Flushing Financial Corporation Annual Report 2005

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FY2005 Annual Report · Flushing Financial Corporation

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FLUSHING FINANCIAL CORPORATION

2005 Annual Report

Serving Our Neighborhoods

Flushing Financial Corporation, a Delaware corporation, was formed in May 1994 to

serve as the holding company for Flushing Savings Bank, FSB, a federally chartered,

FDIC-insured savings institution organized in 1929.

The Bank is a customer-oriented, full-service community bank primarily engaged in

attracting deposits from residents and businesses in the local communities of Queens,

Nassau, Brooklyn, and Manhattan and investing such deposits and other available funds

primarily in originations of multi-family mortgage loans, commercial real estate loans

and one-to-four family mixed-use property loans.

Flushing Financial Corporation’s common stock is publicly traded on the Nasdaq National

Market® under the symbol “FFIC.”

Additional information on Flushing Financial Corporation may be obtained by visiting the

Company’s web site at www.flushingsavings.com.

Why Invest in Flushing Financial Corporation?

■ Sustained five year EPS growth of 15%

■ Historically strong Asset Quality and

■ Ability to grow Core Deposits in a vibrant

multicultural market

■ Efficient Capital Management

Reserve Coverage

■ Generator of Higher-Yielding Loans

■ Emphasis on Shareholder Value

through niche development

Financial Highlights

(Dollars in thousands, except per share data)

At or for the year ended December 31,

2005

2004

Selected Financial Data
80
Total assets
70

Loans receivable, net

60
Securities available for sale
50

Certificate of deposit accounts

Other deposit accounts

Stockholders’ equity

Dividends paid per common share

Book value per share

0
Selected Operating Data

Net interest income

1.5

Net income

1.2
Basic earnings per share

Diluted earnings per share
0.9

Financial Ratios

0.6
Return on average assets

Return on average equity
0.3

Interest rate spread

Net interest margin

0.0

Efficiency ratio

Equity to total assets

Non-performing assets to

$ 2,353,208

$ 2,058,044

1,881,876

1,516,507

337,761

898,157

569,130

176,467

435,745

703,314

589,483

160,653

0.40

9.07

0.35

8.35

68,210

66,491

23,542

22,649

1.34

1.31

1.30

1.25

1.07%

1.13%

14.27

3.03

3.24

48.03

7.50

14.97

3.30

3.49

48.79

7.81

15
total assets

0.10

0.04

Allowance for loan losses to

10
gross loans

0.34

0.43

Allowance for loan losses to

5
non-performing loans

260.39

717.29

2005 Annual Report • Page One

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Net Interest
Income
(millions)

2005

$68.2

2004

$66.5

2003

$60.2

2002

$52.3

2001

$42.2

Diluted
Earnings
per Share
(dollars)

2005

$1.31

2004

$1.25

2003

$1.22

2002

$0.90

2001

$0.78

Return on
Equity
(percent)

2005

14.27%

2004

14.97%

2003

15.93%

2002

12.57%

2001

11.52%

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Flushing Financial Corporation

Dear Shareholders:

2005 was a year of transition and challenge for Flushing

As a result, we grew our deposits by $175 million. Late

Financial, yet the Company for the ninth consecutive year

in 2005, we stepped up the process of integrating our

posted record earnings per share. As previously

strong niche lending business with our deposit gathering

announced, John R. Buran was appointed President and

efforts. Business development efforts have focused on

Chief Executive Officer of Flushing Financial and Flushing

developing deposit relationships with our lending cus-

Savings Bank, succeeding Michael J. Hegarty on July 1,

tomers. The results have been exceptional and we look

2005. The transition, which had been planned for sev-

for more growth from that effort in 2006.

eral years, went smoothly, and our Bank hit new levels in

earnings and loan growth as we continued to provide

top quality service to our multicultural client base.

Earnings per share reached $1.31 and net income hit

$23.5 million—both all-time highs.

The press continued to recognize the results of our

unique approach to doing business. In a 2005 Crain’s

article entitled “Flushing Learns to Fly”, our multicultural

strategy and move to more commercial lending was

highlighted with the words “...savings bank reinvents

While these results were strong, the earnings challenge

itself; speaking in tongues.” Financial services research

was significant in 2005 as the Federal Reserve Bank

firm SNL Financial once again recognized our strong per-

raised interest rates 8 times creating a flat yield curve

formance as we were ranked 8th out of the top 100

that squeezed margins industry-wide. Our long-standing

thrifts in the country—up from number 11 last year.

strategy of loan niche diversification and funding at

longer maturities paid off as Flushing’s margins declined

less than key multi-family competitors in our market.

Importantly, loan yields that had been declining through-

out most of 2005 began to increase toward the end of

the year.

In December, we announced an agreement to acquire

Atlantic Liberty Savings for a combination of stock and

cash. The acquisition is projected to be accretive to earn-

ings and capital in the first year. It marks our largest deal

to date and our second acquisition as a public company.

Atlantic Liberty is a $177 million institution with branches

Competition for loans was intense, as the refinance wave

in two very attractive commercial markets. We believe

of the past few years that had been fueled by lower

our larger size and greater breadth of product offerings

rates began to recede. Nevertheless, we were able to

will enable us to provide an enhanced level of service to

bring in loan originations of almost $600 million, a 21%

the Atlantic Liberty customer base, while expanding the

increase over last year, and a new all-time high for this

growth opportunities for the franchise in the densely

important business measure. Our mixed-use and multi-

populated Brooklyn market. We expect to complete this

family loan businesses were particularly strong, posting

acquisition at the end of the second quarter of 2006.

increases of 36% and 9% respectively. Our commercial

real estate and small business loan originations grew as

we continued to evolve the company to a more “com-

mercial-like” banking institution, focusing on the unique

personal and small business banking needs of the multi-

cultural neighborhoods we serve.

Deposit competition heated up across the New York

metropolitan market as competitor banks “rediscovered”

the importance of retail banking in 2005. The year also

marked the realization across much of the industry that

internet banks had become formidable competitors. We

continued our traditional focus on service within our

multicultural neighborhoods and met these challenges.

Continued growth is clearly part of our plans. In the

second quarter of 2006, we expect to open our tenth

branch, situated along a busy retail strip in Bayside,

New York. Bayside, a neighborhood just beginning to go

through some ethnic changes, offers a variety of busi-

ness opportunities for us.

In 2006 we will introduce an internet banking business

to capitalize on the new economy. E-banks like ING and

Met Life have established basic business models that

we expect to replicate, thereby reducing our depen-

dency on wholesale borrowings.

In 2005 we celebrated 10 years as a public company. We cele-

brated a strong, well-capitalized company that has increased in

size by 232% over that time. We celebrated nine years of increas-

ing earnings per share as Flushing Financial’s earnings increased

424% in that time. And we celebrated our plans for continued

growth and a strong future.

On a sad note, 2005 brought the departure of our long-time

friend and business associate John Gleason, who passed away

December 7, 2005. John served Flushing Financial well as a

Trustee and later as a Director of the Bank for over 40 years. He

will be missed by us all.

Our history before and after going public has been built on solid

relationships with customers, communities, employees, directors

and shareholders. Those relationships have sustained our growth

through a variety of economic environments and we will rely

upon them in the future as we work to enhance the value of your

company.

Before closing, we wish to thank Michael J. Hegarty who retired

as President and Chief Executive Officer last June after 10 years

of dedicated service to the Bank. We are pleased that Mike will

remain with us as a Director, allowing Flushing Financial

Corporation to continue to draw upon his knowledge and years

of experience.

On behalf of the Board of Directors and the executive manage-

ment team, we would like to thank our employees for their hard

work, and our clients, shareholders and communities for their

ongoing support. We plan to build on our current successes and

strive to achieve excellent results in the years to come.

John R. Buran
President and Chief Executive Officer

Gerard P. Tully, Sr.
Chairman of the Board

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2005 Annual Report • Page Three

…focusing on the

unique personal

and small business

banking needs of

the multicultural

neighborhoods

we serve.

Deposits
(millions)

2005

$1,467

2004

$1,293

2003

$1,170

2002

$1,012

2001

$829

Total
Assets
(millions)

2005

$2,353

2004

$2,058

2003

$1,911

2002

$1,653

2001

$1,488

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Flushing Financial Corporation

It’s a People Business!

The availability of technology at every level of banking has made much of our business easily replicable and commoditized.

What can never be commoditized however, are our people—dedicated employees who are well-trained, knowledgeable

and skilled, with a strong service orientation that differentiates us from our competitors by providing financial solutions

for every client need.

We select our employees from the neighborhoods we serve, which provides us with a competitive advantage as these

employees understand the culture, language and customs of our neighborhoods.

Both new and long-term clients of Flushing Savings Bank will always find a welcome smile and a helpful hand to serve

them. Many of our clients have a long history with us and a sense of loyalty to remain with a financial institution that truly

cares about them. It is this fundamental approach to our business strategy that enables us to build on a foundation that

enhances the depth of our client relationships and will be a key driver in our future success.

The neighborhoods we serve are some of the most diverse in the country—each continuing to evolve as the population

ages and new residents take their place. It is our ongoing commitment to continuously communicate with our current and

future client base, to enhance our understanding of the ever-changing needs of the neighborhoods we serve, and the

people who reside in them.

“

We bank at Flushing
because of the people.”

“Each time we step into a Flushing branch
we are always greeted with a warm and
friendly smile. We’ve been loyal customers
and shareholders for ten years and will stay
with the bank for many years to come.”
—Howard & Anna Chan

The Perfect Loan for the Right Property

2005 Annual Report • Page Five

As a neighborhood bank with over 76 years of experience in this market,

our loan officers have developed a strong reputation for service. They uti-

lize their understanding of our neighborhoods and the ability to customize a

borrowing opportunity that will be a “perfect fit” for our clients.

We have an ongoing commitment to ensure that the local neighborhoods we

serve grow and prosper by financing the places where people live, work and

shop. Our lending and creative financing are a part of that commitment.

Loans are locally approved and in the heart of our communities. The right

properties for us to lend on are the multi-family and mixed-use buildings

that house the diverse consumers who populate the New York Metropolitan

area. Flushing closed more than $400 million of these loans in 2005. The

breadth of our lending products affords us the opportunity to successfully

compete in an extremely competitive market.

We have an ongoing commitment to ensure that the local neighborhoods we serve

grow and prosper by financing the places where people live, work and shop.

