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 September 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 every Interactive Data File required to be submitted 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 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 October 31, 2018 was 28,001,422.

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	62
ITEM 4. Controls and Procedures	62
PART II — OTHER INFORMATION
ITEM 1. Legal Proceedings	63
ITEM 1A. Risk Factors	63
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds	63
ITEM 3. Defaults Upon Senior Securities	63
ITEM 4. Mine Safety Disclosures	63
ITEM 5. Other Information	63
ITEM 6. Exhibits	64
SIGNATURES	65

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Consolidated Statements of Financial Condition

(Unaudited)

Item 1. Financial Statements

	September 30, 2018			December 31, 2017
	(Dollars in thousands, except per share data)
Assets
Cash and due from banks	$	45,094		$	51,546
Securities held-to-maturity:
Mortgage-backed securities (including assets pledged of $4,701 at September 30, 2018 and none pledged at December 31, 2017; fair value of $7,221 and $7,810 at September 30, 2018 and December 31, 2017, respectively)		7,958			7,973
Other securities (none pledged; fair value of $20,996 and $21,889 at September 30, 2018 and December 31, 2017, respectively)		23,207			22,913
Securities available for sale, at fair value:
Mortgage-backed securities (including assets pledged of $106,607 and $148,505 at September 30, 2018 and December 31, 2017, respectively; $1,330 and $1,590 at fair value pursuant to the fair value option at September 30, 2018 and December 31, 2017, respectively)		528,119			509,650
Other securities (including assets pledged of $24,575 and $44,052 at September 30, 2018 and December 31, 2017, respectively; $12,610 and $12,685 at fair value pursuant to the fair value option at September 30, 2018 and December 31, 2017, respectively)		232,913			228,704
Loans:
Multi-family residential		2,235,370			2,273,595
Commercial real estate		1,460,555			1,368,112
One-to-four family ― mixed-use property		565,302			564,206
One-to-four family ― residential		188,975			180,663
Co-operative apartments		7,771			6,895
Construction		40,239			8,479
Small Business Administration		14,322			18,479
Taxi medallion		6,078			6,834
Commercial business and other		846,224			732,973
Net unamortized premiums and unearned loan fees		15,226			16,763
Allowance for loan losses		(20,309	)		(20,351	)
Net loans		5,359,753			5,156,648
Interest and dividends receivable		24,673			21,405
Bank premises and equipment, net		29,929			30,836
Federal Home Loan Bank of New York stock, at cost		54,942			60,089
Bank owned life insurance		131,009			131,856
Goodwill		16,127			16,127
Other assets		85,819			61,527
Total assets	$	6,539,543		$	6,299,274

Liabilities
Due to depositors:
Non-interest bearing	$	398,606		$	385,269
Interest-bearing		4,259,042			3,955,403
Mortgagors' escrow deposits		58,667			42,606
Borrowed funds:
Federal Home Loan Bank advances		1,083,031			1,198,968
Subordinated debentures		73,919			73,699
Junior subordinated debentures, at fair value		40,151			36,986
Total borrowed funds		1,197,101			1,309,653
Other liabilities		84,371			73,735
Total liabilities		5,997,787			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 September 30, 2018 and December 31, 2017; 28,025,081 shares and 28,588,266 shares outstanding at September 30, 2018 and December 31, 2017, respectively)		315			315
Additional paid-in capital		221,622			217,906
Treasury stock, at average cost (3,505,514 shares and 2,942,329 shares at September 30, 2018 and December 31, 2017, respectively)		(74,222	)		(57,675	)
Retained earnings		407,590			381,048
Accumulated other comprehensive loss, net of taxes		(13,549	)		(8,986	)
Total stockholders' equity		541,756			532,608

Total liabilities and stockholders' equity	$	6,539,543		$	6,299,274

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

Interest and dividend income
Interest and fees on loans	$	59,658		$	53,318		$	171,997		$	155,834
Interest and dividends on securities:
Interest		5,562			5,850			16,646			18,377
Dividends		18			30			49			274
Other interest income		248			121			873			403
Total interest and dividend income		65,486			59,319			189,565			174,888

Interest expense
Deposits		17,425			10,655			44,323			29,145
Other interest expense		6,540			5,623			18,472			15,696
Total interest expense		23,965			16,278			62,795			44,841

Net interest income		41,521			43,041			126,770			130,047
Provision for loan losses		-			3,266			153			3,266
Net interest income after provision for loan losses		41,521			39,775			126,617			126,781

Non-interest income
Banking services fee income		1,017			885			2,965			2,773
Net loss on sale of securities		-			(186	)		-			(186	)
Net gain on sale of loans		10			152			168			396
Net loss from fair value adjustments		(170	)		(1,297	)		(537	)		(2,834	)
Federal Home Loan Bank of New York stock dividends		873			740			2,630			2,206
Gain from life insurance proceeds		2,222			238			2,998			1,405
Bank owned life insurance		782			816			2,320			2,418
Other income		221			313			779			1,120
Total non-interest income		4,955			1,661			11,323			7,298

