Edgar Filing: FLUSHING FINANCIAL CORP

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, 2018

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.)

220 RXR Plaza, Uniondale, New York 11556

(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 X

Non-accelerated filer __

Emerging growth company __

Accelerated filer __

Smaller reporting company __

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the exchange act.__

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, 2018 was 28,295,441.

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	47
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk	61
ITEM 4. Controls and Procedures	61
PART II — OTHER INFORMATION
ITEM 1. Legal Proceedings	62
ITEM 1A. Risk Factors	62
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds	62
ITEM 3. Defaults Upon Senior Securities	62
ITEM 4. Mine Safety Disclosures	62
ITEM 5. Other Information	62
ITEM 6. Exhibits	63
SIGNATURES	64

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Consolidated Statements of Financial Condition

(Unaudited)

Item 1. Financial Statements

	June 30, 2018			December 31, 2017
	(Dollars in thousands, except per share data)
Assets
Cash and due from banks	$	42,805		$	51,546
Securities held-to-maturity:
Mortgage-backed securities (including assets pledged of $4,801 at June 30, 2018 and none pledged at December 31, 2017; fair value of $7,373 and $7,810 at June 30, 2018 and December 31, 2017, respectively)		7,963			7,973
Other securities (none pledged; fair value of $21,281 and $21,889 at June 30, 2018 and December 31, 2017, respectively)		23,130			22,913
Securities available for sale, at fair value:
Mortgage-backed securities (including assets pledged of $144,942 and $148,505 at June 30, 2018 and December 31, 2017, respectively; $1,426 and $1,590 at fair value pursuant to the fair value option at June 30, 2018 and December 31, 2017, respectively)		513,868			509,650
Other securities (including assets pledged of $25,812 and $44,052 at June 30, 2018 and December 31, 2017, respectively; $12,615 and $12,685 at fair value pursuant to the fair value option at June 30, 2018 and December 31, 2017, respectively)		214,755			228,704
Loans:
Multi-family residential		2,247,852			2,273,595
Commercial real estate		1,471,894			1,368,112
One-to-four family ― mixed-use property		564,474			564,206
One-to-four family ― residential		187,741			180,663
Co-operative apartments		7,839			6,895
Construction		33,826			8,479
Small Business Administration		14,405			18,479
Taxi medallion		6,225			6,834
Commercial business and other		783,904			732,973
Net unamortized premiums and unearned loan fees		15,647			16,763
Allowance for loan losses		(20,220	)		(20,351	)
Net loans		5,313,587			5,156,648
Interest and dividends receivable		24,184			21,405
Bank premises and equipment, net		30,658			30,836
Federal Home Loan Bank of New York stock, at cost		57,384			60,089
Bank owned life insurance		131,429			131,856
Goodwill		16,127			16,127
Other assets		91,726			61,527
Total assets	$	6,467,616		$	6,299,274

Liabilities
Due to depositors:
Non-interest bearing	$	388,467		$	385,269
Interest-bearing		4,170,411			3,955,403
Mortgagors' escrow deposits		50,781			42,606
Borrowed funds:
Federal Home Loan Bank advances		1,137,318			1,198,968
Subordinated debentures		73,848			73,699
Junior subordinated debentures, at fair value		39,566			36,986
Total borrowed funds		1,250,732			1,309,653
Other liabilities		69,181			73,735
Total liabilities		5,929,572			5,766,666

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, 2018 and December 31, 2017;28,319,213 shares and 28,588,266 shares outstanding at June 30, 2018 and December 31, 2017, respectively)		315			315
Additional paid-in capital		220,432			217,906
Treasury stock, at average cost (3,211,382 shares and 2,942,329 shares at June 30,2018 and December 31, 2017, respectively)		(66,656	)		(57,675	)
Retained earnings		395,960			381,048
Accumulated other comprehensive loss, net of taxes		(12,007	)		(8,986	)
Total stockholders' equity		538,044			532,608

Total liabilities and stockholders' equity	$	6,467,616		$	6,299,274

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 June 30,						For the six months ended June 30,
(Dollars in thousands, except per share data)	2018			2017			2018			2017

Interest and dividend income
Interest and fees on loans	$	57,322		$	51,631		$	112,339		$	102,516
Interest and dividends on securities:
Interest		5,616			6,432			11,084			12,527
Dividends		17			123			31			244
Other interest income		338			129			625			282
Total interest and dividend income		63,293			58,315			124,079			115,569

Interest expense
Deposits		14,788			9,510			26,898			18,490
Other interest expense		5,865			5,188			11,932			10,073
Total interest expense		20,653			14,698			38,830			28,563

Net interest income		42,640			43,617			85,249			87,006
Provision for loan losses		-			-			153			-
Net interest income after provision for loan losses		42,640			43,617			85,096			87,006

Non-interest income
Banking services fee income		1,000			1,014			1,948			1,888
Net gain on sale of loans		421			34			158			244
Net loss from fair value adjustments		(267	)		(1,159	)		(367	)		(1,537	)
Federal Home Loan Bank of New York stock dividends		881			643			1,757			1,466
Gain from life insurance proceeds		-			6			776			1,167
Bank owned life insurance		776			807			1,538			1,602
Other income		357			603			558			807
Total non-interest income		3,168			1,948			6,368			5,637

Non-interest expense
Salaries and employee benefits		15,291			15,424			33,746			32,528
Occupancy and equipment		2,476			2,654			5,053			5,150
Professional services		2,439			1,919			4,624			3,915
FDIC deposit insurance		547			503			1,047			829
Data processing		1,426			1,321			2,827			2,524
Depreciation and amortization		1,455			1,155			2,844			2,320
Other real estate owned/foreclosure expense (income)		40			(96	)		136			255
Net gain from sales of real estate owned		(27	)		-			(27	)		(50	)
Other operating expenses		3,749			3,185			8,440			8,158
Total non-interest expense		27,396			26,065			58,690			55,629

Income before income taxes		18,412			19,500			32,774			37,014

Provision for income taxes
Federal		3,311			5,576			5,918			10,325
State and local		1,178			1,199			1,521			1,704
Total taxes		4,489			6,775			7,439			12,029

Net income	$	13,923		$	12,725		$	25,335		$	24,985


Basic earnings per common share	$	0.48		$	0.44		$	0.88		$	0.86
Diluted earnings per common share	$	0.48		$	0.44		$	0.88		$	0.86
Dividends per common share	$	0.20		$	0.18		$	0.40		$	0.36

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 June 30,						For the six months ended June 30,
(In thousands)	2018			2017			2018			2017

Net income	$	13,923		$	12,725		$	25,335		$	24,985

Other comprehensive income (loss), net of tax:
Amortization of actuarial losses, net of taxes of $(43) and ($64) for the three months ended June 30, 2018 and 2017, respectively and of ($84) and ($128) for six months ended June 30, 2018 and 2017, respectively.		90			87			181			174
Amortization of prior service credits, net of taxes of $3 and $5 for the three months ended June 30, 2018 and 2017, respectively and of $6 and $9 for six months ended June 30, 2018 and 2017, respectively.		(6	)		(6	)		(13	)		(13	)
Net unrealized (losses) gains on securities, net of taxes of $1,388 and ($436) for three months ended June 30, 2018 and 2017, respectively and of $4,443 and ($1,247) for six months ended June 30, 2018 and 2017, respectively.		(3,014	)		601			(9,654	)		1,749
Net unrealized gains (losses) on cash flow hedges, net of taxes of ($961) and $90 three months ended June 30, 2018 and 2017, respectively and of ($3,565) and $90 for six months ended June 30, 2018 and 2017, respectively.		2,085			(124	)		7,746			(124	)
Change in fair value of liabilities related to instrument-specific credit risk,net of taxes of ($6) for the three and six months ended June 30, 2018.		13			-			13			-

