Edgar Filing: FLUSHING FINANCIAL CORP

f10q_051214.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2014

Commission file number 001-33013

FLUSHING FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

Delaware

(State or other jurisdiction of incorporation or organization)

11-3209278

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

1979 Marcus Avenue, Suite E140, Lake Success, New York 11042

(Address of principal executive offices)

(718) 961-5400

(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [x] Yes [ ] No

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

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

Large accelerated filer [ ]

Non-accelerated filer [ ]

Accelerated filer [x]

Smaller reporting company [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). [ ] Yes [x] No

The number of shares of the registrant’s Common Stock outstanding as of April 30, 2014 was 30,255,362.

TABLE OF CONTENTS

	PAGE
PART I — FINANCIAL INFORMATION
ITEM 1. Financial Statements - (Unaudited)
Consolidated Statements of Financial Condition	1
Consolidated Statements of Income	2
Consolidated Statements of Comprehensive Income	3
Consolidated Statements of Cash Flows	4
Consolidated Statements of Changes in Stockholders’ Equity	5
Notes to Consolidated Financial Statements	6
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	43
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk	60
ITEM 4. Controls and Procedures	60
PART II — OTHER INFORMATION
ITEM 1. Legal Proceedings	61
ITEM 1A. Risk Factors	61
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds	61
ITEM 3. Defaults Upon Senior Securities	61
ITEM 4. Mine Safety Disclosures	61
ITEM 5. Other Information	61
ITEM 6. Exhibits	62
SIGNATURES	63

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Consolidated Statements of Financial Condition

(Unaudited)

Item 1.

Financial Statements

(Dollars in thousands, except per share data)	March 31, 2014			December 31, 2013
ASSETS
Cash and due from banks	$	43,630		$	33,485
Securities available for sale:
Mortgage-backed securities ($5,823 and $7,119 at fair value pursuant to the fair value option at March 31, 2014 and December 31, 2013, respectively)		774,202			756,156
Other securities ($33,447 and $30,163 at fair value pursuant to the fair value option at March 31, 2014 and December 31, 2013 respectively)		279,164			261,634
Loans held for sale		-			425
Loans:
Multi-family residential		1,722,764			1,712,039
Commercial real estate		509,728			512,552
One-to-four family ― mixed-use property		587,482			595,751
One-to-four family ― residential		194,611			193,726
Co-operative apartments		9,974			10,137
Construction		4,859			4,247
Small Business Administration		7,628			7,792
Taxi medallion		24,127			13,123
Commercial business and other		427,406			373,641
Net unamortized premiums and unearned loan fees		11,080			11,170
Allowance for loan losses		(30,270	)		(31,776	)
Net loans		3,469,389			3,402,402
Interest and dividends receivable		17,133			17,370
Bank premises and equipment, net		19,983			20,356
Federal Home Loan Bank of New York stock		44,698			46,025
Bank owned life insurance		110,383			109,606
Goodwill		16,127			16,127
Other assets		45,267			57,915
Total assets	$	4,819,976		$	4,721,501

LIABILITIES
Due to depositors:
Non-interest bearing	$	200,947		$	197,343
Interest-bearing:
Certificate of deposit accounts		1,150,064			1,120,955
Savings accounts		260,980			265,003
Money market accounts		194,172			199,907
NOW accounts		1,495,761			1,416,774
Total interest-bearing deposits		3,100,977			3,002,639
Mortgagors' escrow deposits		48,870			32,798
Borrowed funds ($29,541 and $29,570 at fair value pursuant to the fair value option at March 31, 2014 and December 31, 2013, respectively)		827,573			856,822
Securities sold under agreements to repurchase		155,300			155,300
Other liabilities		38,747			44,067
Total liabilities		4,372,414			4,288,969

Commitments and contingencies (Notes 4 & 5)

STOCKHOLDERS' EQUITY
Preferred stock ($0.01 par value; 5,000,000 shares authorized; None issued)		-			-
Common stock ($0.01 par value; 100,000,000 shares authorized; 31,530,595 shares issued at March 31, 2014 and December 31, 2013; 30,252,704 shares and 30,123,252 shares outstanding at March 31, 2014 and December 31, 2013, respectively)		315			315
Additional paid-in capital		204,605			201,902
Treasury stock, at average cost (1,277,891 shares and 1,407,343 shares at March 31, 2014 and December 31, 2013, respectively)		(20,496	)		(22,053	)
Retained earnings		269,093			263,743
Accumulated other comprehensive (loss) income, net of taxes		(5,955	)		(11,375	)
Total stockholders' equity		447,562			432,532

Total liabilities and stockholders' equity	$	4,819,976		$	4,721,501

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

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Consolidated Statements of Income

(Unaudited)

	For the three months ended March 31,
(Dollars in thousands, except per share data)	2014			2013

Interest and dividend income
Interest and fees on loans	$	42,120		$	42,940
Interest and dividends on securities:
Interest		6,875			6,954
Dividends		189			175
Other interest income		27			17
Total interest and dividend income		49,211			50,086

Interest expense
Deposits		7,718			8,291
Other interest expense		5,006			7,649
Total interest expense		12,724			15,940

Net interest income		36,487			34,146
Provision (benefit) for loan losses		(1,119	)		6,000
Net interest income after provision for loan losses		37,606			28,146

Non-interest income
Banking services fee income		709			1,040
Net loss on sale of loans		-			(9	)
Net gain on sale of securities		-			2,858
Net loss from fair value adjustments		(644	)		(123	)
Federal Home Loan Bank of New York stock dividends		551			414
Bank owned life insurance		776			825
Other income		318			343
Total non-interest income		1,710			5,348

Non-interest expense
Salaries and employee benefits		12,578			12,233
Occupancy and equipment		2,035			1,860
Professional services		1,210			1,618
FDIC deposit insurance		697			991
Data processing		1,068			1,043
Depreciation and amortization		715			767
Other real estate owned/foreclosure expense		256			668
Other operating expenses		3,534			3,239
Total non-interest expense		22,093			22,419

