Plan in 2006.

The following benefit payments, which reflect expected future service, are expected to be paid by the Retirement Plan:

For the year ending December 31:	Future Benefit Payments

	*(In thousands)*
2006	$	653
2007		670
2008		754
2009		815
2010		854
2011 – 2015		5,216

Outside Director Pension Plan:

The Bank has an unfunded noncontributory defined benefit Outside Director Retirement Plan (the “Directors’ Plan”), which provides benefits to each non-employee director who has at least five years of service as a non-employee director and whose years of service as a non-employee director plus age equal or exceed 55. Benefits are also payable to a non-employee director whose status as a non-employee director terminates because of death or disability or who is a non-employee director upon a change of control (as defined in the Directors’ Plan). Any person who becomes a non-employee director after January 1, 2004 will not be eligible to participate in the Directors’ Plan. An eligible director will be paid an annual retirement benefit equal to the last annual retainer paid, plus fees paid to such director for attendance at Board meetings of the Holding Company or the Bank during the twelve-month period prior to retirement, but not more than $48,000. Such benefit will be paid in equal monthly installments for the lesser of the number of months such director served as a non-employee director or 120 months. In the event of a termination of Board service due to a change of control, a non-employee director who has completed at least two years of service as a non-employee director will receive a cash lump sum payment equal to 120 months of benefit, and a non-employee director with less than two years service will receive a cash lump sum payment equal to a number of months of benefit equal to the number of months of his service as a non-employee director. In the event of the director’s death, the surviving spouse will receive the equivalent benefit. No benefits will be payable to a director who is removed for cause. The Holding Company has guaranteed the payment of benefits under the Directors’ Plan. Upon adopting the Directors’ Plan, the Bank elected to immediately recognize the

effect of adopting the Directors’ Plan. Subsequent plan amendments are amortized as a past service liability. The Bank uses a December 31 measurement date for the Directors’ Plan.

The following table sets forth, for the Directors’ Plan, the change in benefit obligation and assets, and for the Company, the amounts recognized in the Consolidated Statements of Financial Condition at December 31:

	2005			2004

	(In thousands)
Change in benefit obligation:
Projected benefit obligation at beginning of year	$	3,051		$	2,575
Service cost		84			74
Interest cost		72			50
Actuarial loss (gain)		82			(2	)
Benefits paid		(147	)		(99	)
Plan amendments		—			453

Projected benefit obligation at end of year		3,142			3,051

Change in plan assets:
Market value of assets at beginning of year		—			—
Employer contributions		147			99
Benefits paid		(147	)		(99	)

Market value of plan assets at end of year		—			—

Funded status		(3,142	)		(3,051	)
Unrecognized net loss from past experience different from that assumed and effects of changes in assumptions		610			536
Prior service cost not yet recognized in periodic pension cost		708			857
Adjustment required to recognize minimum liability		(1,277	)		(1,360	)

Accrued pension cost included in other liabilities	$	(3,101	)	$	(3,018	)

The accumulated benefit obligation for the Directors’ Plan was $3,142,000 and $3,051,000 at December 31, 2005 and 2004, respectively.

The components of the net pension expense for the Directors’ Plan are as follows for the years ended December 31:

	2005		2004		2003

	(In thousands)
Service cost	$	84	$	74	$	40
Interest cost		72		50		20
Amortization of unrecognized loss		12		15		14
Amortization of past service liability		148		141		119

Net pension expense	$	316	$	280	$	193

Assumptions used to determine benefit obligations and periodic pension benefit expense for the Directors’ Plan for the years ended December 31 were:



Weighted average discount rate for the benefit obligation	5.63	%	6.13	%	6.25	%
Weighted average discount rate for periodic pension benefit expense	6.13	%	6.25	%	6.50	%
Rate of increase in future compensation levels	0.00	%	0.00	%	0.00	%

The (decrease) increase in other comprehensive income from the change in the minimum liability for the Directors’ Plan was ($38,000), $7,000 and ($22,000) for the years ended December 31, 2005, 2004 and 2003, respectively.

The Bank expects to make payments of $178,000 under its Directors’ Plan in 2006.

The following benefit payments under the Directors’ Plan, which reflect expected future service, are expected to be paid:

For the year ending December 31:	Future Benefit Payments

	(In thousands)
2006	$	178
2007		200
2008		236
2009		272
2010		275
2011 – 2015		1,392

Amounts recognized for the Directors’ Plan in the Consolidated Statements of Financial Position at December 31:

	2005			2004

	(In thousands)
Accrued benefit	$	(3,101	)	$	(3,018	)
Intangible asset		708			857
Accumulated other comprehensive income		307			269

Net amount recognized	$	(2,086	)	$	(1,892	)

Other Postretirement Benefit Plans:

The Company sponsors two unfunded postretirement benefit plans (the “Postretirement Plans”) that cover all retirees who were full-time permanent employees with at least five years of service, and their spouses. One plan provides medical benefits through a 50% cost sharing arrangement. Effective January 1, 2000, the spouses of future retirees will be required to pay 100% of the premiums for their coverage. The other plan provides life insurance benefits and is noncontributory. Under these programs, eligible retirees receive lifetime medical and life insurance coverage for themselves and lifetime medical coverage for their spouses. The Company reserves the right to amend or terminate these plans at its discretion.

Comprehensive medical plan benefits equal the lesser of the normal plan benefit or the total amount not paid by Medicare. Life insurance benefits for retirees are based on annual compensation and age at retirement. As of December 31, 2005, the Company has not funded these plans. The Company uses a December 31 measurement date for these plans.

The following table sets forth, for the Postretirement Plans, the change in benefit obligation and assets, and for the Company, the amounts recognized in the Consolidated Statements of Financial Condition at December 31:

	2005			2004

	(In thousands)
Change in benefit obligation:
Projected benefit obligation at beginning of year	$	4,142		$	3,574
Service cost		156			162
Interest cost		249			235
Actuarial (gain) loss		(1,721	)		265
Benefits paid		(200	)		(94	)

Projected benefit obligation at end of year		2,626			4,142

Change in plan assets:
Market value of assets at beginning of year		—			—
Employer contributions		200			94
Benefits paid		(200	)		(94	)

Market value of plan assets at end of year		—			—

Funded status		(2,626	)		(4,142	)
Unrecognized net (gain) loss from past experience different from that assumed and effects of changes in assumptions		(581	)		1,204
Prior service cost not yet recognized in periodic pension cost		(100	)		(135	)

Accrued pension cost included in other liabilities	$	(3,307	)	$	(3,073	)

The amounts shown above as accrued postretirement cost are the only amounts recognized in the Consolidated Statements of Financial Condition at December 31, 2005 and 2004. The accumulated benefit obligation for the Postretirement Plans was $2,626,000 and $4,142,000 at December 31, 2005 and 2004, respectively.