Non-interest expense
Salaries and employee benefits		15,720			15,310			49,466			47,838
Occupancy and equipment		2,475			2,502			7,528			7,652
Professional services		1,915			1,763			6,539			5,678
FDIC deposit insurance		596			499			1,643			1,328
Data processing		1,427			1,349			4,254			3,873
Depreciation and amortization		1,484			1,173			4,328			3,493
Other real estate owned/foreclosure expense (income)		(102	)		121			34			376
Net gain from sales of real estate owned		-			-			(27	)		(50	)
Other operating expenses		3,718			3,249			12,158			11,407
Total non-interest expense		27,233			25,966			85,923			81,595

Income before income taxes		19,243			15,470			52,017			52,484

Provision (benefit) for income taxes
Federal		2,307			4,680			8,225			15,005
State and local		(397	)		611			1,124			2,315
Total taxes		1,910			5,291			9,349			17,320

Net income	$	17,333		$	10,179		$	42,668		$	35,164


Basic earnings per common share	$	0.61		$	0.35		$	1.48		$	1.21
Diluted earnings per common share	$	0.61		$	0.35		$	1.48		$	1.21
Dividends per common share	$	0.20		$	0.18		$	0.60		$	0.54

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 September 30,						For the nine months ended September 30,
(In thousands)	2018			2017			2018			2017

Net income	$	17,333		$	10,179		$	42,668		$	35,164

Other comprehensive income (loss), net of tax:
Amortization of actuarial losses, net of taxes of $(41) and ($64) for the three months ended September 30, 2018 and 2017, respectively and of ($124) and ($192) for nine months ended September 30, 2018 and 2017, respectively.		91			88			272			262
Amortization of prior service credits, net of taxes of $3 and $5 for the three months ended September 30, 2018 and 2017, respectively and of $8 and $14 for nine months ended September 30, 2018 and 2017, respectively.		(7	)		(7	)		(20	)		(20	)
Reclassification adjustment for net gains included in income, net of taxes of ($78) for the three and nine months ended September 30, 2017.		-			108			-			108
Net unrealized (losses) gains on securities, net of taxes of $1,612and $241 for three months ended September 30, 2018 and 2017, respectively and of $6,055 and ($1,006) for nine months ended September 30, 2018 and 2017, respectively.		(3,505	)		(333	)		(13,159	)		1,416
Net unrealized gains (losses) on cash flow hedges, net of taxes of ($860) and ($41) three months ended September 30, 2018 and 2017, respectively and of ($4,425) and $49 for nine months ended September 30, 2018 and 2017, respectively.		1,870			56			9,616			(68	)
Change in fair value of liabilities related to instrument-specific credit risk, net of taxes of ($4) and ($10) for the three and nine months ended September 30, 2018, respectively.		9			-			22			-

Total other comprehensive income (loss), net of tax		(1,542	)		(88	)		(3,269	)		1,698

Comprehensive income	$	15,791		$	10,091		$	39,399		$	36,862

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 nine months ended September 30,
(In thousands)	2018			2017
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	42,668		$	35,164
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		153			3,266
Depreciation and amortization of bank premises and equipment		4,328			3,493
Amortization of premium, net of accretion of discount		6,462			5,716
Net loss from fair value adjustments		537			2,834
Net gain from sale of loans		(168	)		(396	)
Net loss from sale of securities		-			186
Net gain from sale of OREO		(27	)		(50	)
Income from bank owned life insurance		(2,320	)		(2,418	)
Gain from life insurance proceeds		(2,998	)		(1,405	)
Stock-based compensation expense		5,973			5,092
Deferred compensation		(2,450	)		(3,322	)
Deferred income tax benefit		(1,437	)		(1,806	)
Increase in other liabilities		6,580			6,810
Decrease (increase) in other assets		2,103			(68	)
Net cash provided by operating activities		59,404			53,096

CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of bank premises and equipment		(3,421	)		(5,321	)
Net redemptions of Federal Home Loan Bank of New York shares		5,147			3,945
Purchases of securities held-to-maturity		(653	)		(8,030	)
Proceeds from maturities and prepayments of securities held-to-maturity		364			14,830
Purchases of securities available for sale		(102,756	)		(152,121	)
Proceeds from sales and calls of securities available for sale		10,000			155,999
Proceeds from maturities and prepayments of securities available for sale		57,839			60,573
Proceeds from bank owned life insurance		6,165			4,646
Net repayments (originations) of loans		3,605			(234,227	)
Purchases of loans		(235,193	)		(75,832	)
Proceeds from sale of real estate owned		665			583
Proceeds from sale of loans		14,410			54,990
Net cash used in investing activities		(243,828	)		(179,965	)

CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in non-interest bearing deposits		13,337			29,346
Net increase in interest-bearing deposits		303,288			195,552
Net increase in mortgagors' escrow deposits		16,061			13,455
Net proceeds (repayments) from short-term borrowed funds		115,250			(43,500	)
Proceeds from long-term borrowings		25,000			180,000
Repayment of long-term borrowings		(256,088	)		(205,049	)
Purchases of treasury stock		(21,638	)		(2,902	)
Proceeds from issuance of common stock upon exercise of stock options		6			-
Cash dividends paid		(17,244	)		(15,729	)
Net cash provided by financing activities		177,972			151,173

Net (decrease) increase in cash and cash equivalents		(6,452	)		24,304
Cash and cash equivalents, beginning of period		51,546			35,857
Cash and cash equivalents, end of period	$	45,094		$	60,161

SUPPLEMENTAL CASH FLOW DISCLOSURE
Interest paid	$	57,811		$	42,543
Income taxes paid		5,116			16,906
Taxes paid if excess tax benefits were not tax deductible		5,753			16,906
Non-cash activities:
Loans transferred to Other Real Estate Owned or Other Assets		673			-
Reclassification of the Income tax effects of Tax Cuts and Jobs Act from AOCI to Retained Earnings		2,073			-
Loans held for investment transferred to loans available for sale		-			30,565
Securities purchased not yet settled		10,000			-

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

For the nine months ended September 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		42,668			-		-			42,668			-			-
Award of common shares released from Employee Benefit Trust (124,583 shares)		2,652			-		2,652			-			-			-
Vesting of restricted stock unit awards (257,597 shares)		-			-		(4,908	)		(176	)		5,084			-
Exercise of stock options (600 shares)		6			-		(1	)		-			7			-
Stock-based compensation expense		5,973			-		5,973			-			-			-
Purchase of treasury shares (744,953 shares)		(19,500	)		-		-			-			(19,500	)		-
Repurchase of shares to satisfy tax obligation (76,212 shares)		(2,138	)		-		-			-			(2,138	)		-
Dividends on common stock ($0.60 per share)		(17,244	)		-		-			(17,244	)		-			-
Other comprehensive loss		(3,269	)		-		-			-			-			(3,269	)
Balance at September 30, 2018	$	541,756		$	315	$	221,622		$	407,590		$	(74,222	)	$	(13,549	)


Balance at December 31, 2016	$	513,853		$	315	$	214,462		$	361,192		$	(53,754	)	$	(8,362	)
Net income		35,164			-		-			35,164			-			-
Award of common shares released from Employee Benefit Trust (114,754 shares)		2,433			-		2,433			-			-			-
Vesting of restricted stock unit awards (284,595 shares)		-			-		(5,052	)		(271	)		5,323			-
Exercise of stock options (4,400 shares)		-			-		(6	)		(40	)		46			-
Stock-based compensation expense		5,092			-		5,092			-			-			-
Purchase of treasury shares (10,000 shares)		(278	)		-		-			-			(278	)		-
Repurchase of shares to satisfy tax obligation (90,779 shares)		(2,624	)		-		-			-			(2,624	)		-
Dividends on common stock ($0.54 per share)		(15,729	)		-		-			(15,729	)		-			-
Other comprehensive income		1,698			-		-			-			-			1,698
Balance at September 30, 2017	$	539,609		$	315	$	216,929		$	380,316		$	(51,287	)	$	(6,664	)

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)

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 September 30,						For the nine months ended September 30,
	2018			2017			2018			2017
	(Dollars in thousands, except per share data)
Net income, as reported	$	17,333		$	10,179		$	42,668		$	35,164
Divided by:
Weighted average common shares outstanding		28,604			29,120			28,806			29,092
Weighted average common stock equivalents		-			1			1			2
Total weighted average common shares outstanding and common stock equivalents		28,604			29,121			28,807			29,094

Basic earnings per common share	$	0.61		$	0.35		$	1.48		$	1.21
Diluted earnings per common share ⁽¹⁾	$	0.61		$	0.35		$	1.48		$	1.21
Dividend payout ratio		32.8	%		51.4	%		40.5	%		44.6	%

(1)

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

-6-

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 September 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 September 30, 2018:

	Amortized Cost		Fair Value		Gross Unrealized Gains		Gross Unrealized Losses
	(In thousands)
Securities held-to-maturity:
Municipals	$	23,207	$	20,996	$	-	$	2,211

Total other securities		23,207		20,996		-		2,211

FNMA		7,958		7,221		-		737

Total mortgage-backed securities		7,958		7,221		-		737
Total	$	31,165	$	28,217	$	-	$	2,948

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

-7-

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 September 30, 2018:

	Amortized Cost		Fair Value		Gross Unrealized Gains		Gross Unrealized Losses
	(In thousands)
Corporate	$	120,000	$	109,757	$	-	$	10,243
Municipals		100,018		100,546		589		61
Mutual funds		11,405		11,405		-		-
Collateralized loan obligations		10,000		10,000		-		-
Other		1,205		1,205		-		-
Total other securities		242,628		232,913		589		10,304
REMIC and CMO		372,472		360,119		17		12,370
GNMA		805		848		43		-
FNMA		130,397		125,168		47		5,276
FHLMC		43,939		41,984		9		1,964
Total mortgage-backed securities		547,613		528,119		116		19,610
Total securities available for sale	$	790,241	$	761,032	$	705	$	29,914

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 September 30, 2018.