Total other comprehensive income (loss), net of tax		(832	)		558			(1,727	)		1,786

Comprehensive income	$	13,091		$	13,283		$	23,608		$	26,771

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 six months ended June 30,
(In thousands)	2018			2017
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	25,335		$	24,985
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		153			-
Depreciation and amortization of bank premises and equipment		2,844			2,320
Amortization of premium, net of accretion of discount		4,463			3,657
Net loss from fair value adjustments		367			1,537
Net gain from sale of loans		(158	)		(244	)
Net gain from sale of OREO		(27	)		(50	)
Income from bank owned life insurance		(1,538	)		(1,602	)
Gain from life insurance proceeds		(776	)		(1,167	)
Stock-based compensation expense		4,680			4,190
Deferred compensation		(1,815	)		(1,930	)
Deferred income tax (benefit) provision		(415	)		1,005
Increase in other liabilities		840			4
Decrease (increase) in other assets		2,747			(21	)
Net cash provided by operating activities		36,700			32,684

CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of bank premises and equipment		(2,666	)		(2,351	)
Net redemptions (purchases) of Federal Home Loan Bank of New York shares		2,705			(7,457	)
Purchases of securities held-to-maturity		(353	)		(8,030	)
Proceeds from maturities of securities held-to-maturity		45			13,330
Purchases of securities available for sale		(57,265	)		(40,641	)
Proceeds from sales and calls of securities available for sale		10,000			27,500
Proceeds from maturities and prepayments of securities available for sale		40,915			38,161
Proceeds from bank owned life insurance		2,741			3,911
Net originations of loans		(81,420	)		(201,438	)
Purchases of loans		(110,140	)		(58,431	)
Proceeds from sale of real estate owned		665			583
Proceeds from sale of loans		10,200			21,575
Net cash used in investing activities		(184,573	)		(213,288	)

CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in non-interest bearing deposits		3,198			16,139
Net increase in interest-bearing deposits		214,773			31,629
Net increase in mortgagors' escrow deposits		8,175			1,087
Net proceeds from short-term borrowed funds		73,500			66,500
Proceeds from long-term borrowings		25,000			173,066
Repayment of long-term borrowings		(160,084	)		(82,049	)
Purchases of treasury stock		(13,889	)		(2,599	)
Proceeds from issuance of common stock upon exercise of stock options		6			-
Cash dividends paid		(11,547	)		(10,487	)
Net cash provided by financing activities		139,132			193,286

Net (decrease) increase in cash and cash equivalents		(8,741	)		12,682
Cash and cash equivalents, beginning of period		51,546			35,857
Cash and cash equivalents, end of period	$	42,805		$	48,539

SUPPLEMENTAL CASH FLOW DISCLOSURE
Interest paid	$	36,296		$	27,840
Income taxes paid		3,103			10,646
Taxes paid if excess tax benefits were not tax deductible		3,739			9,409
Non-cash activities:
Loans transferred to Other Real Estate Owned or Other Assets		673			-
Loans held for investment transferred to loans available for sale		-			30,565

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

For the six months ended June 30, 2018 and 2017

(Unaudited)

(Dollars in thousands, except per share data)	Total			Common Stock		Additional Paid-in Capital			Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Income (Loss)

Balance at December 31, 2017	$	532,608		$	315	$	217,906		$	381,048		$	(57,675	)	$	(8,986	)
Reclassification of the Income Tax Effects of the Tax Cuts and Jobs Act from Accumulated Other Comprehensive Income (Loss) to Retained Earnings		-			-		-			2,073			-			(2,073	)
Impact of adoption of Accounting Standard Update 2016-01		-			-		-			(779	)		-			779
Net income		25,335			-		-			25,335			-			-
Award of common shares released from Employee Benefit Trust (120,684 shares)		2,578			-		2,578			-			-			-
Vesting of restricted stock unit awards (248,877 shares)		-			-		(4,731	)		(170	)		4,901			-
Exercise of stock options (600 shares)		6			-		(1	)		-			7			-
Stock-based compensation expense		4,680			-		4,680			-			-			-
Purchase of treasury shares (445,444 shares)		(11,838	)		-		-			-			(11,838	)		-
Repurchase of shares to satisfy tax obligation (72,869 shares)		(2,051	)		-		-			-			(2,051	)		-
Dividends on common stock ($0.40 per share)		(11,547	)		-		-			(11,547	)		-			-
Other comprehensive loss		(1,727	)		-		-			-			-			(1,727	)
Balance at June 30, 2018	$	538,044		$	315	$	220,432		$	395,960		$	(66,656	)	$	(12,007	)


Balance at December 31, 2016	$	513,853		$	315	$	214,462		$	361,192		$	(53,754	)	$	(8,362	)
Net income		24,985			-		-			24,985			-			-
Award of common shares released from Employee Benefit Trust (111,470 shares)		2,363			-		2,363			-			-			-
Vesting of restricted stock unit awards (258,165 shares)		-			-		(4,562	)		(262	)		4,824			-
Exercise of stock options (4,400 shares)		-			-		(6	)		(40	)		46			-
Stock-based compensation expense		4,190			-		4,190			-			-			-
Purchase of treasury shares (10,000 shares)		(278	)		-		-			-			(278	)		-
Repurchase of shares to satisfy tax obligation (80,303 shares)		(2,321	)		-		-			-			(2,321	)		-
Dividends on common stock ($0.36 per share)		(10,487	)		-		-			(10,487	)		-			-
Other comprehensive income		1,786			-		-			-			-			1,786
Balance at June 30, 2017	$	534,091		$	315	$	216,447		$	375,388		$	(51,483	)	$	(6,576	)

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)

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 that 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, 2017.

When necessary, certain reclassifications were made to prior-year amounts to conform to the current-year presentation.

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 review of the need for a valuation allowance of the Company’s deferred tax assets, the fair value of financial instruments and the evaluation of other-than-temporary impairment (“OTTI”) on securities. Actual results could differ from these estimates.

Earnings Per Share

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,
	2018			2017			2018			2017
	(Dollars in thousands, except per share data)
Net income, as reported	$	13,923		$	12,725		$	25,335		$	24,985
Divided by:
Weighted average common shares outstanding		28,845			29,135			28,909			29,077
Weighted average common stock equivalents		1			1			1			3
Total weighted average common shares outstanding and common stock equivalents		28,846			29,136			28,910			29,080

Basic earnings per common share	$	0.48		$	0.44		$	0.88		$	0.86
Diluted earnings per common share ⁽¹⁾	$	0.48		$	0.44		$	0.88		$	0.86
Dividend payout ratio		41.7	%		40.9	%		45.5	%		41.9	%

(1)

For the three and six months ended June 30, 2018 and 2017, there were no common stock equivalents that were anti-dilutive.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

Securities

The Company did not hold any trading securities at June 30, 2018 and December 31, 2017. Securities available for sale are recorded at fair value. Securities held-to-maturity are recorded at amortized cost.