Assumptions used in determining the actuarial present value of the accumulated postretirement benefit obligations at December 31 are as follows:



Rate of return on plan assets	N/A		N/A
Discount rate	5.63	%	6.13	%
Rate of increase in health care costs
Initial	9.50	%	10.00	%
Ultimate (year 2012)	4.50	%	4.25	%
Annual rate of salary increase for life insurance	3.00	%	3.25	%

The resulting net periodic postretirement benefit expense consisted of the following components for the years ended December 31:

	2005			2004			2003

	(In thousands)
Service cost	$	156		$	162		$	152
Interest cost		249			235			218
Amortization of unrecognized loss		64			69			61
Amortization of past service liability		(35	)		(131	)		(131	)

Net postretirement benefit expense	$	434		$	335		$	300

Assumptions used to develop periodic postretirement benefit expense for the Postretirement Plans for the years ended December 31 were:



Rate of return on plans assets	NA		NA		NA
Discount rate	6.13	%	6.25	%	6.50	%
Rate of increase in health care costs
Initial	10.00	%	10.00	%	9.00	%
Ultimate (year 2011)	4.25	%	3.75	%	4.50	%
Annual rate of salary increases for life insurance	3.25	%	3.25	%	4.00	%

The health care cost trend rate assumptions have a significant effect on the amounts reported. A one percentage point change in assumed health care trend rates would have the following effects:

	Increase		Decrease

	(In thousands)
Effect on postretirement benefit obligation	$	149	$	(129	)
Effect on total service and interest cost		48		(38	)

The Company expects to pay benefits of $105,000 under its Postretirement Plans in 2006.

The following benefit payments under the Postretirement Plan, which reflect expected future service, are expected to be paid

For the year ending December 31:	Future Benefit Payments

	(In thousands)
2006		$ 105
2007		112
2008		122
2009		128
2010		135
2011 – 2015		788

On December 8, 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Medicare Act”) was signed into law. The Medicare Act introduces a prescription drug benefit under Medicare Part D as well as a Federal subsidy to employers whose plans provide an “actuarial equivalent” prescription drug benefit. Since the Company does not currently provide a prescription drug benefit for retirees, the Medicare Act has not had an effect on the consolidated financial statements.

11. Stockholders’ Equity

Dividend Restrictions:

In connection with the Bank’s conversion from mutual to stock form in November 1995, a special liquidation account was established at the time of conversion, in accordance with the requirements of the Office of Thrift Supervision (“OTS”), which was equal to its capital as of June 30, 1995. The liquidation account is reduced as and to the extent that eligible account holders have reduced their qualifying deposits. Subsequent increases in deposits do not restore an eligible account holder’s interest in the liquidation account. In the event of a complete liquidation of the Bank, each eligible account holder will be entitled to receive a distribution from the liquidation account in an amount proportionate to the current adjusted qualifying balances for accounts then held. As of December 31, 2005, the Bank’s liquidation account was $3.6 million and was presented within retained earnings.

In addition to the restriction described above, Federal banking regulations place certain restrictions on dividends paid by the Bank to the Holding Company. The total amount of dividends which may be paid at any date is generally limited to the net income of the Bank for the current year and prior two years, less any dividends previously paid from those earnings. As of December 31, 2005, the Bank had $33.7 million in retained earnings available to distribute to the Holding Company in the form of cash dividends.

In addition, dividends paid by the Bank to the Holding Company would be prohibited if the effect thereof would cause the Bank’s capital to be reduced below applicable minimum capital requirements.

Treasury Stock Transactions:

The Holding Company repurchased 144,700 shares in 2005 and 520,600 shares in 2004, of its outstanding common stock on the open market under its stock repurchase programs. In 2004, the Company approved a new stock repurchase program, which authorized the purchase of an additional 1,000,000 shares. At December 31, 2005, 774,650 shares remain to be repurchased under this plan. At December 31, 2005 and 2004, there were 1,050 and 224,448 shares, respectively, held as Treasury Stock.

12. Regulatory Capital

The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) imposes a number of mandatory supervisory measures on banks and thrift institutions. Among other matters, FDICIA established five capital zones or classifications (well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized). Such classifications are used by the OTS and other bank regulatory agencies to determine matters ranging from each institution’s semi-annual FDIC deposit insurance premium assessments, to approvals of applications authorizing institutions to grow their asset size or otherwise expand business activities. Under OTS capital regulations, the Bank is required to comply with each of three separate capital adequacy standards. As of December 31, 2005, the Bank continues to be categorized as “well-capitalized” by the OTS under the prompt corrective action regulations and continues to exceed all regulatory capital requirements.

Set forth below is a summary of the Bank’s compliance with OTS capital standards.

	December 31, 2005					December 31, 2004

	Amount		Percent of Assets			Amount		Percent of Assets

	(Dollars in thousands)
Tangible capital:
Capital level	$	167,550		7.14	%	$	161,176		7.89	%
Requirement		35,201		1.50			30,659		1.50
Excess		132,349		5.64			130,517		6.39

Leverage and Core (Tier I) capital:
Capital level	$	167,550		7.14	%	$	161,176		7.89	%
Requirement		70,402		3.00			61,318		3.00
Excess		97,148		4.14			99,858		4.89

Total risk-based capital:
Capital level	$	173,936		12.12	%	$	167,710		14.01	%
Requirement		114,845		8.00			95,788		8.00
Excess		59,091		4.12			71,922		6.01

13. Commitments and Contingencies

Commitments:

The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and lines of credit. The instruments involve, to varying degrees, elements of credit and market risks in excess of the amount recognized in the consolidated financial statements.

The Company’s exposure to credit loss in the event of nonperformance by the counterparty to the financial instrument for loan commitments and lines of credit is represented by the contractual amounts of these instruments.

Commitments to extend credit (principally real estate mortgage loans) and lines of credit (principally construction loans and home equity lines of credit) amounted to $56.2 million and $73.1 million, respectively, at December 31, 2005. Included in these commitments were $43.8 million of fixed-rate commitments at a weighted average rate of 7.55%, and $85.5 million of adjustable-rate commitments with a weighted average rate, as of December 31, 2005, of 7.39%. Since generally all of the loan commitments are expected to be drawn upon, the total loan commitments approximate future cash requirements, whereas the amounts of lines of credit may not be indicative of the Company’s future cash requirements. The loan commitments generally expire in ninety days, while construction loan lines of credit mature within eighteen months and home equity lines of credit mature within ten years. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.