Net Loan
Portfolio
(millions)

2005

$1,882

2004

$1,517

2003

$1,270

2002

$1,170

2001

$1,067

One such opportunity came in the spring of 2005. Our client approached

us with an urgent request to finance the expansion of a construction project

that was already well underway. This required us to immediately refinance

an existing acquisition loan that was scheduled to mature, and to provide

additional financing to complete the project.

The property is located in a fast-improving commercial area within walking

distance of the Bank’s Main Office in Flushing. The completion of this

project will help ensure the continued renaissance of this area, while pro-

viding housing and employment opportunities. The project is expected to

be completed in early 2007.

Loan
Originations
(millions)

This request was somewhat unique due to the timing and flexibility required

to complete the refinancing prior to the fall season, enabling construction to

continue through the winter months. We were successful in evaluating and

2005

$599

2004

$496

2003

$412

2002

$325

2001

$230

closing the transaction in time to permit the developer to finalize required

zoning changes and continue the construction.

Our knowledge of the local markets and familiarity in understanding the

needs of our clients is essential to providing valuable financing and banking

services. This ongoing level of service has proven to be essential in expand-

ing our client base and loan portfolio.

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Flushing Financial Corporation

“

“ Flushing helped us start our

business by having faith in our
dream and providing us with a
Small Business Loan to finance
our newest venture.”

—Dong-Chul Shin

“Flushing Made Our Dream A Reality”

Dong Chul Shin and his wife Eunmi came from Korea to provide a better education for their two children and pursue the

American Dream.

Approximately six years ago, the family arrived and settled in Flushing, Queens. Dong Chul Shin took his love of animals

and decided to return to school and become a licensed Veterinary Technician. With the support of his wife, and utilizing

all the money they had brought from Korea, Dong studied hard and received his license.

After this crowning achievement, Dong and Eunmi came to Flushing Savings Bank for guidance on how to start a

business. “Flushing helped us start our business by having faith in our dream and providing us with a Small Business

Loan to finance our newest venture.”

In October 2005, Happy Dreams LVT, Pet Care Service was born in Bayside, Queens. In just six short months,

Happy Dreams has already exceeded financial expectations for the first year.

Throughout the years, Flushing Savings Bank has helped long-time residents and new arrivals to this country achieve

their dreams.

Our Communities—The Heart of Our Success

2005 Annual Report • Page Seven

Our commitment to the multicultural neighborhoods we serve has always

been at the heart of our success. Whether they be long-standing commu-

nities like Flushing, in Queens; or new communities like Brooklyn Heights

and Midwood in Brooklyn or Bayside and Forest Hills in Queens, our dedi-

cation and support of these neighborhoods will remain the motivation for

everything we do.

Our employees are the greatest strength we possess in relating to our

communities. We speak over 37 languages and dialects and understand

the many customs and traditions that are specific to the neighborhoods in

and around New York City.

We take great pride in supporting the neighborhood groups that play a

significant role in making our communities a better place to live and work.

We believe in our community responsibility to provide time and financial

support to the local charities, associations and schools that help build the

foundation of our future.

In 2005, we provided financial grants to The Queens Botanical Gardens

(QBG) and the Flushing Council on Culture and the Arts. These two orga-

nizations contribute significantly to the betterment of our communities and

provide a variety of programs for the neighborhoods we serve together.

Through its collections, exhibits, and programs, QBG fosters connections

between global conservation, local sustainability, and traditional cultural

practices as they relate to natural resources. Over 300,000 people, speak-

ing more than 130 languages or dialects heard in our multicultural neigh-

borhoods, visit QBG annually.

The Flushing Council on Culture and the Arts, located in Flushing Town

Hall, presents an array of high-quality programs, including exhibitions of

painting, sculpture and photography and award-winning performances in

jazz, opera, theater, dance and classical music. The Flushing Council also

provides in-school, on-site and family-oriented educational opportunities

for community residents of all ages, and an array of vital services to local

artists and arts organizations.

Our commitment to our communities is the foundation upon which our

future growth will rest.

Flushing Financial Corporation

10 Years as a Public Company

The date was November 21, 1995 when Flushing Financial Corporation appeared on the NASDAQ exchange for the first time.

Since then, much has happened to enhance the value of our company.

With three stock splits to the Company’s credit since that November day, the stock price has risen from an adjusted IPO of

$3.41 to $15.57 as we ended 2005.

This ten-year milestone accomplishment was celebrated as Flushing Financial Corporation was invited to participate in the

NASDAQ closing bell ceremony. President & CEO John R. Buran was accompanied by the Flushing Financial Board of

Directors, senior management, business partners and associates, that have helped guide Flushing Financial Corporation to the

success it enjoys today. Mr. Buran commented, “Our growth in profitability over the past ten years was a result of a disciplined

client-focused marketing strategy.” Mr. Buran continued, “We have built a firm base in understanding the needs of the multi-

cultural neighborhoods we serve. This has been and will continue to be a cornerstone of our business strategy.”

“We have built a firm base in understanding the needs of the

multicultural neighborhoods we serve and this has been and will

continue to be a cornerstone of our business strategy.”

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
(State or other jurisdiction of
incorporation or organization)

11-3209278

(I.R.S. Employer Identification No.)

1979 Marcus Avenue, Suite E140, Lake Success, New York 11042
(Address of principal executive offices)

(718) 961-5400
(Registrant’s telephone number, including area code)

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.

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.

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

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.

[

]

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 ___

Accelerated filer X

Non-accelerated filer ___

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the

Act).

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

PART I

Page

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.

Item 1.

Business.

Overview

PART I

GENERAL

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.”

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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:

(In thousands)

Mortgage Loans

At beginning of year

Mortgage loans originated:
Multi-family residential
Commercial real estate
One-to-four family mixed-use property
One-to-four family residential
Co-operative apartment
Construction

Total mortgage loans originated

Mortgage loans purchased:
Multi-family residential
One-to-four family mixed-use property
One-to-four family residential

Total mortgage loans purchased

Less:

Principal reductions
Mortgage loan sales
Mortgage loan foreclosures

At end of year

SBA, Commercial Business & Other Loans

At beginning of year

Loans originated:
SBA loans
Small business loans
Other loans

Total other loans originated

Less:

Sales
Repayments
Charge-offs

At end of year

For the years ended December 31,
2004

2005

2003

1,500,104

1,264,219

1,166,192

222,065
103,090
186,700
13,186
-
46,414
571,455

1,009
-
-
1,009

217,199
4,118
-

203,741
92,526
136,804
17,699
302
25,923
476,995

-
-
-
-

233,327
7,783
-

188,242
89,134
85,336
17,412
35
18,884
399,043

-
190
592
782

288,916
12,882
-

1,851,251

1,500,104

1,264,219

18,138

9,825

8,486

12,249
12,410
1,537
26,196

6,630
8,940
163

4,781
11,642
2,172
18,595

2,472
7,794
16

28,601

18,138

5,626
2,561
3,982
12,169

4,065
6,650
115

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)

Amounts due within one year
Amounts due after one year:

One to two years
Two to three years
Three to five years
Over five years

Total due after one year

Total amounts due

Sensitivity of loans to changes in
interest rates - loans due
after one year:

Fixed rate loans
Adjustable rate loans
Total loans due after one year

Commercial
Mortgage
Loans

Construction

SBA

Commercial
Business and
Other

Total

43,742

44,461

1,976

8,989

99,168

37,802
35,249
66,636
215,652
355,339
399,081

83,202
272,137
355,339

4,833
228
-
-
5,061
49,522

3,358
1,703
5,061

970
886
1,454
3,953
7,263
9,239

54
7,209
7,263

6,421
2,015
924
1,013
10,373
19,362

8,974
1,399
10,373

50,026
38,378
69,014
220,618
378,036
477,204

95,588
282,448
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
to a limited extent, finances the construction of commercial real estate. The Bank’s policies provide that
also,
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 addition, construction lending entails the risk that the project
in light of uncertainties inherent in such estimations.
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.

(Dollars in thousands)

Non-accrual loans:
Multi-family residential
Commercial real estate
One-to-four family mixed-use property
One-to-four family residential
Co-operative apartment
Construction

Total non-accrual mortgage loans

Other non-accrual loans

Total non-accrual loans
Loans 90 days or more delinquent

and still accruing

Total non-performing loans

Foreclosed real estate
Investment securities

Total non-performing assets

Troubled debt restructurings

Non-performing loans to gross loans
Non-performing assets to total assets

2005

2004

At December 31,
2003

2002

2001

861
-
-
960
-
-
1,821
101
1,922

530
2,452
-
-
2,452

-
-
-
659
-
-
659
252
911

-
911
-
-
911

-
-
-
525
-
-
525
157
682

-
682
-
-
682

-
2,537
-
816
20
-
3,373
219
3,592

-
3,592
-
700
4,292

225
-
309
1,649
20
-
2,203
117
2,320

-
2,320
93
-
2,413

0.13%
0.10%

0.06%
0.04%

0.05%
0.04%

0.31%
0.26%

0.22%
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.

(Dollars in thousands)

At and for the years ended December 31,

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
Commercial real estate
One-to-four family mixed-use property
One-to-four family residential
Co-operative apartment
Construction
Other

Total loans charged-off

Recoveries:

Mortgage loans
Other loans

Total recoveries

Net charge-offs

-
-
-
-
-
-
(164)
(164)

3
13
16

-
-
-
-
-
-
(28)
(28)

3
5
8

(148)

(20)

-
-
-
-
-
-
(155)
(155)

125
2
127

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-
-
-
-
-
-
(12)
(12)

3
5
8

-
-

(2)

(1)

-
-
(146)
(149)

6
7
13

(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%

0.01%

Ratio of allowance for loan losses to
gross loans at end of the year
Ratio of allowance for loan losses to

0.34%

0.43%

0.51%

0.56%

0.61%

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%

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5
1

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.

Securities available for sale
Bonds and other debt securities:

U.S. government and agencies
Corporate debentures

Total bonds and other debt securities

Mutual funds

Equity securities:

Common stock
Preferred stock

Total equity securities

Mortgage-backed securities:

FNMA
REMIC and CMO
FHLMC
GNMA

Total mortgage-backed securities

2005

At December 31,
2004

2003

Amortized
Cost

Market
Value

Amortized
Cost

Market
Value

Amortized
Cost

Market
Value

10,942
-
10,942

20,296

619
5,493
6,112

152,412
91,369
57,470
7,789
309,040

10,911
-
10,911

19,767

619
5,270
5,889

147,802
89,561
55,735
8,096
301,194

(In thousands)

12,866
-
12,866

20,600

779
5,600
6,379

217,278
89,416
78,453
12,043
397,190

12,868
-
12,868

20,352

1,416
5,480
6,896

215,657
89,164
78,094
12,714
395,629

27,621
1,000
28,621

20,003

243
6,211
6,454

256,705
103,838
95,794
22,901
479,238

27,784
1,035
28,819

19,873

1,384
6,240
7,624

255,858
103,932
95,524
24,079
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

1,186

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,
2004

2005

2003

Balance at beginning of year

395,629

479,393

319,255

Purchases of mortgage-backed securities

29,627

53,649

396,742

(In thousands)

Amortization of unearned premium, net of

accretion of unearned discount

Net change in unrealized losses on mortgage-backed

securities available for sale

(1,219)

(1,851)

(2,976)

(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.