The following table summarizes the Company’s portfolio of securities held-to-maturity at June 30, 2018:

	Amortized Cost		Fair Value		Gross Unrealized Gains		Gross Unrealized Losses
	(In thousands)
Securities held-to-maturity:
Municipals	$	23,130	$	21,281	$	-	$	1,849

Total other securities		23,130		21,281		-		1,849

FNMA		7,963		7,373		-		590

Total mortgage-backed securities		7,963		7,373		-		590
Total	$	31,093	$	28,654	$	-	$	2,439

The following table summarizes the Company’s portfolio of securities held-to-maturity at December 31, 2017:

	Amortized Cost		Fair Value		Gross Unrealized Gains		Gross Unrealized Losses
	(In thousands)
Securities held-to-maturity:
Municipals	$	22,913	$	21,889	$	-	$	1,024

Total other securities		22,913		21,889		-		1,024

FNMA		7,973		7,810		-		163

Total mortgage-backed securities		7,973		7,810		-		163

Total	$	30,886	$	29,699	$	-	$	1,187

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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 June 30, 2018:

	Amortized Cost		Fair Value		Gross Unrealized Gains		Gross Unrealized Losses
	(In thousands)
Corporate	$	110,000	$	100,532	$	-	$	9,468
Municipals		100,576		101,608		1,063		31
Mutual funds		11,427		11,427		-		-
Other		1,188		1,188		-		-
Total other securities		223,191		214,755		1,063		9,499
REMIC and CMO		342,394		332,381		80		10,093
GNMA		847		898		51		-
FNMA		133,359		129,222		54		4,191
FHLMC		52,925		51,367		12		1,570
Total mortgage-backed securities		529,525		513,868		197		15,854
Total securities available for sale	$	752,716	$	728,623	$	1,260	$	25,353

The following table summarizes the Company’s portfolio of securities available for sale at December 31, 2017:

	Amortized Cost		Fair Value		Gross Unrealized Gains		Gross Unrealized Losses
	(In thousands)
Corporate	$	110,000	$	102,767	$	-	$	7,233
Municipals		101,680		103,199		1,519		-
Mutual funds		11,575		11,575		-		-
Collateralized loan obligations		10,000		10,053		53		-
Other		1,110		1,110		-		-
Total other securities		234,365		228,704		1,572		7,233
REMIC and CMO		328,668		325,302		595		3,961
GNMA		1,016		1,088		72		-
FNMA		136,198		135,474		330		1,054
FHLMC		48,103		47,786		18		335
Total mortgage-backed securities		513,985		509,650		1,015		5,350
Total securities available for sale	$	748,350	$	738,354	$	2,587	$	12,583

Mortgage-backed securities shown in the table above include one private issue collateralized mortgage obligation (“CMO”) that is collateralized by commercial real estate mortgages with an amortized cost and market value of $21,000 at December 31, 2017. We did not hold any private issue CMO’s that are collateralized by commercial real estate mortgages at June 30, 2018.

The corporate securities held by the Company at June 30, 2018 and December 31, 2017 are issued by U.S. banking institutions.

- 8 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The following tables detail the amortized cost and fair value of the Company’s securities classified as held-to-maturity and available for sale at June 30, 2018, by contractual maturity. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

Securities held-to-maturity:	Amortized Cost		Fair Value
	(In thousands)

Due in one year or less	$	1,353	$	1,353
Due after ten years		21,777		19,928

Total other securities		23,130		21,281
Mortgage-backed securities		7,963		7,373

Total	$	31,093	$	28,654

Securities available for sale:	Amortized Cost		Fair Value
	(In thousands)

Due in one year or less	$	-	$	-
Due after one year through five years		4,248		4,269
Due after five years through ten years		125,569		116,201
Due after ten years		81,947		82,858

Total other securities		211,764		203,328
Mutual funds		11,427		11,427
Mortgage-backed securities		529,525		513,868

Total	$	752,716	$	728,623

- 9 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The following tables show the Company’s 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 the dates indicated:

	At June 30, 2018
			Total				Less than 12 months				12 months or more
	Count		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
			(Dollars in thousands)

Held-to-maturity securities
Municipals		1	$	19,928	$	1,849	$	-	$	-	$	19,928	$	1,849
Total other securities		1		19,928		1,849		-		-		19,928		1,849

FNMA		1		7,373		590		7,373		590		-		-
Total mortgage-backed securities		1		7,373		590		7,373		590		-		-
Total		2	$	27,301	$	2,439	$	7,373	$	590	$	19,928	$	1,849


Available for sale securities
Corporate		14	$	100,532	$	9,468	$	9,394	$	606	$	91,138	$	8,862
Municipals		2		5,088		31		5,088		31		-		-
Total other securities		16		105,620		9,499		14,482		637		91,138		8,862

REMIC and CMO		48		312,201		10,093		231,236		5,860		80,965		4,233
FNMA		23		126,338		4,191		110,983		3,445		15,355		746
FHLMC		2		42,830		1,570		39,920		1,438		2,910		132
Total mortgage-backed securities		73		481,369		15,854		382,139		10,743		99,230		5,111
Total		89	$	586,989	$	25,353	$	396,621	$	11,380	$	190,368	$	13,973

	At December 31, 2017
			Total				Less than 12 months				12 months or more
	Count		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(Dollars in thousands)
Held-to-maturity securities

Municipals		1	$	20,844	$	1,024	$	20,844	$	1,024	$	-	$	-
Total other securities		1		20,844		1,024		20,844		1,024		-		-

FNMA		1		7,810		163		7,810		163		-		-
Total mortgage-backed securities		1		7,810		163		7,810		163		-		-

Total securities held-to-maturity		2	$	28,654	$	1,187	$	28,654	$	1,187	$	-	$	-

Available for sale securities
Corporate		14	$	102,767	$	7,233	$	9,723	$	277	$	93,044	$	6,956
Total other securities		14		102,767		7,233		9,723		277		93,044		6,956

REMIC and CMO		36		249,596		3,961		162,781		1,406		86,815		2,555
FNMA		17		120,510		1,054		109,258		850		11,252		204
FHLMC		2		46,829		335		43,258		294		3,571		41
Total mortgage-backed securities		55		416,935		5,350		315,297		2,550		101,638		2,800
Total securities available for sale		69	$	519,702	$	12,583	$	325,020	$	2,827	$	194,682	$	9,756

- 10 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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 in an unrealized loss position, 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 loss (“AOCL”) within Stockholders’ Equity. Unrealized losses on available for sale securities, that are deemed to be temporary, are recorded in AOCL, net of tax.

The Company reviewed each investment that had an unrealized loss at June 30, 2018 and December 31, 2017. The unrealized losses in held-to-maturity municipal securities at June 30, 2018 and December 31, 2017 were caused by illiquidity in the market and movements in interest rates. The unrealized losses in held-to-maturity FNMA securities at June 30, 2018 and December 31, 2017 were caused by movements in interest rates. The unrealized losses in securities available for sale at June 30, 2018 and December 31, 2017 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, 2018 and December 31, 2017.

The Company did not sell any securities during the three and six months ended June 30, 2018 and 2017.

Loans

Loans are reported at their outstanding principal balance net of any unearned income, charge-offs, deferred loan fees and costs on originated loans and unamortized premiums or discounts on purchased loans. 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.