The corporate securities held by the Company at September 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 September 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	$	1,568	$	1,568
Due after ten years		21,639		19,428

Total other securities		23,207		20,996
Mortgage-backed securities		7,958		7,221

Total	$	31,165	$	28,217

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

Due in one year or less	$	-	$	-
Due after one year through five years		4,219		4,215
Due after five years through ten years		135,466		125,245
Due after ten years		91,538		92,048

Total other securities		231,223		221,508
Mutual funds		11,405		11,405
Mortgage-backed securities		547,613		528,119

Total	$	790,241	$	761,032

-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 September 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	$	19,427	$	2,211	$	-	$	-	$	19,427	$	2,211
Total other securities		1		19,427		2,211		-		-		19,427		2,211

FNMA		1		7,221		737		-		-		7,221		737
Total mortgage-backed securities		1		7,221		737		-		-		7,221		737
Total		2	$	26,648	$	2,948	$	-	$	-	$	26,648	$	2,948


Available for sale securities
Corporate		14	$	99,756	$	10,243	$	-	$	-	$	99,756	$	10,243
Municipals		11		28,686		61		28,686		61		-		-
Total other securities		25		128,442		10,304		28,686		61		99,756		10,243

REMIC and CMO		56		337,184		12,370		189,028		4,658		148,156		7,712
FNMA		23		123,654		5,276		38,461		904		85,193		4,372
FHLMC		2		41,274		1,964		-		-		41,274		1,964
Total mortgage-backed securities		81		502,112		19,610		227,489		5,562		274,623		14,048
Total		106	$	630,554	$	29,914	$	256,175	$	5,623	$	374,379	$	24,291

	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 September 30, 2018 and December 31, 2017. The unrealized losses in held-to-maturity municipal securities at September 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 September 30, 2018 and December 31, 2017 were caused by movements in interest rates. The unrealized losses in securities available for sale at September 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 September 30, 2018 and December 31, 2017.

Realized gains and losses on the sales of securities are determined using the specific identification method. The Company did not sell any securities during the three and nine months ended September 30, 2018. The Company sold available for sale securities totaling $112.4 million during the three and nine months ended September 30, 2017.

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 September 30,					For the nine months ended September 30,
	2018		2017			2018		2017
	(In thousands)
Gross gains from the sale of securities	$	-	$	401		$	-	$	401
Gross losses from the sale of securities		-		(587	)		-		(587	)

Net losses from the sale of securities	$	-	$	(186	)	$	-	$	(186	)

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.

-11-

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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.

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.

Prior to the quarter ended September 30, 2018, we have 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. For the September 30, 2018 ALLL calculation, the decision was made to no longer segregate the loans by origination year and collapse the two portfolios. Management concluded this revision was appropriate due to the loan balance of loans originated before January 1, 2010 represents approximately 11% of the total loan portfolio and these loans are seasoned, therefore most losses in the pre January 1, 2010 originations have already been identified and incurred. Additionally, in connection with this change in methodology we also combined the economic factors used to calculate the qualitative component of the ALLL. The combined impact of these changes in methodology reduced the ALLL by approximately $0.2 million from what would have been recorded if we did not change our methodology. The Loss Emergence Period (“LEP”) used was 1.33 years for the Residential portfolio and 1.58 years for the Commercial portfolio. 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.

-12-

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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.

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

	For the three months ended
	September 30, 2018					September 30, 2017
(Dollars in thousands)	Number		Balance		Modification description	Number		Balance		Modification description


Taxi medallion		-	$	-			4	$	1,306	Loan amortization extension
Commercial business and other		1		1,620	Loan amortization extension		-		-
Total		1	$	1,620			4	$	1,306

	For the nine months ended
	September 30, 2018					September 30, 2017
(Dollars in thousands)	Number		Balance		Modification description	Number		Balance		Modification description


Taxi medallion		-	$	-			9	$	5,595	All Loan amortization extension, with three loans also receiving a below market rate
Commercial business and other		1		1,620	Loan amortization extension		-		-
Total		1	$	1,620			9	$	5,595

-13-

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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:

	September 30, 2018				December 31, 2017
(Dollars in thousands)	Number of contracts		Recorded investment		Number of contracts		Recorded investment

Multi-family residential		7	$	1,927		9	$	2,518
Commercial real estate		-		-		2		1,986
One-to-four family - mixed-use property		5		1,713		5		1,753
One-to-four family - residential		3		557		3		572
Taxi medallion		19		5,366		20		5,916
Commercial business and other		3		1,885		2		462
Total performing troubled debt restructured		37	$	11,448		41	$	13,207

During the nine months ended September 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.