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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.

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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.

2005

At December 31,
2004

2003

Interest rate:
1.99% or less
2.00% to 2.99%
3.00% to 3.99%
4.00% to 4.99% (1)
5.00% to 5.99%
6.00% to 6.99%
7.00% to 7.99%

Total

70,762
20,044
336,757
379,327
83,925
3,007
4,335
898,157

121,676
62,457
297,300
118,212
42,772
35,874
25,023
703,314

153,206
87,296
170,966
82,245
32,260
43,332
24,455
593,760

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

Within
One Year
(In thousands)

60,981
13,440
252,007
155,911
4,643
2,718
370
490,070

At December 31, 2005
One to
Three Years

Thereafter

9,781
6,258
55,107
99,099
16,357
289
3,965
190,856

-
346
29,643
124,317
62,925
-
-
217,231

Total

70,762
20,044
336,757
379,327
83,925
3,007
4,335
898,157

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.

Maturity Period:

Three months or less
Over three through six months
Over six through 12 months
Over 12 months

Total

Amount

Weighted
Average Rate

(Dollars in thousands)

36,418
22,551
96,788
99,574
255,331

3.21 %
3.43
4.09
4.53
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.

Net deposits
Interest credited on deposits
Net increase in deposits

2005

139,833
34,657
174,490

For the year ended December 31,
2004
(In thousands)
93,916
$
28,972
122,888

2003

130,563
27,521
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.

2005
Percent
of Total
Deposits

Average
Balance

Average
Cost

For the years ended December 31,
2004
Percent
of Total
Deposits

Average
Cost

Average
Balance

2003
Percent
of Total
Deposits

Average
Balance

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

Demand accounts

Mortgagors' escrow

deposits

Total

Money market
accounts

Certificate of deposit

accounts

43,133

52,017

27,337

363,608

3.22

3.88

2.04

27.12

228,818

17.06

748,747

55.82

0.50

0.21

0.69

2.27

3.60

44,103

45,093

20,482

328,014

3.52

3.60

1.64

26.19

279,952

22.36

644,328

51.45

0.50

0.24

0.42

1.83

3.49

40,483

36,054

15,018

308,990

3.65

3.25

1.36

27.88

229,141

20.67

570,208

51.45

0.63

0.40

0.62

2.08

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.

2005

At or for the years ended December 31,
2004
(Dollars in thousands)

2003

Securities Sold with the Agreement to Repurchase
Average balance outstanding
Maximum amount outstanding at any month

end during the period

Balance outstanding at the end of period
Weighted average interest rate during the period
Weighted average interest rate at end of period

FHLB-NY Advances
Average balance outstanding
Maximum amount outstanding at any month

end during the period

Balance outstanding at the end of period
Weighted average interest rate during the period
Weighted average interest rate at end of period

Other Borrowings
Average balance outstanding
Maximum amount outstanding at any month

end during the period

Balance outstanding at the end of period
Weighted average interest rate during the period
Weighted average interest rate at end of period

Total Borrowings
Average balance outstanding
Maximum amount outstanding at any month

end during the period

Balance outstanding at the end of period
Weighted average interest rate during the period
Weighted average interest rate at end of period

Subsidiary Activities

210,174

194,610

121,338

213,900
178,900

4.25 %
4.43

213,900
213,900

4.23 %
4.22

163,900
163,900

5.20 %
4.21

452,246

365,321

383,533

524,198
490,191

4.23 %
4.40

399,240
350,217

3.82 %
3.90

429,251
394,242

4.52 %
3.74

20,619

20,000

20,619
20,619

7.21 %
7.80

20,619
20,619

5.13 %
5.72

20,000
20,000

5.07 %
4.80

683,039

580,550

524,871

758,717
689,710

4.33 %
4.51

614,749
584,736

4.01 %
4.08

578,142
578,142

4.70 %
3.91

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.

(c)

Flushing Service Corporation was formed in 1998 to market insurance products and mutual funds.

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.

General

REGULATION

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
In prescribing these standards, the banking agencies must consider the risk posed to the
improvements on real estate.
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

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.

the amount of servicing assets,

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
In
the $64 exercise price, Common Stock (or a common stock equivalent) with a value of twice the exercise price.
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

Corporate Headquarters

1979 Marcus Avenue, Suite E140
Lake Success, N.Y. 11042

Main Office Branch

144-51 Northern Boulevard
Flushing, N.Y. 11354

Broadway Branch

159-18 Northern Boulevard
Flushing, N.Y. 11358

Auburndale Branch

188-08 Hollis Court Boulevard
Flushing, N.Y. 11358

Springfield Branch

61-54 Springfield Boulevard
Bayside, N.Y. 11364

Bay Ridge Branch

7102 Third Avenue
Brooklyn, N.Y. 11209

Irving Place Branch
33 Irving Place
New York, N.Y. 10003

New Hyde Park Branch
661 Hillside Avenue
New Hyde Park, N.Y. 11040

Kissena Branch

44-43 Kissena Boulevard
Flushing, N.Y. 11355
Bell Boulevard Branch (1)
42-11 Bell Boulevard
Bayside, N.Y. 11361

Astoria Branch

31-16 30th Avenue
Astoria, N.Y. 11102

Leased or
Owned

Date Leased
or Acquired

Lease
Expiration Date

Net Book Value at
December 31, 2005

Leased

2004

3/31/2015

1,312,088

Owned

1972

Owned

1962

Owned

1991

N/A

Leased

1991

11/30/2006

Owned

1991

N/A

Leased

1991

11/30/2011

Leased

1971

12/31/2011

Leased

2000

4/30/2010

Leased

2005

11/30/2020

Leased

2003

10/31/2013

2,261,296

728,886

734,683

93,926

343,051

144,239

231,850

278,539

298,273

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.

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

PART II

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.

First Quarter
Second Quarter
Third Quarter
Fourth Quarter

High

20.23
18.75
19.65
17.52

2005
Low
17.17
15.55
15.87
13.95

Dividend
0.10
$
0.10
0.10
0.10

High

19.50
18.93
19.19
21.50

2004
Low
17.57
16.35
16.48
18.80

Dividend
0.08
$
0.09
0.09
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

11,700
-
156
11,856

Average
Price
Paid per
Share

15.62
-
16.20
15.63

Total Number
of Shares
Purchased as
Part of Publicly
Announced
Plans or
Program

11,700
-
-
11,700

Maximum
Number of Shares
that May Yet Be
Purchased Under
the Plans or
Program

774,650
774,650
774,650
774,650

October 1 to October 31, 2005
November 1 to November 30, 2005
December 1 to December 31, 2005
Total

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,

Selected Financial Condition Data
Total assets
Loans, net
Securities available for sale
Real estate owned, net
Deposits
Borrowed funds
Stockholders' equity
Book value per share (1)(2)

Selected Operating Data
Interest and dividend income
Interest expense

Net interest income
Provision for loan losses

Net interest income after provision

for loan losses
Non-interest income:

Net (losses) gains on sales of securities

and loans
Other income

Total non-interest income

Non-interest expense

Income before income tax provision

Income tax provision

Net income

Basic earnings per share (2)(3)
Diluted earnings per share (2)(3)
Dividends declared per share (2)
Dividend payout ratio

$
$
$

2005

2002
2003
2004
(Dollars in thousands, except per share data)

2001

2,353,208
1,881,876
337,761
-

1,467,287
689,710
176,467
9.07

132,439
64,229
68,210
-

2,058,044
1,516,507
435,745
-

1,292,797
584,736
160,653
8.35

118,724
52,233
66,491
-

1,910,751
1,269,521
535,709
-

1,169,909
578,142
146,762
7.61

112,339
52,176
60,163
-

1,652,958
1,169,560
358,984
-

1,011,825
493,164
131,386
6.95

106,906
54,564
52,342
-

1,487,529
1,067,197
305,539
93
828,582
513,435
133,387
6.59

101,899
59,702
42,197
-

68,210

66,491

60,163

52,342

42,197

329
5,956
6,285
31,226
35,222
13,544
21,678

(4,158)
5,667
1,509
27,621
26,230
9,967
16,263

$
$
$

1.27
1.22
0.28
22.0%
(Footnotes on the following page)

0.93
0.90
0.24
25.7%

$
$
$

321
5,737
6,058
24,457
23,798
8,869
14,929

0.81
0.78
0.21
25.4%

(45)
6,692
6,647
36,264
38,593
15,051
23,542

1.34
1.31
0.40
29.9%

$
$
$

206
5,737
5,943
35,389
37,045
14,396
22,649

1.30
1.25
0.35
26.9%

$
$
$

At or for the years ended December 31,

2005

2004

2003

2002

2001

Selected Financial Ratios and Other Data

Performance ratios:

Return on average assets
Return on average equity
Average equity to average assets
Equity to total assets
Interest rate spread
Net interest margin
Non-interest expense to average assets
Efficiency ratio
Average interest-earning assets to average

interest-bearing liabilities

Regulatory capital ratios: (4)

Tangible capital
Core capital
Total risk-based capital

Asset quality ratios:

Non-performing loans to gross loans (5)
Non-performing assets to total assets (6)
Net charge-offs to average loans
Allowance for loan losses to gross loans
Allowance for loan losses to total

non-performing assets (6)

Allowance for loan losses to total

non-performing loans (5)

1.07 %

1.13 %

1.21 %

14.27
7.47
7.50
3.03
3.24
1.64
48.03

14.97
7.56
7.81
3.30
3.49
1.77
48.79

15.93
7.57
7.68
3.37
3.56
1.74
47.00

1.03 %
12.57
8.22
7.95
3.32
3.55
1.76
47.41

1.06 %

11.52
9.19
8.97
2.89
3.20
1.74
50.06

1.07 x

1.06 x

1.07 x

7.14 %
7.14
12.12

7.89 %
7.89
14.01

8.00 %
8.00
15.12

7.74 %
7.74
14.27

7.32 %
7.32
13.58

0.13 %
0.10
0.01
0.34

0.06 %
0.04
-
0.43

0.05 %
0.04
-
0.51

0.31 %
0.26
-
0.56

0.22 %
0.16
0.01
0.61

260.39

717.29

960.86

153.34

272.94

260.39

717.29

960.86

183.23

283.85

Full-service customer facilities

(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
Commercial real estate
One-to-four family (cid:1) mixed-use property
One-to-four family (cid:1) residential
Construction
Co-operative apartment
Small Business Administration
Commercial Business and Other

Total

223,074
103,090
186,700
13,186
46,414
-
12,249
13,947

598,660

788,071
399,081
477,775
134,641
49,522
2,161
9,239
19,362

1,879,852

100.00 %

Percent of
Gross Loans

41.92 %
21.23
25.42
7.17
2.63
0.11
0.49
1.03

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,
the Company
as well as evaluating the feasibility of opening additional branches. In December 2005,
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.

