f10q_081114.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 June 30, 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 July 31, 2014 was 30,194,640.

 
 
 
TABLE OF CONTENTS

 
PAGE
 
 
 
 
 
 
 
i
 
 
 
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)
  
June 30,
2014
    
December 31,
2013
  
ASSETS
            
Cash and due from banks
   $ 36,982     $ 33,485  
Securities available for sale:
                
Mortgage-backed securities ($5,182 and $7,119 at fair value pursuant to the fair value option at June 30, 2014 and December 31, 2013, respectively)
     770,545       756,156  
Other securities ($33,718 and $30,163 at fair value pursuant to the fair value option at June 30, 2014 and December 31, 2013 respectively)
     288,137       261,634  
Loans held for sale
     -       425  
Loans:
                
Multi-family residential
     1,784,111       1,712,039  
Commercial real estate
     510,224       512,552  
One-to-four family ― mixed-use property
     581,207       595,751  
One-to-four family ― residential
     192,895       193,726  
Co-operative apartments
     9,885       10,137  
Construction
     4,717       4,247  
Small Business Administration
     7,543       7,792  
Taxi medallion
     25,291       13,123  
Commercial business and other
     405,853       373,641  
Net unamortized premiums and unearned loan fees
     10,811       11,170  
Allowance for loan losses
     (29,235 )     (31,776 )
Net loans
     3,503,302       3,402,402  
Interest and dividends receivable
     17,524       17,370  
Bank premises and equipment, net
     19,779       20,356  
Federal Home Loan Bank of New York stock
     51,407       46,025  
Bank owned life insurance
     111,137       109,606  
Goodwill
     16,127       16,127  
Other assets
     38,872       57,915  
Total assets
   $ 4,853,812     $ 4,721,501  
                 
LIABILITIES
                
Due to depositors:
                
Non-interest bearing
   $ 213,263     $ 197,343  
Interest-bearing:
                
Certificate of deposit accounts
     1,159,897       1,120,955  
Savings accounts
     254,665       265,003  
Money market accounts
     272,679       199,907  
NOW accounts
     1,297,480       1,416,774  
Total interest-bearing deposits
     2,984,721       3,002,639  
Mortgagors' escrow deposits
     40,987       32,798  
Borrowed funds ($29,388 and $29,570 at fair value pursuant to the fair value option at June 30, 2014 and December 31, 2013, respectively)
     966,202       856,822  
Securities sold under agreements to repurchase
     146,000       155,300  
Other liabilities
     42,132       44,067  
Total liabilities
     4,393,305       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 June 30, 2014 and December 31, 2013; 30,185,040 shares and 30,123,252 shares outstanding at June 30, 2014 and December 31, 2013, respectively)
     315       315  
Additional paid-in capital
     205,322       201,902  
Treasury stock, at average cost (1,345,555 shares and 1,407,343 shares at June 30, 2014 and December 31, 2013, respectively)
     (22,048 )     (22,053 )
Retained earnings
     276,269       263,743  
Accumulated other comprehensive (loss) income, net of taxes
     649       (11,375 )
Total stockholders' equity
     460,507       432,532  
                 
Total liabilities and stockholders' equity
   $ 4,853,812     $ 4,721,501  

The accompanying notes are an integral part of these consolidated financial statements
 
 
-1-
 
PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Consolidated Statements of Income
(Unaudited)

   
For the three months
ended June 30,
    
For the six months
ended June 30 ,
  
(Dollars in thousands, except per share data)
  
2014
    
2013
    
2014
    
2013
  
                         
Interest and dividend income
                        
Interest and fees on loans
   $ 42,489     $ 42,861     $ 84,609     $ 85,801  
Interest and dividends on securities:
                                
Interest
     6,867       7,174       13,742       14,128  
Dividends
     195       236       384       411  
Other interest income
     18       24       45       41  
Total interest and dividend income
     49,569       50,295       98,780       100,381  
                                 
