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, 2020

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)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.01 par value	FFIC	The Nasdaq Stock Market LLC

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	Accelerated filer  __
Non-accelerated filer  __	Smaller reporting company  __
Emerging growth 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 30, 2020 was 28,218,427.

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	6
Notes to Consolidated Financial Statements	8
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	54
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk	71
ITEM 4. Controls and Procedures	71
PART II  — OTHER INFORMATION
ITEM 1. Legal Proceedings	72
ITEM 1A. Risk Factors	72
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds	72
ITEM 3. Defaults Upon Senior Securities	72
ITEM 4. Mine Safety Disclosures	72
ITEM 5. Other Information	72
ITEM 6. Exhibits	73
SIGNATURES	75

i

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Consolidated Statements of Financial Condition

(Unaudited)

Item 1.   Financial Statements

	September 30,		December 31,
	2020		2019
	(Dollars in thousands, except per share data)
Assets
Cash and due from banks	$	75,560	$	49,787
Securities held-to-maturity:
Mortgage-backed securities (including assets pledged of $8,942 and $5,283 at September 30, 2020 and December 31, 2019, respectively; fair value of $9,198 and $8,114 at September 30, 2020 and December 31, 2019, respectively)		7,919		7,934
Other securities, net of allowance for credit losses of $402 (none pledged; fair value of $53,268 and $53,998 at September 30, 2020 and December 31, 2019, respectively)		50,252		50,954
Securities available for sale, at fair value:
Mortgage-backed securities (including assets pledged of $238,818 and $212,038 at September 30, 2020 and December 31, 2019, respectively; $672 and $772 at fair value pursuant to the fair value option at September 30, 2020 and December 31, 2019, respectively)		386,235		523,849
Other securities (none pledged; $13,841 and $13,548 at fair value pursuant to the fair value option at September 30, 2020 and December 31, 2019, respectively)		234,721		248,651
Loans:
Multi-family residential		2,252,757		2,238,591
Commercial real estate		1,636,659		1,582,008
One-to-four family - mixed-use property		585,159		592,471
One-to-four family - residential		191,011		188,216
Co-operative apartments		8,132		8,663
Construction		63,567		67,754
Small Business Administration		124,649		14,445
Taxi medallion		2,317		3,309
Commercial business and other		1,063,429		1,061,478
Net unamortized premiums and unearned loan fees		13,718		15,271
Allowance for loan losses		(38,343)		(21,751)
Net loans		5,903,055		5,750,455
Interest and dividends receivable		36,068		25,722
Bank premises and equipment, net		25,766		28,676
Federal Home Loan Bank of New York stock, at cost		57,119		56,921
Bank owned life insurance		158,701		157,713
Goodwill		16,127		16,127
Other real estate owned, net		—		239
Right of Use Asset		42,326		41,254
Other assets		69,207		59,494
Total assets	$	7,063,056	$	7,017,776
Liabilities
Due to depositors:
Non-interest bearing	$	607,954	$	435,072
Interest-bearing		4,298,405		4,586,977
Total Deposits		4,906,359		5,022,049
Mortgagors' escrow deposits		57,136		44,375
Borrowed funds:
Federal Home Loan Bank advances		1,211,122		1,118,528
Subordinated debentures		74,566		74,319
Junior subordinated debentures, at fair value		38,287		44,384
Total borrowed funds		1,323,975		1,237,231
Operating lease liability		49,737		49,367
Other liabilities		139,443		85,082
Total liabilities		6,476,650		6,438,104
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, 2020 and December 31, 2019; 28,218,427 shares and 28,157,206 shares outstanding at September 30, 2020 and December 31, 2019, respectively)		315		315
Additional paid-in capital		227,877		226,691
Treasury stock, at average cost (3,312,168 shares and 3,373,389 shares at September 30, 2020 and December 31, 2019, respectively)		(69,409)		(71,487)
Retained earnings		445,931		433,960
Accumulated other comprehensive loss, net of taxes		(18,308)		(9,807)
Total stockholders' equity		586,406		579,672
Total liabilities and stockholders' equity	$	7,063,056	$	7,017,776

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				For the nine months ended
	September 30,				September 30,
(Dollars in thousands, except per share data)	2020		2019		2020		2019
Interest and dividend income
Interest and fees on loans	$	60,367	$	62,825	$	182,033	$	187,428
Interest and dividends on securities:
Interest		3,525		6,287		12,963		20,007
Dividends		9		18		35		56
Other interest income		13		259		325		1,286
Total interest and dividend income		63,914		69,389		195,356		208,777
Interest expense
Deposits		7,093		22,244		35,842		66,540
Other interest expense		6,897		8,196		20,047		21,476
Total interest expense		13,990		30,440		55,889		88,016
Net interest income		49,924		38,949		139,467		120,761
Provision for credit losses		2,470		683		19,267		3,129
Net interest income after provision for credit losses		47,454		38,266		120,200		117,632
Non-interest income
Banking services fee income		1,316		847		3,058		2,879
Net loss on sale of securities		—		—		(91)		(15)
Net gain on sale of loans		—		204		42		381
Net gain on sale of assets		—		—		—		770
Net gain (loss) from fair value adjustments		(2,225)		(2,124)		1,987		(6,160)
Federal Home Loan Bank of New York stock dividends		874		834		2,719		2,563
Life insurance proceeds		—		—		659		43
Bank owned life insurance		923		1,000		2,798		2,550
Other income		463		278		1,052		1,422
Total non-interest income		1,351		1,039		12,224		4,433
Non-interest expense
Salaries and employee benefits		17,335		15,461		52,139		50,295
Occupancy and equipment		3,021		2,847		8,688		8,378
Professional services		2,064		2,167		6,911		6,238
FDIC deposit insurance		727		(589)		2,114		563
Data processing		1,668		1,490		5,175		4,402
Depreciation and amortization		1,542		1,439		4,633		4,454
Other real estate owned/foreclosure expense		240		48		121		145
Net loss from other real estate owned		5		—		36		—
Other operating expenses		3,383		3,182		11,303		11,147
Total non-interest expense		29,985		26,045		91,120		85,622
Income before income taxes		18,820		13,260		41,304		36,443
Provision for income taxes
Federal		3,359		2,457		8,655		7,381
State and local		1,130		79		1,436		714
Total taxes expense		4,489		2,536		10,091		8,095
Net income	$	14,331	$	10,724	$	31,213	$	28,348
Basic earnings per common share	$	0.50	$	0.37	$	1.08	$	0.99
Diluted earnings per common share	$	0.50	$	0.37	$	1.08	$	0.99
Dividends per common share	$	0.21	$	0.21	$	0.63	$	0.63

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				For the nine months ended
	September 30,				September 30,
(In thousands)	2020		2019		2020		2019
Net income	$	14,331		10,724		31,213		28,348
Other comprehensive income (loss), net of tax:
Amortization of actuarial losses, net of taxes of ($30) and ($11) for the three months ended September 30, 2020 and 2019, respectively and of ($91) and ($30) for the nine months ended September 30, 2020 and 2019, respectively.		67		22		201		66
Amortization of prior service credits, net of taxes of $6 and $7 for the three months ended September 30, 2020 and 2019, respectively and of $20 and $20 for nine months ended September 30, 2020 and 2019, respectively.		(15)		(15)		(44)		(44)
Net unrealized gains(losses) on securities, net of taxes of ($1,449) and $218 for the three months ended September 30, 2020 and 2019, respectively and of ($2,000) and ($5,102) for nine months ended September 30, 2020 and 2019, respectively.		3,185		(475)		4,397		11,349
Reclassification adjustment for net losses included in income, net of taxes of ($29) and ($5) for the nine months ended September 30, 2020 and 2019, respectively.		—		—		62		10
Net unrealized gains (losses) on cash flow hedges, net of taxes of ($849) and $874 for the three months ended September 30, 2020 and 2019 respectively and of $6,253 and $5,293 for nine months ended September 30, 2020 and 2019, respectively.		1,866		(1,946)		(13,744)		(11,782)
Change in fair value of liabilities related to instrument-specific credit risk, net of taxes of ($50) and ($27) for the three months ended September 30, 2020 and 2019 respectively and of ($280) and ($81) for the nine months ended September 30, 2020 and 2019, respectively.		111		61		627		184
Total other comprehensive income (loss), net of tax		5,214		(2,353)		(8,501)		(217)
Comprehensive income	$	19,545	$	8,371	$	22,712	$	28,131

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,
	2020		2019
	(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	31,213	$	28,348
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit loan losses		19,267		3,129
Depreciation and amortization of bank premises and equipment		4,633		4,454
Amortization of premium, net of accretion of discount		4,721		4,932
Net (gain) loss from fair value adjustments		(1,987)		6,160
Net loss from fair value adjustments on qualifying hedges		2,208		2,717
Net gain from sale of loans		(42)		(381)
Net loss from sale of securities		91		15
Net gain from sale of asset		—		(770)
Net loss from OREO		36		—
Income from bank owned life insurance		(2,798)		(2,550)
Life insurance proceeds		(659)		(43)
Stock-based compensation expense		5,510		6,617
Deferred compensation		(3,579)		(2,526)
Deferred income tax benefit		(4,174)		(3,777)
Increase in other liabilities		6,143		4,358
Decrease (increase) in other assets		(15,043)		1,659
Net cash provided by operating activities		45,540		52,342
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of bank premises and equipment		(1,723)		(2,182)
Net purchases of Federal Home Loan Bank of New York shares		(198)		(7,998)
Purchases of securities held-to-maturity		—		(30,030)
Proceeds from maturities and calls of securities held-to-maturity		180		1,568
Proceeds from prepayments of securities held-to-maturity		129		434
Purchases of securities available for sale		(130,397)		(141,798)
Proceeds from sales and calls of securities available for sale		143,376		65,493
Proceeds from maturities and prepayments of securities available for sale		142,320		88,217
Proceeds from sale of assets		—		813
Proceeds from bank owned life insurance		2,477		777
Purchase of bank owned life insurance		—		(25,000)
Net originations of loans		(11,295)		(9,660)
Purchases of loans		(132,893)		(193,703)
Proceeds from sale of real estate owned		203		—
Proceeds from sale of loans		580		7,187
Net cash provided by (used in) investing activities		12,759		(245,882)

-4-

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Consolidated Statements of Cash Flows (Contd.)

(Unaudited)

	For the nine months ended September 30,
	2020		2019
	(In thousands)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in non-interest bearing deposits		172,882		8,039
Net decrease in interest-bearing deposits		(288,694)		(11,643)
Net increase in mortgagors' escrow deposits		12,761		16,942
Net proceeds from short-term borrowed funds		—		115,750
Proceeds from long-term borrowings		240,378		184,950
Repayment of long-term borrowings		(147,771)		(131,301)
Purchases of treasury stock		(3,872)		(2,656)
Proceeds from issuance of common stock upon exercise of stock options		—		3
Cash dividends paid		(18,210)		(18,116)
Net cash provided by (used in) financing activities		(32,526)		161,968
Net increase (decrease) in cash and cash equivalents		25,773		(31,572)
Cash and cash equivalents, beginning of period		49,787		118,561
Cash and cash equivalents, end of period	$	75,560	$	86,989
SUPPLEMENTAL CASH FLOW DISCLOSURE
Interest paid	$	57,334	$	85,346
Income taxes paid		13,594		8,531
Taxes paid if excess tax benefits were not tax deductible		13,404		8,523
Non-cash activities:
Loans transferred to REO		—		239

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

-5-

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Consolidated Statement of Changes in Stockholders’ Equity

(Unaudited)

					Additional						Accumulated Other
			Common		Paid-in		Retained		Treasury		Comprehensive
(Dollars in thousands, except per share data)	Total		Stock		Capital		Earnings		Stock		Income (Loss)
Balance at December 31, 2019	$	579,672	$	315	$	226,691	$	433,960	$	(71,487)	$	(9,807)
Impact of adoption of ASC 326 - Credit Losses		(875)		—		—		(875)		—		—
Net loss		(1,390)		—		—		(1,390)		—		—
Award of common shares released from Employee Benefit Trust (116,414 shares)		1,398		—		1,398		—		—		—
Vesting of restricted stock unit awards (272,946 shares)		—		—		(5,626)		(156)		5,782		—
Stock-based compensation expense		3,430		—		3,430		—		—		—
Purchase of treasury shares (142,405 shares)		(2,342)		—		—		—		(2,342)		—
Repurchase of shares to satisfy tax obligation (74,145 shares)		(1,493)		—		—		—		(1,493)		—
Dividends on common stock ($0.21 per share)		(6,084)		—		—		(6,084)		—		—
Other comprehensive loss		(22,633)		—		—		—		—		(22,633)
Balance at March 31, 2020		549,683		315		225,893		425,455		(69,540)		(32,440)
Net income		18,272		—		—		18,272		—		—
Award of common shares released from Employee Benefit Trust (10,956 shares)		40		—		40		—		—		—
Vesting of restricted stock unit awards (6,390 shares)		—		—		(133)		(1)		134		—
Stock-based compensation expense		1,101		—		1,101		—		—		—
Repurchase of shares to satisfy tax obligation (2,558 shares)		(30)		—		—		—		(30)		—
Dividends on common stock ($0.21 per share)		(6,063)		—		—		(6,063)		—		—
Other comprehensive income		8,918		—		—		—		—		8,918
Balance at June 30, 2020		571,921		315		226,901		437,663		(69,436)		(23,522)
Net income		14,331		—		—		14,331		—		—
Award of common shares released from Employee Benefit Trust (9,384 shares)		31		—		31		—		—		—
Vesting of restricted stock unit awards (1,640 shares)		—		—		(34)		—		34		—
Stock-based compensation expense		979		—		979		—		—		—
Repurchase of shares to satisfy tax obligation (647 shares)		(7)		—		—		—		(7)		—
Dividends on common stock ($0.21 per share)		(6,063)		—		—		(6,063)		—		—
Other comprehensive loss		5,214		—		—		—		—		5,214
Balance at September 30, 2020	$	586,406	$	315	$	227,877	$	445,931	$	(69,409)	$	(18,308)

-6-

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Consolidated Statement of Changes in Stockholders’ Equity (Contd.)