Three
Months
And Less

More Than
Three
Months To
One Year

Interest Rate Sensitivity Gap Analysis at December 31, 2005
More Than More Than More Than
Five Years
Three Years
One Year
To Ten
To Five
To Three
Years
Years
Years
(Dollars in thousands)

More Than
Ten Years

Total

144,034
15,079
4,396

282,652
4,495
-

610,976
7,090
-

602,894
924
-

175,918
1,013
-

34,777
-
-

1,851,251
28,601
4,396

13,913
24,972
202,394

13,688
-
39,177
119,403
-
110,626
282,894

(80,500)
(80,500)

43,734
4,967
335,848

41,064
-
64,825
370,667
-
75,021
551,577

(215,729)
(296,229)

$
$

102,998
184
721,248

109,504
-
68,395
190,856
-
363,963
732,718

(11,470)
(307,699)

59,624
-
663,442

109,497
-
2,850
175,098
-
140,073
427,518

235,924
(71,775)

36,892
5,944
219,767

-
-
-
42,133
-
27
42,160

177,607
105,832

$
$

44,033
500
79,310

-
42,029
-
-
19,423
-
61,452

17,858
123,690

$
$

301,194
36,567
2,222,009

273,753
42,029
175,247
898,157
19,423
689,710
2,098,319

123,690

-3.42%

-12.59%

-13.08%

-3.05%

4.50%

5.26%

71.54%

64.50%

80.37%

96.40%

105.20%

105.89%

Interest-Earning Assets
Mortgage loans
Other loans
Short-term securities (1)
Securities available for sale:

Mortgage-backed securities
Other

Total interest-earning assets

Interest-Bearing Liabilities
Savings accounts
NOW accounts
Money market accounts
Certificate of deposit accounts
Mortgagors' escrow deposits
Borrowed funds

$
$

Total interest-bearing liabilities (2)

Interest rate sensitivity gap
Cumulative interest-rate sensitivity gap
Cumulative interest-rate sensitivity gap

as a percentage of total assets

Cumulative net interest-earning assets
as a percentage of interest-bearing
liabilities

(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.

Change in Interest Rate

-300 basis points
-200 basis points
-100 basis points
Base interest rate
+100 basis points
+200 basis points
+300 basis points

Projected Percentage Change In

Net Interest Income
2005
2004

Net Portfolio Value
2005
2004

4.91 % -19.13 %
5.00
4.37
(cid:1)
-3.27
-6.57
-11.62

-6.71
-1.25
(cid:1)
-2.85
-6.94
-12.30

24.57 % -14.13 %
17.20
9.93
(cid:1)
-11.28
-23.10
-36.27

-6.47
-0.95
(cid:1)
-7.12
-17.38
-28.48

Net Portfolio
Value Ratio

2005

2004

10.79 %
10.36
9.92
9.23
8.39
7.46
6.35

8.82 %
9.69
10.39
10.67
10.16
9.29
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.

2005

Average
Balance

Interest

Yield/
Cost

For the year ended December 31,
2004

Average
Balance

Interest

Yield/
Cost

(Dollars in thousands)

2003

Average
Balance

Interest

Yield/
Cost

1,687,701
23,136
1,710,837

114,319
1,531
115,850

6.77 %
6.62
6.77

1,376,685
12,742
1,389,427

97,367
787
98,154

7.07 %
6.18
7.06

1,198,720
8,647
1,207,367

92,922
554
93,476

7.75 %
6.41
7.74

353,364
39,149
392,513

14,949
1,523
16,472

4.23
3.89
4.20

447,209
52,621
499,830

18,516
1,836
20,352

4.14
3.49
4.07

416,851
50,274
467,125

16,998
1,699
18,697

4.08
3.38
4.00

3,586

117

3.26

18,066

218

1.21

16,708

166

0.99

2,106,936
100,726
2,207,662

241,121
43,133
228,818

748,747
1,261,819

132,439

6.29

2,225
216
5,199

26,960
34,600

0.92
0.50
2.27

3.60
2.74

118,724

6.22

1,907,323
95,231
2,002,554

218,336
44,103
279,952

1,092
221
5,122

644,328
1,186,719

22,487
28,922

0.50
0.50
1.83

3.49
2.44

112,339

6.64

1,691,200
106,564
1,797,764

217,435
40,483
229,141

1,611
257
4,758

570,208
1,057,267

20,835
27,461

0.74
0.63
2.08

3.65
2.60

27,337

0.21

20,482

0.24

15,018

0.40

1,289,156
683,039

34,657
29,572

2.69
4.33

1,207,201
580,550

28,972
23,261

2.40
4.01

1,072,285
524,871

27,521
24,655

2.57
4.70

1,972,195

64,229

3.26

1,787,751

52,233

2.92

1,597,156

52,176

3.27

52,017
18,499
2,042,711
164,951

45,093
18,415
1,851,259
151,295

36,054
28,486
1,661,696
136,068

2,207,662

2,002,554

1,797,764

68,210

3.03 %

66,491

3.30 %

60,163

3.37 %

134,741

3.24 %

119,572

3.49 %

94,044

3.56 %

1.07 X

1.06 X

Interest-earning assets:
Mortgage loans, net (1)(2)
Other loans, net (1)(2)
Total loans, net
Mortgage-backed

securities

Other securities

Total securities

Interest-earning deposits
and federal funds sold

Total interest-earning
assets
Other assets

Total assets

Interest-bearing liabilities:
Deposits:

Passbook accounts
NOW accounts
Money market accounts
Certificate of deposit

accounts

Total due to depositors

Mortgagors' escrow

accounts

Total interest-bearing

deposits
Borrowed funds

Total interest-bearing

liabilities
Non interest-bearing
demand deposits
Other liabilities

Total liabilities

Equity

Total liabilities and

equity

Net interest income /
net interest rate spread (3)

Net interest-earning assets /
net interest margin (4)

Ratio of interest-earning
assets to interest-bearing
liabilities

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

(3)
(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

Due to

Volume

Rate

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

Due to

Net
(Dollars in thousands)

Volume

Rate

Net

Interest-Earning Assets:
Mortgage loans, net
Other loans, net
Mortgage-backed securities
Other securities
Interest-earning deposits and

federal funds sold

Total interest-earning assets

Interest-Bearing Liabilities:
Deposits:

Passbook accounts
NOW accounts
Money market accounts
Certificate of deposit accounts
Mortgagors' escrow accounts

Other borrowed funds

Total interest-bearing liabilities

21,225
684
(3,961)
(507)

(270)
17,171

(4,273)
60
394
194

169
(3,456)

16,952
744
(3,567)
(313)

(101)
13,715

13,040
254
1,263
81

14
14,652

(8,595)
(21)
255
56

38
(8,267)

4,445
233
1,518
137

52
6,385

125
(5)
(1,031)
3,744
14
4,346
7,193

1,008
-
1,108
729
(7)
1,965
4,803

1,133
(5)
77
4,473
7
6,311
11,996

7
21
979
2,600
18
2,454
6,079

(526)
(57)
(615)
(948)
(28)
(3,848)
(6,022)

(519)
(36)
364
1,652
(10)
(1,394)
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
to approvals of applications authorizing
insurance premium assessments,
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

689,710
1,467,287
129,278
-
15,041
3,859

7,204
4,626

Less Than
1 Year

130,000
1,059,200
129,278
-
1,603
2,459

1,287
301

1 - 3
Years
(In thousands)
370,000
$
190,856
-
-
3,564
702

806
477

3 - 5
Years

168,900
175,098
-
-
3,657
438

946
328

More
Than
5 Years

20,810
42,133
-
-
6,217
260

4,165
3,520

Borrowed funds
Deposits
Loan commitments
Capital lease obligations
Operating lease obligations
Purchase obligations
Pension and other postretirement
benefits
Deferred compensation plans

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

Assets
Cash and due from banks
Securities available for sale:

Mortgage-backed securities (including assets pledged of $198,415 and

$230,400 at December 31, 2005 and 2004, respectively)

Other securities

Loans

Less: Allowance for loan losses

Net loans

Interest and dividends receivable
Bank premises and equipment, net
Federal Home Loan Bank of New York stock
Bank owned life insurance
Goodwill
Other assets

Total assets

Liabilities
Due to depositors:

Non-interest bearing
Interest-bearing

Mortgagors' escrow deposits
Borrowed funds
Securities sold under agreements to repurchase
Other liabilities

Total liabilities

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)
Additional paid-in capital
Treasury stock, at average cost (1,050 shares and 224,448 shares at

December 31, 2005 and 2004, respectively)

Unearned compensation
Retained earnings
Accumulated other comprehensive loss, net of taxes

Total stockholders' equity

December 31,
2005

December 31,
2004

(Dollars in thousands, except per share data)

26,754

14,661

301,194
36,567
1,888,261
(6,385)
1,881,876
10,554
7,238
29,622
26,526
3,905
28,972
2,353,208

58,678
1,389,186
19,423
510,810
178,900
19,744
2,176,741

395,629
40,116
1,523,040
(6,533)
1,516,507
8,868
7,558
22,261
25,399
3,905
23,140
2,058,044

49,540
1,226,784
16,473
370,836
213,900
19,858
1,897,391

195
39,635

(12)
(4,159)
146,068
(5,260)
176,467

195
37,187

(3,893)
(5,117)
133,290
(1,009)
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

Interest and dividend income
Interest and fees on loans
Interest and dividends on securities:

Interest
Dividends

Other interest income

Total interest and dividend income

Interest expense
Deposits
Other interest expense

Total interest expense

Net interest income
Provision for loan losses
Net interest income after provision for loan losses