Interest expense
                                
Deposits
     7,670       8,093       15,388       16,384  
Other interest expense
     5,070       4,906       10,076       12,555  
Total interest expense
     12,740       12,999       25,464       28,939  
                                 
Net interest income
     36,829       37,296       73,316       71,442  
(Benefit) provision for loan losses
     (1,092 )     3,500       (2,211 )     9,500  
Net interest income after provision for loan losses
     37,921       33,796       75,527       61,942  
                                 
Non-interest income (loss)
                                
Other-than-temporary impairment ("OTTI") charge
     -       (1,221 )     -       (1,221 )
Less: Non-credit portion of OTTI charge recorded in Other Comprehensive Income, before taxes
     -       718       -       718  
Net OTTI charge recognized in earnings
     -       (503 )     -       (503 )
Banking services fee income
     867       1,228       1,576       2,268  
Net gain on sale of loans
     -       152       -       143  
Net gain from sale of securities
     -       18       -       2,876  
Net loss from fair value adjustments
     (402 )     (308 )     (1,046 )     (431 )
Federal Home Loan Bank of New York stock dividends
     430       401       981       815  
Bank owned life insurance
     755       841       1,531       1,666  
Other income
     336       370       654       713  
Total non-interest income
     1,986       2,199       3,696       7,547  
                                 
Non-interest expense
                                
Salaries and employee benefits
     11,944       10,961       24,522       23,194  
Occupancy and equipment
     1,919       1,856       3,954       3,716  
Professional services
     1,527       1,515       2,737       3,133  
FDIC deposit insurance
     673       786       1,370       1,777  
Data processing
     1,042       1,099       2,110       2,142  
Depreciation and amortization
     717       734       1,432       1,501  
Other real estate owned/foreclosure expense
     279       444       535       1,112  
Other operating expenses
     2,523       2,818       6,057       6,057  
Total non-interest expense
     20,624       20,213       42,717       42,632  
                                 
Income before income taxes
     19,283       15,782       36,506       26,857  
                                 
Provision for income taxes
                                
Federal
     5,513       4,663       10,271       8,124  
State and local
     2,085       1,492       4,254       2,350  
Total taxes
     7,598       6,155       14,525       10,474  
                                 
Net income
   $ 11,685     $ 9,627     $ 21,981     $ 16,383  
                                 
                                 
Basic earnings per common share
   $ 0.39     $ 0.32     $ 0.73     $ 0.54  
Diluted earnings per common share
   $ 0.39     $ 0.32     $ 0.73     $ 0.54  
Dividends per common share
   $ 0.15     $ 0.13     $ 0.30     $ 0.26  
 
The accompanying notes are an integral part of these consolidated financial statements.

 
-2-
 
PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(Unaudited)
 
 
   
For the three months ended
June 30,
    
For the six months ended
June 30,
  
(Dollars in thousands)
  
2014
    
2013
    
2014
    
2013
  
                         
                         
Comprehensive Income
                        
Net income
   $ 11,685     $ 9,627     $ 21,981     $ 16,383  
Amortization of actuarial losses
     98       174       161       348  
Amortization of prior service credits
     (7 )     (6 )     (10 )     (12 )
OTTI charges included in income
     -       283       -       283  
Unrealized gains (losses) on securities, net
     6,513       (15,634 )     11,873       (19,837 )
Comprehensive income (loss)
   $ 18,289     $ (5,556 )   $ 34,005     $ (2,835 )
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
 
-3-
 
PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
 
   
For the six months ended
June 30,
  
(Dollars in thousands)
  
2014
    
2013
  
CASH FLOWS FROM OPERATING ACTIVITIES
            
Net income
   $ 21,981     $ 16,383  
Adjustments to reconcile net income to net cash provided by operating activities:
                