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:

	September 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 and nine months ended September 30, 2018 and 2017.

-14-

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

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

Loans ninety days or more past due and still accruing:
Commercial real estate	$	111	$	2,424
Total		111		2,424

Non-accrual mortgage loans:
Multi-family residential		862		3,598
Commercial real estate		1,398		1,473
One-to-four family - mixed-use property		795		1,867
One-to-four family - residential		6,610		7,808
Total		9,665		14,746

Non-accrual non-mortgage loans:
Small Business Administration		1,395		46
Taxi medallion		712		918
Commercial business and other		761		-
Total		2,868		964

Total non-accrual loans		12,533		15,710

Total non-performing loans	$	12,644	$	18,134

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 September 30,				For the nine months ended September 30,
	2018		2017		2018		2017
	(In thousands)
Interest income that would have been recognized had the loans performed in accordance with their original terms	$	398	$	401	$	1,194	$	1,249
Less: Interest income included in the results of operations		173		166		487		434
Total foregone interest	$	225	$	235	$	707	$	815

-15-

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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


	September 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	$	3,233	$	486	$	863	$	4,582	$	2,230,788	$	2,235,370
Commercial real estate		562		2,025		1,509		4,096		1,456,459		1,460,555
One-to-four family - mixed-use property		1,657		362		796		2,815		562,487		565,302
One-to-four family - residential		1,382		266		6,610		8,258		180,717		188,975
Co-operative apartments		-		-		-		-		7,771		7,771
Construction loans		-		-		-		-		40,239		40,239
Small Business Administration		145		-		1,395		1,540		12,782		14,322
Taxi medallion		-		-		-		-		6,078		6,078
Commercial business and other		5		-		760		765		845,459		846,224
Total	$	6,984	$	3,139	$	11,933	$	22,056	$	5,342,780	$	5,364,836

	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

-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 three month periods indicated:

September 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	$	5,538		$	4,726		$	2,297		$	1,003		$	264		$	549		$	-		$	5,832		$	11	$	20,220
Charge-off's		(18	)		-			(3	)		-			-			(144	)		(40	)		(15	)		-		(220	)
Recoveries		-			-			39			258			-			10			-			2			-		309
Provision (Benefit)		37			(650	)		(407	)		(382	)		(2	)		138			40			1,186			40		-
Ending balance	$	5,557		$	4,076		$	1,926		$	879		$	262		$	553		$	-		$	7,005		$	51	$	20,309

September 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	$	5,917		$	4,688		$	2,568		$	990		$	130		$	306	$	2,330	$	4,668		$	560		$	22,157
Charge-off's		(290	)		-			(1	)		-			-			-		-		(33	)		-			(324	)
Recoveries		66			25			-			58			-			17		-		4			-			170
Provision (Benefit)		43			(86	)		(49	)		(90	)		(13	)		70		3,661		290			(560	)		3,266
Ending balance	$	5,736		$	4,627		$	2,518		$	958		$	117		$	393	$	5,991	$	4,929		$	-		$	25,269

-17-

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 nine month periods indicated:

September 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		(99	)		-			(3	)		(1	)		-		(196	)		(393	)		(29	)		-		(721	)
Recoveries		2			-			118			370			-		25			-			11			-		526
Provision (Benefit)		(169	)		(567	)		(734	)		(572	)		194		55			393			1,502			51		153
Ending balance	$	5,557		$	4,076		$	1,926		$	879		$	262	$	553		$	-		$	7,005		$	51	$	20,309

September 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		(452	)		(4	)		(36	)		(170	)		-		(89	)		(54	)		(48	)		-			(853	)
Recoveries		297			93			68			58			-		66			-			45			-			627
Provision (Benefit)		(32	)		51			(417	)		55			25		(65	)		3,802			440			(593	)		3,266
Ending balance	$	5,736		$	4,627		$	2,518		$	958		$	117	$	393		$	5,991		$	4,929		$	-		$	25,269

-18-

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:

September 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	$	2,235,370	$	1,460,555	$	565,302	$	188,975	$	7,771	$	40,239	$	14,322	$	6,078	$	846,224	$	-	$	5,364,836
Ending balance: individually evaluated for impairment	$	5,023	$	4,206	$	3,680	$	7,561	$	-	$	-	$	1,429	$	6,078	$	25,059	$	-	$	53,036
Ending balance: collectively evaluated for impairment	$	2,230,347	$	1,456,349	$	561,622	$	181,414	$	7,771	$	40,239	$	12,893	$	-	$	821,165	$	-	$	5,311,800