Non-interest income
Loan fee income
Banking services fee income
Net gain on sale of loans held for sale
Net gain on sale of loans
Net (loss) gain on sale of securities
Federal Home Loan Bank of New York stock dividends
Bank owned life insurance
Other income

Total non-interest income

Non-interest expense
Salaries and employee benefits
Occupancy and equipment
Professional services
Data processing
Depreciation and amortization of premises and equipment
Other operating expenses

Total non-interest expense

Income before income taxes

Provision for income taxes
Federal
State and local

Total provision for income taxes

Net income

Basic earnings per share
Diluted earnings per share

2005

For the years ended December 31,
2004
(In thouasands, except per share data)

2003

115,850

98,154

93,476

16,098
374
117
132,439

34,657
29,572
64,229

68,210
-
68,210

2,162
1,454
583
19
(647)
1,163
1,127
786
6,647

17,096
4,170
4,489
2,290
1,553
6,666
36,264

38,593

11,896
3,155
15,051

19,963
389
218
118,724

28,972
23,261
52,233

66,491
-
66,491

1,924
1,588
306
-
(100)
441
1,157
627
5,943

18,403
3,653
3,497
1,892
1,487
6,457
35,389

37,045

11,454
2,942
14,396

18,445
252
166
112,339

27,521
24,655
52,176

60,163
-
60,163

1,768
1,600
323
-

6
891
1,264
433
6,285

16,011
3,055
2,954
1,928
1,232
6,046
31,226

35,222

10,499
3,045
13,544

23,542

22,649

21,678

$1.34
$1.31

$1.30
$1.25

$1.27
$1.22

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

Consolidated Statements of Changes in Stockholders’ Equity

Common Stock
Balance, beginning of year
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)

Stock dividend (6,430,058 common shares; 1,011,660 common

shares funded from Treasury in 2003)

Balance, end of year

Additional Paid-In Capital
Balance, beginning of year
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)

Surrender of restricted stock awards (124,650 common shares for
the year ended December 31, 2004) which were replaced by
restricted stock units

Restricted stock awards (16,874 and 81,783 common shares for
the years ended December 31, 2004 and 2003, respectively)

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)

Forefeiture of restricted stock awards (2,400 and 2,025 common
shares for the years ended December 31, 2005 and 2004)
Options exercised (10,198, 166,095 and 32,610 common shares

for the years ended December 31, 2005, 2004 and 2003,
respectively)

Tax benefit from compensation expense in excess of that

recognized for financial reporting purposes

Stock dividend (6,430,058 common shares; 1,011,660 common

shares funded from Treasury in 2003)

Balance, end of year

For the years ended December 31,
2003
2004
(Dollars in thouasands, except per share data)

2005

195

193

139

-
195

54
193

37,187

32,783

47,208

616

585

(4)

1,752

-
39,635

(227)

(2)

858

3,144

-
37,187

522

156

147

3,331

(18,581)
32,783

Continued

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

Consolidated Statements of Changes in Stockholders’ Equity (continued)

Treasury Stock
Balance, beginning of year
Purchases of common shares outstanding (144,700, 520,600 and 336,700

shares for the years ended December 31, 2005, 2004 and 2003,
respectively)

Issuance for options exercised (329,968, 394,668 and 548,984 common

shares for the years ended December 31, 2005, 2004 and 2003,
respectively)

Purchase of common shares to fund options exercised

(7,570 common shares for the year ended December 31, 2004)
Surrender of restricted stock awards (124,650 common shares for the

year ended December 31, 2004) which were replaced by
restricted stock units.

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)

Restricted stock awards (16,874 and 54,525 common shares for
the years ended December 31, 2004 and 2003, respectively)

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)

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)
Stock dividend
Balance, end of year

Unearned Compensation
Balance, beginning of year
Surrender of restricted stock awards (124,650 common shares for the
year ended December 31, 2004) which were replaced by restricted
stock units

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)

Restricted stock awards (16,874 and 81,783 common shares

for the years ended December 31, 2004 and 2003, respectively)
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)

Restricted stock award expense
Balance, end of year

For the years ended December 31,
2003
2004
(Dollars in thouasands, except per share data)

2005

(3,893)

(21,733)

(2,567)

(9,337)

(6,899)

5,777

1,216

6,329

(147)

(1,177)

607

293

9,661

949

(518)

(436)

(430)

(27)
-
(12)

(25)
-
(3,893)

(71)
18,523
-

(5,117)

(7,373)

(7,825)

696

31
231
(4,159)

564

622

(337)

27
1,380
(5,117)

508

(1,105)

71
978
(7,373)

Continued

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

Consolidated Statements of Changes in Stockholders’ Equity (continued)

Retained Earnings
Balance, beginning of year
Net income
Stock options exercised (329,968, 394,668 and 821,075 common
shares for the years ended December 31, 2005, 2004 and 2003,
respectively)

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)

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)

Balance, end of year

Accumulated Other Comprehensive (Loss) Income, Net of Taxes
Balance, beginning of year
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

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

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

Balance, end of year

Total Stockholders' Equity

Comprehensive Income
Net income
Other comprehensive income, net of tax
Minimum pension (liability) benefit
Unrealized losses on securities

Comprehensive income

For the years ended December 31,
2003
2004
(Dollars in thouasands, except per share data)

2005

133,290
23,542

120,683
22,649

109,208
21,678

(3,439)

(3,759)

(5,351)

(298)

(156)

(7,027)
146,068

(6,127)
133,290

(4,852)
120,683

(1,009)

(38)

476

4,389

(22)

(4,608)

(1,553)

(3,888)

395
(5,260)

61
(1,009)

(3)
476

176,467

160,653

146,762

23,542

22,649

21,678

(38)
(4,213)
19,291

7
(1,492)
21,164

(22)
(3,891)
17,765

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

Consolidated Statements of Cash Flows

Operating Activities

Net income
Adjustments to reconcile net income to net cash provided
by operating activities:

Depreciation and amortization of bank premises and equipment
Impairment write-down of investment securities
Net loss (gain) on sales of securities
Net gain on sales of loans held for sale
Net gain on sales of loans
Origination of loans held for sale
Proceeds from sale of loans held for sale
Amortization of unearned premium, net of accretion
of unearned discount
Deferred income tax provision (benefit)
Deferred compensation

Net (decrease) increase in other assets and liabilities
Unearned compensation

Net cash provided by operating activities

Investing Activities

Purchases of bank premises and equipment
Net (purchase) redemption of Federal Home Loan Bank
of New York shares
Purchases of securities available for sale
Proceeds from sales and calls of securities available for sale
Proceeds from maturities and prepayments of
securities available for sale
Net originations and repayments of loans
Proceeds from sale of delinquent loans
Purchases of loans
Proceeds from sale of loans

Net cash used in investing activities

For the years ended December 31,
2004

2005

2003

(In thousands)

23,542

22,649

21,678

1,553
-
647
(583)
(19)
(6,630)
7,259

1,584
2,021
(2,576)
(2,799)
1,544

25,543

1,487
89
11
(306)
-
(5,916)
6,222

1,920
(678)
481
746
2,587

29,292

1,232
-

(6)
(323)
-
(13,442)
13,765

3,430
1,845
736
(1,767)
2,008

29,156

(1,233)

(2,665)

(2,223)

(7,361)
(30,384)
29,248

89,839
(368,442)
3,088
(1,009)
1,030

(285,224)

2,201
(104,336)
78,822

121,346
(250,884)
4,339
-
-

(151,177)

(2,249)
(440,073)
62,391

190,423
(105,379)
6,090
(789)
-

(291,809)

Continued

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

Consolidated Statements of Cash Flows (continued)

2005

For the years ended December 31,
2004
(In thousands)

2003

Financing Activities

Net increase in non-interest bearing deposits
Net increase in interest bearing deposits
Net increase in mortgagors' escrow deposits
Net (repayments) proceeds of short-term borrowed funds
Proceeds from long-term borrowings
Repayment of long-term borrowings
Purchases of treasury stock
Proceeds from issuance of common stock upon exercise
of stock options
Cash dividends paid

Net cash provided by financing activities

Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of year

Cash and cash equivalents, end of year

Supplemental Cash Flow Disclosure
Interest paid
Income taxes paid
Non-cash activities

Securities sale transaction, not yet settled

9,138
162,402
2,950
(10,000)
170,000
(55,026)
(3,085)

2,422
(7,027)

8,143
109,606
5,139
(5,000)
110,000
(99,025)
(9,773)

3,283
(6,127)

6,110
150,452
1,522
25,000
170,000
(110,022)
(7,333)

4,457
(4,852)

271,774

116,246

235,334

12,093
14,661

26,754

62,909
13,538

319

(5,639)
20,300

14,661

51,961
11,534

(27,319)
47,619

20,300

52,513
9,403

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:
to make estimates and
The preparation of financial statements in conformity with GAAP requires management
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.

Net income, as reported
Add: Stock-based compensation expense included in
reported net income, net of related tax effects
Deduct: Total stock-based compensation expense

determined under fair value based method for all
awards, net of related tax effects

Pro forma net income

Basic earnings per share:

As reported
Pro forma

Diluted earnings per share:

As reported
Pro forma

2004
2005
(Dollars in thousands, except per share data)

2003

$23,542

$22,649

$21,678

908

1,272

734

(1,559)

$22,891

(3,062)

$20,859

(1,447)

$20,965

$1.34
$1.30

$1.31
$1.27

$1.30
$1.20

$1.25
$1.15

$1.27
$1.23

$1.22
$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:

Dividend yield
Expected volatility
Risk-free interest rate
Expected option life

2005 Grants

2004 Grants

2003 Grants

2.24%
21.48%
3.87%
7 Years

2.04%
24.49%
4.29%
7 Years

1.97%
28.82%
2.87%
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
(In thousands, except per share data)

2003

Net income, as reported
Divided by:

Weighted average common shares outstanding
Weighted average common stock equivalents
Total weighted average common shares outstanding and

common stock equivalents

Basic earnings per share
Diluted earnings per share

$23,542

$22,649

$21,678

17,555
446

18,001

$1.34
$1.31

17,429
663

18,092

$1.30
$1.25

17,023
747

17,770

$1.27
$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:

Multi-family residential
Commercial real estate
One-to-four family (cid:1) mixed-use property
One-to-four family (cid:1) residential
Co-operative apartments
Construction
Small Business Administration
Commercial business and other

Gross loans

Unearned loan fees and deferred costs, net

Total loans

2005

2004

(In thousands)

788,071
399,081
477,775
134,641
2,161
49,522
9,239
19,362

646,922
334,048
332,805
151,737
3,132
31,460
5,633
12,505

1,879,852
8,409

1,518,242
4,798

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:
2004
(In thousands)

2005

2003

Interest income that would have been recognized had the loans performed

in accordance with their original terms

Less: Interest income included in the results of operations

Foregone interest

158
55

103

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

76
26

105
71

2003

6,581
-
(155)
127

6,553

2005

2004
(In thousands)

6,533
-
(164)
16

6,553
-
(28)
8

6,385

6,533

Balance, beginning of year
Provision for loan losses
Charge-offs
Recoveries

Balance, end of year

4. Bank Premises and Equipment, Net

Bank premises and equipment are as follows at December 31:

Land
Building and leasehold improvements
Equipment and furniture

Total

Less: Accumulated depreciation and amortization

Bank premises and equipment, net

2005

2004

(In thousands)

801
4,668
12,287
17,756
10,518

7,238

801
4,885
11,562
17,248
9,690

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

U.S. government agencies
Mutual funds
Other

Total other securities

FNMA
REMIC and CMO
FHLMC
GNMA

Total mortgage-backed securities

(In thousands)

10,942
20,296
6,112
37,350

152,412
91,369
57,470
7,789
309,040

10,911
19,767
5,889
36,567

147,802
89,561
55,735
8,096
301,194

Total securities available for sale

346,390

337,761

-
-
21
21

222
19
81
307
629

650

31
529
244
804

4,832
1,827
1,816
-
8,475

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.