Commitments to extend credit are legally binding agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates and require payment of a fee. The Company evaluates each customer’s creditworthiness on a case-by-case basis. Collateral held consists primarily of real estate.

The Trust issued $20.0 million of floating rate capital securities in July 2002. The Holding Company has guaranteed the payment of the Trust’s obligations under these capital securities.

The Company’s minimum annual rental payments for Bank premises due under non-cancelable leases are as follows:

	Minimum Rental

	(In thousands)
Years ended December 31:
2006	$	1,603
2007		1,755
2008		1,809
2009		1,857
2010		1,800
Thereafter		6,217

Total minimum payments required	$	15,041

The leases have escalation clauses for operating expenses and real estate taxes. Certain lease agreements provide for increases in rental payments based upon increases in the consumer price index. Rent expense under these leases for the years ended December 31, 2005, 2004 and 2003 was approximately $1,660,000, $1,300,000 and $1,000,000, respectively.

Contingencies:

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 or cash flows.

14. Concentration of Credit Risk

The Company’s lending is concentrated in the metropolitan New York area. The Company evaluates each customer’s creditworthiness on a case-by-case basis under the Company’s established underwriting policies. The collateral obtained by the Company generally consists of first liens on one-to-four family residential, multi-family residential, and commercial real estate.

15. Disclosures About Fair Value of Financial Instruments

SFAS No. 107, “Disclosures About Fair Value of Financial Instruments”, requires that the Company disclose the estimated fair values for certain of its financial instruments. Financial instruments include items such as loans, deposits, securities, commitments to lend and other items as defined in SFAS No. 107.

Fair value estimates are supposed to represent estimates of the amounts at which a financial instrument could be exchanged between willing parties in a current transaction other than in a forced liquidation. However, in many instances current exchange prices are not available for many of the Company’s financial instruments, since no active market generally exists for a significant portion of the Bank’s financial instruments. Accordingly, the Company uses other valuation techniques to estimate fair values of its financial instruments such as discounted cash flow methodologies and other methods allowable under SFAS No. 107.

Fair value estimates are subjective in nature and are dependent on a number of significant assumptions based on management’s judgment regarding future expected loss experience, current economic condition, risk characteristics of various financial instruments, and other factors. In addition, SFAS No. 107 allows a wide range of valuation techniques; therefore, it may be difficult to compare the Company’s fair value information to independent markets or to other financial institutions’ fair value information.

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

SFAS No. 107 does not require disclosure about fair value information for items that do not meet the definition of a financial instrument or certain other financial instruments specifically excluded from its requirements. These items include core deposit intangibles and other customer relationships, premises and equipment, leases, income taxes, foreclosed properties and equity.

Further, SFAS No. 107 does not attempt to value future income or business. These items may be material and accordingly, the fair value information presented does not purport to represent, nor should it be construed to represent, the underlying “market” or franchise value of the Company.

The estimated fair value of each material class of financial instruments at December 31, 2005 and 2004 and the related methods and assumptions used to estimate fair value are as follows:

Cash and due from banks, overnight interest-earning deposits and federal funds sold, FHLB-NY stock, bank owned life insurance, interest and dividends receivable, mortgagors’ escrow deposits and other liabilities:

The carrying amounts are a reasonable estimate of fair value.

Securities available for sale:

The estimated fair values of securities available for sale are contained in Note 5 of Notes to Consolidated Financial Statements. Fair value is based upon quoted market prices, where available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities and adjusted for differences between the quoted instrument and the instrument being valued.

Loans:

The estimated fair value of loans, with carrying amounts of $1,881,876,000 and $1,516,507,000 at December 31, 2005 and 2004, respectively, was $1,881,008,000 and $1,548,745,000 at December 31, 2005 and 2004, respectively.

Fair value is estimated by discounting the expected future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and remaining maturities.

For non-accruing loans, fair value is generally estimated by discounting management’s estimate of future cash flows with a discount rate commensurate with the risk associated with such assets.

Due to depositors:

The estimated fair value of due to depositors, with carrying amounts of $1,447,864,000 and $1,276,324,000 at December 31, 2005 and 2004, respectively, was $1,408,553,000 and $1,235,418,000 at December 31, 2005 and 2004, respectively.

The fair values of demand, passbook savings, NOW and money market deposits are, by definition, equal to the amount payable on demand at the reporting dates (i.e. their carrying value). The fair value of fixed-maturity certificates of deposits are estimated by discounting the expected future cash flows using the rates currently offered for deposits of similar remaining maturities.

Borrowed funds:

The estimated fair value of borrowed funds, with carrying amounts of $689,710,000 and $584,736,000 at December 31, 2005 and 2004, respectively, was $682,872,000 and $593,266,000 at December 31, 2005 and 2004, respectively.

The fair value of borrowed funds is estimated by discounting the contractual cash flows using interest rates in effect for borrowings with similar maturities and collateral requirements.

Other financial instruments:

The fair values of commitments to sell, lend or borrow are estimated using the fees currently charged or paid to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties or on the estimated cost to terminate them or otherwise settle with the counterparties at the reporting date. For fixed-rate loan commitments to sell, lend or borrow, fair values also consider the difference between current levels of interest rates and committed rates (where applicable).

At December 31, 2005 and 2004, the fair values of the above financial instruments approximate the recorded amounts of the related fees and were not considered to be material.

16. Recent Accounting Pronouncements

primarily be dependent on the level of future grants of stock options awarded by the Company. While management is unable to determine the actual effect the adoption of this statement will have on its diluted earnings per share, management estimates, based on prior year grants, that the effect on annual diluted earnings per share will be in the range of $0.02 and $0.04 per diluted share.

On December 12, 2003, the American Institute of Certified Public Accountants issued Statement of Position No. 03-3, “Accounting for Certain Loans or Debt Securities Acquired in a Transfer” (“SOP 03-3”). SOP 03-3 requires acquired impaired loans, for which it is probable that the investor will be unable to collect all contractually required payments receivable, to be recorded at the present value of amounts expected to be received, and prohibits carrying over or creating a valuation allowance in the initial accounting for these loans. SOP 03-3 also limits the yield that may be accreted to income. SOP 03-3 applies to the purchase of an individual loan, a pool of loans, a group of loans, and loans acquired in a business combination. SOP 03-3 was effective for loans acquired in fiscal years beginning after December 31, 2004. The adoption of SOP 03-3 in the first quarter of 2005 did not have a material effect on the Company’s results of operations or financial condition.