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. Payments received on non-accrual loans that do not bring the loan to less than 90 days delinquent are recorded on a cash basis. 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 likely to occur.

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. Prior to a loan becoming 90 days delinquent, an updated appraisal is ordered and/or an internal evaluation is prepared.

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. All non-accrual loans are considered impaired.

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. An unallocated component may at times be maintained to cover uncertainties that could affect management's estimate of probable losses. When necessary an unallocated component of the allowance will reflect the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio. The allowance is established through charges to earnings in the form of 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. 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.

- 11 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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.

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 through the sale of the loan or by foreclosure and sale of the property.

The Company considers fair value of collateral dependent loans to be 85% of the appraised or internally estimated value of the property. The 85% is based on the actual net proceeds the Bank has received from the sale of other real estate owned (“OREO”) as a percentage of OREO’s appraised value. For collateral dependent taxi medallion loans, the Company considers fair value to be the value of the underlying medallion based upon the most recently reported arm’s length sales transaction. When there is no recent sale activity, the fair value is calculated using capitalization rates. For both collateral dependent mortgage loans and taxi medallion loans, the amount by which the loan’s book value exceeds fair value is charged-off. During the three months ended June 30, 2018, the fair value of Chicago taxi medallion loans was reduced from $60,000 per medallion to $25,000 per medallion, based upon recent sales transactions. At June 30, 2018, our exposure to the Chicago taxi medallion portfolio totals $0.2 million and to all taxi medallion loans held $6.2 million, which is 0.12% of total loans.

The Company segregated its 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. During the three months ended June 30, 2018, the Loss Emergence Period (“LEP”) used was 1.33 years for the Residential portfolio and 1.58 years for the Commercial portfolio. In the prior quarter, a blended LEP of 1.33 years was used for both portfolios. 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 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.

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. 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-accrual performing TDR loans until they have made timely payments for six consecutive months.

- 12 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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 loan which is collateral dependent, the fair value of the collateral. At June 30, 2018, 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 Company did not modify any loans as TDR during the three and six months ended June 30, 2018.

The following tables shows loans modified and classified as TDR during the periods indicated:

	For the three and six months ended June 30, 2017
(Dollars in thousands)	Number		Balance		Modification description


Taxi medallion		5	$	4,289	Three received a below market interest rate and a loan amortization extension, while two received an amortization extension.
Total		5	$	4,289

The recorded investment of the loans modified and classified as TDR presented in the table above, were unchanged as there was no principal forgiven in this modification.

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, 2018				December 31, 2017
(Dollars in thousands)	Number of contracts		Recorded investment		Number of contracts		Recorded investment

Multi-family residential		9	$	2,488		9	$	2,518
Commercial real estate		-		-		2		1,986
One-to-four family - mixed-use property		5		1,726		5		1,753
One-to-four family - residential		3		562		3		572
Taxi medallion		19		5,482		20		5,916
Commercial business and other		2		351		2		462
Total performing troubled debt restructured		38	$	10,609		41	$	13,207

During the six months ended June 30, 2018, we sold one commercial real estate TDR loan totaling $1.8 million, for a loss of $0.3 million and foreclosed on one taxi medallion TDR loan of $35,000, which is included in “Other Assets”. There were no TDR loans that defaulted during the period, which were within 12 months of their modification date.

- 13 -

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, 2018				December 31, 2017
(Dollars in thousands)	Number of contracts		Recorded investment		Number of contracts		Recorded investment

Multi-family residential		1	$	383		1	$	383

Total troubled debt restructurings that subsequently defaulted		1	$	383		1	$	383

There were no TDR loans transferred to non-performing status during the three months ended June 30, 2018 and 2017 and the six months ended June 30, 2017.

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

(In thousands)	June 30, 2018		December 31, 2017

Loans ninety days or more past due and still accruing:
Commercial real estate	$	-	$	2,424
Construction		730		-
Total		730		2,424

Non-accrual mortgage loans:
Multi-family residential		2,165		3,598
Commercial real estate		1,448		1,473
One-to-four family - mixed-use property		2,157		1,867
One-to-four family - residential		6,969		7,808
Co-operative apartments		575		-
Total		13,314		14,746

Non-accrual non-mortgage loans:
Small Business Administration		-		46
Taxi medallion		743		918
Commercial business and other		2		-
Total		745		964

Total non-accrual loans		14,059		15,710

Total non-performing loans	$	14,789	$	18,134

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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,
	2018		2017		2018		2017
	(In thousands)
Interest income that would have been recognized had the loans performed in accordance with their original terms	$	390	$	433	$	798	$	848
Less: Interest income included in the results of operations		156		141		315		268
Total foregone interest	$	234	$	292	$	483	$	580

The following tables show an age analysis of our recorded investment in loans, including loans past maturity, at the periods indicated:

	June 30, 2018
(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	$	2,887	$	410	$	2,165	$	5,462	$	2,242,390	$	2,247,852
Commercial real estate		4,139		3,206		1,448		8,793		1,463,101		1,471,894
One-to-four family - mixed-use property		2,080		-		2,157		4,237		560,237		564,474
One-to-four family - residential		767		400		6,969		8,136		179,605		187,741
Co-operative apartments		-		-		575		575		7,264		7,839
Construction loans		-		-		730		730		33,096		33,826
Small Business Administration		1,537		-		-		1,537		12,868		14,405
Taxi medallion		-		-		-		-		6,225		6,225
Commercial business and other		562		761		2		1,325		782,579		783,904
Total	$	11,972	$	4,777	$	14,046	$	30,795	$	5,287,365	$	5,318,160

	December 31, 2017
(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	$	2,533	$	279	$	3,598	$	6,410	$	2,267,185	$	2,273,595
Commercial real estate		1,680		2,197		3,897		7,774		1,360,338		1,368,112
One-to-four family - mixed-use property		1,570		860		1,867		4,297		559,909		564,206
One-to-four family - residential		1,921		680		7,623		10,224		170,439		180,663
Co-operative apartments		-		-		-		-		6,895		6,895
Construction loans		-		-		-		-		8,479		8,479
Small Business Administration		-		-		-		-		18,479		18,479
Taxi medallion		-		108		-		108		6,726		6,834
Commercial business and other		2		-		-		2		732,971		732,973
Total	$	7,706	$	4,124	$	16,985	$	28,815	$	5,131,421	$	5,160,236

- 15 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The following tables show the activity in the allowance for loan losses for the three month periods indicated:

June 30, 2018
(In thousands)	Multi-family residential			Commercial real estate		One-to-four family - mixed-use property			One-to-four family - residential			Construction loans		Small Business Administration			Taxi medallion			Commercial business and other			Unallocated		Total

Allowance for credit losses:
Beginning balance	$	5,750		$	4,602	$	2,470		$	1,041		$	191	$	675		$	-		$	5,813		$	-	$	20,542
Charge-off's		(28	)		-		-			-			-		(27	)		(353	)		(8	)		-		(416	)
Recoveries		-			-		79			4			-		9			-			2			-		94
Provision (Benefit)		(184	)		124		(252	)		(42	)		73		(108	)		353			25			11		-
Ending balance	$	5,538		$	4,726	$	2,297		$	1,003		$	264	$	549		$	-		$	5,832		$	11	$	20,220