Income before income taxes		17,223			11,075

Provision for income taxes
Federal		4,758			3,461
State and local		2,169			858
Total taxes		6,927			4,319

Net income	$	10,296		$	6,756


Basic earnings per common share	$	0.34		$	0.22
Diluted earnings per common share	$	0.34		$	0.22
Dividends per common share	$	0.15		$	0.13

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

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(Unaudited)

	For the three months ended March 31,
(Dollars in thousands)	2014			2013


Comprehensive Income, net of tax
Net income	$	10,296		$	6,756
Amortization of actuarial losses		63			174
Amortization of prior service credits		(3	)		(6	)
Unrealized gains (losses) on securities, net		5,360			(4,203	)
Comprehensive income	$	15,716		$	2,721

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

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)

	For the three months ended March 31,
(Dollars in thousands)	2014			2013
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	10,296		$	6,756
Adjustments to reconcile net income to net cash provided by operating activities:
Provision (benefit) for loan losses		(1,119	)		6,000
Depreciation and amortization of bank premises and equipment		715			767
Amortization of premium, net of accretion of discount		1,821			1,774
Net loss from fair value adjustments		644			123
Net loss from sale of loans		-			9
Net gain from sale of securities		-			(2,858	)
Income from bank owned life insurance		(776	)		(825	)
Stock-based compensation expense		2,581			1,993
Deferred compensation		(1,192	)		(423	)
Amortization of core deposit intangibles		-			117
Excess tax benefit from stock-based payment arrangements		(675	)		(245	)
Deferred income tax provision		2,925			904
Decrease in prepaid FDIC assessment		-			927
Increase (decrease) in other liabilities		(2,748	)		2,089
Decrease in other assets		1,917			3,004
Net cash provided by operating activities		14,389			20,112

CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of bank premises and equipment		(342	)		(283	)
Net redemptions of Federal Home Loan Bank of New York shares		1,327			3,651
Purchases of securities available for sale		(48,277	)		(171,018	)
Proceeds from sales and calls of securities		1,871			96,396
Proceeds from maturities and prepayments of securities available for sale		20,715			37,461
Net (originations) and repayment of loans		(57,488	)		4,426
Purchases of loans		(11,649	)		(452	)
Proceeds from sale of real estate owned		1,062			1,793
Proceeds from sale of delinquent loans		5,424			8,166
Net cash used in investing activities		(87,357	)		(19,860	)

CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in non-interest bearing deposits		3,604			4,445
Net increase in interest-bearing deposits		98,091			72,700
Net increase in mortgagors' escrow deposits		16,072			14,025
Net repayment from short-term borrowed funds		(29,500	)		(121,500	)
Proceeds from long-term borrowings		-			110,271
Repayment of long-term borrowings		-			(69,912	)
Purchases of treasury stock		(1,659	)		(954	)
Excess tax benefit from stock-based payment arrangements		675			245
Proceeds from issuance of common stock upon exercise of stock options		343			22
Cash dividends paid		(4,513	)		(3,973	)
Net cash provided by financing activities		83,113			5,369

Net increase (decrease) in cash and cash equivalents		10,145			5,621
Cash and cash equivalents, beginning of period		33,485			40,425
Cash and cash equivalents, end of period	$	43,630		$	46,046

SUPPLEMENTAL CASH FLOW DISCLOSURE
Interest paid	$	12,646		$	15,652
Income taxes paid		4,680			1,581
Taxes paid if excess tax benefits were not tax deductible		5,355			1,826
Non-cash activities:
Securities purchased not yet settled		1,000			14,308
Loans transferred to Other Real Estate Owned		115			679
Loans provided for the sale of Other Real Estate Owned		308			2,088
Loans held for investment transferred to loans held for sale		-			7,682

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

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Consolidated Statements of Changes in Stockholders’ Equity

(Unaudited)

	For the three months ended March 31,
(Dollars in thousands, except per share data)	2014			2013

Common Stock
Balance, beginning of period	$	315		$	315
No activity		-			-
Balance, end of period	$	315		$	315
Additional Paid-In Capital
Balance, beginning of period	$	201,902		$	198,314
Award of common shares released from Employee Benefit Trust (126,650 and 133,656 common shares for the three months ended March 31, 2014 and 2013, respectively)		1,929			1,563
Shares issued upon vesting of restricted stock unit awards (1,000 and 98,610 common shares for the three months ended March 31, 2014 and 2013, respectively)		3			78
Issuance upon exercise of stock options (50,215 and 42,400 common shares for the three months ended March 31, 2014 and 2013, respectively)		122			55
Stock-based compensation activity, net		(26	)		(120	)
Stock-based income tax benefit		675			245
Balance, end of period	$	204,605		$	200,135
Treasury Stock
Balance, beginning of period	$	(22,053	)	$	(10,257	)
Purchases of outstanding shares (28,120 and 18,560 common shares for the three months ended March 31, 2014 and 2013, respectively)		(556	)		(301	)
Shares issued upon vesting of restricted stock unit awards (183,864 and 151,652 common shares for the three months ended March 31, 2014 and 2013, respectively)		2,897			1,983
Issuance upon exercise of stock options (50,215 and 52,320 common shares for the three months ended March 31, 2014 and 2013, respectively)		797			691
Purchases of shares to fund options exercised (23,003 and 39,957 common shares for the three months ended March 31, 2014 and 2013, respectively)		(478	)		(637	)
Repurchase of shares to satisfy tax obligations (53,504 and 42,666 common shares for the three months ended March 31, 2014 and 2013, respectively)		(1,103	)		(653	)
Balance, end of period	$	(20,496	)	$	(9,174	)
Retained Earnings
Balance, beginning of period	$	263,743		$	241,856
Net income		10,296			6,756
Cash dividends declared and paid on common shares ($0.15 and $0.13 per common share for the three months ended March 31, 2014 and 2013, respectively)		(4,513	)		(3,973	)
Issuance upon exercise of stock options (7,140 and 9,920 common shares for the three months ended March 31, 2014 and 2013, respectively)		(44	)		(35	)
Shares issued upon vesting of restricted stock unit awards (182,864 and 53,042 common shares for the three months ended March 31, 2014 and 2013, respectively)		(389	)		(99	)
Balance, end of period	$	269,093		$	244,505
Accumulated Other Comprehensive Income
Balance, beginning of period	$	(11,375	)	$	12,137
Change in net unrealized gains (losses) on securities available for sale, net of taxes of approximately ($4,237) and $2,013 for the three months ended March 31, 2014 and 2013, respectively		5,360			(2,594	)
Amortization of actuarial losses, net of taxes of approximately ($112) and ($135) for the three months ended March 31, 2014 and 2013, respectively		63			174
Amortization of prior service credits, net of taxes of approximately $8 and $5 for the three months ended March 31, 2014 and 2013, respectively)		(3	)		(6	)
Reclassification adjustment for net gains included in net income, net of taxes of approximately $1,249 for the three months ended March 31, 2013		-			(1,609	)
Balance, end of period	$	(5,955	)	$	8,102