(Benefit) provision for loan losses
     (2,211 )     9,500  
Depreciation and amortization of bank premises and equipment
     1,432       1,501  
Net gain on sale of loans
     -       (143 )
Net gain on sale of securities
     -       (2,876 )
Amortization of premium, net of accretion of discount
     3,582       3,750  
Net loss from fair value adjustments
     1,046       431  
OTTI charge recognized in earnings
     -       503  
Income from bank owned life insurance
     (1,531 )     (1,666 )
Stock-based compensation expense
     3,135       2,400  
Deferred compensation
     (1,486 )     (509 )
Amortization of core deposit intangibles
     -       234  
Excess tax benefit from stock-based payment arrangements
     (748 )     (324 )
Deferred income tax provision
     2,745       148  
Decrease in prepaid FDIC assessment
     -       3,287  
Increase in other liabilities
     1,948       7,307  
Decrease in other assets
     1,489       572  
Net cash provided by operating activities
     31,382       40,498  
                 
CASH FLOWS FROM INVESTING ACTIVITIES
                
Purchases of bank premises and equipment
     (855 )     (381 )
Net purchase of Federal Home Loan Bank of New York shares
     (5,382 )     (5,083 )
Purchases of securities available for sale
     (70,871 )     (303,694 )
Proceeds from sales and calls of securities available for sale
     1,871       106,914  
Proceeds from maturities and prepayments of securities available for sale
     47,535       75,567  
Net originations of loans
     (90,946 )     (77,337 )
Purchases of loans
     (12,884 )     (452 )
Proceeds from sale of real estate owned
     2,034       2,834  
Proceeds from sale of delinquent loans
     7,332       20,891  
Net cash used in investing activities
     (122,166 )     (180,741 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES
                
Net increase in non-interest bearing deposits
     15,920       18,164  
Net increase (decrease) in interest-bearing deposits
     (18,405 )     28,362  
Net increase in mortgagors' escrow deposits
     8,189       8,245  
Net proceeds from short-term borrowed funds
     109,000       38,000  
Proceeds from long-term borrowings
     -       149,837  
Repayment of long-term borrowings
     (9,300 )     (79,911 )
Purchases of treasury stock
     (3,285 )     (13,363 )
Excess tax benefit from stock-based payment arrangements
     748       324  
Proceeds from issuance of common stock upon exercise of stock options
     429       235  
Cash dividends paid
     (9,015 )     (7,879 )
Net cash provided by financing activities
     94,281       142,014  
                 
Net increase in cash and cash equivalents
     3,497       1,771  
Cash and cash equivalents, beginning of period
     33,485       40,425  
Cash and cash equivalents, end of period
   $ 36,982     $ 42,196  
                 
SUPPLEMENTAL CASH FLOW DISCLOSURE
                
Interest paid
   $ 25,172     $ 28,319  
Income taxes paid
     12,236       10,732  
Taxes paid if excess tax benefits were not tax deductible
     12,984       11,056  
Non-cash activities:
                
Loans transferred to real estate owned
     655       2,758  
Loans provided for the sale of real estate owned
     308       2,583  
Loans held for investment transferred to available for sale
     -       7,525  
Loans held for sale transferred to loans held for investment
     -       2,214  

The accompanying notes are an integral part of these consolidated financial statements.
 
 
-4-
 
PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Consolidated Statements of Changes in Stockholders’ Equity
(Unaudited)
 
 
   
For the six months ended
June 30,
  
(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 (129,694 and 137,346 common shares for the six months ended June 30, 2014 and 2013, respectively)
     1,975       1,556  
Shares issued upon vesting of restricted stock unit awards (2,500 and 120,014 common shares for the six months ended June 30, 2014 and 2013, respectively)
     9       160  
Issuance upon exercise of stock options (100,625 and 96,925 common shares for the six months ended June 30, 2014 and 2013, respectively)
     296       116  
Stock-based compensation activity, net
     392       (192 )
Stock-based income tax benefit
     748       324  
Balance, end of period
   $ 205,322     $ 200,278  
Treasury Stock
                