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)

4,967
19,767
4,334
29,068

134,450
78,681
50,447

263,578

31
529
244
804

4,832
1,827
1,816

8,475

4,967
-
4,334
9,301

28,594
40,170
12,796

81,560

31
-
244
275

479
447
264

-
19,767
-
19,767

105,856
38,511
37,651

1,190

182,018

-
529
-
529

4,353
1,380
1,552

7,285

U. S. government agencies
Mutual funds
Other

Total other securities

FNMA
REMIC and CMO
FHLMC

Total mortgage-backed
securities
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
Due after one year through five years
Due after five years through ten years
Due after ten years

Total other securities
Mortgage-backed securities

25,728
5,178
5,944
500

37,350
309,040

Total securities available for sale

346,390

24,972
5,151
5,944
500

36,567
301,194

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

U.S. government agencies
Mutual funds
Other

Total other securities

FNMA
REMIC and CMO
FHLMC
GNMA

Total mortgage-backed securities

(In thousands)

12,866
20,600
6,379
39,845

217,278
89,416
78,453
12,043
397,190

12,868
20,352
6,896
40,116

215,657
89,164
78,094
12,714
395,629

Total securities available for sale

437,035

435,745

-
681
683

947
178
343
671
2,139

2,822

-
248
164
412

2,568
430
702
-
3,700

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

19,338
4,491
23,829

167,198
61,639
47,776

248
164
412

2,568
430
702

(In thousands)
$

13,815
4,491
18,306

97,649
61,639
30,452

188
164
352

770
430
89

5,523
-
5,523

69,549
-
17,324

276,613

3,700

189,740

1,289

86,873

60
-
60

1,798
-
613

2,411

Mutual funds
Other

Total other securities

FNMA
REMIC and CMO
FHLMC

Total mortgage-backed
securities
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:

Interest-bearing deposits:

Certificate of deposit accounts
Savings accounts
Money market accounts
NOW accounts

Total interest-bearing deposits
Non-interest bearing demand deposits
Total due to depositors

Mortgagors' escrow deposits
Total deposits

2005

2004

(Dollars in thousands)

898,157
273,753
175,247
42,029
1,389,186
58,678
1,447,864
19,423
1,467,287

703,314
216,772
258,235
48,463
1,226,784
49,540
1,276,324
16,473
1,292,797

Weighted
Average
Rate
2005

3.90 %
1.45
2.47
0.50

0.21

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:

Certificate of deposit accounts
Savings accounts
Money market accounts
NOW accounts

Total due to depositors
Mortgagors' escrow deposits

Total interest expense on deposits

2005

2004
(In thousands)

2003

26,960
2,225
5,199
216
34,600
57
34,657

22,487
1,092
5,122
221
28,922
50
28,972

20,835
1,611
4,758
257
27,461
60
27,521

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

Within 12 months
More than 12 months to 24 months
More than 24 months to 36 months
More than 36 months to 48 months
More than 48 months to 60 months
More than 60 months

Total certificate of deposit accounts

2005

2004

(In thousands)

490,070
107,613
83,243
51,919
123,179
42,133
898,157

266,047
216,933
70,752
69,151
49,854
30,577
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:

Repurchase agreements - adjustable rate:

Due in 2010

Repurchase agreements - fixed rate:

Due in 2005
Due in 2006
Due in 2007
Due in 2008
Due in 2009
Due in 2010

Total repurchase agreements - fixed rate

Total repurchase agreements

FHLB-NY advances - adjustable rate:

Due in 2006
Due in 2007

Total FHLB-NY advances - adjustable rate

FHLB-NY advances - fixed rate:

Due in 2005
Due in 2006
Due in 2007
Due in 2008
Due in 2009
Due in 2010
Due in 2011

Total FHLB-NY advances - fixed rate

Total FHLB-NY advances

Junior subordinated debentures - adjustable rate

Due in 2032

Total borrowings

2005

2004

Weighted
Average
Rate

Amount

(Dollars in thousands)

25,000

2.16 %

-
35,000
60,000
20,000
35,000
28,900
178,900

178,900

10,000
35,000
45,000

-
85,000
90,000
165,000
55,000
50,000
191
445,191

490,191

-
3.00
5.25
3.89
5.08
4.07
4.43

4.43

4.54
5.06
4.95

-
4.25
4.04
4.06
3.79
6.56
7.34
4.34

4.40

20,900
53,000
60,000
20,000
35,000
-
188,900

213,900

10,000
35,000
45,000

40,000
40,000
75,000
70,000
30,000
50,000
217
305,217

350,217

4.01
3.67
5.25
3.89
5.08
-
4.49

4.22

2.92
3.03
3.01

1.96
4.64
4.03
3.48
3.07
6.56
7.34
4.03

3.90

20,619

7.80

20,619

5.72

689,710

4.51 %

584,736

4.08 %

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

Amount

Rate

Maturity Date

Call Date

FHLB-NY advances - fixed rate
Repurchase agreements - fixed rate
Repurchase agreements - fixed rate
Repurchase agreements - fixed rate
Repurchase agreements - fixed rate

25,000
50,000
25,000
10,900
18,000

(Dollars in thousands)
6.15 %
5.64
5.52
4.18
4.00

7/13/2007
12/18/2007
7/22/2009
3/15/2010
4/19/2010

On Demand
On Demand
On Demand
3/15/2007
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:

Book value of collateral
Estimated fair value of collateral
Average balance of outstanding agreements during the year
Maximum balance of outstanding agreements at a month end during the year
Average interest rate of outstanding agreements during the year

2005

2004

(Dollars in thousands)

198,415
198,415
210,174
213,900
4.25%

230,400
230,400
194,610
213,900
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:

Federal:

Current
Deferred

Total federal tax provision

State and Local:
Current
Deferred

Total state and local tax provision

Total income tax provision

2005

2004
(In thousands)

2003

10,989
907
11,896

2,041
1,114
3,155
15,051

12,197
(743)
11,454

2,877
65
2,942
14,396

9,679
820
10,499

2,020
1,025
3,045
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:

Taxes at federal statutory rate
Increase (reduction) in taxes resulting from:

State and local income tax, net of Federal

2005

2004
(Dollars in thousands)

2003

13,508

35.0 %

12,966

35.0 %

12,328

35.0 %

income tax benefit

Other

Taxes at effective rate

2,051
(508)
15,051

5.3
(1.3)
39.0 %

1,912
(482)
14,396

5.2
(1.3)
38.9 %

1,979
(763)
13,544

5.6
(2.1)
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:

Income from operations
Equity:

2005

15,051

2004
(In thousands)
$
14,396

2003

13,544

Change in fair value of securities available for sale
Adjustment required to recognize minimum pension liability
Compensation expense for tax purposes in excess of that

recognized for financial reporting purposes

Total income taxes

(3,127)
(28)

(1,190)
9

(3,314)
(22)

(1,752)
10,144

(3,144)
10,071

(3,331)
6,877

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

Deferred tax asset:

Postretirement benefits
Impairment write-down
Unrealized losses on securities available for sale
Minimum pension liability
Other

Deferred tax asset

Deferred tax liability:

Allowance for loan losses
Depreciation
Other

Deferred tax liability

Net deferred tax asset included in other assets

2005

2004

(In thousands)

1,574
-
3,676
262
722
6,234

722
106
519
1,347

4,887

2,808
39
549
234
532
4,162

277
128
4
409

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:

Shares owned by Employee Benefit Trust, beginning balance
Shares released and allocated
Shares owned by Employee Benefit Trust, ending balance

2005

2004

1,743,278
(46,212)
1,697,066

1,779,057
(35,779)
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

Full value awards
Shares repurchased to satisfy tax withholding obligations
Forfeitures
Shares available for future full value awards at

2005

2004

2003

309,815
(125,200)
28,651
5,820

373,125
(91,657)
25,222
3,125

417,768
(81,783)
30,855
6,285

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:

Balance outstanding December 31, 2002

Granted
Exercised
Forfeited

Balance outstanding December 31, 2003

Granted
Exercised
Forfeited

Balance outstanding December 31, 2004

Granted
Exercised
Forfeited

Balance outstanding December 31, 2005

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

Shares
Underlying
Awards

Weighted
Average
Exercise
Price

2,907,699
268,050
(853,685)
(27,795)
2,294,269
237,450
(560,763)
(5,705)
1,965,251
123,725
(340,166)
(17,017)
1,731,793

751,912

$7.14
$13.55
$5.22
$9.00
$8.58
$17.75
$6.12
$13.49
$10.38
$17.88
$7.12
$9.38
$11.56

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

Options Outstanding

Options Exercisable

Exercise Price

$4.81
$5.00-$10.00
$10.01-$15.00
$15.01-$20.00

$4.81-$20.00

Number
Outstanding

155,348
366,735
851,435
358,275

1,731,793

Weighted
Average
Remaining
Contractual Life

0.4 years
3.6 years
6.4 years
8.8 years

5.8 years

Number
Exercisable

155,348
339,735
636,365
250,475

1,381,923

Weighted
Average
Exercise
Price

$4.81
$6.73
$12.06
$17.60

$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:

Change in benefit obligation:

Projected benefit obligation at beginning of year
Service cost
Interest cost
Actuarial loss
Benefits paid

Projected benefit obligation at end of year

Change in plan assets:

Market value of assets at beginning of year
Actual return on plan assets
Employer contributions
Benefits paid

Market value of plan assets at end of year

Funded status
Unrecognized net loss from past experience different from that

assumed and effects of changes in assumptions

Prepaid pension cost included in other assets

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

Weighted average discount rate
Rate of increase in future compensation levels
Expected long-term rate of return on assets

2005

2004

(In thousands)

14,006
587
843
1,173
(600)
16,009

13,039
1,575
976
(600)
14,990

(1,019)

5,139

4,120

12,843
621
788
275
(521)
14,006

11,612
1,089
859
(521)
13,039

(967)

4,464

3,497

2005

2004

5.63%
3.00%
8.50%

6.13%
3.25%
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:

Service cost
Interest cost
Amortization of past service liability
Amortization of unrecognized loss
Expected return on plan assets
Net pension expense

2005

587
843
-
161
(1,238)
353

2004
(In thousands)
621
$
788
(13)
81
(1,166)
311

2003

554
754
(24)
18
(1,087)
215

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

Weighted average discount rate
Rate of increase in future compensation levels
Expected long-term rate of return on assets

2005

2004

2003

6.13%
3.25%
8.50%

6.25%
3.50%
9.00%

6.50%
4.00%
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
Debt securities

2005

72%
28%

2004

69%
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:

2006
2007
2008
2009
2010
2011 – 2015

Future
Benefit
Payments

(In thousands)
$ 653
670
754
815
854
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
Service cost
Interest cost
Actuarial loss (gain)
Benefits paid
Plan amendments

Projected benefit obligation at end of year

Change in plan assets:

Market value of assets at beginning of year
Employer contributions
Benefits paid

Market value of plan assets at end of year

Funded status
Unrecognized net loss from past experience different from that

assumed and effects of changes in assumptions

Prior service cost not yet recognized in periodic pension cost
Adjustment required to recognize minimum liability

3,051
84
72
82
(147)
-
3,142

-
147
(147)
-

(3,142)

610
708
(1,277)

Accrued pension cost included in other liabilities

(3,101)

2,575
74
50
(2)
(99)
453
3,051

-
99
(99)
-

(3,051)

536
857
(1,360)

(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:

Service cost
Interest cost
Amortization of unrecognized loss
Amortization of past service liability

Net pension expense

2005

84
72
12
148
316

2004
(In thousands)
$
74
50
15
141
280

2003

40
20
14
119
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
Weighted average discount rate for periodic pension benefit expense
Rate of increase in future compensation levels

2005

2004

2003

5.63%
6.13%
0.00%

6.13%
6.25%
0.00%

6.25%
6.50%
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:

2006
2007
2008
2009
2010
2011 – 2015

Future Benefit
Payments

(In thousands)
$ 178
200
236
272
275
1,392

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

Accrued benefit
Intangible asset
Accumulated other comprehensive income

Net amount recognized

2005

2004

(In thousands)

(3,101)
708
307
(2,086)

(3,018)
857
269
(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:

Change in benefit obligation:

Projected benefit obligation at beginning of year
Service cost
Interest cost
Actuarial (gain) loss
Benefits paid

Projected benefit obligation at end of year

Change in plan assets:

Market value of assets at beginning of year
Employer contributions
Benefits paid

Market value of plan assets at end of year

2005

2004

(In thousands)

4,142
156
249
(1,721)
(200)
2,626

-
200
(200)
-

3,574
162
235
265
(94)
4,142

-
94
(94)
-

Funded status
Unrecognized net (gain) loss from past experience different from that

assumed and effects of changes in assumptions

Prior service cost not yet recognized in periodic pension cost

(2,626)

(4,142)

(581)
(100)

1,204
(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
Discount rate
Rate of increase in health care costs

Initial
Ultimate (year 2012)

Annual rate of salary increase for life insurance

2005

2004

N/A
5.63%

9.50%
4.50%
3.00%

N/A
6.13%

10.00%
4.25%
3.25%

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

Service cost
Interest cost
Amortization of unrecognized loss
Amortization of past service liability

Net postretirement benefit expense

2005

156
249
64
(35)
434

2004
(In thousands)
$
162
235
69
(131)
335

2003

152
218
61
(131)
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
Discount rate
Rate of increase in health care costs

Initial
Ultimate (year 2011)

Annual rate of salary increases for life insurance

2005

2004

2003

NA
6.13%

10.00%
4.25%
3.25%

NA
6.25%

10.00%
3.75%
3.25%

NA
6.50%

9.00%
4.50%
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:

Effect on postretirement benefit obligation
Effect on total service and interest cost

Increase

Decrease

(In thousands)

$149
48

$(129)
(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:

2006
2007
2008
2009
2010
2011 - 2015

Future Benefit
Payments

(In thousands)
$ 105
112
122
128
135
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)

$167,550
35,201
132,349

$167,550
70,402
97,148

$173,936
114,845
59,091

7.14 %
1.50
5.64

7.14 %
3.00
4.14

12.12 %

8.00
4.12

$161,176
30,659
130,517

$161,176
61,318
99,858

$167,710
95,788
71,922

7.89 %
1.50
6.39

7.89 %
3.00
4.89

14.01 %

8.00
6.01

Tangible capital:
Capital level
Requirement
Excess

Leverage and Core (Tier I) capital:

Capital level
Requirement
Excess

Total risk-based capital:

Capital level
Requirement
Excess

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:

Years ended December 31:

2006
2007
2008
2009
2010
Thereafter

Total minimum payments required

Minimum Rental
(In thousands)

1,603
1,755
1,809
1,857
1,800
6,217
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

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.

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.

17. Quarterly Financial Data (unaudited)

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

Quarterly operating data:
Interest income
Interest expense

Net interest income
Provision for loan losses
Other operating income
Other operating expense

Income before income

tax expense
Income tax expense
Net income

Basic earnings per share
Diluted earnings per share
Dividends per share

4th

3rd

2nd

1st

4th

3rd

2nd

1st

2005

2004

(In thousands, except per share data)

35,139
18,103
17,036
-
1,182
8,868

9,350
3,646
5,704

$0.32
$0.32
$0.10

34,098
16,959
17,139
-
2,089
9,433

9,795
3,820
5,975

$0.34
$0.33
$0.10

32,486
15,324
17,162
-
1,861
9,360

9,663
3,769
5,894

$0.34
$0.33
$0.10

30,716
13,843
16,873
-
1,515
8,603

9,785
3,816
5,969

$0.34
$0.33
$0.10

30,036
13,689
16,347
-
1,324
9,449

8,222
3,155
5,067

$0.29
$0.28
$0.09

30,022
13,150
16,872
-
1,528
8,142

10,258
4,001
6,257

$0.36
$0.35
$0.09

29,561
12,700
16,861
-
1,615
8,509

9,967
3,887
6,080

$0.35
$0.34
$0.09

29,105
12,694
16,411
-
1,476
9,289

8,598
3,353
5,245

$0.30
$0.29
$0.08

Average common shares outstanding for:
Basic earnings per share
Diluted earnings per share

17,673
18,031

17,581
18,034

17,487
17,937

17,478
18,003

17,444
18,069

17,458
18,051

17,439
18,093

17,377
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

Assets:

Cash and due from banks
Securities available for sale:

Other securities
Interest receivable
Investment in subsidiaries
Other assets

Total assets

Liabilities:

Borrowings
Other liabilities

Total liabilities

Stockholders' Equity:
Common stock
Additional paid-in capital
Treasury stock
Unearned compensation
Retained earnings
Accumulated other comprehensive income, net of taxes

Total equity

Total liabilities and equity

2005

2004

(In thousands)

23,197

9,203

4,588
21
166,517
3,498
197,821

20,619
735
21,354

195
39,635
(12)
(4,159)
146,068
(5,260)
176,467

6,388
19
163,954
2,382
181,946

20,619
674
21,293

195
37,187
(3,893)
(5,117)
133,290
(1,009)
160,653

197,821

181,946

Condensed Statements of Income

Dividends from the Bank
Interest income
Interest expense
Gain (loss) on sale of securities
Other operating income
Other operating expenses

Income (loss) before taxes and equity in undistributed

earnings of subsidiary

Income tax benefit

Income (loss) before equity in undistributed subsidiary

Equity in undistributed earnings of the Bank

Net income

2005

2004
(In thousands)

2003

20,000
305
(1,487)
437
-
(1,307)

17,948
934
18,882
4,660
23,542

17,000
283
(1,095)
229
6
(983)

15,440
690
16,130
6,519
22,649

-
203
(1,014)
(28)
-
(806)

(1,645)
780
(865)
22,543
21,678

Condensed Statements of Cash Flows

Operating activities:
Net income
Adjustments to reconcile net income to net cash provided
by operating activities:

Equity in undistributed earnings of the Bank
Amortization of unearned premium, net of accretion of
unearned discount
Securities impairment adjustment
Net (gain) loss on sale of investment securities
Net increase (decrease) in operating assets and liabilities
Unearned compensation, net

Net cash provided by operating activities

Investing activities:

Purchases of securities available for sale
Proceeds from sales and calls of securities available for sale

Net cash provided by investing activities

Financing activities:

Purchase of treasury stock
Cash dividends paid
Stock options exercised

Net cash used in financing activities

Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year

2005

2004

(In thousands)

2003

23,542

22,649

21,678

(4,660)

(6,519)

(22,543)

-
-
(437)
157
1,543
20,145

(150)
1,689
1,539

(3,085)
(7,027)
2,422
(7,690)

13,994
9,203
23,197

3
89
(318)
(168)
2,587
18,323

(124)
931
807

(9,773)
(6,127)
3,283
(12,617)

6,513
2,690
9,203

28
(763)
2,008
410

(70)
102
32

(7,333)
(4,852)
4,457
(7,728)

(7,286)
9,976
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,
Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the
2005.
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
Internal control over
statements for external purposes in accordance with generally accepted accounting principles.
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).

Because of its inherent

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.

limitations,

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.

Item 10. Directors and Executive Officers of the Registrant.

PART III

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

Equity compensation plans not

approved by security holders

Total

1,731,793

⎯

1,731,793

$11.56

⎯

$11.56

970,998 (1)

⎯

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.

Item 15. Exhibits, Financial Statement Schedules.