(Unaudited)

					Additional						Accumulated Other
			Common		Paid-in		Retained		Treasury		Comprehensive
(Dollars in thousands, except per share data)	Total		Stock		Capital		Earnings		Stock		Income (Loss)
Balance at December 31, 2018	$	549,464	$	315	$	222,720	$	414,327	$	(75,146)	$	(12,752)
Impact of adoption of ASC 842-Leases		2,716		—		—		2,716		—		—
Net income		7,068		—		—		7,068		—		—
Award of common shares released from Employee Benefit Trust (138,775 shares)		2,086		—		2,086		—		—		—
Vesting of restricted stock unit awards (287,155 shares)				—		(5,878)		(210)		6,088		—
Exercise of stock options (300 shares)		3		—		—		(3)		6		—
Stock-based compensation expense		3,931		—		3,931		—		—		—
Repurchase of shares to satisfy tax obligation (83,908 shares)		(1,877)		—		—		—		(1,877)		—
Dividends on common stock ($0.21 per share)		(6,042)		—		—		(6,042)		—		—
Other comprehensive income		2,210		—		—		—		—		2,210
Balance at March 31, 2019		559,559		315		222,859		417,856		(70,929)		(10,542)
Net income		10,556		—		—		10,556		—		—
Award of common shares released from Employee Benefit Trust (5,568 shares)		81		—		81		—		—		—
Vesting of restricted stock unit awards (1,120 shares)		—		—		(24)		—		24		—
Stock-based compensation expense		1,315		—		1,315		—		—		—
Repurchase of shares to satisfy tax obligation (382 shares)		(8)		—		—		—		(8)		—
Dividends on common stock ($0.21 per share)		(6,039)		—		—		(6,039)		—		—
Other comprehensive loss		(74)		—		—		—		—		(74)
Balance at June 30, 2019		565,390		315		224,231		422,373		(70,913)		(10,616)
Net income		10,724		—		—		10,724		—		—
Award of common shares released from Employee Benefit Trust (5,015 shares)		66		—		66		—		—		—
Vesting of restricted stock unit awards (9,284 shares)		—		—		(197)		—		197		—
Stock-based compensation expense		1,371		—		1,371		—		—		—
Purchase of treasury shares (40,000 shares)		(771)		—		—		—		(771)		—
Dividends on common stock ($0.21 per share)		(6,035)		—		—		(6,035)		—		—
Other comprehensive loss		(2,353)		—		—		—		—		(2,353)
Balance at September 30, 2019	$	568,392	$	315	$	225,471	$	427,062	$	(71,487)	$	(12,969)

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

-7-

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

1.     Basis of Presentation

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

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

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

The accompanying unaudited consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and general practices within the banking industry. The information furnished in these interim statements reflects all adjustments 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, 2019.

When necessary, certain reclassifications were made to prior-year amounts to conform to the current-year presentation. Such reclassifications had no effect on prior period net income or shareholders’ equity and were insignificant amounts.

2.     Use of Estimates

In December 2019, a novel coronavirus (COVID-19) was reported in China, and, in March 2020, the World Health Organization declared it a pandemic. The outbreak of COVID-19 has adversely impacted a broad range of industries in which the Company’s customers operate and could impair their ability to fulfill their financial obligations to the Company.  The World Health Organization has declared COVID-19 to be a global pandemic indicating that almost all public commerce and related business activities must be, to varying degrees, curtailed with the goal of decreasing the rate of new infections. The spread of the outbreak has caused significant disruptions in the U.S. economy and has disrupted banking and other financial activity in the areas in which the Company operates.

As a result of the emergence of the pandemic and the uncertainty, it is not possible to determine the overall impact of the pandemic on the Company’s business. However, if the pandemic continues for an extended period of time, there could be a material adverse effect on the Company’s business, results of operations, financial condition and cash flows.

On March 27, 2020, the President of the United States signed into law the Coronavirus Aid, Relief and Economic Security (“CARES”) Act in response to the coronavirus pandemic. This legislation aims at providing relief for individuals and businesses that have been negatively impacted by the coronavirus pandemic.

-8-

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The CARES Act includes a provision for the Company to opt out of applying the “troubled-debt restructuring” (“TDR”) accounting guidance in Accounting Standards Codification (“ASC”) 310-40 for certain loan modifications. Loan modifications made between March 1, 2020 and the earlier of i) December 30, 2020 or ii) 60 days after the President declares a termination of the COVID-19 national emergency are eligible for this relief if the related loans were not more than 30 days past due as of December 31, 2019. The Bank adopted this provision and at September 30, 2020, we have 509 active forbearances for loans with an aggregate outstanding loan balance of approximately $846 million resulting in total deferment of $28.4 million in principal, interest and escrow, as disclosed more fully in Note 5 (“Loans”) of the Notes to the Consolidated Financial Statements.

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, including COVID-19 related changes, are used in connection with the determination of the allowance for credit losses, the evaluation of goodwill for impairment, the review of the need for a valuation allowance of the Company’s deferred tax assets and the fair value of financial instruments.

Goodwill

Goodwill is presumed to have an indefinite life and is tested annually for impairment, or more frequently when certain conditions are met. If the fair value of the reporting unit is greater than the carrying value, no further evaluation is required. If the fair value of the reporting unit is less than the carrying value, further evaluation would be required to compare the fair value of the reporting unit to the carrying value and determine if impairment is required.

Quoted market prices in active markets are the best evidence of fair value and are to be used as the basis for measurement, when available. Other acceptable valuation methods include an asset approach, which determines a fair value based upon the value of assets net of liabilities, an income approach, which determines fair value using one or more methods that convert anticipated economic benefits into a present single amount, and a market approach, which determines a fair value based on the similar businesses that have been sold.

Volatility in the Company’s stock price primarily driven by the COVID-19 pandemic has resulted in the net book value of our reporting unit exceeding market capitalization, however, the fair value of our reporting unit is not driven solely by the market price of our stock. As described above, fair value of our reporting unit is derived using a combination of an asset approach, an income approach and a market approach. These valuation techniques consider several other factors beyond our market capitalization, such as the estimated future cash flows of our reporting unit, the discount rate used to present value such cash flows and the market multiples of comparable companies. Changes to input assumptions used in the analysis could result in materially different evaluations of goodwill impairment. We qualitatively assess whether the carrying value of our reporting unit exceeds fair value. If this qualitative assessment determines that it is more likely than not that the carrying value exceeds fair value, further qualitative evaluation for impairment would be required to compare the fair value of the reporting unit to the carrying value and determine if impairment is required.

In performing the goodwill impairment testing, the Company has identified a single reporting unit. The Company continues to evaluate the impact of the COVID-19 pandemic and as such, evaluated goodwill for impairment at September 30, 2020. The Company conducted a quantitative impairment test of goodwill as of September 30, 2020, which did not indicate an impairment of goodwill. Management will continue to monitor if events requiring further goodwill impairment testing have occurred. At September 30, 2020 and December 31, 2019, the carrying amount of goodwill totaled $16.1 million. The identification of additional reporting units, the use of other valuation techniques and/or changes to input assumptions used in the analysis could result in materially different evaluations of goodwill impairment.

-9-

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

3.     Earnings Per Share

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

	For the three months ended						For the nine months ended
	September 30,						September 30,
	2020			2019			2020			2019
	(In thousands, except per share data)
Net income	$	14,331		$	10,724		$	31,213		$	28,348
Divided by:
Weighted average common shares outstanding		28,874			28,730			28,865			28,704
Weighted average common stock equivalents		—			—			—			—
Total weighted average common shares outstanding and common stock equivalents		28,874			28,730			28,865			28,704
Basic earnings per common share	$	0.50		$	0.37		$	1.08		$	0.99
Diluted earnings per common share (1)	$	0.50		$	0.37		$	1.08		$	0.99
Dividend payout ratio		42.0	%		56.8	%		58.3	%		63.6	%

(1) For the three and nine months ended September 30, 2020 and 2019, there were no common stock equivalents that were anti-dilutive.

4.     Securities

The Company did not hold any trading securities at September 30, 2020 and December 31, 2019. Securities available for sale are recorded at fair value. Securities held-to-maturity (“HTM”) are recorded at amortized cost.

Allowance for credit losses

The Company’s estimate of expected credit losses for held-to-maturity debt securities is based on historical information, current conditions and a reasonable and supportable forecast. The Company’s portfolio is made up of three securities, two of which are structured similar to a commercial owner occupied loan, which is modeled for credit losses similar to commercial business loans secured by real estate. The other security is issued and guaranteed by Fannie Mae, which is a government sponsored enterprise that has a credit rating and perceived credit risk comparable to the U.S. government and therefore the Company assumes a zero loss expectation. As of September 30, 2020, we have one active forbearance for held-to-maturity securities with an outstanding balance of $20.9 million. During the time this security is in forbearance, it is considered current and as such, continues to accrue interest at its original contractual terms. Accrued interest receivable on held-to-maturity securities totaled $0.1 million at September 30, 2020 and is excluded from estimates of credit losses.

The following table summarizes the Company’s portfolio of securities held-to-maturity at September 30, 2020:

					Gross		Gross		Allowance
	Amortized				Unrealized		Unrealized		for Credit
	Cost		Fair Value		Gains		Losses		Losses
	(In thousands)
Securities held-to-maturity:
Municipals	$	50,654	$	53,268	$	2,614	$	—	$	(402)
Total other securities		50,654		53,268		2,614		—		(402)
FNMA		7,919		9,198		1,279		—		—
Total mortgage-backed securities		7,919		9,198		1,279		—		—
Total	$	58,573	$	62,466	$	3,893	$	—	$	(402)

-10-

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 held-to-maturity at December 31, 2019:

					Gross		Gross
	Amortized				Unrealized		Unrealized
	Cost		Fair Value		Gains		Losses
	(In thousands)
Securities held-to-maturity:
Municipals	$	50,954	$	53,998	$	3,044	$	—
Total other securities		50,954		53,998		3,044		—
FNMA		7,934		8,114		180		—
Total mortgage-backed securities		7,934		8,114		180		—
Total	$	58,888	$	62,112	$	3,224	$	—

The following table summarizes the Company’s portfolio of securities available for sale at September 30, 2020:

					Gross		Gross
	Amortized				Unrealized		Unrealized
	Cost		Fair Value		Gains		Losses
	(In thousands)
Securities available for sale:
Corporate	$	130,000	$	123,516	$	192	$	6,676
Municipals		65		65		—		—
Mutual funds		12,691		12,691		—		—
Collateralized loan obligations		100,473		97,300		—		3,173
Other		1,149		1,149		—		—
Total other securities		244,378		234,721		192		9,849
REMIC and CMO		206,973		213,941		7,007		39
GNMA		505		554		49		—
FNMA		129,140		132,001		2,883		22
FHLMC		39,266		39,739		504		31
Total mortgage-backed securities		375,884		386,235		10,443		92
Total securities available for sale	$	620,262	$	620,956	$	10,635	$	9,941

-11-

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The following table summarizes the Company’s portfolio of securities available for sale at December 31, 2019:

					Gross		Gross
	Amortized				Unrealized		Unrealized
	Cost		Fair Value		Gains		Losses
	(In thousands)
Securities available for sale:
Corporate	$	130,000	$	123,050	$	—	$	6,950
Municipals		12,797		12,916		119		—
Mutual funds		12,216		12,216		—		—
Collateralized loan obligations		100,349		99,137		—		1,212
Other		1,332		1,332		—		—
Total other securities		256,694		248,651		119		8,162
REMIC and CMO		348,236		348,989		2,193		1,440
GNMA		653		704		51		—
FNMA		104,235		104,882		1,073		426
FHLMC		68,476		69,274		871		73
Total mortgage-backed securities		521,600		523,849		4,188		1,939
Total securities available for sale	$	778,294	$	772,500	$	4,307	$	10,101

We did not hold any private issue CMO’s that are collateralized by commercial real estate mortgages at September 30, 2020 and December 31, 2019.