Balance, beginning of period
   $ (22,053 )   $ (10,257 )
Purchases of shares outstanding (108,120 and 806,092 common shares for the six months ended June 30, 2014, and 2013, respectively)
     (2,143 )     (12,609 )
Shares issued upon vesting of restricted stock unit awards (188,480 and 176,456 common shares for the six months ended June 30, 2014 and 2013, respectively)
     2,972       2,335  
Issuance upon exercise of stock options (100,625 and 151,355 common shares for the six months ended June 30, 2014 and 2013, respectively)
     1,608       2,056  
Purchases of shares to fund options exercised (63,732 and 112,332 common shares for the six months ended June 30, 2014 and 2013, respectively)
     (1,290 )     (1,750 )
Repurchase of shares to satisfy tax obligations (55,465 and 49,103 common shares for the six months ended June 30, 2014 and 2013, respectively)
     (1,142 )     (754 )
Balance, end of period
   $ (22,048 )   $ (20,979 )
Retained Earnings
                
Balance, beginning of period
   $ 263,743     $ 241,856  
Net income
     21,981       16,383  
Cash dividends declared and paid on common shares ($0.30 and $0.26 per common share for the six months ended June 30, 2014 and 2013, respectively)
     (9,015 )     (7,879 )
Issuance upon exercise of stock options (7,200 and 54,160 common shares for the six months ended June 30, 2014 and 2013, respectively)
     (45 )     (69 )
Shares issued upon vesting of restricted stock unit awards (185,980 and 56,242 common shares for the six months ended June 30, 2014 and 2013, respectively)
     (395 )     (99 )
Balance, end of period
   $ 276,269     $ 250,192  
Accumulated Other Comprehensive Income (Loss)
                
Balance, beginning of period
   $ (11,375 )   $ 12,137  
Change in net unrealized gains (losses) on securities available for sale, net of taxes of approximately ($9,141) and $14,140 for the six months ended June 30, 2014 and 2013, respectively
     11,873       (18,218 )
Amortization of actuarial losses, net of taxes of approximately ($189) and ($270) for the six months ended June 30, 2014 and 2013, respectively
     161       348  
Amortization of prior service credits, net of taxes of approximately $13 and $10 for the six months ended June 30, 2014 and 2013, respectively
     (10 )     (12 )
OTTI charges included in income, net of taxes of approximately ($220) for the six months ended June 30, 2013
     -       283  
Reclassification adjustment for gains included in net income, net of tax of approximately $1,257 for the six months ended June 30, 2013
     -       (1,619 )
Balance, end of period
   $ 649     $ (7,081 )
                 
Total Stockholders' Equity
   $ 460,507     $ 422,725  
 
The accompanying notes are an integral part of these consolidated financial statements.

 
-5-
 
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.
 
-6-
 
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
June 30,
    
For the six months ended
June 30,
  
   
2014
    
2013
    
2014
    
2013
  
   
(In thousands, except per share data)
  
Net income, as reported
   $ 11,685     $ 9,627     $ 21,981     $ 16,383  
Divided by:
                                
Weighted average common shares outstanding
     30,059       30,213       30,022       30,330  
Weighted average common stock equivalents
     31       22       34       27  
Total weighted average common shares outstanding and common stock equivalents
     30,090       30,235       30,056       30,357  
                                 
Basic earnings per common share
   $ 0.39     $ 0.32     $ 0.73     $ 0.54  
Diluted earnings per common share (1)
   $ 0.39     $ 0.32     $ 0.73     $ 0.54  
Dividend payout ratio
     38.5 %     40.6 %     41.1 %     48.1 %

(1)
For the three and six months ended June 30, 2014, there were no options which were considered anti-dilutive. For the three and six months ended June 30, 2013, options to purchase 542,340 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 and six months ended June 30, 2014 and 2013. Securities available for sale are recorded at fair value.
 