In May 2005, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 154, “Accounting Changes and Error Corrections,” which replaces APB Opinion No. 20, “Accounting Changes,” and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements,” and changes the requirements for the accounting for and reporting of a change in accounting principle. SFAS No. 154 applies to all voluntary changes in accounting principle and to changes required by an accounting pronouncement when the pronouncement does not include specific transition provisions. SFAS No. 154 requires retrospective application of changes in accounting principle to prior periods’ financial statements unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. APB Opinion No. 20 previously required that most voluntary changes in accounting principle be recognized by including the cumulative effect of the change in net income for the period of the change in accounting principle. SFAS No. 154 carries forward without change the guidance contained in APB Opinion No. 20 for reporting the correction of an error in previously issued financial statements and a change in accounting estimate. SFAS No. 154 also carries forward the guidance in APB Opinion No. 20 requiring justification of a change in accounting principle on the basis of preferability. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005, with early adoption permitted. Adoption of SFAS No. 154 is not expected to have a material impact on the Company’s results of operations or financial condition.

On November 3, 2005, the FASB issued FASB Staff Position (FSP) Nos. FAS 115-1 and FAS 124-1, “The Meaning of Other-Than-Temporary Impairment and Its Application.” This FSP addresses the determination as to when an investment is considered impaired, whether that impairment is other than temporary, and the measurement of an impairment loss. This FSP also includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. The guidance in this FSP amends SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” and No. 124, “Accounting for Certain Investments Held by Not-for-Profit Organizations, ” and APB Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock.” This FSP is effective for reporting periods beginning after December 15, 2005. The adoption of this FSP did not have a material effect on the Company’s results of operations or financial condition.

17. Quarterly Financial Data (unaudited)

Selected unaudited quarterly financial data for the fiscal years ended December 31, 2005 and 2004 is presented below:

	2005								2004

	4th		3rd		2nd		1st		4th		3rd		2nd		1st

	*(In thousands, except per share data)*
Quarterly operating data:
Interest income	$	35,139	$	34,098	$	32,486	$	30,716	$	30,036	$	30,022	$	29,561	$	29,105
Interest expense		18,103		16,959		15,324		13,843		13,689		13,150		12,700		12,694

Net interest income		17,036		17,139		17,162		16,873		16,347		16,872		16,861		16,411
Provision for loan losses		—		—		—		—		—		—		—		—
Other operating income		1,182		2,089		1,861		1,515		1,324		1,528		1,615		1,476
Other operating expense		8,868		9,433		9,360		8,603		9,449		8,142		8,509		9,289

Income before income tax expense		9,350		9,795		9,663		9,785		8,222		10,258		9,967		8,598
Income tax expense		3,646		3,820		3,769		3,816		3,155		4,001		3,887		3,353

Net income	$	5,704	$	5,975	$	5,894	$	5,969	$	5,067	$	6,257	$	6,080	$	5,245

Basic earnings per share	$	0.32	$	0.34	$	0.34	$	0.34	$	0.29	$	0.36	$	0.35	$	0.30
Diluted earnings per share	$	0.32	$	0.33	$	0.33	$	0.33	$	0.28	$	0.35	$	0.34	$	0.29
Dividends per share	$	0.10	$	0.10	$	0.10	$	0.10	$	0.09	$	0.09	$	0.09	$	0.08
Average common shares outstanding for:
Basic earnings per share		17,673		17,581		17,487		17,478		17,444		17,458		17,439		17,377
Diluted earnings per share		18,031		18,034		17,937		18,003		18,069		18,051		18,093		18,163

18. Parent Company Only Financial Information

Earnings of the Bank are recognized by the Holding Company using the equity method of accounting. Accordingly, earnings of the Bank are recorded as increases in the Holding Company’s investment, any dividends would reduce the Holding Company’s investment in the Bank, and any changes in the Bank’s unrealized gain or loss on securities available for sale, net of taxes, would increase or decrease, respectively, the Holding Company’s investment in the Bank. The condensed financial statements for the Holding Company, at and for the years ended December 31, 2005 and 2004 are presented below:

Condensed Statements of Financial Condition
	2005			2004

	(In thousands)
Assets:
Cash and due from banks	$	23,197		$	9,203
Securities available for sale:
Other securities		4,588			6,388
Interest receivable		21			19
Investment in subsidiaries		166,517			163,954
Other assets		3,498			2,382

Total assets	$	197,821		$	181,946

Liabilities:
Borrowings	$	20,619		$	20,619
Other liabilities		735			674

Total liabilities		21,354			21,293

Stockholders’ Equity:
Common stock		195			195
Additional paid-in capital		39,635			37,187
Treasury stock		(12	)		(3,893	)
Unearned compensation		(4,159	)		(5,117	)
Retained earnings		146,068			133,290
Accumulated other comprehensive income, net of taxes		(5,260	)		(1,009	)

Total equity		176,467			160,653

Total liabilities and equity	$	197,821		$	181,946

Condensed Statements of Income
	2005			2004			2003

	(In thousands)
Dividends from the Bank	$	20,000		$	17,000		$	—
Interest income		305			283			203
Interest expense		(1,487	)		(1,095	)		(1,014	)
Gain (loss) on sale of securities		437			229			(28	)
Other operating income		—			6			—
Other operating expenses		(1,307	)		(983	)		(806	)

Income (loss) before taxes and equity in undistributed earnings of subsidiary		17,948			15,440			(1,645	)
Income tax benefit		934			690			780

Income (loss) before equity in undistributed subsidiary		18,882			16,130			(865	)
Equity in undistributed earnings of the Bank		4,660			6,519			22,543

Net income	$	23,542		$	22,649		$	21,678

	2005			2004			2003
Condensed Statements of Cash Flow

	(In thousands)
Operating activities:
Net income	$	23,542		$	22,649		$	21,678
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed earnings of the Bank		(4,660	)		(6,519	)		(22,543	)
Amortization of unearned premium, net of accretion of unearned discount		—			3			2
Securities impairment adjustment		—			89			—
Net (gain) loss on sale of investment securities		(437	)		(318	)		28
Net increase (decrease) in operating assets and liabilities		157			(168	)		(763	)
Unearned compensation, net		1,543			2,587			2,008

Net cash provided by operating activities		20,145			18,323			410

Investing activities:
Purchases of securities available for sale		(150	)		(124	)		(70	)
Proceeds from sales and calls of securities available for sale		1,689			931			102

Net cash provided by investing activities		1,539			807			32

Financing activities:
Purchase of treasury stock		(3,085	)		(9,773	)		(7,333	)
Cash dividends paid		(7,027	)		(6,127	)		(4,852	)
Stock options exercised		2,422			3,283			4,457