Allowance for credit losses:
Ending balance: individually evaluated for impairment	$	102	$	-	$	151	$	53	$	-	$	-	$	-	$	-	$	2	$	-	$	308
Ending balance: collectively evaluated for impairment	$	5,455	$	4,076	$	1,775	$	826	$	-	$	262	$	553	$	-	$	7,003	$	51	$	20,001

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

-19-

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:

	September 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	$	3,741	$	4,288	$	-	$	5,091	$	5,539	$	-
Commercial real estate		4,206		4,206		-		7,103		7,103		-
One-to-four family mixed-use property		2,484		2,703		-		4,218		4,556		-
One-to-four family residential		7,158		7,792		-		9,272		10,489		-
Non-mortgage loans:
Small Business Administration		1,429		1,577		-		137		151		-
Taxi medallion		6,078		17,343		-		6,834		18,063		-
Commercial business and other		24,773		25,142		-		313		682		-

Total loans with no related allowance recorded		49,869		63,051		-		32,968		46,583		-

With an allowance recorded:
Mortgage loans:
Multi-family residential		1,282		1,282		102		2,220		2,220		205
Commercial real estate		-		-		-		1,986		1,986		177
One-to-four family mixed-use property		1,196		1,196		151		1,227		1,227		198
One-to-four family residential		403		403		53		414		414		56
Non-mortgage loans:
Commercial business and other		286		286		2		348		348		6

Total loans with an allowance recorded		3,167		3,167		308		6,195		6,195		642

Total Impaired Loans:
Total mortgage loans	$	20,470	$	21,870	$	306	$	31,531	$	33,534	$	636

Total non-mortgage loans	$	32,566	$	44,348	$	2	$	7,632	$	19,244	$	6

-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 three months ended:

	September 30, 2018				September 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	$	4,013	$	31	$	2,451	$	12
Commercial real estate		4,587		50		5,142		60
One-to-four family mixed-use property		3,452		28		5,269		45
One-to-four family residential		7,742		7		10,023		29
Construction		365		-		890		15
Non-mortgage loans:
Small Business Administration		739		31		260		5
Taxi medallion		6,152		84		3,177		19
Commercial business and other		20,301		482		1,254		6

Total loans with no related allowance recorded		47,351		713		28,466		191

With an allowance recorded:
Mortgage loans:
Multi-family residential		1,740		19		2,242		28
Commercial real estate		-		-		2,040		24
One-to-four family mixed-use property		1,201		15		1,445		16
One-to-four family residential		405		4		422		4
Non-mortgage loans:
Taxi medallion		-		-		14,716		73
Commercial business and other		297		4		385		5

Total loans with an allowance recorded		3,643		42		21,250		150

Total Impaired Loans:
Total mortgage loans	$	23,505	$	154	$	29,924	$	233

Total non-mortgage loans	$	27,489	$	601	$	19,792	$	108

-21-

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 nine months ended:

	September 30, 2018				September 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	$	4,201	$	67	$	2,650	$	57
Commercial real estate		5,300		176		5,881		214
One-to-four family mixed-use property		3,759		108		5,399		123
One-to-four family residential		7,974		32		10,062		85
Construction		243		10		794		22
Non-mortgage loans:
Small Business Administration		526		33		230		9
Taxi medallion		6,307		252		3,771		74
Commercial business and other		13,560		792		1,584		93

Total loans with no related allowance recorded		41,870		1,470		30,371		677

With an allowance recorded:
Mortgage loans:
Multi-family residential		1,896		78		2,391		107
Commercial real estate		1,206		39		2,039		72
One-to-four family mixed-use property		407		12		1,379		50
One-to-four family residential		-		-		422		12
Non-mortgage loans:
Taxi medallion		-		-		14,663		166
Commercial business and other		307		13		383		17

Total loans with an allowance recorded		3,816		142		21,277		424

Total Impaired Loans:
Total mortgage loans	$	24,986	$	522	$	31,017	$	742

Total non-mortgage loans	$	20,700	$	1,090	$	20,631	$	359

-22-

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:

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

Multi-family residential	$	3,092	$	3,095	$	-	$	-	$	6,187
Commercial real estate		2,969		4,206		-		-		7,175
One-to-four family - mixed-use property		1,215		1,967		-		-		3,182
One-to-four family - residential		480		7,005		-		-		7,485
Small Business Administration		487		274		-		-		761
Taxi medallion		-		6,078		-		-		6,078
Commercial business and other		749		25,050		-		-		25,799
Total loans	$	8,992	$	47,675	$	-	$	-	$	56,667

	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 $45.0 million and $304.1 million, respectively, at September 30, 2018.