The following table summarizes the Company’s portfolio of securities available for sale at June 30, 2014:
 
   
Amortized
Cost
    
Fair Value
    
Gross
Unrealized
Gains
    
Gross
Unrealized
Losses
  
   
(In thousands)
  
Corporate
   $ 110,686     $ 112,577     $ 2,286     $ 395  
Municipals
     133,892       135,262       1,977       607  
Mutual funds
     26,937       26,937       -       -  
Other
     16,343       13,361       -       2,982  
Total other securities
     287,858       288,137       4,263       3,984  
REMIC and CMO
     512,453       514,622       8,616       6,447  
GNMA
     33,588       35,642       2,186       132  
FNMA
     206,666       207,819       4,072       2,919  
FHLMC
     12,236       12,462       267       41  
Total mortgage-backed securities
     764,943       770,545       15,141       9,539  
Total securities available for sale
   $ 1,052,801     $ 1,058,682     $ 19,404     $ 13,523  

 
-7-
 
 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 $12.5 million and $12.6 million, respectively, at June 30, 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 June 30, 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
   $ 49,605     $ 395     $ 9,809     $ 191     $ 39,796     $ 204  
Municipals
     44,859       607       17,307       49       27,552       558  
Other
     6,580       2,982       -       -       6,580       2,982  
Total other securities
     101,044       3,984       27,116       240       73,928       3,744  
REMIC and CMO
     236,976       6,447       89,203       1,022       147,773       5,425  
GNMA
     8,989       132       -       -       8,989       132  
FNMA
     96,273       2,919       -       -       96,273       2,919  
FHLMC
     7,192       41       -       -       7,192       41  
Total mortgage-backed securities
     349,430       9,539       89,203       1,022       260,227       8,517  
Total securities available for sale
   $ 450,474     $ 13,523     $ 116,319     $ 1,262     $ 334,155     $ 12,261  

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 June 30, 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. When an OTTI is identified, the portion of the impairment that is credit related, for trust preferred securities, is determined by management 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.
 
Corporate:
The unrealized losses in Corporate securities at June 30, 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 June 30, 2014.
 
 
-8-
 
PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
 
Municipal Securities:
The unrealized losses in Municipal securities at June 30, 2014, consist of losses on 13 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 June 30, 2014.
 
Other Securities:
The unrealized losses in Other Securities at June 30, 2014, consist of losses on one single issuer trust preferred security and two pooled trust preferred securities. The unrealized losses on these 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 the pooled trust preferred 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.
 
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. No issuer in our pooled trust preferred securities had a Texas Ratio in excess of 50%. We concluded that issuers with a Texas Ratio below 50% are considered healthy, and there was minimal risk of default. 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.
 
 
-9-
 
PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
 
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) one issuer totaling $13.3 million will prepay in the third quarter of 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 June 30, 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 June 30, 2014.
 
At June 30, 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 June 30, 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     $ 290     $ -    
None
    
None
    
BB-
  
Pooled issuer
   B1     16       5,617       3,040       2,383     22.5%     0.0%     C  
Pooled issuer
   C1     15       3,645       3,250       1,355     21.3%     0.0%     C  
Total
               $ 9,562     $ 6,580     $ 3,738                    
 
REMIC and CMO:
The unrealized losses in Real Estate Mortgage Investment Conduit (“REMIC”) and CMO securities at June 30, 2014 consist of 10 issues from the Federal Home Loan Mortgage Corporation (“FHLMC”), 16 issues from the Federal National Mortgage Association (“FNMA”) and four 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 June 30, 2014.
 
GNMA:
The unrealized losses in GNMA securities at June 30, 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 June 30, 2014.

 
-10-
 
PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
 
FNMA:
The unrealized losses in FNMA securities at June 30, 2014 consist of losses on 13 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 June 30, 2014.
 
FHMLC:
The unrealized losses in FHMLC securities at June 30, 2014 consist of losses on two 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 are 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 that 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 securities’ to be other-than-temporarily impaired at June 30, 2014.
 
The following table details gross unrealized losses recorded in AOCI and the ending credit loss amount on two pooled trust preferred securities, as of June 30, 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     $ 6,290     $ 2,972     $ 3,738  
Total
   $ 9,262     $ 6,290     $ 2,972     $ 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.
 