The corporate securities held by the Company at September 30, 2020 and December 31, 2019 are issued by U.S. banking institutions.

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, 2020, 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.

	Amortized
Securities held-to-maturity:	Cost		Fair Value
	(In thousands)
Due after ten years	$	50,654	$	53,268
Total other securities		50,654		53,268
Mortgage-backed securities		7,919		9,198
Total	$	58,573	$	62,466

	Amortized
Securities available for sale:	Cost		Fair Value
	(In thousands)
Due after one year through five years	$	45,000	$	43,654
Due after five years through ten years		110,431		104,599
Due after ten years		76,256		73,777
Total other securities		231,687		222,030
Mutual funds		12,691		12,691
Mortgage-backed securities		375,884		386,235
Total	$	620,262	$	620,956

-12-

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, 2020
	Total					Less than 12 months				12 months or more
				Unrealized				Unrealized				Unrealized
	Count	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
	(Dollars in thousands)
Available for sale securities
Corporate	14	$	113,324	$	6,676	$	—	$	—	$	113,324	$	6,676
Collateralized loan obligations	13		97,299		3,173		7,293		183		90,006		2,990
Total other securities	27		210,623		9,849		7,293		183		203,330		9,666
REMIC and CMO	2		5,663		39		5,663		39		—		—
GNMA (1)	1		48		—		48		—		—		—
FNMA	1		8,652		22		—		—		8,652		22
FHLMC	1		13,449		31		13,449		31		—		—
Total mortgage-backed securities	5		27,812		92		19,160		70		8,652		22
Total securities available for sale	32	$	238,435	$	9,941	$	26,453	$	253	$	211,982	$	9,688

(1) At September 30, 2020, the unrealized loss was less than $1,000 and in a continuous loss position for less than 12 months.

	At December 31, 2019
	Total					Less than 12 months				12 months or more
				Unrealized				Unrealized				Unrealized
	Count	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
	(Dollars in thousands)
Available for sale securities
Corporate	16	$	123,050	$	6,950	$	—	$	—	$	123,050	$	6,950
Collateralized loan obligations	13		99,137		1,212		25,451		108		73,686		1,104
Total other securities	29		222,187		8,162		25,451		108		196,736		8,054
REMIC and CMO	23		120,989		1,440		102,384		1,117		18,605		323
GNMA	1		49		—		49		—		—		—
FNMA	8		67,618		426		19,073		138		48,545		288
FHLMC	1		30,200		73		—		—		30,200		73
Total mortgage-backed securities	33		218,856		1,939		121,506		1,255		97,350		684
Total securities available for sale	62	$	441,043	$	10,101	$	146,957	$	1,363	$	294,086	$	8,738

The Company reviewed each available for sale debt security that had an unrealized loss at September 30, 2020 and December 31, 2019. At September 30, 2020, the Company evaluated whether the decline in fair value of a debt security resulted from credit losses or other factors under ASC 326. 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. All of these securities are rated investment grade or above and have a long history of no credit losses. 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.

-13-

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

In determining the risk of loss for available for sale securities, the Company considered that mortgage-backed securities are either fully guaranteed or issued by a government sponsored enterprise, which has a credit rating and perceived credit risk comparable to U.S. government, the issuer of Corporate securities are global systematically important banks, and the tranche of the purchased CLO’s. Each of these securities is performing according to its terms and, in the opinion of management, will continue to perform according to its terms. Based on this review, management believes that the unrealized losses have resulted from other factors not deemed credit-related and no allowance for credit loss was recorded.

Accrued interest receivable on available-for-sale debt securities totaled $1.4 million at September 30, 2020 and is excluded from the estimate of credit losses.

Upon adoption of ASC Topic 326, “Credit Losses” on January 1, 2020, see Note 17 related to the adoption of Topic 326, we recorded a transition adjustment of $0.3 million in the allowance for credit losses for held-to-maturity debt securities.

The following table presents the activity in the allowance for credit losses for debt securities held-to-maturity for the three months ended September 30, 2020:

	Mortgage-backed securities		Other securities
	(In thousands)
Beginning balance	$	—	$	402
Provision		—		—
Allowance for credit losses - securities	$	—	$	402

The following table presents the activity in the allowance for credit losses for debt securities held-to-maturity for the nine months ended September 30, 2020:

	Mortgage-backed securities		Other securities
	(In thousands)
Beginning balance	$	—	$	—
CECL adoption		—		340
Provision		—		62
Allowance for credit losses - securities	$	—	$	402

Realized gains and losses on the sales of securities are determined using the specific identification method. The Company did not sell any securities during three months ended September 30, 2020 and 2019. The Company sold $130.8 million and $26.4 million in mortgage-backed securities during the nine months ended September 30, 2020 and 2019, respectively.

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				For the nine months ended
	September 30,				September 30,
	2020		2019		2020		2019
	(In thousands)
Gross gains from the sale of securities	$	—	$	—	$	1,476	$	423
Gross losses from the sale of securities		—		—		(1,567)		(438)
Net losses from the sale of securities	$	—	$	—	$	(91)	$	(15)

-14-

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

5.     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. Accrued interest receivable totaled $33.5 million at September 30, 2020 and was reported in “Interest and dividends receivable” on the Consolidated Statements of Financial Condition. 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.

Pursuant to the CARES Act, loan modifications made between March 1, 2020 and the earlier of i) December 30, 2020 or ii) 60 days after the President declares a termination of the COVID-19 national emergency are not classified as TDRs if the related loans were not more than 30 days past due as of December 31, 2019. The Company has elected that loans temporarily modified for borrowers directly impacted by COVID-19 are not considered TDR, assuming the above criteria is met and as such, these loans are considered current and continue to accrue interest at its original contractual terms.  Deferrals granted under the Cares Act are deemed in accrual status and interest income is accrued until the end of deferral period even if there are no payments being collected. When the forbearance period is over, borrowers are expected to resume contractual payments. The determination of whether a loan is past due is based on the modified terms of the agreement. Once the deferral period is over, the borrower will resume making payments and normal delinquency-based non-accrual policies will apply.

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 the loan is well secured and there is, in our opinion, compelling evidence the borrower will bring the loan current in the immediate future. Prior to a real estate secured loan becoming 90 days delinquent, an updated appraisal is ordered and/or an internal evaluation is prepared.

Allowance for credit losses

The Allowance for credit losses (“ACL”) is an estimate that is deducted from the amortized cost basis of the financial asset to present the net carrying value at the amount expected to be collected on the financial assets. Loans are charged off against that ACL when management believes that a loan balance is uncollectable based on quarterly analysis of credit risk.

As of January 1, 2020, the Company adopted Topic 326, see Note 17 related to the adoption of Topic 326.

The amount of the ACL is based upon a loss rate model that considers multiple factors which reflects management’s assessment of the credit quality of the loan portfolio. Management estimates the allowance balance using relevant information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. The factors are both quantitative and qualitative in nature including, but not limited to, historical losses, economic conditions, trends in delinquencies, value and adequacy of underlying collateral, volume and portfolio mix, and internal loan processes.

-15-

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The quantitative allowance is calculated using a number of inputs and assumptions. The process and guidelines were developed using, among other factors, the guidance from federal banking regulatory agencies and GAAP. The results of this process, support management’s assessment as to the adequacy of the ACL at each balance sheet date.

The process for calculating the allowance for credit losses begins with our historical losses by portfolio segment. The losses are then incorporated into reasonable and supportable forecast to develop the quantitative component of the allowance for credit losses.

The Bank has established an Asset Classification Committee which carefully evaluates loans which are past due 90 days and/or are classified. The Asset Classification Committee thoroughly assesses the condition and circumstances surrounding each loan meeting the criteria. The Bank also has a Delinquency Committee that evaluates loans meeting specific criteria. The Bank’s loan policy requires loans to be placed into non-accrual status once the loan becomes 90 days delinquent unless there is, compelling evidence the borrower will bring the loan current in the immediate future.  

For the quantitative measurement, the Company’s portfolio consists of mortgage loans secured by real estate (both commercial and retail) and non-mortgage loans, which are primarily commercial business term loans and line of credit. Based on the Company’s evaluation of the loan portfolio, listed below are the pools that were established as a baseline level of segmentation with their primary risk factor. The Company confirms this data remains relevant in absence of changes to the composition of the portfolio.

The mortgage portfolio is a substantial component of Company’s portfolio and it is a focus of the Company’s lending strategy, primarily focusing on multi-family and commercial real estate. While the mortgage portfolio consists of real-estate secured loans, the source of repayment and types of properties securing these loans varies and thus the Company first considered these differences as follows:

1. One-to-four family residential property – These loans are secured by residential properties for which the primary source of repayment is the income generated by the residential borrower. Delinquency status is considered a risk factor in this pool.

2. One-to-four family mixed use – These loans are secured by residential properties for which the primary source of repayment is the income generated by the property. Unlike the one-to-four residential credits, properties securing mixed use loans include a commercial space component. Delinquency status is considered a risk factor in this pool.

3. Multi-family residential – These loans are secured by multi-unit residential buildings for which the primary source of repayment is the income generated by the property. Properties securing multifamily loans have five or more residential units and thus a greater number of cash flow streams compared to one-to-four mixed use loans. Delinquency status and risk rating are considered risk factors in this pool.

4. Commercial real estate (CRE) – These loans are secured by properties for commercial use for which the primary source of repayment is the income generated by the property. Delinquency status, risk rating and collateral type are considered risk factors in this pool.

5. Construction – These loans are provided to fund construction projects for both residential and commercial properties. These loans are inherently different from all others as they represent “work in progress” and expose the Company to risk from non-completion and less recovery value should the sponsor of an unfinished property default. Delinquency status and risk rating are considered risk factors in this pool.

Relative to the non-mortgage portfolio, the Company considered the following categories as a baseline for evaluation:

6. Commercial Business – These loans are not typically secured by real estate. The primary source of repayment is cash flows from operations of the borrower’s business. Within this category are Small Business Administration (“SBA”) credits and equipment finance credits. Delinquency status, risk rating and industry are considered a risk factors in this pool.

-16-

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

7. Commercial Business secured by real estate – These loans are secured by properties used by the borrower for commercial use where the primary source of repayment is expected to be the income generated by the borrower’s business use of the property. As a result of the Coronavirus pandemic and the strain placed upon many businesses, the Company recognized in circumstances where the borrower is not performing, the real estate collateral would be the source of repayment. The Company considers these credits to be less risky than commercial business loans, however, riskier than commercial real estate loans. Delinquency status, risk rating and industry are considered risk factors in this pool.

8. Taxi Medallions – These loans consist primarily of loans made to New York taxi medallion owners and are secured by liens on the taxi medallions. No new taxi medallions have been originated since 2014, the remaining portfolio is running off and all credits are individually evaluated for expected credit losses.

Lastly, the Company identified that the remainder of the portfolio includes overdraft lines of credit.

9. Overdrafts – These are unsecured consumer lines of credits and are an immaterial component of the Company’s portfolio.

For the qualitative measurement, the Company aggregated the portfolio segments according to three business units: business banking, residential and commercial real estate. In accordance with the interagency statement and SEC guidance, Management evaluates nine qualitative risk factors to determine if the risk is captured elsewhere in the ACL process. If not captured elsewhere, the Company has identified specific risk factors to evaluate and incorporate into its Qualitative Framework. Some risk factors include time to maturity, origination loan-to-value, loan type composition, the value of underlying collateral, changes in policies and procedures for lending strategies and underwriting standards, collection and recovery practices, internal credit review, changes in personnel, divergence between the levels of NYC and national unemployment, divergence between the NYC GDP and national GDP, industry concentrations and riskiness and large borrower concentrations.

The Company recorded a provision for loans losses totaling $2.5 million and $19.2 million for the three months and nine months ending September 30, 2020, respectively, primarily due to the economic conditions resulting from COVID-19 and the growth in the loan portfolio. The Company specifies both the reasonable and supportable forecast and reversion periods in three economic conditions (expansion, transition, contraction). When calculating the ACL estimate for September 30, 2020, Management acknowledged deteriorated economic conditions as a result of the COVID-19 pandemic were captured in the forecast within the model platform. As such, when determining the reasonable and supportable forecast, Management adjusted the period to reflect a forecast of four quarters, to align with a previously established framework for contraction periods. Similarly, the reversion period was adjusted to four quarters. Management believed these adjustments are necessary as the forecast has suggested more stability than at the beginning of the COVID-19 pandemic. This resulted in the ACL for loans totaling $38.3 million at September 30, 2020, representing 0.65% of gross loans and 154.7% of non-performing loans compared to $21.8 million at December 31, 2019.