Net cash used in financing activities		(7,690	)		(12,617	)		(7,728	)

Net increase (decrease) in cash and cash equivalents		13,994			6,513			(7,286	)
Cash and cash equivalents, beginning of year		9,203			2,690			9,976

Cash and cash equivalents, end of year	$	23,197		$	9,203		$	2,690

19. Acquisition of Atlantic Liberty Financial Corporation

On December 21, 2005, the Company announced the signing of a definitive agreement to acquire 100 percent of the outstanding common stock of Atlantic Liberty Financial Corporation (“Atlantic Liberty”), and its subsidiary Atlantic Liberty Savings, FA, based in Brooklyn, New York. Under the terms of the agreement, Atlantic Liberty’s shareholders may elect to receive $24.00 in cash, 1.43 Holding Company shares per Atlantic Liberty share owned, or a combination thereof, subject to aggregate allocation to all Atlantic Liberty’s shareholders of 65% stock / 35% cash. The transaction has an aggregate value of approximately $41.9 million, based on the Holding Company’s share price at the close of business on December 20, 2005. The transaction is subject to approval by the shareholders of Atlantic Liberty, customary regulatory approvals, and other customary conditions. The transaction is expected to close in the second quarter of 2006.

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of
Flushing Financial Corporation:

We have completed integrated audits of Flushing Financial Corporation’s 2005 and 2004 consolidated financial statements and of its internal control over financial reporting as of December 31, 2005 and an audit of its 2003 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.

Consolidated financial statements

In our opinion, the accompanying consolidated statements of financial condition and the related consolidated statements of income, changes in stockholders’ equity, and cash flows present fairly, in all material respects, the financial position of Flushing Financial Corporation and its subsidiaries at December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2005 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

Internal control over financial reporting

Also, in our opinion, management’s assessment, included in the Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A, that the Company maintained effective internal control over financial reporting as of December 31, 2005 based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control - Integrated Framework issued by the COSO. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Management’s assessment and our audit of Flushing Financial Corporation’s internal control over financial reporting also included controls over the preparation of financial statements in accordance with the instructions to the Office of Thrift Supervision Instructions for Thrift Financial Reports (“TFR instructions”) to comply with the reporting requirements of Section 112 of the Federal Deposit Insurance Corporation Improvement Act (FDICIA). A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/S/ PRICEWATERHOUSECOOPERS LLP

New York, New York
March 9, 2006

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

Item 9A. Controls and Procedures.

Disclosure 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 Annual Report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2005, the design and operation of these disclosure controls and procedures were effective. During the period covered by this Annual 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.

Management’s Report on Internal Control over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting, and for performing an assessment of the effectiveness of internal control over financial reporting as of December 31, 2005. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers and effected by the Company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. Internal control over financial reporting also includes controls over the preparation of financial statements in accordance with the instructions to the Office of Thrift Supervision Instructions for Thrift Financial Reports to comply with the reporting requirements of Section 112 of the Federal Deposit Insurance Corporation Improvement Act (FDICIA).

Management performed an assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2005 based upon criteria in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this assessment, management concluded that the Company’s internal control over financial reporting was effective as of December 31, 2005 based on those criteria issued by COSO.

The Company’s independent registered public accounting firm, PricewaterhouseCoopers LLP, has audited management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2005, as stated in their report which appears on page 94.

Dated March 8, 2006

Item 9B. Other Information.

None.

PART III

Item 10. Directors and Executive Officers of the Registrant.

Other than the disclosures below, information regarding the directors and executive officers of the Company appears in the Company’s Proxy Statement for the Annual Meeting of Stockholders to be held May 16, 2006 (“Proxy Statement”) under the captions “Board Nominees”, “Continuing Directors”, “Executive Officers Who Are Not Directors” and “Meeting and Committees of the Board of Directors – Audit Committee” and is incorporated herein by this reference. Information regarding Section 16(a) beneficial ownership appears in the Company’s Proxy Statement under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” and is incorporated herein by this reference.

Code of Ethics. The Company has adopted a Code of Business Conduct and Ethics that applies to all of its directors, officers and employees. This code is publicly available on the Company’s website at http://media.corporate-ir.net/media_files/NSD/FFIC/reports/codeofethics.pdf. Any substantive amendments to the code and any grant of a waiver from a provision of the code requiring disclosure under applicable SEC or NASDAQ rules will be disclosed in a report on Form 8-K.

Audit Committee Financial Expert. The Board of Directors of the Company has determined that Louis C. Grassi, the Chairman of the Audit Committee, is an “audit committee financial expert” as defined under Item 401(h) of Regulation S-K, and that he is independent as defined under applicable NASDAQ listing standards. Mr. Grassi is a certified public accountant and a certified fraud examiner.

Item 11. Executive Compensation.

Information regarding executive compensation appears in the Proxy Statement under the caption “Executive Compensation” and is incorporated herein by this reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

Information regarding security ownership of certain beneficial owners appears in the Proxy Statement under the caption “Stock Ownership of Certain Beneficial Owners” and is incorporated herein by this reference.

Information regarding security ownership of management appears in the Proxy Statement under the caption “Stock Ownership of Management” and is incorporated herein by this reference.

The following table sets forth securities authorized for issuance under all equity compensation plans of the Company at December 31, 2005:


	( a ) Number of securities to be issued upon exercise of outstanding options, warrants and rights		( b ) Weighted-average exercise price of outstanding options, warrants and rights			( c ) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)

Equity compensation plans approved by security holders		1,731,793		$	11.56		970,998	⁽¹⁾

Equity compensation plans not approved by security holders		—			—		—

Total		1,731,793		$	11.56		970,998	⁽¹⁾

(1) Consists of 751,912 shares available for future non-full value awards and 219,086 shares available for future full value awards.

Item 13. Certain Relationships and Related Transactions.

Information regarding certain relationships and related transactions appears in the Proxy Statement under the captions “Compensation Committee Interlocks and Insider Participation” and “Related Party Transactions” and is incorporated herein by this reference.

Item 14. Principal Accounting Fees and Services.

Information regarding fees paid to the Company’s independent auditor appears in the Proxy Statement under the caption “Schedule of Fees to Independent Auditors” and is hereby incorporated by this reference.

PART IV

Item 15. Exhibits, Financial Statement Schedules.