Total Stockholders' Equity	$	447,562		$	443,883

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

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

1.	Basis of Presentation

The primary business of Flushing Financial Corporation (the “Holding Company”), a Delaware corporation, is the operation of its wholly-owned subsidiary, Flushing Bank (the “Bank”).

The unaudited consolidated financial statements presented in this Quarterly Report on Form 10-Q (“Quarterly Report”) include the collective results of the Holding Company and its direct and indirect wholly-owned subsidiaries, including the Bank, Flushing Preferred Funding Corporation, Flushing Service Corporation, and FSB Properties Inc., which are collectively herein referred to as “we,” “us,” “our” and the “Company.”

The Holding Company also owns Flushing Financial Capital Trust II, Flushing Financial Capital Trust III, and Flushing Financial Capital Trust IV (the “Trusts”), which are special purpose business trusts. The Trusts are not included in the Company’s consolidated financial statements as the Company would not absorb the losses of the Trusts if any losses were to occur.

The accompanying unaudited consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and general practices within the banking industry. The information furnished in these interim statements reflects all adjustments which are, in the opinion of management, necessary for a fair statement of the results for such presented periods of the Company. Such adjustments are of a normal recurring nature, unless otherwise disclosed in this Quarterly Report. All inter-company balances and transactions have been eliminated in consolidation. The results of operations in the interim statements are not necessarily indicative of the results that may be expected for the full year.

The accompanying unaudited consolidated financial statements have been prepared in conformity with the instructions to Quarterly Report on Form 10-Q and Article 10, Rule 10-01 of Regulation S-X for interim financial statements. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The unaudited consolidated interim financial information should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

2.	Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements, and reported amounts of revenue and expenses during the reporting period. Estimates that are particularly susceptible to change in the near term are used in connection with the determination of the allowance for loan losses (“ALLL”), the evaluation of goodwill for impairment, the evaluation of the need for a valuation allowance of the Company’s deferred tax assets, the evaluation of other-than-temporary impairment (“OTTI”) on securities and the valuation of certain financial instruments. The current economic environment has increased the degree of uncertainty inherent in these material estimates. Actual results could differ from these estimates.

3.	Earnings Per Share

Earnings per share are computed in accordance with ASC Topic 260 “Earnings Per Share.” Basic earnings per common share is computed by dividing net income available to common shareholders by the total weighted average number of common shares outstanding, which includes unvested participating securities. Unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and as such are included in the calculation of earnings per share. The Company’s unvested restricted stock and restricted stock unit awards are considered participating securities. Therefore, weighted average common shares outstanding used for computing basic earnings per common share includes common shares outstanding plus unvested restricted stock and restricted stock unit awards. The computation of diluted earnings per share includes the additional dilutive effect of stock options outstanding and other common stock equivalents during the period. Common stock equivalents that are anti-dilutive are not included in the computation of diluted earnings per common share. The numerator for calculating basic and diluted earnings per common share is net income available to common shareholders. The shares held in the Company’s Employee Benefit Trust are not included in shares outstanding for purposes of calculating earnings per common share.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

	For the three months ended March 31,
	2014			2013
	(In thousands, except per share data)
Net income, as reported	$	10,296		$	6,756
Divided by:
Weighted average common shares outstanding		29,984			30,449
Weighted average common stock equivalents		38			32
Total weighted average common shares outstanding and common stock equivalents		30,022			30,481

Basic earnings per common share	$	0.34		$	0.22
Diluted earnings per common share (1)	$	0.34		$	0.22
Dividend payout ratio		43.7	%		59.1	%

(1)

For the three months ended March 31, 2014, there were no options that were anti-dilutive. For the three months ended March 31, 2013, options to purchase 542,400 shares at an average exercise price of $17.66 were not included in the computation of diluted earnings per common share as they were anti-dilutive.

4.	Debt and Equity Securities

The Company’s 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 three month periods ended March 31, 2014 and December 31, 2013. Securities available for sale are recorded at fair value.

The following table summarizes the Company’s portfolio of securities available for sale at March 31, 2014:

	Amortized Cost		Fair Value		Gross Unrealized Gains		Gross Unrealized Losses
	(In thousands)
Corporate	$	110,524	$	111,925	$	2,143	$	742
Municipals		128,346		127,482		967		1,831
Mutual funds		26,697		26,697		-		-
Other		16,313		13,060		-		3,253
Total other securities		281,880		279,164		3,110		5,826
REMIC and CMO		515,372		513,148		7,142		9,366
GNMA		36,884		38,877		2,265		272
FNMA		212,014		209,345		2,715		5,384
FHLMC		12,753		12,832		238		159
Total mortgage-backed securities		777,023		774,202		12,360		15,181
Total securities available for sale	$	1,058,903	$	1,053,366	$	15,470	$	21,007

The table above includes commitments to purchase securities totaling $1.0 million which settled during April 2014.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

Mortgage-backed securities shown in the table above include three private issue collateralized mortgage obligations (“CMOs”) that are collateralized by commercial real estate mortgages with amortized cost and market values totaling $12.8 million and $12.9 million, respectively, at March 31, 2014.