In response to COVID-19, the Company is actively assisting customers by providing modifications in the form of deferrals of interest, principal and/or escrow for terms ranging from one to twelve months. At September 30, 2020, we have 509 active forbearances for loans with an aggregate outstanding loan balance of approximately $846.2 million resulting in total deferment of $28.4 million in principal, interest and escrow, down from 808 active forbearances for loans with an aggregate outstanding loan balance of approximately $1.3 billion at June 30, 2020. Given the pandemic and current economic environment, we continue to work with our customers to modify loans although the pace of requests slowed late in the second quarter. The Company actively participated in the SBA Paycheck Protection Program, closing $111.6 million of these loans. We are also a proud participant in the Main Street Lending Program in order to assist customers. As previously discussed, pursuant to the CARES Act, loan modifications made between March 1, 2020 and the earlier of i) December 30, 2020 or ii) 60 days after the President declares a termination of the COVID-19 national emergency are not classified as TDRs if the related loans were not more than 30 days past due as of December 31, 2019. The Company has elected that loans temporarily modified for borrowers directly impacted by COVID-19 are not considered TDR, assuming the above criteria is met and as such, these loans are considered current and continue to accrue interest at its original contractual terms until the completion of deferred period. Once the deferred period is over, the borrower will resume making payment

-17-

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

and normal delinquency-based non-accrual policies will apply.  These loans were captured in the portfolio segments described above and the potential losses captured in the variables used in the ACL calculation.

The Company may restructure loans that are not directly impacted by COVID-19 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 TDR.

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 individually evaluated, 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. These restructurings have not included a reduction of principal balance.

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, 2020, 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 table shows  TDR loan modifications and classified as TDR loans during the periods indicated.

	For the three and nine months ended
	September 30, 2020				September 30, 2019
(Dollars in thousands)	Number	Balance		Modification description	Number	Balance		Modification description
One-to-four family - mixed-use property	1	$	270	Below market interest rate.	—		—
Commercial business and other	—		—		3	$	951	Amortization extension
Total	1	$	270		3	$	951

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

	September 30, 2020
	Number	Amortized
(Dollars in thousands)	of contracts	Cost
Multi-family residential	7	$	1,876
One-to-four family - mixed-use property (1)	5		1,744
One-to-four family - residential	3		513
Taxi medallion (1)	1		99
Commercial business and other (1)	3		950
Total performing troubled debt restructured	19	$	5,182

(1) These loans in the table above continue to pay as agreed, however the Company records interest received on a cash basis.

-18-

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

	December 31, 2019
	Number	Recorded
(Dollars in thousands)	of contracts	investment
Multi-family residential	7	$	1,873
One-to-four family - mixed-use property	4		1,481
One-to-four family - residential	3		531
Taxi medallion (1)	7		1,668
Commercial business and other (1)	3		941
Total performing troubled debt restructured	24	$	6,494

(1) These loans in the table above continue to pay as agreed, however the Company records interest received on a cash basis.

During the three and nine months ended September 30, 2020 and 2019, there were no defaults of TDR loans within 12 months of their modification date.

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

	September 30, 2020
	Number	Amortized
(Dollars in thousands)	of contracts	Cost
Taxi medallion	10	$	1,823
Commercial business and other	1		279
Total troubled debt restructurings that subsequently defaulted	11	$	2,102

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:

	December 31, 2019
	Number	Recorded
(Dollars in thousands)	of contracts	investment
Taxi medallion	4	$	1,065
Commercial business and other	1		279
Total troubled debt restructurings that subsequently defaulted	5	$	1,344

-19-

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The following table shows our non-accrual loans at amortized cost with no related allowance and interest income recognized for loans ninety days or more past due and still accruing for period shown below:

	At or for the nine months ended September 30, 2020
				Non-Accrual				Loans ninety days
		Total Non-Accrual		with no related		Interest Income		or more past due
(In thousands)		Amortized Cost		Allowance		Recognized		and still accruing:
Multi-family residential	$	2,723	$	2,723	$	—	$	—
Commercial real estate		2,714		2,714		—		—
One-to-four family - mixed-use property		1,704		1,704		—		—
One-to-four family - residential		5,922		5,922		—		—
Small Business Administration		1,169		1,169		—		—
Taxi medallion(1)		2,318		2,318		—		—
Commercial business and other(1)		9,278		6,456		32		—
Total	$	25,828	$	23,006	$	32	$	—

(1)Included in the above analysis are non-accrual performing one-to-four family – mixed-use property totaling $0.3 million, non-accrual performing TDR taxi medallion loans totaling $0.1 million September 30, 2020 and non-accrual performing TDR commercial business loans totaling $1.0 million at September 30, 2020.

-20-

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 period indicated:

	December 31,
(In thousands)	2019
Loans ninety days or more past due and still accruing:
Multi-family residential	$	445
Total		445
Non-accrual mortgage loans:
Multi-family residential		2,296
Commercial real estate		367
One-to-four family - mixed-use property		274
One-to-four family - residential		5,139
Total		8,076
Non-accrual non-mortgage loans:
Small Business Administration		1,151
Taxi medallion(1)		1,641
Commercial business and other(1)		1,945
Total		4,737
Total non-accrual loans		12,813
Total non-performing loans	$	13,258

(1) Not included in the above analysis are non-accrual performing TDR taxi medallion loans totaling $1.7 million at December 31, 2019, respectively and non-accrual performing TDR commercial business loans totaling $0.9 million at December 31, 2019.

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				For the nine months ended
	September 30,				September 30,
	2020		2019		2020		2019
	(In thousands)
Interest income that would have been recognized had the loans performed in accordance with their original terms	$	491	$	416	$	1,296	$	1,224
Less: Interest income included in the results of operations		78		89		240		330
Total foregone interest	$	413	$	327	$	1,056	$	894

-21-

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The following tables shows the aging of the amortized cost basis in past-due loans at the period indicated by class of loans:

	September 30, 2020
					Greater
	30 - 59 Days		60 - 89 Days		than		Total Past
(In thousands)	Past Due		Past Due		90 Days		Due		Current		Total Loans
Multi-family residential	$	4,499	$	777	$	2,723	$	7,999	$	2,251,453	$	2,259,452
Commercial real estate		525		192		2,714		3,431		1,635,986		1,639,417
One-to-four family - mixed-use property		3,048		559		1,429		5,036		584,562		589,598
One-to-four family - residential		2,118		689		5,922		8,729		192,052		200,781
Construction loans		—		—		—		—		63,406		63,406
Small Business Administration		—		—		1,169		1,169		122,311		123,480
Taxi medallion		198		99		2,021		2,318		—		2,318
Commercial business and other		112		—		6,456		6,568		1,056,378		1,062,946
Total	$	10,500	$	2,316	$	22,434	$	35,250	$	5,906,148	$	5,941,398

The following tables show by delinquency an analysis of our recorded investment in loans at the periods indicated by class of loans:

	December 31, 2019
					Greater
	30 - 59 Days		60 - 89 Days		than		Total Past
	Past Due		Past Due		90 Days		Due		Current		Total Loans
Multi-family residential	$	4,042	$	1,563	$	2,741	$	8,346	$	2,230,245	$	2,238,591
Commercial real estate		—		4,941		367		5,308		1,576,700		1,582,008
One-to-four family - mixed-use property		1,117		496		274		1,887		590,584		592,471
One-to-four family - residential		720		1,022		5,139		6,881		181,335		188,216
Co-operative apartments		—		—		—		—		8,663		8,663
Construction loans		—		—		—		—		67,754		67,754
Small Business Administration		—		—		1,151		1,151		13,294		14,445
Taxi medallion		—		—		1,065		1,065		2,244		3,309
Commercial business and other		2,340		5		1,945		4,290		1,057,188		1,061,478
Total	$	8,219	$	8,027	$	12,682	$	28,928	$	5,728,007	$	5,756,935

-22-

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, 2020
					One-to-four
					family -		One-to-four								Commercial
	Multi-family		Commercial		mixed-use		family -		Construction		Small Business		Taxi		business and
(In thousands)	residential		real estate		property		residential		loans		Administration		medallion		other		Total
Allowance for credit losses:
Beginning balance	$	8,935	$	6,971	$	2,826	$	1,161	$	183	$	1,386	$	—	$	15,248	$	36,710
Charge-offs		—		—		—		—		—		—		(951)		(13)		(964)
Recoveries		14		—		60		2		—		47		—		4		127
Provision (benefit)		(1,553)		1,576		(1,208)		(483)		35		450		951		2,702		2,470
Ending balance	$	7,396	$	8,547	$	1,678	$	680	$	218	$	1,883	$	—	$	17,941	$	38,343

	September 30, 2019
					One-to-four
					family -		One-to-four								Commercial
	Multi-family		Commercial		mixed-use		family -		Construction		Small Business		Taxi		business and
(In thousands)	residential		real estate		property		residential		loans		Administration		medallion		other		Total
Allowance for credit losses:
Beginning balance	$	5,506	$	4,265	$	1,786	$	746	$	381	$	382	$	—	$	8,444	$	21,510
Charge-offs		(189)		—		—		—		—		—		—		(242)		(431)
Recoveries		6		—		140		3		—		32		—		92		273
Provision (benefit)		54		99		(120)		(4)		37		(57)		—		674		683
Ending balance	$	5,377	$	4,364	$	1,806	$	745	$	418	$	357	$	—	$	8,968	$	22,035

See also Note 17 for the adoption of ASC Topic 326, “Credit Loses”.

-23-

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, 2020
					One-to-four
					family -		One-to-four				Small				Commercial
	Multi-family		Commercial		mixed-use		family -		Construction		Business		Taxi		business and
(In thousands)	residential		real estate		property		residential		loans		Administration		medallion		other		Total
Allowance for credit losses:
Beginning balance	$	5,391	$	4,429	$	1,817	$	756	$	441	$	363	$	—	$	8,554	$	21,751
Impact of CECL Adoption		(650)		1,170		(55)		(160)		(279)		1,180		—		(827)		379
Charge-off's		—		—		(3)		—		—		(178)		(951)		(2,121)		(3,253)
Recoveries		27		—		138		10		—		67		—		18		260
Provision		2,628		2,948		(219)		74		56		451		951		12,317		19,206
Ending balance	$	7,396	$	8,547	$	1,678	$	680	$	218	$	1,883	$	—	$	17,941	$	38,343

	September 30, 2019
					One-to-four
					family -		One-to-four				Small				Commercial
	Multi-family		Commercial		mixed-use		family -		Construction		Business		Taxi		business and
(In thousands)	residential		real estate		property		residential		loans		Administration		medallion		other		Total
Allowance for credit losses:
Beginning balance	$	5,676	$	4,315	$	1,867	$	749	$	329	$	418	$	—	$	7,591	$	20,945
Charge-off's		(190)		—		(1)		(113)		—		—		—		(2,379)		(2,683)
Recoveries		30		7		228		10		—		52		134		183		644
Provision (Benefit)		(139)		42		(288)		99		89		(113)		(134)		3,573		3,129
Ending balance	$	5,377	$	4,364	$	1,806	$	745	$	418	$	357	$	—	$	8,968	$	22,035

See also Note 17 for the adoption of ASC Topic 326, “Credit Loses”.

-24-

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 and management believes weakness is evident then we designate the loan as “Watch”, all other loans 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 Credit 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. Loans that are in forbearance pursuant to the CARES Act, primarily continued to be reported in the same category as they were reported immediately prior to modification.