 
-11-
 
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
June 30,
    
For the six months ended
June 30,
  
   
2014
    
2013
    
2014
    
2013
  
   
(In thousands)
  
Beginning balance
   $ 3,738     $ 6,009     $ 3,738     $ 6,178  
                                 
Recognition of actual losses
     -       (319 )     -       (488 )
OTTI charges due to credit loss recorded in earnings
     -       503       -       503  
Securities sold during the period
     -       -       -       -  
Securities where there is an intent to sell or requirement to sell
     -       -       -       -  
Ending balance
   $ 3,738     $ 6,193     $ 3,738     $ 6,193  
 
The following table details the amortized cost and estimated fair value of the Company’s securities classified as available for sale at June 30, 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
   $ 44,295     $ 44,424  
Due after one year through five years
     41,225       43,266  
Due after five years through ten years
     63,537       63,354  
Due after ten years
     138,801       137,093  
Total other securities
     287,858       288,137  
Mortgage-backed securities
     764,943       770,545  
Total securities available for sale
   $ 1,052,801     $ 1,058,682  
 
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
June 30,
    
For the six months ended
June 30,
  
   
2014
    
2013
    
2014
    
2013
  
   
(In thousands)
  
Gross gains from the sale of securities
   $ -     $ 18     $ -     $ 3,217  
Gross losses from the sale of securities
     -       -       -       (341 )
Net gains from the sale of securities
   $ -     $ 18     $ -     $ 2,876  
 
 
-12-
 
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  
 
5. 
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.
 
 
-13-
 
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 (benefit) 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 have 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 (benefit) for loan losses. Increases and decreases in the allowance other than charge-offs and recoveries are included in the provision (benefit) 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 June 30, 2014, we utilized recent third party appraisals of the collateral to measure impairment for $47.4 million, or 76.2%, of collateral dependent impaired loans, and used internal evaluations of the property’s value for $14.8 million, or 23.8%, 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 June 30, 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 or six months ended June 30, 2014.

 
-15-
 
PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
 
The following table shows loans modified and classified as TDR during the three and six months ended June 30, 2013:
 
   
For the three months ended
June 30, 2013
  
For the six months ended
June 30, 2013
(Dollars in thousands)
  
Number
    
Balance
  
Modification description
  
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       488  
Received a below market interest rate, loan amortization was extended, and loan term extended
     2       761  
Received a below market interest rate and the loan amortization was extended
One-to-four family - mixed-use property
     1       390  
Received a below market interest rate, loan amortization was extended, and loan term extended
     1       390  
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
     2     $ 878         5     $ 2,179    
 
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.

The following table shows our recorded investment for loans classified as TDR that are performing according to their restructured terms at the periods indicated:
 
   
June 30, 2014
    
December 31, 2013
  
(Dollars in thousands)
  
Number
of contracts
    
Recorded
investment
    
Number
of contracts
    
Recorded
investment
  
                         
Multi-family residential
     10     $ 3,061       10     $ 3,087  
Commercial real estate
     4       3,652       4       3,686  
One-to-four family - mixed-use property
     7       2,405       8       2,692  
One-to-four family - residential
     1       359       1       364  
Construction
     -       -       1       746  
Commercial business and other
     3       1,066       4       3,127  
Total performing troubled debt restructured
     25     $ 10,543       28     $ 13,702  
 
During the six months ended June 30, 2014, two TDR loans totaling $2.4 million were transferred to non-performing status when they became over 90 days past maturity, which resulted in these loans being included in non-performing loans. These loans were paid in full during the quarter ended June 30, 2014. During the six months ended June 30, 2014, one additional TDR loan for $0.2 million was transferred to non-performing status when it became 90 days past due as to payments. During the six months ended June 30, 2013, there were no loans classified as TDR transferred to non-performing status.