-23-

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 September 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 September 30, 2018
(Dollars in thousands)	Loans sold		Proceeds		Net Recoveries (Charge-offs)			Net gain
Delinquent and non-performing loans
Multi-family residential		1	$	595	$	-		$	-
Commercial real estate		1		2,500		-			-
One-to-four family - mixed-use property		2		725		(4	)		-
One-to-four family - residential		2		390		72			10

Total		6	$	4,210	$	68		$	10

	For the three months ended September 30, 2017
(Dollars in thousands)	Loans sold		Proceeds		Net gain (loss)
Delinquent and non-performing loans
Multi-family residential		2	$	707	$	30
Commercial real estate		3		1,118		34
One-to-four family - mixed-use property		3		913		115
Total		8	$	2,738	$	179

Performing loans
Multi-family residential		10	$	12,704	$	(22	)
Commercial real estate		2		17,832		(7	)
Small Business Administration		1		142		2
Total		13	$	30,678	$	(27	)

-24-

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

	For the nine months ended September 30, 2018
(Dollars in thousands)	Loans sold		Proceeds		Net Recoveries (Charge-offs)			Net gain (loss)
Delinquent and non-performing loans
Multi-family residential		4	$	1,559	$	-		$	-
Commercial real estate		4		6,065		-			(235	)
One-to-four family - mixed-use property		2		725		(4	)		-
One-to-four family - residential		2		390		72			10

Total		12	$	8,739	$	68		$	(225	)

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

Total		9	$	5,671	$	-		$	393

	For the nine months ended September 30, 2017
(Dollars in thousands)	Loans sold		Proceeds		Net charge-offs			Net gain (loss)
Delinquent and non-performing loans
Multi-family residential		2	$	707	$	-		$	30
Commercial real estate		4		1,453		(4	)		35
One-to-four family - mixed-use property		8		2,703		(33	)		143
Total		14	$	4,863	$	(37	)	$	208

Performing loans
Multi-family residential		12	$	18,784	$	-		$	(36	)
Commercial real estate		7		26,283		-			(28	)
Small Business Administration		8		5,061		-			252
Total		27	$	50,128	$	-		$	188

Other Real Estate Owned

During the nine months ended September 30, 2018 we foreclosed on one residential real estate property for $0.6 million. During the three months ended September 30, 2018 and the three and nine months ended September 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 September 30, 2018 and December 31, 2017. Included within net loans as of September 30, 2018 and December 31, 2017 was a recorded investment of $8.1 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 September 30, 2018 and 2017, the Company’s net income, as reported, includes $1.1 million and $1.1 million, respectively, of stock-based compensation costs and $0.2 million and $0.4 million of income tax benefits, respectively, related to the stock-based compensation plans in each of the periods. For the nine months ended September 30, 2018 and 2017, the Company’s net income, as reported, includes $5.7 million and $5.2 million, respectively, of stock-based compensation costs and $1.2 million and $1.7 million of income tax benefits, respectively, related to the stock-based compensation plans in each of the periods. The Company did not grant any restricted stock units during the three months ended September 30, 2018 and 2017. During the nine months ended September 30, 2018 and 2017, the Company granted 280,590 and 276,900 restricted stock units, respectively. The Company has not granted stock options since 2009. At September 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 nine months ended September 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		(248,319	)		23.68
Forfeited		(11,955	)		25.31
Non-vested at September 30, 2018		517,638		$	24.91

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

As of September 30, 2018, there was $9.4 million of total unrecognized compensation cost related to RSU awards granted. That cost is expected to be recognized over a weighted-average period of 3.0 years. The total fair value of awards vested for the three months ended September 30, 2018 and 2017 was $0.2 million and $14,000, respectively. The total fair value of awards vested for each of the nine month periods ended September 30, 2018 and 2017 was $7.0 million. 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 nine months ended September 30, 2018:

Phantom Stock Plan	Shares			Fair Value

Outstanding at December 31, 2017		89,180		$	27.50
Granted		9,750			27.47
Forfeited		-			-
Distributions		(65	)		26.16
Outstanding at September 30, 2018		98,865		$	24.40
Vested at September 30, 2018		98,397		$	24.40

The Company recorded stock-based compensation benefit for the Phantom Stock Plan of $0.1 million and $0.2 million for the three months ended September 30, 2018 and 2017, respectively. The total fair value of the distributions from the Phantom Stock Plan was less than $1,000 and $0.2 million for the three months ended September 30, 2018 and 2017, respectively.

For the nine months ended September 30, 2018 and 2017, the company recorded stock-based compensation benefit for the Phantom Stock Plan of $0.2 million and $0.1 million, respectively. The total fair value of the distributions from the Phantom Stock Plan was $2,000 and $0.2 million for the nine months ended September 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 September 30,						Nine months ended September 30,
(In thousands)	2018			2017			2018			2017

Employee Pension Plan:
Interest cost	$	195		$	216		$	585		$	648
Amortization of unrecognized loss		155			174			465			523
Expected return on plan assets		(363	)		(348	)		(1,089	)		(1,044	)
Net employee pension ( benefit) expense	$	(13	)	$	42		$	(39	)	$	127