-25-

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The following table summarizes the risk category of mortgage and non-mortgage loans by loan portfolio segments and class of loans by year of origination :

	For the year ended
														Revolving Loans,		Lines of Credit
														Amortized Cost		converted to
(In thousands)		2020		2019		2018		2017		2016		Prior		Basis		term loans
1-4 Family Residential
Pass	$	22,735	$	25,030	$	27,827	$	15,548	$	11,231	$	59,657	$	7,678	$	18,095
Watch		489		—		—		—		—		2,936		299		2,011
Special Mention		—		—		—		—		—		667		—		492
Substandard		—		—		—		—		960		3,390		—		1,736
Total 1-4 Family Residential	$	23,224	$	25,030	$	27,827	$	15,548	$	12,191	$	66,650	$	7,977	$	22,334
1-4 Family Mixed-Use
Pass	$	27,156	$	66,500	$	74,828	$	59,923	$	53,344	$	288,858	$	—	$	—
Watch		—		1,873		903		2,013		1,146		8,556		—		—
Special Mention		—		—		379		—		—		1,179		—		—
Substandard		—		620		806		—		—		1,514		—		—
Total 1-4 Family Mixed Use	$	27,156	$	68,993	$	76,916	$	61,936	$	54,490	$	300,107	$	—	$	—
Commercial Real Estate
Pass	$	118,019	$	248,812	$	281,920	$	189,592	$	213,553	$	482,495	$	—	$	—
Watch		—		8,606		—		4,883		28,203		58,587		—		—
Special Mention		—		981		—		192		—		861		—		—
Substandard		—		1,702		—		—		—		1,011		—		—
Total Commercial Real Estate	$	118,019	$	260,101	$	281,920	$	194,667	$	241,756	$	542,954	$	—	$	—
Construction
Pass	$	10,058	$	14,751	$	31,402	$	—	$	—	$	—	$	—	$	—
Watch		—		886		5,631		—		—		—		—		—
Special Mention		—		—		678		—		—		—		—		—
Total Construction	$	10,058	$	15,637	$	37,711	$	—	$	—	$	—	$	—	$	—
Multifamily
Pass	$	174,397	$	309,564	$	364,298	$	356,206	$	269,388	$	749,946	$	3,433	$	—
Watch		—		1,571		—		2,537		2,784		19,504		865		—
Special Mention		—		—		—		—		699		776		—		—
Substandard		—		—		1,999		—		—		1,485		—		—
Total Multifamily	$	174,397	$	311,135	$	366,297	$	358,743	$	272,871	$	771,711	$	4,298	$	—
Commercial Business - Secured by RE
Pass	$	68,713	$	91,282	$	56,704	$	22,051	$	47,335	$	82,368	$	—	$	—
Watch		—		—		7,080		1,320		—		416		—		—
Substandard		—		—		—		—		—		3,331		—		—
Total Commercial Business - Secured by RE	$	68,713	$	91,282	$	63,784	$	23,371	$	47,335	$	86,115	$	—	$	—
Commercial Business
Pass	$	59,956	$	137,475	$	108,265	$	64,737	$	17,573	$	67,940	$	186,882	$	—
Watch		—		2,889		4,112		7,880		—		10		10,935		—
Special Mention		—		51		2,411		—		2,418		—		(26)		—
Substandard		39		—		—		4,810		—		1,711		171		—
Doubtful		—		—		—		—		—				1,872		—
Total Commercial Business	$	59,995	$	140,415	$	114,788	$	77,427	$	19,991	$	69,661	$	199,834	$	—
Small Business Administration
Pass	$	110,121	$	1,067	$	3,590	$	1,043	$	2,551	$	1,625	$	—	$	—
Watch		—		—		—		2,257		—		—		—		—
Special Mention		—		—		—		—		—		50		—		—
Substandard		—		—		—		1,169		7		—		—		—
Total Small Business Administration	$	110,121	$	1,067	$	3,590	$	4,469	$	2,558	$	1,675	$	—	$	—
Taxi Medallions
Substandard	$	—	$	—	$	—	$	—	$	—	$	2,318	$	—	$	—
Total Taxi Medallions	$	—	$	—	$	—	$	—	$	—	$	2,318	$	—	$	—
Other
Pass	$	—	$	—	$	—	$	—	$	—	$	136	$	99	$	—
Total Other	$	—	$	—	$	—	$	—	$	—	$	136	$	99	$	—
Total Loans	$	591,683	$	913,660	$	972,833	$	736,161	$	651,192	$	1,841,327	$	212,208	$	22,334

-26-

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

	December 31, 2019
(In thousands)	Special Mention		Substandard		Doubtful		Loss		Total
Multi-family residential	$	1,563	$	2,743	$	—	$	—	$	4,306
Commercial real estate		5,525		367		—		—		5,892
One-to-four family - mixed-use property		1,585		453		—		—		2,038
One-to-four family - residential		1,095		5,787		—		—		6,882
Construction		—		—		—		—		—
Small Business Administration		55		85		—		—		140
Taxi medallion		—		3,309		—		—		3,309
Commercial business and other		3,924		11,289		266		—		15,479
Total loans	$	13,747	$	24,033	$	266	$	—	$	38,046

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 $86.2 million and $282.5 million, respectively, at September 30, 2020.

The following table presents types of collateral-dependent loans by class of loans as of September 30, 2020:

	Collateral Type
(In thousands)		Real Estate		Business Assets
Multi-family residential	$	2,723	$	—
Commercial real estate		6,045		—
One-to-four family - mixed-use property		1,704		—
One-to-four family - residential		5,922		—
Small Business Administration		—		1,169
Commercial business and other		—		4,996
Taxi Medallion		—		2,318
Total	$	16,394	$	8,483

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

Off-Balance Sheet Credit Losses

Also included within scope of the CECL standard are off-balance sheet loan commitments, which includes the unfunded portion of committed lines of credit and commitments “in-process”. Commitments “in‐process” reflect loans not in the Company’s books but rather negotiated loan / line of credit terms and rates that the Company has offered to customers and is committed to honoring. In reference to “in‐process” credits, the Company defines an unfunded commitment as a credit that has been offered to and accepted by a borrower, which has not closed and by which the obligation is not unconditionally cancellable.

The Company estimates expected credit losses over the contractual period in which the company is exposed to credit risk through a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The allowance for credit losses on losses on off-balance sheet exposures is adjusted as a provision for credit loss expense. The Company uses similar assumptions and risk factors that are developed for collectively evaluated financing receivables. This estimates includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments to be funded over its estimated life.

At September 30, 2020, allowance for off-balance-sheet credit losses is $1.6 million, which is included the “Other liabilities” on the Consolidated Statements of Financial Condition. During the three and nine months ended September 30, 2020, the Company has $0.3 million and $1.0 million, respectively, in credit loss expense for off-balance-sheet items, which is included in the “Other operating expense” on the Consolidated Statements of Income.

6.     Loans held for sale

Loans held for sale are carried at the lower of cost or estimated fair value. At September 30, 2020 and December 31, 2019, 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. There were no loan sales for three months ended September 30, 2020.

The following tables show loans sold during the period indicated:

	For the three months ended September 30, 2019
				Net Recoveries
(Dollars in thousands)	Loans sold	Proceeds		(Charge-offs)		Net gain
Delinquent and non-performing loans
Multi-family residential	1	$	700	$	—	$	204
Commercial business and other	1		3,248		—		—
Total	2	$	3,948	$	—	$	204

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

	For the nine months ended September 30, 2020
				Net Recoveries
(Dollars in thousands)	Loans sold	Proceeds		(Charge-offs)		Net gain
Delinquent and non-performing loans
Multi-family residential	1	$	284	$	—	$	42
One-to-four family - mixed-use property	1		296		—		—
Total	2	$	580	$	—	$	42

	For the nine months ended September 30, 2019
				Net Recoveries
(Dollars in thousands)	Loans sold	Proceeds		(Charge-offs)		Net gain (loss)
Delinquent and non-performing loans
Multi-family residential	3	$	1,465	$	—	$	267
One-to-four family - mixed-use property	1		405		(1)		—
Commercial real estate	1	$	3,248	$	—	$	—
Total	5	$	5,118	$	(1)	$	267
Performing loans
Small Business Administration	3	$	2,069	$	—	$	114
Total	3	$	2,069	$	—	$	114

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

7.     Other Real Estate Owned

The following table shows changes in Other Real Estate Owned (“OREO”) during the periods indicated:

	For the three months ended				For the nine months ended
	September 30,				September 30,
	2020		2019		2020		2019
	(In thousands)
Balance at beginning of period	$	208	$	239	$	239	$	—
Acquisitions		—		—		—		239
Reductions to carrying value		—		—		(31)		—
Sales		(208)		—		(208)		—
Balance at end of period	$	—	$	239	$	—	$	239

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				For the nine months ended
	September 30,				September 30,
	2020		2019		2020		2019
	(In thousands)
Gross gains	$	—	$	—	$	—	$	—
Gross losses		(5)		—		(5)		—
Write-down of carrying value		—		—		(31)		—
Total income	$	(5)	$	—	$	(36)	$	—

Included within net loans as of September 30, 2020 and December 31, 2019 were $6.1 million and $6.6 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.

8.     Leases

The Company has 22 operating leases for branches (including headquarters) and office spaces, nine operating leases for vehicles, and one operating lease for equipment. Our leases have remaining lease terms ranging from two months to 15 years, none of which has a renewal option reasonably certain of exercise, which has been reflected in the Company’s calculation of lease term.

During the third quarter of 2020, the Company entered into one new branch lease, which is expected to open in the fourth quarter of 2020. Additionally, the Company executed an extension for one of its current branches and reduced office space at another location.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The Company has elected the short-term lease recognition exemption such that the Company will not recognize Right-Of-Use (“ROU”) assets or lease liabilities for leases with a term of less than 12 months from the commencement date. The Company’s operating lease expense totaled $1.9 million and was recorded in Occupancy and equipment on the Consolidated Statements of Income for each of the three month periods ended September 30, 2020 and 2019. The Company’s operating lease expense totaled $5.7 million and was recorded in Occupancy and equipment on the Consolidated Statements of Income for each of the nine month periods ended September 30, 2020 and 2019.

The Company has one agreement that qualifies as a short-term lease with expense totaling approximately $34,000 for each of the three month periods ended September 30, 2020 and 2019 and approximately $102,000 for each of the nine month periods ended September 30, 2020 and 2019, included in Professional services on the Consolidated Statements of Income. The Company has $0.3 million and $0.2 million in variable lease payments, which include insurance and real estate tax expenses and was recorded in Occupancy and equipment on the Consolidated Statements of Income, for the three months ended September 30, 2020 and 2019, respectively. The Company has $0.8 million and $0.6 million in variable lease payments, which include insurance and real estate tax expenses and was recorded in Occupancy and equipment on the Consolidated Statements of Income, for the nine months ended September 30, 2020 and 2019, respectively. At September 30, 2020, the weighted-average remaining lease term for our operating leases is approximately eight years and the weighted average discount rate is 3.6%. At September 30, 2020, the Company is evaluating the lease portfolio to assess present and future contracts, including but not limited to, real estate, vehicles and equipment.

Certain leases have escalation clauses for operating expenses and real estate taxes. The Company’s non-cancelable operating lease agreements expire through 2036.

Supplemental balance sheet information related to leases was as follows:

(Dollars in thousands)	September 30, 2020			December 31, 2019
Operating lease ROU assets	$	42,326		$	41,254
Operating lease liabilities	$	49,737		$	49,367
Weighted-average remaining lease term-operating leases		8.2 years			8.0 years
Weighted average discount rate-operating leases		3.6	%		3.8	%

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The components of lease expense and cash flow information related to leases were as follows:

	For the three months ended
(Dollars in thousands)	September 30, 2020		September 30, 2019
Lease Cost
Operating lease cost	$	1,895	$	1,891
Short-term lease cost		34		34
Variable lease cost		281		267
Total lease cost	$	2,210	$	2,192
Other information
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	2,101	$	2,002
Right-of-use assets obtained in exchange for new operating lease liabilities	$	6,772	$	1,253

	For the nine months ended
(Dollars in thousands)	September 30, 2020		September 30, 2019
Lease Cost
Operating lease cost	$	5,676	$	5,676
Short-term lease cost		102		102
Variable lease cost		832		757
Total lease cost	$	6,610	$	6,535
Other information
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	6,283	$	6,052
Right-of-use assets obtained in exchange for new operating lease liabilities	$	6,822	$	1,295

The Company’s minimum annual rental payments for Bank facilities due under non-cancelable leases are as follows as of September 30, 2020:

	Minimum Rental
	(In thousands)
Years ended December 31:
2020	$	1,715
2021		7,739
2022		7,491
2023		7,612
2024		7,650
Thereafter		24,935
Total minimum payments required		57,142
Less: Implied interest		7,405
Total lease obligations	$	49,737

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

9.     Stock-Based Compensation

On January 31, 2019, the Board of Directors approved a 2019 long-term incentive compensation program for certain Company executive officers that includes grants of performance-based restricted stock units (“PRSUs”) in addition to time-based restricted stock units (“RSU”). Under the terms of the PRSU Agreement, the number of PRSUs that may be earned depends on the extent to which performance goals for the award are achieved over a three-year performance period, as determined by the Compensation Committee of the Board. The number of PRSUs that may be earned ranges from 0% to 150% of the target award, with no PRSUs earned for below threshold-level performance, 50% of PRSUs earned for threshold-level performance, 100% of PRSUs earned for target-level performance, and 150% of PRSUs earned for maximum-level performance. As of September 30, 2020, PRSU’s granted in 2020 are being accrued at target and PRSU’s granted in 2019 are being accrued above target. The different levels of accrual are commensurate with the projected performance of the respective grant.