 
-16-
 
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 not performing according to their restructured terms at the periods indicated:
 
   
June 30, 2014
    
December 31, 2013
  
(Dollars in thousands)
  
Number
of contracts
    
Recorded
investment
    
Number
of contracts
    
Recorded
investment
  
                         
Commercial real estate
     1     $ 2,186       1     $ 2,332  
One-to-four family - mixed-use property
     1       187       -       -  
                                 
Total troubled debt restructurings that subsequently defaulted
     2     $ 2,373       1     $ 2,332  
 
The following table shows our non-performing loans at the periods indicated:
 
(In thousands)
  
June 30,
2014
    
December 31,
2013
  
             
Loans 90 days or more past due and still accruing:
            
Multi-family residential
   $ 987     $ 52  
Commercial real estate
     266       -  
One-to-four family - mixed-use property
     1,303       -  
One-to-four family - residential
     14       15  
Commercial Business and other
     410       539  
Total
     2,980       606  
                 
Non-accrual mortgage loans:
                
Multi-family residential (1)
     10,861       13,297  
Commercial real estate
     9,761       9,962  
One-to-four family - mixed-use property
     8,713       9,063  
One-to-four family - residential
     11,346       13,250  
Co-operative apartments
     -       57  
Total
     40,681       45,629  
                 
Non-accrual non-mortgage loans:
                
Commercial Business and other
     2,130       2,348  
Total
     2,130       2,348  
                 
Total non-accrual loans
     42,811       47,977  
                 
                 
Total non-accrual loans and days or more past due and still accruing
   $ 45,791     $ 48,583  

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

 
-17-
 
PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
 
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
June 30,
    
For the six months ended
June 30,
  
   
2014
    
2013
    
2014
    
2013
  
   
(In thousands)
  
Interest income that would have been recognized had the loans performed in accordance with their original terms
   $ 989     $ 1,697     $ 1,979     $ 3,510  
Less: Interest income included in the results of operations
     151       220       318       496  
Total foregone interest
   $ 838     $ 1,477     $ 1,661     $ 3,014  
 
The following table shows an age analysis of our recorded investment in loans at June 30, 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
   $ 12,320     $ 1,325     $ 10,860     $ 24,505     $ 1,759,606     $ 1,784,111  
Commercial real estate
     8,615       -       9,762       18,377       491,847       510,224  
One-to-four family - mixed-use property
     14,325       718       8,714       23,757       557,450       581,207  
One-to-four family - residential
     2,363       472       11,136       13,971       178,924       192,895  
Co-operative apartments
     -       -       -       -       9,885       9,885  
Construction loans
     -       -       -       -       4,717       4,717  
Small Business Administration
     108       -       -       108       7,435       7,543  
Taxi medallion
     -       -       -       -       25,291       25,291  
Commercial business and other
     51       -       1,190       1,241       404,612       405,853  
Total
   $ 37,782     $ 2,515     $ 41,662     $ 81,959     $ 3,439,767     $ 3,521,726  
 
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
  
   
(in thousands)
  
                                     
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 June 30, 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
   $ 11,103     $ 5,379     $ 7,142     $ 1,944     $ -     $ 40     $ 391     $ 14     $ 4,257     $ 30,270  
Charge-off's
     (69 )     (39 )     (175 )     (37 )     -       -       (49 )     -       (1 )     (370 )
Recoveries
     134       -       95       97       -       -       51       -       50       427  
Provision (benefit)
     (418 )     (13 )     (69 )     (214 )     -       (6 )     (20 )     -       (352 )     (1,092 )
Ending balance
   $ 10,750     $ 5,327     $ 6,993     $ 1,790     $ -     $ 34     $ 373     $ 14     $ 3,954     $ 29,235  
Ending balance: individually evaluated for impairment
   $ 299     $ 197     $ 601     $ 56     $ -     $ -     $ -     $ -     $ 150     $ 1,303  
Ending balance: collectively evaluated for impairment
   $ 10,451     $ 5,130     $ 6,392     $ 1,734     $ -     $ 34     $ 373     $ 14     $ 3,804     $ 27,932  
                                                                                 
Financing Receivables:
                                                                                