(a) 1. Financial Statements

The following financial statements are included in Item 8 of this Annual Report and are incorporated herein by this reference:

	•	Consolidated Statements of Financial Condition at December 31, 2005 and 2004

	•	Consolidated Statements of Income for each of the three years in the period ended December 31, 2005

	•	Consolidated Statements of Changes in Stockholders’ Equity for each of the three years in the period ended December 31, 2005

	•	Consolidated Statements of Cash Flow for each of the three years in the period ended December 31, 2005

	•	Notes to Consolidated Financial Statements

	•	Report of Independent Registered Public Accounting Firm

2. Financial Statement Schedules

Financial Statement Schedules have been omitted because they are not applicable or the required information is shown in the Consolidated Financial Statements or Notes thereto included in Item 8 of this Annual Report and are incorporated herein by this reference.

3. Exhibits Required by Securities and Exchange Commission Regulation S-K

Exhibit Number	Description


2.1	Agreement and Plan of Merger dated as of December 20, 2005 by and between Flushing Financial Corporation and Atlantic Liberty Financial Corp. (19)

3.1	Certificate of Incorporation of Flushing Financial Corporation (1)

3.2	Certificate of Amendment to Certificate of Incorporation of Flushing Financial Corporation (10)

3.3	Certificate of Designations of Series A Junior Participating Preferred Stock of Flushing Financial Corporation (12)

3.4	By-Laws of Flushing Financial Corporation (1)

4.1	Rights Agreement dated as of September 17, 1996 between Flushing Financial Corporation and State Street Bank and Trust Company, as Rights Agent (5)

4.2	Form of Capital Security Certificate of Flushing Financial Capital Trust I (incorporated by reference to Exhibit A-1 to Exhibit 4.6) (12)

4.3	Form of Common Security of Flushing Financial Capital Trust I (incorporated by reference to Exhibit A-2 to Exhibit 4.6) (12)

4.4	Form of Floating Rate Junior Subordinated Debt Security of Flushing Financial Corporation (incorporated by reference to Exhibit A to Exhibit 4.5) (12)

4.5	Indenture dated July 11, 2002 relating to Floating Rate Junior Subordinated Debt Securities due 2032 between Flushing Financial Corporation and Wilmington Trust Company (12)

4.6	Amended and Restated Declaration of Trust of Flushing Financial Capital Trust I among Flushing Financial Corporation, Wilmington Trust Company, the Administrators named therein and the holders of undivided beneficial interests in the assets of the Trust to be issued pursuant to the Declaration (12)

4.7	Guarantee Agreement dated July 11, 2002 between Flushing Financial Corporation and Wilmington Trust Company (12)

10.2*	Amended and Restated Employment Agreements between Flushing Savings Bank, FSB and Certain Officers (An Employment Agreement substantially the same in all material respects to this agreement was entered into with David W. Fry on July 1, 2004.) (8)

10.3*	Amended and Restated Employment Agreements between Flushing Financial Corporation and Certain Officers (An Employment Agreement substantially the same in all material respects to this agreement was entered into with David W. Fry on July 1, 2004.) (8)

10.4*	Amended and Restated Employment Agreement between Flushing Financial Corporation and Michael J. Hegarty (9)

10.5*	Amended and Restated Employment Agreement between Flushing Savings Bank, FSB and Michael J. Hegarty (9)

10.6*	Amended and Restated Employment Agreement between Flushing Financial Corporation and John R. Buran (9)

10.7*	Amended and Restated Employment Agreement between Flushing Savings Bank, FSB and John R. Buran (9)

10.8*	Form of Special Termination Agreement as amended(8)

10.9*	Amended and Restated Employee Severance Compensation Plan of Flushing Savings Bank, FSB (8)

10.10(a)*	Amended and Restated Outside Director Retirement Plan (13)

10.10(b)*	Amended and Restated Flushing Savings Bank, FSB Outside Director Deferred Compensation Plan (8)

10.11*	Restated Flushing Savings Bank, FSB Supplemental Savings Incentive Plan (11)

10.12(a)	Form of Indemnity Agreement among Flushing Savings Bank, FSB, Flushing Financial Corporation, and each Director (An Indemnity Agreement substantially the same in all material respects to this agreement was entered into with John J. McCabe on June 17, 2003, with John R. Buran on March 1, 2004, and with each of Steven J. D’Iorio and Donna M. O’Brien on December 21, 2004.) (2)

10.12(b)	Form of Indemnity Agreement among Flushing Savings Bank, FSB, Flushing Financial Corporation, and Certain Officers (An Indemnity Agreement substantially the same in all material respects to this agreement was entered into with David W. Fry on July 1, 2004) (2)

10.13*	Employee Benefit Trust Agreement (1)

10.13(a)*	Amendment to the Employee Benefit Trust Agreement (4)

10.14*	Loan Document for Employee Benefit Trust (1)

10.15*	Guarantee by Flushing Financial Corporation (1)

10.16*	Consulting Agreement between Flushing Savings Bank, FSB, Flushing Financial Corporation and Gerard P. Tully, Sr. (3)

10.16(a)*	Amendment to Gerard P. Tully, Sr. Consulting Agreement (4)

10.16(b)*	Amendment No. 2 to Gerard P. Tully, Sr. Consulting Agreement (6)

10.16(c)*	Amendment No. 3 to Gerard P. Tully, Sr. Consulting Agreement (7)

10.16(d)*	Amendment No. 4 to Gerard P. Tully, Sr. Consulting Agreement (11)

10.16(e)*	Amendment No. 5 to Gerard P. Tully, Sr. Consulting Agreement (14)

10.17*	1996 Restricted Stock Incentive Plan of Flushing Financial Corporation (as amended effective April 20, 2004) (15)

10.18*	1996 Stock Option Incentive Plan of Flushing Financial Corporation (as restated as of December 31, 2003 to reflect the three-for-two stock split paid on December 15, 2003 in the form of a stock dividend) (13)

10.19*	Retirement Agreement among Flushing Financial Corporation, Flushing Savings Bank, FSB, and Monica C. Passick (15)

10.20*	Retirement Agreement among Flushing Financial Corporation, Flushing Savings Bank, FSB, and Michael J. Hegarty dated December 23, 2004. (16)

10.21*	Description of Outside Director Fee Arrangements

10.22*	Form of Outside Director Restricted Stock Award Letter (19)

10.23*	Form of Outside Director Restricted Stock Unit Award Letter (19)

10.24*	Form of Outside Director Stock Option Grant Letter (19)

10.25*	Form of Employee Restricted Stock Award Letter (19)

10.26*	Form of Employee Restricted Stock Unit Award Letter (19)

10.27*	Form of Employee Stock Option Award Letter (19)

10.28*	2005 Omnibus Incentive Plan (17)

21.1	Subsidiaries information incorporated herein by reference to Part I – Subsidiary Activities

23.1	Consent of Independent Registered Public Accounting Firm

31.1	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Chief Executive Officer

31.2	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Chief Financial Officer

32.1	Certification Pursuant to 18 U.S.C, Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by the Chief Executive Officer

32.2	Certification Pursuant to 18 U.S.C, Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by the Chief Financial Officer

* Indicates compensatory plan or arrangement.