For the three months ended September 30, 2020 and 2019, the Company’s net income, as reported, included $0.9 million and $1.2 million, respectively, of stock-based compensation costs, including the benefit or expense of phantom stock awards, and $0.2 million and $0.2 million of income tax benefits, respectively, related to the stock-based compensation plans. For the nine months ended September 30, 2020 and 2019, the Company’s net income, as reported, included $4.3 million and $6.5 million, respectively, of stock-based compensation costs, including the benefit or expense of phantom stock awards, and $1.0 million and $1.5 million of income tax benefits, respectively, related to the stock-based compensation plans.

During the three months ended September 30, 2020, and 2019, the Company did not grant any RSU awards. During the three months ended September 30, 2020, the Company did not grant any PRSU awards. During the three months ended September 30, 2019, the Company granted 8,260 in PRSU awards. During the nine months ended September 30, 2020 and 2019, the Company granted 172,728 and 263,574 in RSU awards, respectively. During the nine months ended September 30, 2020 and 2019, the Company granted 72,143 and 66,130 in PRSU awards, respectively. The Company has not granted stock options since 2009 and at September 30, 2020, had none outstanding.

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 RSU and PRSU awards at or for the nine months ended September 30, 2020:

	RSU Awards			PRSU Awards
		Weighted-Average			Weighted-Average
		Grant-Date			Grant-Date
	Shares	Fair Value		Shares	Fair Value
Non-vested at December 31, 2019	428,295	$	24.42	34,186	$	22.38
Granted	172,728		19.66	72,143		20.38
Vested	(241,246)		22.38	(35,149)		20.54
Forfeited	(5,545)		24.62	—		—
Non-vested at September 30, 2020	354,232	$	23.48	71,180	$	21.26
Vested but unissued at September 30, 2020	217,642	$	23.26	62,515	$	21.35

As of September 30, 2020, there was $6.3 million of total unrecognized compensation cost related to RSU and PRSU awards granted. That cost is expected to be recognized over a weighted-average period of 2.5 years. The total fair value of awards vested for the three months ended September 30, 2020 and 2019 was $0.2 million and $0.7 million, respectively. The total fair value of awards vested for the nine months ended September 30, 2020 and 2019 was $5.2 million and $6.9

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

million, respectively. The vested but unissued RSU and PRSU 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, 2020:

Phantom Stock Plan	Shares	Fair Value
Outstanding at December 31, 2019	109,226	$	21.61
Granted	10,392		14.58
Distributions	(890)		11.73
Outstanding at September 30, 2020	118,728	$	10.52
Vested at September 30, 2020	118,677	$	10.52

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, 2020 and 2019, respectively. The total fair value of the distributions from the Phantom Stock Plan was $3,000 and less than $1,000 for the three months ended September 30, 2020 and 2019, respectively.

The Company recorded stock-based compensation benefit for the Phantom Stock Plan of $1.2 million and $0.1 million for the nine months ended September 30, 2020 and 2019, respectively. The total fair value of the distributions from the Phantom Stock Plan was less than $10,000 and $23,000 for the nine months ended September 30, 2020 and 2019, respectively.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

10.     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				Nine months ended
	September 30,				September 30,
(In thousands)	2020		2019		2020		2019
Employee Pension Plan:
Interest cost	$	163	$	199	$	489	$	597
Amortization of actuarial loss		111		68		333		201
Expected return on plan assets		(257)		(272)		(771)		(816)
Net employee pension expense (benefit)	$	17	$	(5)	$	51	$	(18)
Outside Director Pension Plan:
Service cost	$	4	$	10	$	11	$	30
Interest cost		16		21		48		63
Amortization of actuarial gain		(14)		(35)		(41)		(105)
Amortization of past service liability		—		—		—		—
Net outside director pension expense (benefit)	$	6	$	(4)	$	18	$	(12)
Other Postretirement Benefit Plans:
Service cost	$	69	$	70	$	206	$	210
Interest cost		64		85		194		255
Amortization of past service credit		(21)		(22)		(64)		(64)
Net other postretirement expense	$	112	$	133	$	336	$	401

The Company previously disclosed in its Consolidated Financial Statements for the year ended December 31, 2019 that it expects to contribute $0.3 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, 2020. The Company does not expect to make a contribution to the Employee Pension Plan (the “Employee Pension Plan”). As of September 30, 2020, the Company had contributed $108,000 to the Outside Director Pension Plan and $59,000 in contributions were made to the Other Postretirement Benefit Plans. As of September 30, 2020, the Company has not revised its expected contributions for the year ending December 31, 2020.

11.     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. GAAP permits entities to choose to measure many financial instruments and certain other items at fair value. At September 30, 2020, the Company carried financial assets and financial liabilities under the fair value option with fair values of $14.5 million and $38.3 million, respectively. At December 31, 2019, the Company carried financial assets and financial liabilities under the fair value option with fair values of $14.3 million and $44.4 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, 2020 and 2019.

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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)	2020		2019		September 30, 2020		September 30, 2019		September 30, 2020		September 30, 2019
Mortgage-backed securities	$	672	$	772	$	(1)	$	—	$	1	$	2
Other securities		13,841		13,548		83		107		120		470
Borrowed funds		38,287		44,384		(2,897)		(599)		5,086		(2,353)
Net gain (loss) from fair value adjustments (1)(2)					$	(2,815)	$	(492)	$	5,207	$	(1,881)

(1) The net gain (loss) from fair value adjustments presented in the above table does not include net gains (losses) of $0.6 million and ($1.6) million for the three months ended September 30, 2020 and 2019, respectively, from the change in the fair value of interest rate swaps.

(2) The net gain (loss) from fair value adjustments presented in the above table does not include net losses of $3.2 million and $4.3 million for the nine months ended September 30, 2020 and 2019, 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, 2020 and December 31, 2019. The fair value of borrowed funds includes accrued interest payable of $0.1 million and $0.2 million at September 30, 2020 and December 31, 2019, respectively.

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 – when quoted market prices are available in an active market. At September 30, 2020 and December 31, 2019, Level 1 included one mutual fund.

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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, 2020 and December 31, 2019, Level 2 included mortgage-backed securities, CLO’s, 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, 2020 and December 31, 2019, 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 Company’s assets and liabilities that are carried at fair value on a recurring basis, including those reported at fair value under the fair value option, and the level that was used to determine their fair value, at September 30, 2020 and December 31, 2019:

	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
	2020		2019		2020		2019		2020		2019		2020		2019
	(In thousands)
Assets:
Securities available for sale
Mortgage-backed Securities	$	—	$	—	$	386,235	$	523,849	$	—	$	—	$	386,235	$	523,849
Other securities		12,691		12,216		220,881		235,103		1,149		1,332		234,721		248,651
Interest rate swaps		—		—		416		2,352		—		—		416		2,352
Total assets	$	12,691	$	12,216	$	607,532	$	761,304	$	1,149	$	1,332	$	621,372	$	774,852
Liabilities:
Borrowings	$	—	$	—	$	—	$	—	$	38,287	$	44,384	$	38,287	$	44,384
Interest rate swaps		—		—		69,595		19,653		—		—		69,595		19,653
Total liabilities	$	—	$	—	$	69,595	$	19,653	$	38,287	$	44,384	$	107,882	$	64,037

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The following tables set 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, 2020				September 30, 2019
	Trust preferred		Junior subordinated		Trust preferred		Junior subordinated
	securities		debentures		securities		debentures
	(In thousands)
Beginning balance	$	1,068	$	35,570	$	1,303	$	43,414
Net (loss) gain from fair value adjustment of financial assets (1)		82		—		15		—
Net (gain) loss from fair value adjustment of financial liabilities (1)		—		2,897		—		599
Decrease in accrued interest receivable		(1)		—		—		—
Decrease in accrued interest payable		—		(19)		—		(15)
Change in unrealized gains included in other comprehensive income		—		(161)		—		(88)
Ending balance	$	1,149	$	38,287	$	1,318	$	43,910
Changes in unrealized gains held at period end	$	—		2,384		—		1,513

(1) Totals in the table above are presented in the Consolidated Statements of Income under net gain (loss) from fair value adjustments.

	For the nine months ended
	September 30, 2020				September 30, 2019
	Trust preferred		Junior subordinated		Trust preferred		Junior subordinated
	securities		debentures		securities		debentures
	(In thousands)
Beginning balance	$	1,332	$	44,384	$	1,256	$	41,849
Net (loss) gain from fair value adjustment of financial assets (1)		(180)		—		64		—
Net (gain) loss from fair value adjustment of financial liabilities (1)		—		(5,086)		—		2,353
Decrease in accrued interest receivable		(3)		—		(2)		—
Decrease in accrued interest payable		—		(104)		—		(27)
Change in unrealized gains included in other comprehensive income		—		(907)		—		(265)
Ending balance	$	1,149	$	38,287	$	1,318	$	43,910
Changes in unrealized gains held at period end	$	—		2,384		—		1,513

(1) Totals in the table above are presented in the Consolidated Statements of Income under net gain (loss) from fair value adjustments.

During the three and nine months ended September 30, 2020 and 2019, there were no transfers between Levels 1, 2 and 3.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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, 2020
	Fair Value		Valuation Technique	Unobservable Input	Range	Weighted Average
		(Dollars in thousands)
Assets:
Trust preferred securities	$	1,149	Discounted cash flows	Discount rate	n/a	5.0	%
Liabilities:
Junior subordinated debentures	$	38,287	Discounted cash flows	Discount rate	n/a	5.0	%

	December 31, 2019
	Fair Value		Valuation Technique	Unobservable Input	Range	Weighted Average
	(Dollars in thousands)
Assets:
Trust preferred securities	$	1,332	Discounted cash flows	Discount rate	n/a	4.2	%
Liabilities:
Junior subordinated debentures	$	44,384	Discounted cash flows	Discount rate	n/a	4.2	%

The significant unobservable inputs used in the fair value measurement of the Company’s trust preferred securities and junior subordinated debentures valued under Level 3 at September 30, 2020 and December 31, 2019, are the effective yields used in the cash flow models. Significant increases or decreases in the effective yield in isolation would result in a significantly lower or higher fair value measurement.

The following table sets forth the Company’s assets and liabilities that are carried at fair value on a non-recurring basis and the level that was used to determine their fair value at September 30, 2020 and December 31, 2019:

	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 non-recurring basis
	2020		2019		2020		2019		2020		2019		2020		2019
	(In thousands)
Assets
Non-accrual loans	$	—	$	—	$	—	$	—	$	4,167	$	1,081	$	4,167	$	1,081
Other real estate owned		—		—		—		—		—		239		—		239
Total assets	$	—	$	—	$	—	$	—	$	4,167	$	1,320	$	4,167	$	1,320

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

	September 30, 2020
	Fair Value		Valuation Technique	Unobservable Input	Range	Weighted Average
	(Dollars in thousands)
Assets:
Non-accrual loans	$	2,112	Sales approach	Reduction for planned expedited disposal	(100.0%) to 15.0%	(74.0%)
Non-accrual loans	$	2,055	Discounted Cash flow	Discount Rate	4.3% to 6.4%	5.1%
				Probability of Default	20.0% to 35.0%	29.0%

	At December 31, 2019
	Fair Value		Valuation Technique	Unobservable Input	Range	Weighted Average
	(Dollars in thousands)
Assets:
Impaired loans	$	809	Discounted Cash flow	Discount Rate	6.4%	6.4%
				Probability of Default	20.0%	20.0%
Impaired loans	$	272	Blended income and sales approach	Adjustment to sales comparison value to reconcile differences between comparable sales	(10.0%) to 15.0%	2.5%
				Capitalization Rate	9.5%	9.5%
				Reduction for planned expedited disposal	15.0%	15.0%
Other real estate owned	$	239	Sales approach	Reduction for planned expedited disposal	0.5% to 12.5%	6.5%

The Company did not have any liabilities that were carried at fair value on a non-recurring basis at September 30, 2020 and December 31, 2019.

The methods and assumptions used to estimate fair value at September 30, 2020 and December 31, 2019 are as follows:

Securities:

The fair values of securities are contained in Note 4 (“Securities”) of the Notes to Consolidated Financial Statements. Fair value is based upon quoted market prices, where available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities and adjusted for differences between the quoted instrument and the instrument being valued. When there is limited activity or less transparency around inputs to the valuation, securities are valued using discounted cash flows.

Non-accrual Loans:

For non-accruing loans, fair value is generally estimated by discounting management’s estimate of future cash flows with a discount rate commensurate with the risk associated with such assets or, for collateral dependent loans, 85% of the

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

appraised or internally estimated value of the property, except for taxi medallion loans. The fair value of the underlying collateral of taxi medallion loans is the most recent reported arm’s length transaction. When there is no recent sale activity, the fair value is calculated using capitalization rates. See Note 5 (“Loans”) of the Notes to the Consolidated Financial Statements.