Ending balance
   $ 1,784,111     $ 510,224     $ 581,207     $ 192,895     $ 9,885     $ 4,717     $ 7,543     $ 25,291     $ 405,853     $ 3,521,726  
Ending balance: individually evaluated for impairment
   $ 20,613     $ 16,728     $ 16,704     $ 13,505     $ -     $ 570     $ -     $ -     $ 7,899     $ 76,019  
Ending balance: collectively evaluated for impairment
   $ 1,763,498     $ 493,496     $ 564,503     $ 179,390     $ 9,885     $ 4,147     $ 7,543     $ 25,291     $ 397,954     $ 3,445,707  
 
The following table shows the activity in the allowance for loan losses for the three months ended June 30, 2013:
 
(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
   $ 12,395     $ 5,660     $ 6,340     $ 2,077     $ 88     $ 67     $ 471     $ 7     $ 3,922     $ 31,027  
Charge-off's
     (1,261 )     (53 )     (529 )     -       -       (70 )     (133 )     -       (560 )     (2,606 )
Recoveries
     54       213       58       75       4       -       30       -       -       434  
Provision (benefit)
     1,770       64       565       (53 )     7       199       129       -       819       3,500  
Ending balance
   $ 12,958     $ 5,884     $ 6,434     $ 2,099     $ 99     $ 196     $ 497     $ 7     $ 4,181     $ 32,355  
Ending balance: individually evaluated for impairment
   $ 272     $ 290     $ 693     $ 60     $ -     $ 34     $ -     $ -     $ 377     $ 1,726  
Ending balance: collectively evaluated for impairment
   $ 12,686     $ 5,594     $ 5,741     $ 2,039     $ 99     $ 162     $ 497     $ 7     $ 3,804     $ 30,629  
                                                                                 
Financing Receivables:
                                                                                
Ending balance
   $ 1,607,090     $ 526,063     $ 605,254     $ 196,318     $ 9,335     $ 11,450     $ 8,565     $ 5,114     $ 306,897     $ 3,276,086  
Ending balance: individually evaluated for impairment
   $ 26,012     $ 34,895     $ 19,146     $ 14,530     $ 266     $ 9,710     $ 483     $ -     $ 7,551     $ 112,593  
Ending balance: collectively evaluated for impairment
   $ 1,581,078     $ 491,168     $ 586,108     $ 181,788     $ 9,069     $ 1,740     $ 8,082     $ 5,114     $ 299,346     $ 3,163,493  
 
 
 
-19-
 
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 six months ended June 30, 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
     (674 )     (86 )     (258 )     (79 )     -       -       (49 )     -       (125 )     (1,271 )
Recoveries
     141       382       135       165       7       -       61       -       50       941  
Provision (benefit)
     (801 )     72       788       (375 )     (111 )     (410 )     (97 )     14       (1,291 )     (2,211 )
Ending balance
   $ 10,750     $ 5,327     $ 6,993     $ 1,790     $ -     $ 34     $ 373     $ 14     $ 3,954     $ 29,235  
Ending balance: individually evaluated for impairment
   $ 299     $ 197     $ 601     $ 56     $ -     $ -     $ -     $ -     $ 150     $ 1,303  
Ending balance: collectively evaluated for impairment
   $ 10,451     $ 5,130     $ 6,392     $ 1,734     $ -     $ 34     $ 373     $ 14     $ 3,804     $ 27,932  
                                                                                 
Financing Receivables:
                                                                                
Ending balance
   $ 1,784,111     $ 510,224     $ 581,207     $ 192,895     $ 9,885     $ 4,717     $ 7,543     $ 25,291     $ 405,853     $ 3,521,726  
Ending balance: individually evaluated for impairment
   $ 20,613     $ 16,728     $ 16,704     $ 13,505     $ -     $ 570     $ -     $ -     $ 7,899     $ 76,019  
Ending balance: collectively evaluated for impairment
   $ 1,763,498     $ 493,496     $ 564,503