—————————
	(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 10-Q for the quarter ended September 30, 1996.

	(3)	Incorporated by reference to Exhibits filed with Form 10-K for the year ended December 31, 1996.

	(4)	Incorporated by reference to Exhibits filed with Form 10-K for the year ended December 31, 1997.

	(5)	Incorporated by reference to Exhibits filed with Form 8-K filed September 30, 1996.

	(6)	Incorporated by reference to Exhibit filed with the Form 10-K for the year ended December 31, 1998.

	(7)	Incorporated by reference to Exhibits filed with Form 10-K for the year ended December 31, 1999.

	(8)	Incorporated by reference to Exhibits filed with Form 10-Q for the quarter ended September 30, 2000.

	(9)	Incorporated by reference to Exhibits filed with Form 8-K/A filed July 5, 2005.

	(10)	Incorporated by reference to Exhibits filed with Form S-8 filed May 31, 2002.

	(11)	Incorporated by reference to Exhibits filed with Form 10-K for the year ended December 31, 2001.

	(12)	Incorporated by reference to Exhibits filed with Form 10-Q for the quarter ended September 30, 2002.

	(13)	Incorporated by reference to Exhibits filed with Form 10-K for the year ended December 31, 2003.

	(14)	Incorporated by reference to Exhibit filed with Form 8-K filed November 26, 2004.

	(15)	Incorporated by reference to Exhibit filed with Form 10-Q for the quarter ended June 30, 2004.

	(16)	Incorporated by reference to Exhibit filed with Form 8-K filed December 28, 2004.

	(17)	Incorporated by reference to Exhibit A to the Company’s definitive proxy statement on Schedule 14A filed on March 31, 2005 for the Company’s annual meeting of stockholders.

	(18)	Incorporated by reference to Exhibit filed with Form 8-K filed December 23, 2005.

	(19)	Incorporated by reference to Exhibits filed with Form 10-K for the year ended December 31, 2004.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) the Securities Exchange Act of 1934, the Company has duly caused this report, or amendment thereto, to be signed on its behalf by the undersigned, thereunto duly authorized, in New York, New York, on March 10, 2006.

	FLUSHING FINANCIAL CORPORATION

	By	/S/ JOHN R. BURAN

		John R. Buran President and CEO

POWER OF ATTORNEY

We, the undersigned directors and officers of Flushing Financial Corporation (the “Company”) hereby severally constitute and appoint John R. Buran and David W. Fry as our true and lawful attorneys and agents, each acting alone and with full power of substitution and re-substitution, to do any and all things in our names in the capacities indicated below which said John R. Buran or David W. Fry may deem necessary or advisable to enable the Company to comply with the Securities Exchange Act of 1934, and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with the report on Form 10-K, or amendment thereto, including specifically, but not limited to, power and authority to sign for us in our names in the capacities indicated below the report on Form 10-K, or amendment thereto; and we hereby approve, ratify and confirm all that said John R. Buran or David W. Fry shall do or cause to be done by virtue thereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report on Form 10-K, or amendment thereto, has been signed by the following persons in the capacities and on the dates indicated.

Signature	Title	Date


/S/ JOHN R. BURAN	Director, President (Principal Executive Officer)	March 10, 2006
John R. Buran

/S/ GERARD P. TULLY, SR.	Director, Chairman	March 10, 2006
Gerard P. Tully, Sr.

/S/ DAVID W. FRY	Treasurer (Principal Financial and Accounting Officer)	March 10, 2006
David W. Fry

/S/ JAMES D. BENNETT	Director	March 10, 2006
James D. Bennett

100

/S/STEVEN J. D’IORIO	Director	March 10, 2006
Steven J. D’Iorio

/S/LOUIS C. GRASSI	Director	March 10, 2006
Louis C. Grassi

/S/MICHAEL J. HEGARTY	Director	March 10, 2006
Michael J. Hegarty

/S/JOHN J. MCCABE	Director	March 10, 2006
John J. McCabe

/S/VINCENT F. NICOLOSI	Director	March 10, 2006
Vincent F. Nicolosi

/S/DONNA M. O’BRIEN	Director	March 10, 2006
Donna M. O’Brien

/S/FRANKLIN F. REGAN, JR.	Director	March 10, 2006
Franklin F. Regan, Jr.

/S/JOHN E. ROE, SR.	Director	March 10, 2006
John E. Roe, Sr.

/S/MICHAEL J. RUSSO	Director	March 10, 2006
Michael J. Russo

101

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

EXHIBIT INDEX

Exhibit Number	Description

2.1	Agreement and Plan of Merger dated as of December 20, 2005 by and between Flushing Financial Corporation and Atlantic Liberty Financial Corp. (19)

3.1	Certificate of Incorporation of Flushing Financial Corporation (1)

3.2	Certificate of Amendment to Certificate of Incorporation of Flushing Financial Corporation (10)

3.3	Certificate of Designations of Series A Junior Participating Preferred Stock of Flushing Financial Corporation (12)

3.4	By-Laws of Flushing Financial Corporation (1)

4.1	Rights Agreement dated as of September 17, 1996 between Flushing Financial Corporation and State Street Bank and Trust Company, as Rights Agent (5)

4.2	Form of Capital Security Certificate of Flushing Financial Capital Trust I (incorporated by reference to Exhibit A-1 to Exhibit 4.6) (12)

4.3	Form of Common Security of Flushing Financial Capital Trust I (incorporated by reference to Exhibit A-2 to Exhibit 4.6) (12)

4.4	Form of Floating Rate Junior Subordinated Debt Security of Flushing Financial Corporation (incorporated by reference to Exhibit A to Exhibit 4.5) (12)

4.5	Indenture dated July 11, 2002 relating to Floating Rate Junior Subordinated Debt Securities due 2032 between Flushing Financial Corporation and Wilmington Trust Company (12)

4.6	Amended and Restated Declaration of Trust of Flushing Financial Capital Trust I among Flushing Financial Corporation, Wilmington Trust Company, the Administrators named therein and the holders of undivided beneficial interests in the assets of the Trust to be issued pursuant to the Declaration (12)