June 30, 2017
(In thousands)	Multi-family residential			Commercial real estate			One-to-four family - mixed-use property			One-to-four family - residential			Construction loans		Small Business Administration			Taxi medallion		Commercial business and other			Unallocated			Total

Allowance for credit losses:
Beginning balance	$	5,907		$	4,485		$	2,691		$	979		$	94	$	315		$	2,213	$	4,712		$	815		$	22,211
Charge-off's		(148	)		(4	)		(1	)		(170	)		-		(24	)		-		(3	)		-			(350	)
Recoveries		201			-			68			-			-		10			-		17			-			296
Provision (Benefit)		(43	)		207			(190	)		181			36		5			117		(58	)		(255	)		-
Ending balance	$	5,917		$	4,688		$	2,568		$	990		$	130	$	306		$	2,330	$	4,668		$	560		$	22,157

- 16 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The following tables show the activity in the allowance for loan losses for the six month periods indicated:

June 30, 2018
(In thousands)	Multi-family residential			Commercial real estate		One-to-four family - mixed-use property			One-to-four family - residential			Construction loans		Small Business Administration			Taxi medallion			Commercial business and other			Unallocated		Total

Allowance for credit losses:
Beginning balance	$	5,823		$	4,643	$	2,545		$	1,082		$	68	$	669		$	-		$	5,521		$	-	$	20,351
Charge-off's		(81	)		-		-			(1	)		-		(52	)		(353	)		(14	)		-		(501	)
Recoveries		2			-		79			112			-		15			-			9			-		217
Provision (Benefit)		(206	)		83		(327	)		(190	)		196		(83	)		353			316			11		153
Ending balance	$	5,538		$	4,726	$	2,297		$	1,003		$	264	$	549		$	-		$	5,832		$	11	$	20,220

June 30, 2017
(In thousands)	Multi-family residential			Commercial real estate			One-to-four family - mixed-use property			One-to-four family - residential			Construction loans		Small Business Administration			Taxi medallion			Commercial business and other			Unallocated			Total

Allowance for credit losses:
Beginning balance	$	5,923		$	4,487		$	2,903		$	1,015		$	92	$	481		$	2,243		$	4,492		$	593		$	22,229
Charge-off's		(162	)		(4	)		(35	)		(170	)		-		(89	)		(54	)		(15	)		-			(529	)
Recoveries		231			68			68			-			-		49			-			41			-			457
Provision (Benefit)		(75	)		137			(368	)		145			38		(135	)		141			150			(33	)		-
Ending balance	$	5,917		$	4,688		$	2,568		$	990		$	130	$	306		$	2,330		$	4,668		$	560		$	22,157

- 17 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The following tables show the manner in which loans were evaluated for impairment at the periods indicated:

June 30, 2018
(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		Unallocated		Total
Financing Receivables:
Ending Balance	$	2,247,852	$	1,471,894	$	564,474	$	187,741	$	7,839	$	33,826	$	14,405	$	6,225	$	783,904	$	-	$	5,318,160
Ending balance: individually evaluated for impairment	$	6,482	$	4,967	$	5,625	$	8,733	$	-	$	730	$	49	$	6,225	$	16,136	$	-	$	48,947
Ending balance: collectively evaluated for impairment	$	2,241,370	$	1,466,927	$	558,849	$	179,008	$	7,839	$	33,096	$	14,356	$	-	$	767,768	$	-	$	5,269,213

Allowance for credit losses:
Ending balance: individually evaluated for impairment	$	147	$	-	$	159	$	53	$	-	$	-	$	-	$	-	$	4	$	-	$	363
Ending balance: collectively evaluated for impairment	$	5,391	$	4,726	$	2,138	$	950	$	-	$	264	$	549	$	-	$	5,828	$	11	$	19,857

December 31, 2017
(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		Unallocated		Total
Financing Receivables:
Ending Balance	$	2,273,595	$	1,368,112	$	564,206	$	180,663	$	6,895	$	8,479	$	18,479	$	6,834	$	732,973	$	-	$	5,160,236
Ending balance: individually evaluated for impairment	$	7,311	$	9,089	$	5,445	$	9,686	$	-	$	-	$	137	$	6,834	$	661	$	-	$	39,163
Ending balance: collectively evaluated for impairment	$	2,266,284	$	1,359,023	$	558,761	$	170,977	$	6,895	$	8,479	$	18,342	$	-	$	732,312	$	-	$	5,121,073

Allowance for credit losses:
Ending balance: individually evaluated for impairment	$	205	$	177	$	198	$	56	$	-	$	-	$	-	$	-	$	6	$	-	$	642
Ending balance: collectively evaluated for impairment	$	5,618	$	4,466	$	2,347	$	1,026	$	-	$	68	$	669	$	-	$	5,515	$	-	$	19,709

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The following table shows our recorded investment, unpaid principal balance and allocated allowance for loan losses for impaired loans at the periods indicated:

	June 30, 2018						December 31, 2017
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
	(In thousands)
With no related allowance recorded:
Mortgage loans:
Multi-family residential	$	4,285	$	4,814	$	-	$	5,091	$	5,539	$	-
Commercial real estate		4,967		4,967		-		7,103		7,103		-
One-to-four family mixed-use property		4,419		4,676		-		4,218		4,556		-
One-to-four family residential		8,326		9,281		-		9,272		10,489		-
Construction		730		730
Non-mortgage loans:
Small Business Administration		49		58		-		137		151		-
Taxi medallion		6,225		17,450		-		6,834		18,063		-
Commercial business and other		15,829		16,198		-		313		682		-

Total loans with no related allowance recorded		44,830		58,174		-		32,968		46,583		-

With an allowance recorded:
Mortgage loans:
Multi-family residential		2,197		2,197		147		2,220		2,220		205
Commercial real estate		-		-		-		1,986		1,986		177
One-to-four family mixed-use property		1,206		1,206		159		1,227		1,227		198
One-to-four family residential		407		407		53		414		414		56
Non-mortgage loans:
Commercial business and other		307		307		4		348		348		6

Total loans with an allowance recorded		4,117		4,117		363		6,195		6,195		642

Total Impaired Loans:
Total mortgage loans	$	26,537	$	28,278	$	359	$	31,531	$	33,534	$	636

Total non-mortgage loans	$	22,410	$	34,013	$	4	$	7,632	$	19,244	$	6

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The following table shows our average recorded investment and interest income recognized for impaired loans for the three months ended:

	June 30, 2018				June 30, 2017
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(In thousands)
With no related allowance recorded:
Mortgage loans:
Multi-family residential	$	4,431	$	16	$	2,730	$	22
Commercial real estate		5,847		52		6,438		59
One-to-four family mixed-use property		4,397		39		5,560		41
One-to-four family residential		8,382		10		10,263		30
Construction		365		10		602		-
Non-mortgage loans:
Small Business Administration		74		1		160		2
Taxi medallion		6,421		86		4,352		25
Commercial business and other		7,954		308		2,187		43

Total loans with no related allowance recorded		37,871		522		32,292		222

With an allowance recorded:
Mortgage loans:
Multi-family residential		2,203		30		2,471		50
Commercial real estate		-		-		2,043		24
One-to-four family mixed-use property		1,212		15		1,450		16
One-to-four family residential		409		4		424		4
Non-mortgage loans:
Small Business Administration		-		-		-		-
Taxi medallion		-		-		14,216		50
Commercial business and other		318		4		391		6