The following table shows the Company’s available for sale securities with gross unrealized losses and their fair value aggregated by category and length of time the individual securities have been in a continuous unrealized loss position at March 31, 2014:

	Total				Less than 12 months				12 months or more
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(In thousands)
Corporate	$	49,258	$	742	$	29,898	$	102	$	19,360	$	640
Municipals		75,298		1,831		54,055		967		21,243		864
Other		6,309		3,253		-		-		6,309		3,253
Total other securities		130,865		5,826		83,953		1,069		46,912		4,757
REMIC and CMO		286,390		9,366		223,865		6,417		62,525		2,949
GNMA		9,105		272		9,105		272		-		-
FNMA		117,370		5,384		104,021		4,441		13,349		943
FHLMC		7,310		159		7,310		159		-		-
Total mortgage-backed securities		420,175		15,181		344,301		11,289		75,874		3,892
Total securitiesavailable for sale	$	551,040	$	21,007	$	428,254	$	12,358	$	122,786	$	8,649

OTTI losses on impaired securities must be fully recognized in earnings if an investor has the intent to sell the debt security or if it is more likely than not that the investor will be required to sell the debt security before recovery of its amortized cost. However, even if an investor does not expect to sell a debt security, the investor must evaluate the expected cash flows to be received and determine if a credit loss has occurred. In the event that a credit loss has occurred, only the amount of impairment associated with the credit loss is recognized in earnings in the Consolidated Statements of Income. Amounts relating to factors other than credit losses are recorded in accumulated other comprehensive income (“AOCI”) within Stockholders’ Equity.

The Company reviewed each investment that had an unrealized loss at March 31, 2014. An unrealized loss exists when the current fair value of an investment is less than its amortized cost basis. Unrealized losses on available for sale securities, that are deemed to be temporary, are recorded in AOCI, net of tax. Unrealized losses that are considered to be other-than-temporary are split between credit related and noncredit related impairments, with the credit related impairment being recorded as a charge against earnings and the noncredit related impairment being recorded in AOCI, net of tax.

The Company evaluates its pooled trust preferred securities, included in the table above in the row labeled “Other”, using an impairment model through an independent third party, which includes evaluating the financial condition of each counterparty. For single issuer trust preferred securities, the Company evaluates the issuer’s financial condition. The Company evaluates its mortgage-backed securities by reviewing the characteristics of the securities, including delinquency and foreclosure levels, projected losses at various loss severity levels and credit enhancement and coverage. In addition, private issue CMOs are evaluated using an impairment model through an independent third party. When an OTTI is identified, the portion of the impairment that is credit related is determined by management by using the following methods: (1) for trust preferred securities, the credit related impairment is determined by using a discounted cash flow model from an independent third party, with the difference between the present value of the projected cash flows and the amortized cost basis of the security recorded as a credit related loss against earnings; (2) for mortgage-backed securities, credit related impairment is determined for each security by estimating losses based on a set of assumptions, which includes delinquency and foreclosure levels, projected losses at various loss severity levels, credit enhancement and coverage and (3) for private issue CMOs, through an impairment model from an independent third party and then recording those estimated losses as a credit related loss against earnings.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

Corporate:

The unrealized losses in Corporate securities at March 31, 2014 consist of losses on six Corporate securities. The unrealized losses were caused by movements in interest rates. It is not anticipated that these securities would be settled at a price that is less than the amortized cost of the Company’s investment. Each of these securities is performing according to its terms and, in the opinion of management, will continue to perform according to its terms. The Company does not have the intent to sell these securities and it is more likely than not the Company will not be required to sell the securities before recovery of the securities’ amortized cost basis. This conclusion is based upon considering the Company’s cash and working capital requirements and contractual and regulatory obligations, none of which the Company believes would cause the sale of the securities. Therefore, the Company did not consider these investments to be other-than-temporarily impaired at March 31, 2014.

Municipal Securities:

The unrealized losses in Municipal securities at March 31, 2014, consist of losses on 24 municipal securities. The unrealized losses were caused by movements in interest rates. It is not anticipated that these securities would be settled at a price that is less than the amortized cost of the Company’s investment. Each of these securities is performing according to its terms and, in the opinion of management, will continue to perform according to its terms. The Company does not have the intent to sell these securities and it is more likely than not the Company will not be required to sell the securities before recovery of the securities amortized cost basis. This conclusion is based upon considering the Company’s cash and working capital requirements and contractual and regulatory obligations, none of which the Company believes would cause the sale of the securities. Therefore, the Company did not consider these investments to be other-than-temporarily impaired at March 31, 2014.

Other Securities:

The unrealized losses in Other Securities at March 31, 2014, consist of losses on one single issuer trust preferred security and two pooled trust preferred securities. The unrealized losses on such securities were caused by market interest volatility, a significant widening of credit spreads across markets for these securities and illiquidity and uncertainty in the financial markets. These securities are currently rated below investment grade. The pooled trust preferred securities do not have collateral that is subordinate to the classes the Company owns. The Company’s management evaluates these securities using an impairment model, through an independent third party, that is applied to debt securities. In estimating OTTI losses, management considers: (1) the length of time and the extent to which the fair value has been less than amortized cost; (2) the current interest rate environment; (3) the financial condition and near-term prospects of the issuer, if applicable; and (4) the intent and ability of the Company to retain its investment in the security for a period of time sufficient to allow for any anticipated recovery in fair value. Additionally, management reviews the financial condition of each individual issuer within the pooled trust preferred securities. All of the issuers of the underlying collateral of the pooled trust preferred securities we reviewed are banks.