4.7	Guarantee Agreement dated July 11, 2002 between Flushing Financial Corporation and Wilmington Trust Company (12)

10.2*	Amended and Restated Employment Agreements between Flushing Savings Bank, FSB and Certain Officers (An Employment Agreement substantially the same in all material respects to this agreement was entered into with David W. Fry on July 1, 2004.) (8)

10.3*	Amended and Restated Employment Agreements between Flushing Financial Corporation and Certain Officers (An Employment Agreement substantially the same in all material respects to this agreement was entered into with David W. Fry on July 1, 2004.) (8)

10.4*	Amended and Restated Employment Agreement between Flushing Financial Corporation and Michael J. Hegarty (9)

10.5*	Amended and Restated Employment Agreement between Flushing Savings Bank, FSB and Michael J. Hegarty (9)

10.6*	Amended and Restated Employment Agreement between Flushing Financial Corporation and John R. Buran (9)

10.7*	Amended and Restated Employment Agreement between Flushing Savings Bank, FSB and John R. Buran (9)

10.8*	Form of Special Termination Agreement as amended(8)

10.9*	Amended and Restated Employee Severance Compensation Plan of Flushing Savings Bank, FSB (8)

10.10(a)*	Amended and Restated Outside Director Retirement Plan (13)

10.10(b)*	Amended and Restated Flushing Savings Bank, FSB Outside Director Deferred Compensation Plan (8)

10.11*	Restated Flushing Savings Bank, FSB Supplemental Savings Incentive Plan (11)

10.12(a)	Form of Indemnity Agreement among Flushing Savings Bank, FSB, Flushing Financial Corporation, and each Director (An Indemnity Agreement substantially the same in all material respects to this agreement was entered into with John J. McCabe on June 17, 2003, with John R. Buran on March 1, 2004, and with each of Steven J. D’Iorio and Donna M. O’Brien on December 21, 2004.) (2)

10.12(b)	Form of Indemnity Agreement among Flushing Savings Bank, FSB, Flushing Financial Corporation, and Certain Officers (An Indemnity Agreement substantially the same in all material respects to this agreement was entered into with David W. Fry on July 1, 2004) (2)

10.13*	Employee Benefit Trust Agreement (1)

10.13(a)*	Amendment to the Employee Benefit Trust Agreement (4)

10.14*	Loan Document for Employee Benefit Trust (1)

102

10.15*	Guarantee by Flushing Financial Corporation (1)

10.16*	Consulting Agreement between Flushing Savings Bank, FSB, Flushing Financial Corporation and Gerard P. Tully, Sr. (3)

10.16(a)*	Amendment to Gerard P. Tully, Sr. Consulting Agreement (4)

10.16(b)*	Amendment No. 2 to Gerard P. Tully, Sr. Consulting Agreement (6)

10.16(c)*	Amendment No. 3 to Gerard P. Tully, Sr. Consulting Agreement (7)

10.16(d)*	Amendment No. 4 to Gerard P. Tully, Sr. Consulting Agreement (11)

10.16(e)*	Amendment No. 5 to Gerard P. Tully, Sr. Consulting Agreement (14)

10.17*	1996 Restricted Stock Incentive Plan of Flushing Financial Corporation (as amended effective April 20, 2004) (15)

10.18*	1996 Stock Option Incentive Plan of Flushing Financial Corporation (as restated as of December 31, 2003 to reflect the three-for-two stock split paid on December 15, 2003 in the form of a stock dividend) (13)

10.19*	Retirement Agreement among Flushing Financial Corporation, Flushing Savings Bank, FSB, and Monica C. Passick (15)

10.20*	Retirement Agreement among Flushing Financial Corporation, Flushing Savings Bank, FSB, and Michael J. Hegarty dated December 23, 2004. (16)

10.21*	Description of Outside Director Fee Arrangements

10.22*	Form of Outside Director Restricted Stock Award Letter (19)

10.23*	Form of Outside Director Restricted Stock Unit Award Letter (19)

10.24*	Form of Outside Director Stock Option Grant Letter (19)

10.25*	Form of Employee Restricted Stock Award Letter (19)

10.26*	Form of Employee Restricted Stock Unit Award Letter (19)

10.27*	Form of Employee Stock Option Award Letter (19)

10.28*	2005 Omnibus Incentive Plan (17)

21.1	Subsidiaries information incorporated herein by reference to Part I – Subsidiary Activities

23.1	Consent of Independent Registered Public Accounting Firm

31.1	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Chief Executive Officer

31.2	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Chief Financial Officer

32.1	Certification Pursuant to 18 U.S.C, Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by the Chief Executive Officer

32.2	Certification Pursuant to 18 U.S.C, Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by the Chief Financial Officer

* Indicates compensatory plan or arrangement.

—————————
	(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 10-Q for the quarter ended September 30, 1996.

	(3)	Incorporated by reference to Exhibits filed with Form 10-K for the year ended December 31, 1996.

	(4)	Incorporated by reference to Exhibits filed with Form 10-K for the year ended December 31, 1997.

	(5)	Incorporated by reference to Exhibits filed with Form 8-K filed September 30, 1996.

	(6)	Incorporated by reference to Exhibit filed with the Form 10-K for the year ended December 31, 1998.

	(7)	Incorporated by reference to Exhibits filed with Form 10-K for the year ended December 31, 1999.

	(8)	Incorporated by reference to Exhibits filed with Form 10-Q for the quarter ended September 30, 2000.

	(9)	Incorporated by reference to Exhibits filed with Form 8-K/A filed July 5, 2005.

	(10)	Incorporated by reference to Exhibits filed with Form S-8 filed May 31, 2002.

	(11)	Incorporated by reference to Exhibits filed with Form 10-K for the year ended December 31, 2001.

	(12)	Incorporated by reference to Exhibits filed with Form 10-Q for the quarter ended September 30, 2002.

	(13)	Incorporated by reference to Exhibits filed with Form 10-K for the year ended December 31, 2003.

	(14)	Incorporated by reference to Exhibit filed with Form 8-K filed November 26, 2004.

	(15)	Incorporated by reference to Exhibit filed with Form 10-Q for the quarter ended June 30, 2004.

	(16)	Incorporated by reference to Exhibit filed with Form 8-K filed December 28, 2004.

	(17)	Incorporated by reference to Exhibit A to the Company’s definitive proxy statement on Schedule 14A filed on March 31, 2005 for the Company’s annual meeting of stockholders.

	(18)	Incorporated by reference to Exhibit filed with Form 8-K filed December 23, 2005.

	(19)	Incorporated by reference to Exhibits filed with Form 10-K for the year ended December 31, 2004.

103