Total loans with an allowance recorded		4,142		53		20,995		150

Total Impaired Loans:
Total mortgage loans	$	27,246	$	176	$	31,981	$	246

Total non-mortgage loans	$	14,767	$	399	$	21,306	$	126

- 20 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The following table shows our average recorded investment and interest income recognized for impaired loans for the six months ended:

	June 30, 2018				June 30, 2017
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(In thousands)
With no related allowance recorded:
Mortgage loans:
Multi-family residential	$	4,651	$	36	$	3,040	$	45
Commercial real estate		6,266		126		5,788		154
One-to-four family mixed-use property		4,337		80		5,851		78
One-to-four family residential		8,678		25		10,028		56
Construction		243		10		401		7
Non-mortgage loans:
Small Business Administration		95		2		245		4
Taxi medallion		6,559		168		3,679		55
Commercial business and other		5,407		310		2,148		87

Total loans with no related allowance recorded		36,236		757		31,180		486

With an allowance recorded:
Mortgage loans:
Multi-family residential		2,208		59		2,401		79
Commercial real estate		662		-		2,049		48
One-to-four family mixed-use property		1,217		24		1,758		34
One-to-four family residential		411		8		425		8
Non-mortgage loans:
Small Business Administration		-		-		507		-
Taxi medallion		-		-		14,126		93
Commercial business and other		328		9		401		12

Total loans with an allowance recorded		4,826		100		21,667		274

Total Impaired Loans:
Total mortgage loans	$	28,673	$	368	$	31,741	$	509

Total non-mortgage loans	$	12,389	$	489	$	21,106	$	251

- 21 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

In accordance with our policy and the current regulatory guidelines, we designate loans as “Special Mention,” which are considered “Criticized Loans,” and “Substandard,” “Doubtful,” or “Loss,” which are considered “Classified Loans”. If a loan does not fall within one of the previous mentioned categories then the loan would be considered “Pass.” Loans that are non-accrual are designated as Substandard, Doubtful or Loss. These loan designations are updated quarterly. We designate a loan as Substandard when a well-defined weakness is identified that may jeopardize the orderly liquidation of the debt. We designate a loan Doubtful when it displays the inherent weakness of a Substandard loan with the added provision that collection of the debt in full, on the basis of existing facts, is highly improbable. We designate a loan as Loss if it is deemed the debtor is incapable of repayment. The Company does not hold any loans designated as Loss, as loans that are designated as Loss are charged to the Allowance for Loan Losses. We designate a loan as Special Mention if the asset does not warrant classification within one of the other classifications, but does contain a potential weakness that deserves closer attention.

The following table sets forth the recorded investment in loans designated as Criticized or Classified at the periods indicated:

	June 30, 2018
(In thousands)	Special Mention		Substandard		Doubtful		Loss		Total

Multi-family residential	$	3,432	$	3,994	$	-	$	-	$	7,426
Commercial real estate		4,475		4,206		-		-		8,681
One-to-four family - mixed-use property		1,223		3,899		-		-		5,122
One-to-four family - residential		883		7,597		-		-		8,480
Co-operative apartments		-		575		-		-		575
Construction loans		-		730		-		-		730
Small Business Administration		879		45		-		-		924
Taxi medallion		-		6,225		-		-		6,225
Commercial business and other		10,927		16,852		-		-		27,779
Total loans	$	21,819	$	44,123	$	-	$	-	$	65,942

	December 31, 2017
(In thousands)	Special Mention		Substandard		Doubtful		Loss		Total

Multi-family residential	$	6,389	$	4,793	$	-	$	-	$	11,182
Commercial real estate		2,020		8,871		-		-		10,891
One-to-four family - mixed-use property		2,835		3,691		-		-		6,526
One-to-four family - residential		2,076		9,115		-		-		11,191
Small Business Administration		548		108		-		-		656
Taxi medallion		-		6,834		-		-		6,834
Commercial business and other		14,859		545		-		-		15,404
Total loans	$	28,727	$	33,957	$	-	$	-	$	62,684

Commitments to extend credit (principally real estate mortgage loans) and lines of credit (principally home equity lines of credit and business lines of credit) amounted to $25.2 million and $300.8 million, respectively, at June 30, 2018.

- 22 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

Loans held for sale

Loans held for sale are carried at the lower of cost or estimated fair value. At June 30, 2018 and December 31, 2017, the Bank did not have any loans held for sale.

The Company has implemented a strategy of selling certain delinquent and non-performing loans. Once the Company has decided to sell a loan, the sale usually closes in a short period of time, generally within the same quarter. Loans designated held for sale are reclassified from loans held for investment to loans held for sale. Terms of sale include cash due upon the closing of the sale, no contingencies or recourse to the Company and servicing is released to the buyer. Additionally, at times the Company may sell participating interests in performing loans.

The following tables show loans sold during the period indicated:

	For the three months ended June 30, 2018
(Dollars in thousands)	Loans sold		Proceeds		Net gain
Delinquent and non-performing loans
Commercial real estate		2	$	2,065	$	28

Total		2	$	2,065	$	28

Performing loans
Small Business Administration		9	$	5,671	$	393

Total		9	$	5,671	$	393

	For the three months ended June 30, 2017
(Dollars in thousands)	Loans sold		Proceeds		Net charge-offs			Net gain (loss)
Delinquent and non-performing loans
Commercial		1	$	335	$	(4	)	$	-

Total		1	$	335	$	(4	)	$	-

Performing loans
Multi-family residential		2	$	6,080	$	-		$	(14	)
Commercial real estate		5		8,451		-			(21	)
Small Business Administration		4		1,519		-			69

Total		11	$	16,050	$	-		$	34

- 23 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

	For the six months ended June 30, 2018
(Dollars in thousands)	Loans sold		Proceeds		Net gain (loss)
Delinquent and non-performing loans
Multi-family - residential		3	$	964	$	-
Commercial real estate		3		3,565		(235	)

Total		6	$	4,529	$	(235	)

Performing loans
Small Business Administration		9	$	5,671	$	393

Total		9	$	5,671	$	393

	For the six months ended June 30, 2017
(Dollars in thousands)	Loans sold		Proceeds		Net charge-offs			Net gain (loss)
Delinquent and non-performing loans
One-to-four family- residential		5	$	1,790	$	(33	)	$	-
Commercial real estate		1		335		(4	)		-

Total		6	$	2,125	$	(37	)	$	-

Performing loans
Multi-family residential		2	$	6,080	$	-		$	(14	)
Commercial real estate		5		8,451		-			(21	)
Small Business Administration		7		4,919		-			250

Total		14	$	19,450	$	-		$	216

- 24 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

Other Real Estate Owned

OREO are included in other assets on the Company’s Consolidated Statements of Financial Condition. The following table shows changes in OREO during the periods indicated:

	For the three months ended June 30,					For the six months ended June 30,
	2018			2017		2018			2017
	(In thousands)

Balance at beginning of period	$	638		$	-	$	-		$	533
Acquisitions		-			-		638			-
Sales		(638	)		-		(638	)		(533	)

Balance at end of period	$	-		$	-	$	-		$	-

The following table shows the gross gains, gross losses and write-downs of OREO reported in the Consolidated Statements of Income during the periods indicated:

	For the three months ended June 30,				For the six months ended June 30,
	2018		2017		2018		2017
	(In thousands)				(In thousands)

Gross gains	$	27	$	-	$	27	$	50

During the six months ended June 30, 2018 we foreclosed on one residential real estate property for $0.6 million. During the three months ended June 30, 2018 and the three and six months ended June 30, 2017, we did not foreclose on any consumer mortgages through in-substance repossession. We did not hold any foreclosed residential real estate properties at June 30, 2018 and December 31, 2017. Included within net loans as of June 30, 2018 and December 31, 2017 was a recorded investment of $9.8 million and $10.5 million, respectively, of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings were in process according to local requirements of the applicable jurisdiction.