Outside Director Pension Plan:
Service cost	$	11		$	10		$	33		$	30
Interest cost		19			23			60			69
Amortization of unrecognized gain		(23	)		(23	)		(69	)		(69	)
Amortization of past service liability		3			10			9			30
Net outside director pension expense	$	10		$	20		$	33		$	60

Other Postretirement Benefit Plans:
Service cost	$	88		$	79		$	264		$	237
Interest cost		77			76			231			228
Amortization of past service credit		(13	)		(21	)		(37	)		(64	)
Net other postretirement expense	$	152		$	134		$	458		$	401

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 September 30, 2018, the Company has contributed $72,000 to the Outside Director Pension Plan and $64,000 in contributions were made to the Other Postretirement Benefit Plans. As of September 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 September 30, 2018, the Company carried financial assets and financial liabilities under the fair value option with fair values of $13.9 million and $40.2 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 nine months ended September 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 September 30,		at December 31,		Three Months Ended						Nine Months Ended
(In thousands)	2018		2017		September 30, 2018			September 30, 2017			September 30, 2018			September 30, 2017

Mortgage-backed securities	$	1,330	$	1,590	$	(6	)	$	(5	)	$	(17	)	$	(15	)
Other securities		12,610		12,685		(72	)		40			(272	)		184
Borrowed funds		40,151		36,986		(607	)		(925	)		(3,155	)		(2,090	)
Net loss from fair value adjustments ⁽¹⁾⁽²⁾					$	(685	)	$	(890	)	$	(3,444	)	$	(1,921	)

(1)

The net loss from fair value adjustments presented in the above table does not include net gains (losses) of $0.5 million and ($0.4) million for the three months ended September 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 $2.9 million and ($0.9) million for the nine months ended September 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 September 30, 2018 and December 31, 2017. The fair value of borrowed funds includes accrued interest payable of $0.2 million at September 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 September 30, 2018 and December 31, 2017, Level 1 included one mutual fund.

-28-

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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 September 30, 2018 and December 31, 2017, Level 2 included mortgage related securities, corporate debt, municipals and interest rate swaps.

Level 3 – when there is limited activity or less transparency around inputs to the valuation, financial instruments are classified as Level 3. At September 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 September 30, 2018 and December 31, 2017:

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

Assets:
Mortgage-backed
Securities	$	-	$	-	$	528,119	$	509,650	$	-	$	-	$	528,119	$	509,650
Other securities		11,405		11,575		220,303		216,019		1,205		1,110		232,913		228,704
Interest rate swaps		-		-		32,600		7,388		-		-		32,600		7,388

Total assets	$	11,405	$	11,575	$	781,022	$	733,057	$	1,205	$	1,110	$	793,632	$	745,742

Liabilities:
Borrowings	$	-	$	-	$	-	$	-	$	40,151	$	36,986	$	40,151	$	36,986
Interest rate swaps		-		-		449		3,758		-		-		449		3,758

Total liabilities	$	-	$	-	$	449	$	3,758	$	40,151	$	36,986	$	40,600	$	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
	September 30, 2018					September 30, 2017
	Trust preferred securities		Junior subordinated debentures			Trust preferred securities			Junior subordinated debentures
	(In thousands)

Beginning balance	$	1,188	$	39,566		$	7,444		$	35,137
Security Call		-		-			(6,300	)		-
Net gain from fair value adjustment of financial assets ⁽¹⁾		17		-			28			-
Net loss from fair value adjustment of financial liabilities ⁽¹⁾		-		607			-			925
Decrease in accrued interest receivable		-		-			(89	)		-
Increase (decrease) in accrued interest payable		-		(9	)		-			9
Change in unrealized gains (losses) included in other comprehensive income		-		(13	)		-			-
Ending balance	$	1,205	$	40,151		$	1,083		$	36,071

Changes in unrealized gains (losses) held at period end	$	-	$	(13	)	$	-		$	-

-29-

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

	For the nine months ended
	September 30, 2018					September 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
Security call		-		-			(6,300	)		-
Net gain from fair value adjustment of financial assets ⁽¹⁾		94		-			108			-
Net loss from fair value adjustment of financial liabilities ⁽¹⁾				3,155			-			2,090
Increase (Decrease) in accrued interest receivable		1		-			(88	)		-
Increase in accrued interest payable		-		42			-			22
Change in unrealized gains (losses) included in other comprehensive income		-		(32	)		2			-
Ending balance	$	1,205	$	40,151		$	1,083		$	36,071

Changes in unrealized gains (losses)held at period end	$	-	$	(32	)	$	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 nine months ended September 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:

September 30, 2018

Fair Value

Valuation Technique

Unobservable Input

Range

Weighted Average

(Dollars in thousands)

Assets:

Trust preferred securities

1,205

Discounted cash flows

Discount rate

n/a

5.1

Liabilities:

Junior subordinated debentures

40,151

Discounted cash flows

Discount rate

n/a

5.1