(a) 1. Financial Statements

PART IV

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 Flows 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

3.1
3.2
3.3

3.4
4.1

4.2

4.3

4.4

4.5

4.6

4.7

Agreement and Plan of Merger dated as of December 20, 2005 by and between Flushing Financial Corporation

and Atlantic Liberty Financial Corp. (19)

Certificate of Incorporation of Flushing Financial Corporation (1)
Certificate of Amendment to Certificate of Incorporation of Flushing Financial Corporation (10)
Certificate of Designations of Series A Junior Participating Preferred Stock of Flushing Financial

Corporation (12)

By-Laws of Flushing Financial Corporation (1)
Rights Agreement dated as of September 17, 1996 between Flushing Financial Corporation and

State Street Bank and Trust Company, as Rights Agent (5)

Form of Capital Security Certificate of Flushing Financial Capital Trust I (incorporated by reference to Exhibit

A-1 to Exhibit 4.6) (12)

Form of Common Security of Flushing Financial Capital Trust I (incorporated by reference to Exhibit A-2 to

Exhibit 4.6) (12)

Form of Floating Rate Junior Subordinated Debt Security of Flushing Financial Corporation (incorporated by

reference to Exhibit A to Exhibit 4.5) (12)

Indenture dated July 11, 2002 relating to Floating Rate Junior Subordinated Debt Securities due 2032 between

Flushing Financial Corporation and Wilmington Trust Company (12)

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)

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)

Amended and Restated Employment Agreement between Flushing Financial Corporation

and Michael J. Hegarty (9)

Amended and Restated Employment Agreement between Flushing Savings Bank, FSB

and Michael J. Hegarty (9)

Amended and Restated Employment Agreement between Flushing Financial Corporation and John R.

10.4*

10.5*

10.6*

Buran (9)

10.7*
10.8*
10.9*
10.10(a)*
10.10(b)*
10.11*
10.12(a)

Amended and Restated Employment Agreement between Flushing Savings Bank, FSB and John R. Buran (9)
Form of Special Termination Agreement as amended (8)
Amended and Restated Employee Severance Compensation Plan of Flushing Savings Bank, FSB (8)
Amended and Restated Outside Director Retirement Plan (13)
Amended and Restated Flushing Savings Bank, FSB Outside Director Deferred Compensation Plan (8)
Restated Flushing Savings Bank, FSB Supplemental Savings Incentive Plan (11)
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*
10.13(a)*
10.14*
10.15*

Employee Benefit Trust Agreement (1)
Amendment to the Employee Benefit Trust Agreement (4)
Loan Document for Employee Benefit Trust (1)
Guarantee by Flushing Financial Corporation (1)

10.16*

Consulting Agreement between Flushing Savings Bank, FSB, Flushing Financial

Corporation and Gerard P. Tully, Sr. (3)

Amendment to Gerard P. Tully, Sr. Consulting Agreement (4)
10.16(a)*
10.16(b)*
Amendment No. 2 to Gerard P. Tully, Sr. Consulting Agreement (6)
10.16(c)* e Amendment No. 3 to Gerard P. Tully, Sr. Consulting Agreement (7)
10.16(d)* e Amendment No. 4 to Gerard P. Tully, Sr. Consulting Agreement (11)
Amendment No. 5 to Gerard P. Tully, Sr. Consulting Agreement (14)
10.16(e)*
1996 Restricted Stock Incentive Plan of Flushing Financial Corporation (as amended effective April 20, 2004)
10.17*
(15)
1996 Stock Option Incentive Plan of Flushing Financial Corporation (as restated as of December 31, 2003 to

10.18*

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.

10.21*
10.22*
10.23*
10.24*
10.25*
10.26*
10.27*
10.28*
21.1
23.1
31.1
31.2
32.1

Hegarty dated December 23, 2004. (16)

Description of Outside Director Fee Arrangements
Form of Outside Director Restricted Stock Award Letter (19)
Form of Outside Director Restricted Stock Unit Award Letter (19)
Form of Outside Director Stock Option Grant Letter (19)
Form of Employee Restricted Stock Award Letter (19)
Form of Employee Restricted Stock Unit Award Letter (19)
Form of Employee Stock Option Award Letter (19)
2005 Omnibus Incentive Plan (17)
Subsidiaries information incorporated herein by reference to Part I – Subsidiary Activities
Consent of Independent Registered Public Accounting Firm
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Chief Executive Officer
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Chief Financial Officer
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)

(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
(12)
(13)
(14)
(15)
(16)
(17)

(18)
(19)

Incorporated by reference to Exhibits filed with the Registration Statement on Form S-1, Registration No.
33-96488.
Incorporated by reference to Exhibits filed with Form 10-Q for the quarter ended September 30, 1996.
Incorporated by reference to Exhibits filed with Form 10-K for the year ended December 31, 1996.
Incorporated by reference to Exhibits filed with Form 10-K for the year ended December 31, 1997.
Incorporated by reference to Exhibits filed with Form 8-K filed September 30, 1996.
Incorporated by reference to Exhibit filed with the Form 10-K for the year ended December 31, 1998.
Incorporated by reference to Exhibits filed with Form 10-K for the year ended December 31, 1999.
Incorporated by reference to Exhibits filed with Form 10-Q for the quarter ended September 30, 2000.
Incorporated by reference to Exhibits filed with Form 8-K/A filed July 5, 2005.
Incorporated by reference to Exhibits filed with Form S-8 filed May 31, 2002.
Incorporated by reference to Exhibits filed with Form 10-K for the year ended December 31, 2001.
Incorporated by reference to Exhibits filed with Form 10-Q for the quarter ended September 30, 2002.
Incorporated by reference to Exhibits filed with Form 10-K for the year ended December 31, 2003.
Incorporated by reference to Exhibit filed with Form 8-K filed November 26, 2004.
Incorporated by reference to Exhibit filed with Form 10-Q for the quarter ended June 30, 2004.
Incorporated by reference to Exhibit filed with Form 8-K filed December 28, 2004.
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.
Incorporated by reference to Exhibit filed with Form 8-K filed December 23, 2005.
Incorporated by reference to Exhibits filed with Form 10-K for the year ended December 31, 2004.

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.

SIGNATURES

FLUSHING FINANCIAL CORPORATION

/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
John R. Buran

/S/GERARD P. TULLY, SR.
Gerard P. Tully, Sr.

/S/DAVID W. FRY

David W. Fry

/S/JAMES D. BENNETT
James D. Bennett

Director, President (Principal Executive
Officer)

March 10, 2006

Director, Chairman

March 10, 2006

Treasurer (Principal Financial and
Accounting Officer)

March 10, 2006

Director

March 10, 2006

100

March 10, 2006

/S/STEVEN J. D'IORIO
Steven J. D'Iorio

/S/LOUIS C. GRASSI
Louis C. Grassi

/S/MICHAEL J. HEGARTY
Michael J. Hegarty

/S/JOHN J. MCCABE
John J. McCabe

/S/VINCENT F. NICOLOSI
Vincent F. Nicolosi

/S/DONNA M. O'BRIEN
Donna M. O'Brien

/S/FRANKLIN F. REGAN, JR.
Franklin F. Regan, Jr.

/S/JOHN E. ROE, SR.

John E. Roe, Sr.

/S/MICHAEL J. RUSSO
Michael J. Russo

Director

101

Corporate Information

Flushing Financial Corporation

Executive Management

Gerard P. Tully, Sr.
Chairman of the Board

John R. Buran
President & Chief Executive Officer

David W. Fry
Senior Vice President, Treasurer &
Chief Financial Officer

Anna M. Piacentini
Senior Vice President &
Corporate Secretary

Henry A. Braun
Senior Vice President

Robert L. Callicutt
Senior Vice President

Francis W. Korzekwinski
Senior Vice President

Board of Directors

Gerard P. Tully, Sr.
Chairman
Real Estate Development
and Management

Michael J. Hegarty
Former President &
Chief Executive Officer

James D. Bennett
Attorney in Nassau County, New York

John R. Buran
President & Chief Executive Officer

Steven J. D’Iorio
Senior Director of Real Estate and
Construction for Time Warner Cable

Louis C. Grassi
Managing Partner of Grassi & Co.,
CPAs, P.C.

John J. McCabe
Chief Strategist for Shay Assets
Management

Vincent F. Nicolosi
Attorney in Manhasset, New York

Donna M. O’Brien
Healthcare Consultant

Franklin F. Regan, Jr.
Attorney in Flushing, New York

John E. Roe, Sr.
Chairman of City Underwriting
Agency, Inc.
Insurance Brokers

Michael J. Russo
Consulting Engineer, President and
Director of Operations for Northeastern
Aviation Corp.

Corporate Headquarters

Flushing Savings Bank, FSB
1979 Marcus Avenue, Suite E140
Lake Success, New York 11042
718-961-5400
facsimile 516-358-4385
www.flushingsavings.com

Retail Branch Locations

Flushing
144-51 Northern Boulevard
159-18 Northern Boulevard
188-08 Hollis Court Boulevard
44-43 Kissena Boulevard

Astoria
31-16 30th Avenue

Bayside
61-54 Springfield Boulevard
42-11 Bell Boulevard (opening Spring 2006)

New Hyde Park
661 Hillside Avenue

Bay Ridge
7102 Third Avenue

Manhattan
33 Irving Place

Real Estate Lending
Flushing Savings Bank, FSB
144-51 Northern Boulevard
718-961-5400

New York Federal Division
33 Irving Place
212-477-9424

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Shareholder Information Flushing Financial Corporation and Subsidiaries

Annual Meeting
The Annual Meeting of Shareholders
of Flushing Financial Corporation will
be held at 2:00 PM, May 16, 2006, at
the La Guardia Marriott located at 102-05
Ditmars Boulevard, East Elmhurst,
New York 11369

Stock Listing
Nasdaq National Market®
Symbol “FFIC”

Transfer Agent and Registrar
Computershare Trust Company NA
P.O. Box 43010
Providence, Rhode Island 02940-3010
1-800-426-5523
www.Computershare.com

Independent Registered
Public Accounting Firm
PricewaterhouseCoopers LLP
300 Madison Avenue
New York, New York 10017
646-471-4000

Legal Counsel
Hughes Hubbard & Reed LLP
One Battery Park Plaza
New York, New York 10004
212-837-6000

Shareholder Relations
Van Negris and Company, Inc.
1120 Avenue of the Americas
4th Floor
New York, New York 10036
212-759-0290

1979 Marcus Avenue, Suite E140
Lake Success, NY 11042

3345-AR-06