Stock-Based Compensation

For the three months ended June 30, 2018 and 2017, the Company’s net income, as reported, includes $1.2 million and $1.0 million, respectively, of stock-based compensation costs and $0.3 million and $0.4 million of income tax benefits, respectively, related to the stock-based compensation plans in each of the periods. For the six months ended June 30, 2018 and 2017, the Company’s net income, as reported, includes $4.6 million and $4.1 million, respectively, of stock-based compensation costs and $1.0 million and $1.2 million of income tax benefits, respectively, related to the stock-based compensation plans in each of the periods. During the three months ended June 30, 2018, the Company granted 5,600 restricted stock units. The Company did not grant any restricted stock units during the three months ended June 30, 2017. During the six months ended June 30, 2018 and 2017, the Company granted 280,590 and 276,900 restricted stock units, respectively. There were 600 stock options exercised during the three and six months ended June 30, 2018 and 4,400 stock options exercised during the three and six months ended June 30, 2017. The Company has not granted stock options since 2009. At June 30, 2018, the Company had 600 stock options, all 100% vested, outstanding, at an average exercise price of $8.44 per share.

- 25 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The Company uses the fair value of the common stock on the date of award to measure compensation cost for restricted stock unit awards. Compensation cost is recognized over the vesting period of the award using the straight-line method.

The following table summarizes the Company’s restricted stock unit (“RSU”) awards at or for the six months ended June 30, 2018:

	Shares			Weighted-Average Grant-Date Fair Value

Non-vested at December 31, 2017		497,322		$	22.46
Granted		280,590			28.19
Vested		(239,599	)		23.64
Forfeited		(7,110	)		25.27
Non-vested at June 30, 2018		531,203		$	24.91

Vested but unissued at June 30, 2018		234,799		$	25.14

As of June 30, 2018, there was $10.8 million of total unrecognized compensation cost related to RSU awards granted. That cost is expected to be recognized over a weighted-average period of 3.1 years. The total fair value of awards vested for the three months ended June 30, 2018 and 2017 was $28,000 and $40,000, respectively. The total fair value of awards vested for the six months ended June 30, 2018 and 2017 was $6.7 and $4.8 million, respectively. The vested but unissued RSU awards consist of awards made to employees and directors who are eligible for retirement. According to the terms of these awards, which provide for vesting upon retirement, these employees and directors have no risk of forfeiture. These shares will be issued at the original contractual vesting and settlement dates.

Phantom Stock Plan: The Company maintains a non-qualified phantom stock plan as a supplement to its profit sharing plan for officers who have achieved the designated level and completed one year of service. The Company adjusts its liability under this plan to the fair value of the shares at the end of each period.

The following table summarizes the Phantom Stock Plan at or for the six months ended June 30, 2018:

Phantom Stock Plan	Shares			Fair Value

Outstanding at December 31, 2017		89,180		$	27.50
Granted		8,946			27.75
Forfeited		-			-
Distributions		(32	)		27.18
Outstanding at June 30, 2018		98,094		$	26.10
Vested at June 30, 2018		97,515		$	26.10

The Company recorded stock-based compensation benefit for the Phantom Stock Plan of $0.1 million for the each of the three month periods ended June 30, 2018 and 2017. The total fair value of the distributions from the Phantom Stock Plan was less than $1,000 for each of the three month periods ended June 30, 2018 and 2017.

For the six months ended June 30, 2018 and 2017, the company recorded stock-based compensation benefit for the Phantom Stock Plan of $0.1 million for each of the six month periods ended June 30, 2018 and 2017. The total fair value of the distributions from the Phantom Stock Plan was $1,000 and $6,000 for the six months ended June 30, 2018 and 2017, respectively.

- 26 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

Pension and Other Postretirement Benefit Plans

The following table sets forth information regarding the components of net expense for the pension and other postretirement benefit plans.

	Three months ended June 30,						Six months ended June 30,
(In thousands)	2018			2017			2018			2017

Employee Pension Plan:
Interest cost	$	195		$	216		$	390		$	432
Amortization of unrecognized loss		156			174			311			348
Expected return on plan assets		(363	)		(348	)		(726	)		(696	)
Net employee pension ( benefit) expense	$	(12	)	$	42		$	(25	)	$	84

Outside Director Pension Plan:
Service cost	$	11		$	10		$	22		$	20
Interest cost		20			23			40			46
Amortization of unrecognized gain		(23	)		(23	)		(46	)		(46	)
Amortization of past service liability		3			10			6			20
Net outside director pension expense	$	11		$	20		$	22		$	40

Other Postretirement Benefit Plans:
Service cost	$	88		$	79		$	176		$	158
Interest cost		77			76			154			152
Amortization of past service credit		(12	)		(21	)		(25	)		(42	)
Net other postretirement expense	$	153		$	134		$	305		$	268

The Company previously disclosed in its Consolidated Financial Statements for the year ended December 31, 2017 that it expects to contribute $0.2 million to each of the Outside Director Pension Plan (the “Outside Director Pension Plan”) and the other postretirement benefit plans (the “Other Postretirement Benefit Plans”), during the year ending December 31, 2018. The Company does not expect to make a contribution to the Employee Pension Plan (the “Employee Pension Plan”). As of June 30, 2018, the Company has contributed $48,000 to the Outside Director Pension Plan and $56,000 in contributions were made to the Other Postretirement Benefit Plans. As of June 30, 2018, the Company has not revised its expected contributions for the year ending December 31, 2018.

10.

Fair Value of Financial Instruments

The Company carries certain financial assets and financial liabilities at fair value in accordance with GAAP which defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, establishes a framework for measuring fair value and expands disclosures about fair value measurements. GAAP permits entities to choose to measure many financial instruments and certain other items at fair value. At June 30, 2018, the Company carried financial assets and financial liabilities under the fair value option with fair values of $14.0 million and $39.6 million, respectively. At December 31, 2017, the Company carried financial assets and financial liabilities under the fair value option with fair values of $14.3 million and $37.0 million, respectively. The Company did not elect to carry any additional financial assets or financial liabilities under the fair value option during the three and six months ended June 30, 2018.

- 27 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The following table presents the financial assets and financial liabilities reported at fair value under the fair value option, and the changes in fair value included in the Consolidated Statement of Income – Net gain (loss) from fair value adjustments, at or for the periods ended as indicated:

	Fair Value		Fair Value		Changes in Fair Values For Items Measured at Fair Value
	Measurements		Measurements		Pursuant to Election of the Fair Value Option
	at June 30,		at December 31,		Three Months Ended						Six Months Ended
(In thousands)	2018		2017		June 30, 2018			June 30, 2017			June 30, 2018			June 30, 2017

Mortgage-backed securities	$	1,426	$	1,590	$	-		$	(3	)	$	(11	)	$	(10	)
Other securities		12,615		12,685		(62	)		112			(200	)		144
Borrowed funds		39,566		36,986		(867	)		(595	)		(2,548	)		(1,165	)
Net loss from fair value adjustments ⁽¹⁾⁽²⁾					$	(929	)	$	(486	)	$	(2,759	)	$	(1,031	)

(1)

The net loss from fair value adjustments presented in the above table does not include net gains (losses) of $0.7 million and ($0.7) million for the three months ended June 30, 2018 and 2017, respectively, from the change in the fair value of interest rate swaps.