For each bank, our review included the following performance items of the banks:

Ratio of tangible equity to assets

Tier 1 Risk Weighted Capital

Net interest margin

Efficiency ratio for most recent two quarters

Return on average assets for most recent two quarters

Texas Ratio (ratio of non-performing assets plus assets past due over 90 days divided by tangible equity plus the reserve for loan losses)

Credit ratings (where applicable)

Capital issuances within the past year (where applicable)

Ability to complete Federal Deposit Insurance Corporation (“FDIC”) assisted acquisitions (where applicable)

Based on the review of the above factors, we concluded that:

All of the performing issuers in our pools are well capitalized banks, and do not appear likely to be closed by their regulators.

All of the performing issuers in our pools will continue as a going concern and will not default on their securities.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

In order to estimate potential future defaults and deferrals, we segregated the performing underlying issuers by their Texas Ratio. We then reviewed performing issuers with Texas Ratios in excess of 50%. The Texas Ratio is a key indicator of the health of the institution and the likelihood of failure. This ratio compares the problem assets of the institution to the institution’s available capital and reserves to absorb losses that are likely to occur in these assets. There was one issuer in our pooled trust preferred securities which had a Texas Ratio in excess of 50%. We assigned a 25% default rate to this issuer. All other issuers in our pooled trust preferred securities had a Texas Ratio below 50%. We assigned a zero percent default rate to these issuers. Our analysis also assumed that issuers currently deferring would default with no recovery, and issuers that have defaulted will have no recovery.

We had an independent third party prepare a discounted cash flow analysis for each of these pooled trust preferred securities based on the assumptions discussed above. Other significant assumptions were: (1) two issuers totaling $26.7 million will prepay in 2014; (2) two issuers totaling $21.5 million will prepay in the second quarter of 2015; (3) senior classes will not call the debt on their portions; and (4) use of the forward London Interbank Offered Rate (“LIBOR”) curve. The cash flows were discounted at the effective rate for each security.

The Company also owns a single issue security that is carried under the fair value option, where the unrealized losses are included in the Consolidated Statements of Income – Net gain (loss) from fair value adjustments.

It is not anticipated at this time that the one single issuer trust preferred security and the two pooled trust preferred securities would be settled at a price that is less than the amortized cost of the Company’s investment. Each of these securities is performing according to its terms and, in the opinion of management and based on the review performed at March 31, 2014, will continue to perform according to its terms. The Company does not have the intent to sell these securities and it is more likely than not the Company will not be required to sell the securities before recovery of the securities’ amortized cost basis. This conclusion is based upon considering the Company’s cash and working capital requirements and contractual and regulatory obligations, none of which the Company believes would cause the sale of the securities. Therefore, the Company did not consider the one single issuer trust preferred security and the two pooled trust preferred securities to be other-than-temporarily impaired at March 31, 2014.

At March 31, 2014, the Company held four trust preferred issues which had a current credit rating of at least one rating below investment grade. One of those issues are carried under the fair value option and therefore, changes in fair value are included in the Consolidated Statement of Income – Net gain (loss) from fair value adjustments.

The following table details the remaining three trust preferred issues that were evaluated to determine if they were other-than-temporarily impaired at March 31, 2014. The class the Company owns in pooled trust preferred securities does not have any excess subordination.

									Deferrals/Defaults
Issuer Type	Class	Performing Banks	Amortized Cost		Fair Value		Cumulative Credit Related OTTI		Actual as a Percentage of Original Security	Expected Percentage of Performing Collateral	Current Lowest Rating
			(Dollars in thousands)

Single issuer	n/a	1		300		287		-	None	None	BB-
Pooled issuer	B1	15		5,617		3,120		2,196	23.4%	0.0%	C
Pooled issuer	C1	16		3,645		2,900		1,542	21.3%	1.5%	C
Total			$	9,562	$	6,307	$	3,738

REMIC and CMO:

The unrealized losses in Real Estate Mortgage Investment Conduit (“REMIC”) and CMO securities at March 31, 2014 consist of 13 issues from the Federal Home Loan Mortgage Corporation (“FHLMC”), 17 issues from the Federal National Mortgage Association (“FNMA”) and six issues from Government National Mortgage Association (“GNMA”).

The unrealized losses on the REMIC and CMO securities issued by FHLMC, FNMA and GNMA were caused by movements in interest rates. It is not anticipated that these securities would be settled at a price that is less than the amortized cost of the Company’s investment. Each of these securities is performing according to its terms, and, in the opinion of management, will continue to perform according to its terms. The Company does not have the intent to sell these securities and it is more likely than not the Company will not be required to sell the securities before recovery of the securities amortized cost basis. This conclusion is based upon considering the Company’s cash and working capital requirements, and contractual and regulatory obligations, none of which the Company believes would cause the sale of the securities. Therefore, the Company did not consider these investments to be other-than-temporarily impaired at March 31, 2014.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

GNMA:

The unrealized losses in GNMA securities at March 31, 2014 consist of losses on one security. The unrealized losses were caused by movements in interest rates. It is not anticipated that this security would be settled at a price that is less than the amortized cost of the Company’s investment. This security is performing according to its terms and, in the opinion of management, will continue to perform according to its terms. The Company does not have the intent to sell this security and it is more likely than not the Company will not be required to sell the security before recovery of the security’s amortized cost basis. This conclusion is based upon considering the Company’s cash and working capital requirements and contractual and regulatory obligations, none of which the Company believes would cause the sale of the security. Therefore, the Company did not consider this security to be other-than-temporarily impaired at March 31, 2014.

FNMA:

The unrealized losses in FNMA securities at March 31, 2014 consist of losses on 16 securities. The unrealized losses were caused by movements in interest rates. It is not anticipated that these securities would be settled at a price that is less than the amortized cost of the Company’s investment. Each of these securities is performing according to its terms and, in the opinion of management, will continue to perform according to its terms. The Company does not have the intent to sell these securities and it is more likely than not the Company will not be required to sell the securities before recovery of the securities amortized cost basis. This conclusion is based upon considering the Company’s cash and working capital requirements and contractual and regulatory obligations, none of which the Company believes will cause the sale of the securities. Therefore, the Company did not consider these investments to be other-than-temporarily impaired at March 31, 2014.