Junior Subordinated Debentures:

The fair value of the junior subordinated debentures was developed using a credit spread based on stated spreads for recently issued subordinated debt instruments for issuers of similar asset size and credit quality of the Company and with similar durations adjusting for differences in the junior subordinated debt’s credit rating, liquidity and time to maturity. The unrealized net gain/loss attributable to changes in our own credit risk was determined by adjusting the fair value as determined in the proceeding sentence by the average rate of default on debt instruments with a similar debt rating as our junior subordinated debentures, with the difference from the original calculation and this calculation resulting in the instrument-specific unrealized gain/loss.

Other Real Estate Owned and Other Repossessed Assets:

The fair value for OREO is based on appraised value through a current appraisal, or sometimes through an internal review, additionally adjusted by the estimated costs to sell the property. The fair value for other repossessed assets are 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.

Interest Rate Swaps:

The fair value of interest rate swaps is based upon broker quotes.

The following tables set forth the carrying amounts and estimated fair values of selected financial instruments based on the assumptions described above used by the Company in estimating fair value at the periods indicated:

	September 30, 2020
	Carrying		Fair
	Amount		Value		Level 1		Level 2		Level 3
	(In thousands)
Assets:
Cash and due from banks	$	75,560	$	75,560	$	75,560	$	—	$	—
Securities held-to-maturity
Mortgage-backed securities		7,919		9,198		—		9,198		—
Other securities		50,654		53,268		—		—		53,268
Securities available for sale
Mortgage-backed securities		386,235		386,235		—		386,235		—
Other securities		234,721		234,721		12,691		220,881		1,149
Loans		5,941,398		6,030,154		—		—		6,030,154
FHLB-NY stock		57,119		57,119		—		57,119		—
Accrued interest receivable		36,068		36,068		1		1,473		34,594
Interest rate swaps		416		416		—		416		—
Liabilities:
Deposits	$	4,963,495	$	4,970,920	$	3,911,851	$	1,059,069	$	—
Borrowings		1,323,975		1,333,147		—		1,294,860		38,287
Accrued interest payable		6,111		6,111		—		6,111		—
Interest rate swaps		69,595		69,595		—		69,595		—

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

	December 31, 2019
	Carrying		Fair
	Amount		Value		Level 1		Level 2		Level 3
	(In thousands)
Assets:
Cash and due from banks	$	49,787	$	49,787	$	49,787	$	—	$	—
Securities held-to-maturity
Mortgage-backed securities		7,934		8,114		—		8,114		—
Other securities		50,954		53,998		—		—		53,998
Securities available for sale
Mortgage-backed securities		523,849		523,849		—		523,849		—
Other securities		248,651		248,651		12,216		235,103		1,332
Loans		5,772,206		5,822,124		—		—		5,822,124
FHLB-NY stock		56,921		56,921		—		56,921		—
Accrued interest receivable		25,722		25,722		9		2,519		23,194
Interest rate swaps		2,352		2,352		—		2,352		—
Liabilities:
Deposits	$	5,066,424	$	5,070,046	$	3,628,534	$	1,441,512	$	—
Borrowings		1,237,231		1,389,883		—		1,345,499		44,384
Accrued interest payable		6,752		6,752		—		6,752		—
Interest rate swaps		19,653		19,653		—		19,653		—

12.     Derivative Financial Instruments

At September 30, 2020 and December 31, 2019, the Company’s derivative financial instruments consist of interest rate swaps. The Company’s interest rate swaps are used for four purposes: 1) to mitigate the Company’s exposure to rising interest rates on a portion ($18.0 million) of its floating rate junior subordinated debentures that have a contractual value of $61.9 million, at September 30, 2020 and December 31, 2019; 2) to mitigate the Company’s exposure to rising interest rates on certain fixed rate loans totaling $318.6 million and $326.0 million at September 30, 2020 and December 31, 2019, respectively; 3) to facilitate risk management strategies for our loan customers with $41.2 million of swaps outstanding, which include $20.6 million with customers and $20.6 million were from bank counterparties at September 30, 2020 and 4) to mitigate exposure to rising interest rates on certain short-term advances totaling $1,021.5 million and $541.5 million at September 30, 2020 and December 31, 2019, respectively.

At September 30, 2020 and December 31, 2019, we held derivatives designated as cash flow hedges, fair value hedges and certain derivatives not designated as hedges.

The Company’s derivative instruments are carried at fair value in the Company’s financial statements as part of Other Assets for derivatives with positive fair values and Other Liabilities for derivatives with negative fair values. The accounting for changes in the fair value of a derivative instrument is dependent upon whether or not it qualifies and has been designated as a hedge for accounting purposes, and further, by the type of hedging relationship.

At September 30, 2020 and December 31, 2019, derivatives with a combined notional amount of $59.2 million and $18.0 million, respectively, were not designated as hedges. At September 30, 2020 and December 31, 2019, derivatives with a combined notional amount of $318.6 million and $326.0 million, respectively, were designated as fair value hedges. At September 30, 2020 and December 31, 2019, derivatives with a combined notional amount of $1,021.5 million and $541.5 million, respectively, were designated as cash flow hedges.

For cash flow hedges, the changes in the fair value of the derivative is reported in accumulated other comprehensive income (loss), net of tax. Amounts in accumulated other comprehensive income (loss) are reclassified into earnings in the same period during which the hedged forecasted transaction effects earnings. During the three months ended September 30, 2020 and 2019, $1.4 million and $0.4 million, respectively, were reclassified from accumulated other comprehensive loss to interest expense. During the nine months ended September 30, 2020 and 2019, $2.1 million and $1.3 million,

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

respectively, were reclassified from accumulated other comprehensive loss to interest expense. The estimated amount to be reclassified in the next 12 months out of the accumulated comprehensive income (loss) into earnings is $2.9 million.

Changes in the fair value of interest rate swaps not designated as hedges are reflected in “Net gain/loss from fair value adjustments” in the Consolidated Statements of Income.

The following table sets forth information regarding the Company’s derivative financial instruments at the periods indicated:

	September 30, 2020				December 31, 2019
	Notional		Net Carrying		Notional		Net Carrying
	Amount		Value (1)		Amount		Value (1)
	(In thousands)
Interest rate swaps (fair value hedge)	$	—	$	—	$	139,960	$	2,352
Interest rate swaps (non-hedge)		20,600		416		—		—
Interest rate swaps (fair value hedge)		318,569		(34,078)		186,009		(7,769)
Interest rate swaps (cash flow hedge)		1,021,500		(28,527)		541,500		(8,350)
Interest rate swaps (non-hedge)		38,600		(6,990)		18,000		(3,534)
Total derivatives	$	1,399,269	$	(69,179)	$	885,469	$	(17,301)

(1)Derivatives in a positive position are recorded as “Other assets” and derivatives in a negative position are recorded as “Other liabilities” in the Consolidated Statements of Financial Condition.

The following table sets forth the effect of derivative instruments on the Consolidated Statements of Income for the periods indicated:

		For the three months ended				For the nine months ended
		September 30,				September 30,
(In thousands)	Affected Line Item in the Statement Where Net income is Presented	2020		2019		2020		2019
Financial Derivatives:
	Other interest expense	$	(132)	$	(38)	$	(298)	$	(87)
	Net gain (loss) from fair value adjustments		590		(1,632)		(3,220)		(4,279)
Interest rate swaps (non-hedge)			458		(1,670)		(3,518)		(4,366)
Interest rate swaps (fair value hedge)	Interest and fees on loans		(1,158)		(1,041)		(4,863)		(1,833)
Interest rate swaps (cash flow hedge)	Other interest expense		(2,511)		301		(4,057)		1,362
Net loss		$	(3,211)	$	(2,410)	$	(12,438)	$	(4,837)

The Company’s interest rate swaps are subject to master netting arrangements between the Company and its three designated counterparties. The Company has not made a policy election to offset its derivative positions.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The following tables present the effect of the master netting arrangements on the presentation of the derivative assets and liabilities in the Consolidated Statements of Condition as of the dates indicated:

September 30, 2020

Gross Amounts Not Offset in the

Consolidated Statement of

Gross Amount Offset in

Net Amount of Assets

Condition

Gross Amount of

the Statement of

Presented in the Statement of

Financial

Cash Collateral

(In thousands)

Recognized Assets

Condition

Condition

Instruments

Received

Net Amount

Interest rate swaps

$

416

$

—

$

416

$

—

$

—

$

416

Gross Amounts Not Offset in the

Consolidated Statement of

Gross Amount of

Gross Amount Offset in

Net Amount of Liabilities

Condition

Recognized

the Statement of

Presented in the Statement of

Financial

Cash Collateral

(In thousands)

Liabilities

Condition

Condition

Instruments

Pledged

Net Amount

Interest rate swaps

$

69,595

$

—

$

69,595

$

73,812

$

450

$

(4,667)

December 31, 2019

Gross Amounts Not Offset in the

Consolidated Statement of

Gross Amount Offset in

Net Amount of Assets

Condition

Gross Amount of

the Statement of

Presented in the Statement of

Financial

Cash Collateral

(In thousands)

Recognized Assets

Condition

Condition

Instruments

Received

Net Amount

Interest rate swaps

$

2,352

$

—

$

2,352

$

—

$

—

$

2,352

Gross Amounts Not Offset in the

Consolidated Statement of

Gross Amount of

Gross Amount Offset in

Net Amount of Liabilities

Condition

Recognized

the Statement of

Presented in the Statement of

Financial

Cash Collateral

(In thousands)

Liabilities

Condition

Condition

Instruments

Pledged

Net Amount

Interest rate swaps

$

19,653

$

—

$

19,653

$

19,265

$

—

$

388

13.     Income Taxes

Flushing Financial Corporation files consolidated Federal and combined New York State and New York City income tax returns with its subsidiaries, with the exception of the Company’s trusts, which file separate Federal income tax returns as trusts, and Flushing Preferred Funding Corporation, which files a separate Federal income tax return as a real estate investment trust. Additionally, the Bank files New Jersey State tax returns. As of September 30, 2020, the Company is undergoing examination for its New York State income tax returns for 2014, 2015 and 2016 and its New York City income tax return for 2015, 2016 and 2017.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

Income tax provisions are summarized as follows:

	For the three months				For the nine months
	ended September 30,				ended September 30,
	2020		2019		2020		2019
(In thousands)
Federal:
Current	$	4,626	$	3,578	$	11,290	$	9,354
Deferred		(1,267)		(1,121)		(2,635)		(1,973)
Total federal tax provision		3,359		2,457		8,655		7,381
State and Local:
Current		1,491		1,345		2,975		2,518
Deferred		(361)		(1,266)		(1,539)		(1,804)
Total state and local tax provision		1,130		79		1,436		714
Total income tax provision	$	4,489	$	2,536	$	10,091	$	8,095

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

14.     Accumulated Other Comprehensive Income (Loss):

The following tables sets forth the changes in accumulated other comprehensive income (loss) by component for the periods indicated:

	For the three months ended September 30, 2020
	Unrealized Gains		Unrealized Gains
	(Losses) on		(Losses) on				Fair Value
	Available for Sale		Cash flow		Defined Benefit		Option Elected
	Securities		Hedges		Pension Items		on Liabilities		Total
	(In thousands)
Beginning balance, net of tax	$	(2,708)	$	(21,473)	$	(878)	$	1,537	$	(23,522)
Other comprehensive income before reclassifications, net of tax		3,185		937		—		111		4,233
Amounts reclassified from accumulated other comprehensive income, net of tax		—		929		52		—		981
Net current period other comprehensive income, net of tax		3,185		1,866		52		111		5,214
Ending balance, net of tax	$	477	$	(19,607)	$	(826)	$	1,648	$	(18,308)

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

	For the three months ended September 30, 2019
	Unrealized Gains		Unrealized Gains
	(Losses) on		(Losses) on				Fair Value
	Available for Sale		Cash flow		Defined Benefit		Option Elected
	Securities		Hedges		Pension Items		on Liabilities		Total
	(In thousands)
Beginning balance, net of tax	$	(3,815)	$	(6,132)	$	(1,658)	$	989	$	(10,616)
Other comprehensive income before reclassifications, net of tax		(475)		(1,664)		—		61		(2,078)
Amounts reclassified from accumulated other comprehensive income, net of tax		—		(282)		7		—		(275)
Net current period other comprehensive income (loss), net of tax		(475)		(1,946)		7		61		(2,353)
Ending balance, net of tax	$	(4,290)	$	(8,078)	$	(1,651)	$	1,050	$	(12,969)