(2)

The net loss from fair value adjustments presented in the above table does not include net gains (losses) of $2.4 million and ($0.5) million for the six months ended June 30, 2018 and 2017, respectively, from the change in the fair value of interest rate swaps.

Included in the fair value of the financial assets and financial liabilities selected for the fair value option is the accrued interest receivable or payable for the related instrument. The Company reports as interest income or interest expense in the Consolidated Statement of Income, the interest receivable or payable on the financial instruments selected for the fair value option at their respective contractual rates.

The borrowed funds had a contractual principal amount of $61.9 million at both June 30, 2018 and December 31, 2017. The fair value of borrowed funds includes accrued interest payable of $0.2 million at June 30, 2018 and December 31, 2017.

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

Disclosure of fair value does not require fair value information for items that do not meet the definition of a financial instrument or certain other financial instruments specifically excluded from its requirements. These items include core deposit intangibles and other customer relationships, premises and equipment, leases, income taxes and equity.

Further, fair value disclosure does not attempt to value future income or business. These items may be material and accordingly, the fair value information presented does not purport to represent, nor should it be construed to represent, the underlying “market” or franchise value of the Company.

Financial assets and financial liabilities reported at fair value are required to be measured based on either: (1) quoted prices in active markets for identical financial instruments (Level 1); (2) significant other observable inputs (Level 2); or (3) significant unobservable inputs (Level 3).

A description of the methods and significant assumptions utilized in estimating the fair value of the Company’s assets and liabilities that are carried at fair value on a recurring basis are as follows:

Level 1 – where quoted market prices are available in an active market. At June 30, 2018 and December 31, 2017, Level 1 included one mutual fund.

Level 2 – when quoted market prices are not available, fair value is estimated using quoted market prices for similar financial instruments and adjusted for differences between the quoted instrument and the instrument being valued. Fair value can also be estimated by using pricing models, or discounted cash flows. Pricing models primarily use market-based or independently sourced market parameters as inputs, including, but not limited to, yield curves, interest rates, equity or debt prices and credit spreads. In addition to observable market information, models also incorporate maturity and cash flow assumptions. At June 30, 2018 and December 31, 2017, Level 2 included mortgage related securities, corporate debt, municipals and interest rate swaps.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

Level 3 – when there is limited activity or less transparency around inputs to the valuation, financial instruments are classified as Level 3. At June 30, 2018 and December 31, 2017, Level 3 included trust preferred securities owned and junior subordinated debentures issued by the Company.

The methods described above may produce fair values that may not be indicative of net realizable value or reflective of future fair values. While the Company believes, its valuation methods are appropriate and consistent with those of other market participants, the use of different methodologies, assumptions and models to determine fair value of certain financial instruments could produce different estimates of fair value at the reporting date.

The following table sets forth the assets and liabilities that are carried at fair value on a recurring basis and their respective category in the fair value hierarchy, at June 30, 2018 and December 31, 2017:

	Quoted Prices
	in Active Markets				Significant Other				Significant Other
	for Identical Assets				Observable Inputs				Unobservable Inputs				Total carried at fair value
	(Level 1)				(Level 2)				(Level 3)				on a recurring basis
	2018		2017		2018		2017		2018		2017		2018		2017
	(In thousands)

Assets:
Mortgage-backed Securities	$	-	$	-	$	513,868	$	509,650	$	-	$	-	$	513,868	$	509,650
Other securities		11,427		11,575		202,140		216,019		1,188		1,110		214,755		228,704
Interest rate swaps		-		-		27,398		7,388		-		-		27,398		7,388

Total assets	$	11,427	$	11,575	$	743,406	$	733,057	$	1,188	$	1,110	$	756,021	$	745,742

Liabilities:
Borrowings	$	-	$	-	$	-	$	-	$	39,566	$	36,986	$	39,566	$	36,986
Interest rate swaps		-		-		1,128		3,758		-		-		1,128		3,758

Total liabilities	$	-	$	-	$	1,128	$	3,758	$	39,566	$	36,986	$	40,694	$	40,744

The following tables sets forth the Company's assets and liabilities that are carried at fair value on a recurring basis, classified within Level 3 of the valuation hierarchy for the periods indicated:

	For the three months ended
	June 30, 2018					June 30, 2017
	Trust preferred securities		Junior subordinated debentures			Trust preferred securities		Junior subordinated debentures
	(In thousands)

Beginning balance	$	1,162	$	38,692		$	7,394	$	34,536
Net gain from fair value adjustment of financial assets ⁽¹⁾		25		-			48		-
Net loss from fair value adjustment of financial liabilities ⁽¹⁾		-		867			-		594
Increase in accrued interest receivable		1		-			-		-
Increase in accrued interest payable		-		26			-		7
Change in unrealized gains (losses) included in other comprehensive income		-		(19	)		2		-
Ending balance	$	1,188	$	39,566		$	7,444	$	35,137

Changes in unrealized gains (losses) held at period end	$	-	$	(19	)	$	2	$	-

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

	For the six months ended
	June 30, 2018					June 30, 2017
	Trust preferred securities		Junior subordinated debentures			Trust preferred securities		Junior subordinated debentures
	(In thousands)

Beginning balance	$	1,110	$	36,986		$	7,361	$	33,959
Net gain from fair value adjustment of financial assets ⁽¹⁾		77		-			81		-
Net loss from fair value adjustment of financial liabilities ⁽¹⁾				2,548			-		1,165
Increase in accrued interest receivable		1		-			-		-
Increase in accrued interest payable		-		51			-		13
Change in unrealized gains (losses) included in other comprehensive income		-		(19	)		2		-
Ending balance	$	1,188	$	39,566		$	7,444	$	35,137

Changes in unrealized gains (losses)held at period end	$	-	$	(19	)	$	2	$	-

⁽¹⁾

Totals in the table above are presented in the Consolidated Statement of Income under net gains (losses) from fair value adjustments.

During the three and six months ended June 30, 2018 and 2017, there were no transfers between Levels 1, 2 and 3.

The following tables present the quantitative information about recurring Level 3 fair value of financial instruments and the fair value measurements at the periods indicated:

June 30, 2018

Fair Value

Valuation Technique

Unobservable Input

Range

Weighted Average

(Dollars in thousands)

Assets:

Trust preferred securities

1,188

Discounted cash flows

Discount rate

n/a

5.5

Liabilities:

Junior subordinated debentures

39,566

Discounted cash flows

Discount rate

n/a

5.5

December 31, 2017

Fair Value

Valuation Technique

Unobservable Input

Range

Weighted Average

(Dollars in thousands)

Assets:

Trust preferred securities

1,110

Discounted cash flows

Discount rate

n/a

5.7

Liabilities:

Junior subordinated debentures

36,986

Discounted cash flows

Discount rate

n/a