FHMLC:

The unrealized losses in FHMLC securities at March 31, 2014 consist of losses on one security. The unrealized losses were caused by movements in interest rates. It is not anticipated that this security would be settled at a price that is less than the amortized cost of the Company’s investment. This security is performing according to its terms and, in the opinion of management, will continue to perform according to its terms. The Company does not have the intent to sell this security and it is more likely than not the Company will not be required to sell the security before recovery of the security’s amortized cost basis. This conclusion is based upon considering the Company’s cash and working capital requirements and contractual and regulatory obligations, none of which the Company believes would cause the sale of the security. Therefore, the Company did not consider this security to be other-than-temporarily impaired at March 31, 2014.

The following table details gross unrealized losses recorded in AOCI and the ending credit loss amount on debt securities, as of March 31, 2014, for which the Company has recorded a credit related OTTI charge in the Consolidated Statements of Income:

(in thousands)	Amortized Cost		Fair Value		Gross Unrealized Losses Recorded In AOCI		Ending Credit Loss Amount

Trust preferred securities (1)	$	9,262	$	6,020	$	3,242	$	3,738
Total	$	9,262	$	6,020	$	3,242	$	3,738

(1)	The Company has recorded OTTI charges in the Consolidated Statements of Income on two pooled trust preferred securities for which a portion of the unrealized losses are currently recorded in AOCI.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The following table represents the activity related to the credit loss component recognized in earnings on debt securities held by the Company for which a portion of OTTI was recognized in AOCI for the periods indicated:

	For the three months ended March 31,
	2014		2013
	(In thousands)
Beginning balance	$	3,738	$	6,178

Recognition of actual losses		-		(169	)
OTTI charges due to credit loss recorded in earnings		-		-
Securities sold during the period		-		-
Securities where there is an intent to sell or requirement to sell		-		-
Ending balance	$	3,738	$	6,009

The following table details the amortized cost and estimated fair value of the Company’s securities classified as available for sale at March 31, 2014, by contractual maturity. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Amortized Cost		Fair Value
	(In thousands)

Due in one year or less	$	42,511	$	42,705
Due after one year through five years		42,142		44,072
Due after five years through ten years		59,017		58,257
Due after ten years		138,210		134,130

Total other securities		281,880		279,164
Mortgage-backed securities		777,023		774,202

Total securities available for sale	$	1,058,903	$	1,053,366

The following table represents the gross gains and gross losses realized from the sale of securities available for sale for the periods indicated:

	For the three months ended March 31,
	2014		2013
	(In thousands)
Gross gains from the sale of securities	$	-	$	3,199
Gross losses from the sale of securities		-		(341	)
Net gains from the sale of securities	$	-	$	2,858

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The following table summarizes the Company’s portfolio of securities available for sale at December 31, 2013:

	Amortized Cost		Fair Value		Gross Unrealized Gains		Gross Unrealized Losses
	(In thousands)
Corporate	$	100,362	$	101,711	$	2,316	$	967
Municipals		127,967		123,423		93		4,637
Mutual funds		21,565		21,565		-		-
Other		18,160		14,935		-		3,225
Total other securities		268,054		261,634		2,409		8,829
REMIC and CMO		494,984		489,670		6,516		11,830
GNMA		38,974		40,874		2,325		425
FNMA		217,615		212,322		2,233		7,526
FHLMC		13,297		13,290		226		233
Total mortgage-backed securities		764,870		756,156		11,300		20,014
Total securities available for sale	$	1,032,924	$	1,017,790	$	13,709	$	28,843

Mortgage-backed securities shown in the table above include three private issue collateralized mortgage obligations (“CMO”) that are collateralized by commercial real estate mortgages with an amortized cost and market value of $13.9 million at December 31, 2013.

The following table shows the Company’s available for sale securities with gross unrealized losses and their fair value, aggregated by category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2013.

	Total				Less than 12 months				12 months or more
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(In thousands)
Corporate	$	39,033	$	967	$	39,033	$	967	$	-	$	-
Municipals		100,875		4,637		95,958		4,187		4,917		450
Other		6,337		3,225		-		-		6,337		3,225
Total other securities		146,245		8,829		134,991		5,154		11,254		3,675

REMIC and CMO		298,165		11,830		279,743		10,650		18,422		1,180
GNMA		9,213		425		9,213		425		-		-
FNMA		139,999		7,526		131,248		6,654		8,751		872
FHLMC		7,478		233		7,478		233		-		-
Total mortgage-backed securities		454,855		20,014		427,682		17,962		27,173		2,052
Total securities available for sale	$	601,100	$	28,843	$	562,673	$	23,116	$	38,427	$	5,727

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 generally discontinued when certain factors, such as contractual delinquency of 90 days or more, indicate reasonable doubt as to the timely collectability of such income. Uncollected interest previously recognized on non-accrual loans is reversed from interest income at the time the loan is placed on non-accrual status. A non-accrual loan can be returned to accrual status when contractual delinquency returns to less than 90 days delinquent. Subsequent cash payments received on non-accrual loans that do not bring the loan to less than 90 days delinquent are recorded on a cash basis. Subsequent cash payments can also be applied first as a reduction of principal until all principal is recovered and then subsequently to interest, if in management’s opinion, it is evident that recovery of all principal due is unlikely to occur. 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 in the period they are collected.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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 collectability of loans. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revisions as more information becomes available. The allowance is established through a provision for loan losses based on management’s evaluation of the risk inherent in the various components of the loan portfolio and other factors, including historical loan loss experience (which is updated quarterly), current economic conditions, delinquency and non-accrual trends, classified loan levels, risk in the portfolio and volumes and trends in loan types, recent trends in charge-offs, changes in underwriting standards, experience, ability and depth of the Company’s lenders, collection policies and experience, internal loan review function and other external factors. Additionally, the Company segregated our loans into two portfolios based on year of origination. One portfolio was reviewed for loans originated after December 31, 2009 and a second portfolio for loans originated prior to January 1, 2010. Our decision to segregate the portfolio based upon origination dates was based on changes made in our underwriting standards during 2009. By the end of 2009, all loans were being underwritten based on revised and tightened underwriting standards. Loans originated prior to 2010 have a higher delinquency rate and loss history. Each of the years in the portfolio for loans originated prior to 2010 has a similar delinquency rate. The determination of the amount of the allowance for loan losses includes estimates that are susceptible to significant changes due to changes in appraisal values of collateral, national and local economic conditions and other factors. We review our loan portfolio by separate categories with similar risk and collateral characteristics. Impaired loans are segregated and reviewed separately. All non-accrual loans are classified as impaired loans. The Company’s Board of Directors reviews and approves management’s evaluation of the adequacy of the allowance for loan losses on a quarterly basis.

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.

The Company recognizes a loan as non-performing when the borrower has demonstrated the inability to bring the loan current, or due to other circumstances which, in management’s opinion, indicate the borrower will be unable to bring the loan current within a reasonable time. All loans classified as non-performing, which includes all loans past due 90 days or more, are classified as non-accrual unless there is, in our opinion, compelling evidence the borrower will bring the loan current in the immediate future. Appraisals are obtained and/or updated internal evaluations are prepared as soon as practical, and before the loan becomes 90 days delinquent. The loan balances of collateral dependent impaired loans are compared to the property’s updated fair value. The Company considers fair value of collateral dependent loans to be 85% of the appraised or internally estimated value of the property. The balance which exceeds fair value is generally charged-off.

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, in accordance with the original 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, as a practical expedient, 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’s management considers all non-accrual loans impaired.

The Company reviews each impaired loan on an individual basis to determine if either a charge-off or a valuation allowance needs to be allocated to the loan. The Company does not charge-off or allocate a valuation allowance to loans for which management has concluded the current value of the underlying collateral will allow for recovery of the loan balance either through the sale of the loan or by foreclosure and sale of the property.

The Company evaluates the underlying collateral through a third party appraisal, or when a third party appraisal is not available, the Company will use an internal evaluation. The internal evaluations are prepared using an income approach or a sales approach. The income approach is used for income producing properties and uses current revenues less operating expenses to determine the net cash flow of the property. Once the net cash flow is determined, the value of the property is calculated using an appropriate capitalization rate for the property. The sales approach uses comparable sales prices in the market. When an internal evaluation is used, we place greater reliance on the income approach to value the collateral.

- 14 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

In preparing internal evaluations of property values, the Company seeks to obtain current data on the subject property from various sources, including: (1) the borrower; (2) copies of existing leases; (3) local real estate brokers and appraisers; (4) public records (such as for real estate taxes and water and sewer charges); (5) comparable sales and rental data in the market; (6) an inspection of the property and (7) interviews with tenants. These internal evaluations primarily focus on the income approach and comparable sales data to value the property.

As of March 31, 2014, we utilized recent third party appraisals of the collateral to measure impairment for $56.8 million, or 84.4%, of collateral dependent impaired loans, and used internal evaluations of the property’s value for $10.5 million, or 15.6%, of collateral dependent impaired loans.

The Company may restructure a loan to enable a borrower experiencing financial difficulties to continue making payments when it is deemed to be in the Company’s best long-term interest. This restructure may include reducing the interest rate or amount of the monthly payment for a specified period of time, after which the interest rate and repayment terms revert to the original terms of the loan. We classify these loans as Troubled Debt Restructured (“TDR”).

These restructurings have not included a reduction of principal balance. The Company believes that restructuring these loans in this manner will allow certain borrowers to become and remain current on their loans. Restructured loans are classified as a TDR when the Bank grants a concession to a borrower who is experiencing financial difficulties. All loans classified as TDR are considered impaired, however TDR loans which have been current for six consecutive months at the time they are restructured as TDR remain on accrual status and are not included as part of non-performing loans. Loans which were delinquent at the time they are restructured as a TDR are placed on non-accrual status and reported as non-performing loans until they have made timely payments for six consecutive months. Loans that are restructured as TDR but are not performing in accordance with the restructured terms are placed on non-accrual status and reported as non-performing loans.

The allocation of a portion of the allowance for loan losses for a performing TDR loan is based upon the present value of the future expected cash flows discounted at the loan’s original effective rate, or for a non-performing TDR which is collateral dependent, the fair value of the collateral. At March 31, 2014, there were no commitments to lend additional funds to borrowers whose loans were modified to a TDR. The modification of loans to a TDR did not have a significant effect on our operating results, nor did it require a significant allocation of the allowance for loan losses.

The Bank did not modify and classify any loans as TDR during the three months ended March 31, 2014.

The following table shows loans modified and classified as TDR during the three months ended March 31, 2013:

	For the three months ended March 31, 2013
(Dollars in thousands)	Number		Balance		Modification description


Multi-family residential		1	$	413	Received a below market interest rate and the loan amortization was extended
Commercial real estate		1		273	Received a below market interest rate and the loan amortization was extended
Commercial business and other		1		615	Received a below market interest rate and the loan term was extended
Total		3	$	1,301

The recorded investment of each of the loans modified and classified to a TDR, presented in the table above, was unchanged as there was no principal forgiven in any of these modifications.

- 15 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The following table shows our recorded investment for loans classified as TDR that are performing according to their restructured terms at the periods indicated:

	March 31, 2014				December 31, 2013
(Dollars in thousands)	Number of contracts		Recorded investment		Number of contracts		Recorded investment

Multi-family residential		10	$	3,074		10	$	3,087
Commercial real estate		4		3,669		4		3,686
One-to-four family - mixed-use property		8		2,680		8		2,692
One-to-four family - residential		1		362		1		364
Construction		-		-		1		746
Commercial business and other		3		1,097		4		3,127
Total performing troubled debt restructured		26	$	10,882		28	$	13,702

During the three months ended March 31, 2014, there was one construction TDR for $0.7 million and one commercial business and other TDR for $2.0 million transferred to non-performing status. While these borrowers continue to remit monthly payments on these loans, they are over 90 days past maturity, which results in these loans being included in non-performing loans. During the three months ended March 31, 2013, there were no loans classified as TDR transferred to non-performing status.

The following table shows our recorded investment for loans classified as TDR that are not performing according to their restructured terms at the periods indicated:

	March 31, 2014				December 31, 2013
(Dollars in thousands)	Number of contracts		Recorded investment		Number of contracts		Recorded investment

Commercial real estate		1	$	2,245		1	$	2,332
Construction		1		746		-		-
Commercial business and other		1		2,000		-		-
Total troubled debt restructurings that subsequently defaulted		3	$	4,991		1	$	2,332

- 16 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The following table shows our non-performing loans at the periods indicated:

(Dollars in thousands)	March 31, 2014		December 31, 2013

Loans ninety days or more past due and still accruing:
Multi-family residential	$	188	$	52
Commercial real estate		793		-
One-to-four family - mixed-use property		874		-
One-to-four family - residential		15		15
Construction		1,012		-
Commercial Business and other		2,490		539
Total		5,372		606

Non-accrual mortgage loans:
Multi-family residential (1)		12,062		13,297
Commercial real estate		8,769		9,962
One-to-four family - mixed-use property		7,977		9,063
One-to-four family - residential		12,208		13,250
Co-operative apartments		-		57
Total		41,016		45,629

Non-accrual non-mortgage loans:
Commercial Business and other		2,165		2,348
Total		2,165		2,348

Total non-accrual loans		43,181		47,977
Total non-accrual loans and loans ninety days or more past due and still accruing	$	48,553	$	48,583

(1)	The table above does not include non-performing Loans held for sale of $0.4 million at December 31, 2013.

The following is a summary of interest foregone on non-accrual loans and loans classified as TDR for the periods indicated:

	For the three months ended March 31,
	2014		2013
	(In thousands)
Interest income that would have been recognized had the loans performed in accordance with their original terms	$	1,067	$	2,202
Less: Interest income included in the results of operations		155		243
Total foregone interest	$	912	$	1,959

- 17 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The following table shows an age analysis of our recorded investment in loans at March 31, 2014:

(in thousands)	30 - 59 Days Past Due		60 - 89 Days Past Due		Greater than 90 Days		Total Past Due		Current		Total Loans


Multi-family residential	$	13,267	$	2,204	$	12,062	$	27,533	$	1,695,231	$	1,722,764
Commercial real estate		4,876		1,250		8,769		14,895		494,833		509,728
One-to-four family - mixed-use property		13,193		1,382		7,977		22,552		564,930		587,482
One-to-four family - residential		1,849		903		11,999		14,751		179,860		194,611
Co-operative apartments		-		-		-		-		9,974		9,974
Construction loans		-		-		-		-		4,859		4,859
Small Business Administration		198		-		-		198		7,430		7,628
Taxi medallion		-		-		-		-		24,127		24,127
Commercial business and other		483		-		1,198		1,681		425,725		427,406
Total	$	33,866	$	5,739	$	42,005	$	81,610	$	3,406,969	$	3,488,579

The following table shows an age analysis of our recorded investment in loans at December 31, 2013:

(in thousands)	30 - 59 Days Past Due		60 - 89 Days Past Due		Greater than 90 Days		Total Past Due		Current		Total Loans


Multi-family residential	$	14,101	$	2,554	$	13,297	$	29,952	$	1,682,087	$	1,712,039
Commercial real estate		5,029		523		9,962		15,514		497,038		512,552
One-to-four family - mixed-use property		14,017		1,099		9,063		24,179		571,572		595,751
One-to-four family - residential		3,828		518		12,953		17,299		176,427		193,726
Co-operative apartments		99		-		144		243		9,894		10,137
Construction loans		-		-		-		-		4,247		4,247
Small Business Administration		106		-		-		106		7,686		7,792
Taxi medallion		-		-		-		-		13,123		13,123
Commercial business and other		187		2		1,213		1,402		372,239		373,641
Total	$	37,367	$	4,696	$	46,632	$	88,695	$	3,334,313	$	3,423,008

- 18 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The following table shows the activity in the allowance for loan losses for the three months ended March 31, 2014:

(in thousands)	Multi-family residential			Commercial real estate			One-to-four family - mixed-use property			One-to-four family - residential			Co-operative apartments			Construction loans			Small Business Administration			Taxi medallion		Commercial business and other			Total

Allowance for credit losses:
Beginning balance	$	12,084		$	4,959		$	6,328		$	2,079		$	104		$	444		$	458		$	-	$	5,320		$	31,776
Charge-off's		(605	)		(47	)		(83	)		(42	)		-			-			-			-		(124	)		(901	)
Recoveries		7			382			40			68			7			-			10			-		-			514
Provision		(383	)		85			857			(161	)		(111	)		(404	)		(77	)		14		(939	)		(1,119	)
Ending balance	$	11,103		$	5,379		$	7,142		$	1,944		$	-		$	40		$	391		$	14	$	4,257		$	30,270
Ending balance: individually evaluated for impairment	$	304		$	210		$	617		$	57		$	-		$	9		$	-		$	-	$	218		$	1,415
Ending balance: collectively evaluated for impairment	$	10,799		$	5,169		$	6,525		$	1,887		$	-		$	31		$	391		$	14	$	4,039		$	28,855

Financing Receivables:
Ending balance	$	1,722,764		$	509,728		$	587,482		$	194,611		$	9,974		$	4,859		$	7,628		$	24,127	$	427,406		$	3,488,579
Ending balance: individually evaluated for impairment	$	20,898		$	19,558		$	16,060		$	13,941		$	-		$	1,316		$	-		$	-	$	10,155		$	81,928
Ending balance: collectively evaluated for impairment	$	1,701,866		$	490,170		$	571,422		$	180,670		$