	For the nine months ended September 30, 2020
	Unrealized Gains		Unrealized Gains
	(Losses) on		(Losses) on				Fair Value
	Available for Sale		Cash flow		Defined Benefit		Option Elected
	Securities		Hedges		Pension Items		on Liabilities		Total
	(In thousands)
Beginning balance, net of tax	$	(3,982)	$	(5,863)	$	(983)	$	1,021	$	(9,807)
Other comprehensive income before reclassifications, net of tax		4,397		(15,215)		—		627		(10,191)
Amounts reclassified from accumulated other comprehensive income, net of tax		62		1,471		157		—		1,690
Net current period other comprehensive income (loss), net of tax		4,459		(13,744)		157		627		(8,501)
Ending balance, net of tax	$	477	$	(19,607)	$	(826)	$	1,648	$	(18,308)

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

	For the nine months ended September 30, 2019
	Unrealized Gains		Unrealized Gains
	(Losses) on		(Losses) on				Fair Value
	Available for Sale		Cash flow		Defined Benefit		Option Elected
	Securities		Hedges		Pension Items		on Liabilities		Total
	(In thousands)
Beginning balance, net of tax	$	(15,649)	$	3,704	$	(1,673)	$	866	$	(12,752)
Other comprehensive income before reclassifications, net of tax		11,349		(10,914)		—		184		619
Amounts reclassified from accumulated other comprehensive income (loss), net of tax		10		(868)		22		—		(836)
Net current period other comprehensive income, net of tax		11,359		(11,782)		22		184		(217)
Ending balance, net of tax	$	(4,290)	$	(8,078)	$	(1,651)	$	1,050	$	(12,969)

The following tables set forth significant amounts reclassified from accumulated other comprehensive income (loss) by component for the periods indicated:

For the three months ended September 30, 2020
	Amounts Reclassified from
Details about Accumulated Other	Accumulated Other			Affected Line Item in the Statement
Comprehensive Loss Components	Comprehensive Loss			Where Net Income is Presented
(In thousands)
Cash flow hedges:
Interest rate swaps	$	(1,352)		Other interest expense
		423		Provision for income taxes
	$	(929)		Net of tax
Amortization of defined benefit pension items:
Actuarial losses	$	(97)	(1)	Other operating expense
Prior service credits		21	(1)	Other operating expense
		(76)		Total before tax
		24		Provision for income taxes
	$	(52)		Net of tax

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

For the three months ended September 30, 2019
	Amounts Reclassified from
Details about Accumulated Other	Accumulated Other			Affected Line Item in the Statement
Comprehensive Loss Components	Comprehensive Loss			Where Net Income is Presented
(In thousands)
Cash flow hedges:
Interest rate swaps	$	409		Other interest expense
		(127)		Provision for income taxes
	$	282		Net of tax
Amortization of defined benefit pension items:
Actuarial losses	$	(33)	(1)	Other operating expense
Prior service credits		22	(1)	Other operating expense
		(11)		Total before tax
		4		Provision for income taxes
	$	(7)		Net of tax

For the nine months ended September 30, 2020
	Amounts Reclassified from
Details about Accumulated Other	Accumulated Other			Affected Line Item in the Statement
Comprehensive Loss Components	Comprehensive Loss			Where Net Income is Presented
(In thousands)
Unrealized losses on available for sale securities	$	(91)		Net loss on sale of securities
		29		Provision for income taxes
	$	(62)		Net of tax
Cash flow hedges:
Interest rate swaps	$	(2,140)		Other interest expense
		669		Tax benefit
	$	(1,471)		Net of tax
Amortization of defined benefit pension items:
Actuarial losses	$	(292)	(1)	Other operating expense
Prior service credits		64	(1)	Other operating expense
		(228)		Total before tax
		71		Provision for income taxes
	$	(157)		Net of tax

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

For the nine months ended September 30, 2019
	Amounts Reclassified from
Details about Accumulated Other	Accumulated Other			Affected Line Item in the Statement
Comprehensive Loss Components	Comprehensive Loss			Where Net Income is Presented
(In thousands)
Unrealized losses on available for sale securities	$	(15)		Net loss on sale of securities
		5		Provision for income taxes
	$	(10)		Net of tax
Cash flow hedges:
Interest rate swaps	$	1,257		Other interest expense
		(389)		Provision for income taxes
	$	868		Net of tax
Amortization of defined benefit pension items:
Actuarial losses	$	(96)	(1)	Other operating expense
Prior service credits		64	(1)	Other operating expense
		(32)		Total before tax
		10		Provision for income taxes
	$	(22)		Net of tax

(1) These accumulated other comprehensive loss components are included in the computation of net periodic pension cost. See Note 10 (“Pension and Other Postretirement Benefit Plans”) for additional information.

15.     Regulatory Capital

Under current capital regulations, the Bank is required to comply with four separate capital adequacy standards. As of September 30, 2020, the Bank continues to be categorized as “well-capitalized” under the prompt corrective action regulations and continues to exceed all regulatory capital requirements. The Bank is also required to comply with a Capital Conservation Buffer (“CCB”). The CCB is designed to establish a capital range above minimum capital requirements and impose constraints on dividends, share buybacks and discretionary bonus payments when capital levels fall below prescribed levels. The minimum CCB is 2.50%. The CCB for the Bank at September 30, 2020 was 5.54%.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

Set forth below is a summary of the Bank’s compliance with banking regulatory capital standards.

	September 30, 2020				December 31, 2019
			Percent of				Percent of
	Amount		Assets		Amount		Assets
	(Dollars in thousands)
Tier I (leverage) capital:
Capital level	$	694,041	9.93	%	$	680,749	9.65	%
Requirement to be well capitalized		349,453	5.00			352,581	5.00
Excess		344,588	4.93			328,168	4.65
Common Equity Tier I risk-based capital:
Capital level	$	694,041	12.88	%	$	680,749	13.02	%
Requirement to be well capitalized		350,156	6.50			339,944	6.50
Excess		343,885	6.38			340,805	6.52
Tier 1 risk-based capital:
Capital level	$	694,041	12.88	%	$	680,749	13.02	%
Requirement to be well capitalized		430,962	8.00			418,393	8.00
Excess		263,079	4.88			262,356	5.02
Total risk-based capital:
Capital level	$	729,160	13.54	%	$	702,500	13.43	%
Requirement to be well capitalized		538,702	10.00			522,991	10.00
Excess		190,458	3.54			179,509	3.43

The Holding Company is subject to the same regulatory capital requirements as the Bank. As of September 30, 2020, the Holding Company continues to be categorized as “well-capitalized” under the prompt corrective action regulations and continues to exceed all regulatory capital requirements. The CCB for the Holding Company at September 30, 2020 was 5.71%.

Set forth below is a summary of the Holding Company’s compliance with banking regulatory capital standards.

	September 30, 2020				December 31, 2019
			Percent of				Percent of
	Amount		Assets		Amount		Assets
	(Dollars in thousands)
Tier I (leverage) capital:
Capital level	$	630,380	9.03	%	$	615,500	8.73	%
Requirement to be well capitalized		349,174	5.00			352,581	5.00
Excess		281,206	4.03			262,919	3.73
Common Equity Tier I risk-based capital:
Capital level	$	593,344	11.02	%	$	572,651	10.95	%
Requirement to be well capitalized		349,826	6.50			339,929	6.50
Excess		243,518	4.52			232,722	4.45
Tier 1 risk-based capital:
Capital level	$	630,380	11.71	%	$	615,500	11.77	%
Requirement to be well capitalized		430,555	8.00			418,374	8.00
Excess		199,825	3.71			197,126	3.77
Total risk-based capital:
Capital level	$	740,499	13.76	%	$	712,251	13.62	%
Requirement to be well capitalized		538,194	10.00			522,967	10.00
Excess		202,305	3.76			189,284	3.62

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

16.     Subsequent Events

Effective close of business October 31, 2020, Flushing Financial Corporation completed its acquisition of Empire Bancorp, Inc. based in Islandia, NY. At the time of the merger, each outstanding share of Empire Bancorp., Inc. was converted into the right to receive $14.04 per share payable in in cash or 0.6548 shares of Flushing Financial Corporation common stock with total consideration consisting 50% in stock and 50% in cash.

Since the closing date of the acquisition occurred after the end of the period covered by this Quarterly Report on Form 10-Q, the Company's unaudited consolidated financial statements included do not reflect the consummation of acquisition. The fair value of the total consideration transferred in the acquisition totaled $87.5 million that consisted of $54.8 million in cash and 2,557,286 shares of Flushing Financial Corporation common stock for all outstanding stock of Empire Bancorp., Inc., which resulted in 100% ownership interest. The Company is still evaluating the fair values of the assets and liabilities assumed in the Empire Bancorp., Inc. acquisition.

Merger-related expenses totaling $1.5 million were recorded in the nine months ended September 30, 2020. At September 30, 2020, Empire Bancorp, Inc. reported total loans of $672.3 million and total deposits of $803.0 million and operated 4 branch locations on Long Island.

17.     New Authoritative Accounting Pronouncements

Accounting Standards Adopted in 2020:

Effective January 1, 2020, the Company adopted Accounting Standards Topic 326, “Financial Instruments – Credit Losses” which replaced the previously existing U.S. GAAP “incurred loss” approach to “expected credit losses” approach, which is referred as Current Expected Credit Losses (“CECL”). CECL measures the credit loss associated with financial assets carried at amortize cost, including loan receivables, held-to-maturity debt securities, off balance sheet credit exposures and certain leases recognized by a lessor. CECL introduced the concept of purchased credit-deteriorated (PCD) financial assets, in which it requires the estimate of expected credit losses embedded in the purchase price of PCD assets to be estimated and separately recognized as an allowance as of the date of acquisition. It also modifies the accounting of impairment on available-for-sale debt securities by recognizing a credit loss through an allowance for credit.

The Company adopted Topic 326 using the modified retrospective method for all financial assets measured at amortized cost and off-balances sheet exposures. Results for reporting periods beginning after January 1, 2020 are presented under Topic 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP. Upon adoption we recorded a cumulative-effect adjustment to retained earnings totaling $1.3 million, $0.9 million, net of tax. The transition adjustment includes changes to the three applicable components of the ACL: increases of $0.4 million in the allowance for loan losses, $0.3 million in the allowance for held-to-maturity debt securities and $0.6 million in the allowance for off-balance sheet items.

At January 1, 2020, the reasonable and supportable forecast indicated economic growth and low unemployment.

Effective January 1, 2020, the Company adopted ASU No. 2018-13, “Fair Value Measurement (Topic 820)”. The Update modifies the disclosure requirements on fair value measurements in Topic 820. The guidance did not have a significant impact on the Company’s financial positions, results of operations or disclosures.

Effective January 1, 2020, the Company adopted ASU No. 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” The ASU simplifies the subsequent measurement of goodwill and eliminates Step 2 from the goodwill impairment test. Under this ASU, the Company should perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value. The impairment charge

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

is limited to the amount of goodwill allocated to that reporting unit. The guidance did not have a significant impact on the Company’s financial positions, results of operations or disclosures.

Accounting Standards Pending Adoption:

In August 2018, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2018-14, “Compensation – Retirement Benefits – Defined Benefit Plans – General (Subtopic 715-20)” providing targeted improvements to the disclosures required for Defined Benefit Plans. The amendments in in this Update are effective for fiscal years ended after December 15, 2020. Early adoption is permitted. The amendments are to be applied on a retrospective basis to all periods presented. The guidance is not expected to have a significant impact on the Company’s financial positions, results of operations or disclosures.

In March 2020, the FASB issued ASU No. 2020-04, “Reference Rate Reform” (Topic 848), which provides optional expedients and exceptions for applying GAAP to loan and lease agreements, derivative contracts, and other transactions affected by the anticipated transition away from LIBOR toward new interest rate benchmarks. For transactions that are modified because of reference rate reform and that meet certain scope guidance (i) modifications of loan agreements should be accounted for by prospectively adjusting the effective interest rate and the modification will be considered "minor" so that any existing unamortized origination fees/costs would carry forward and continue to be amortized and (ii) modifications of lease agreements should be accounted for as a continuation of the existing agreement with no reassessments of the lease classification and the discount rate or re-measurements of lease payments that otherwise would be required for modifications not accounted for as separate contracts. ASU 2020-04 also provides numerous optional expedients for derivative accounting. ASU 2020-04 is effective March 12, 2020 through December 31, 2022. An entity may elect to apply ASU 2020-04 for contract modifications as of January 1, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. Once elected for a Topic or an Industry Subtopic within the Codification, the amendments in this ASU must be applied prospectively for all eligible contract modifications for that Topic or Industry Subtopic. We anticipate this ASU will simplify any modifications we execute between the selected start date (yet to be determined) and December 31, 2022 that are directly related to LIBOR transition by allowing prospective recognition of the continuation of the contract, rather than extinguishment of the old contract resulting in writing off unamortized fees/costs. We are evaluating the impacts of this ASU and have not yet determined whether LIBOR transition and this ASU will have material effects on our business operations and consolidated financial statements. The amendments in this Update apply to contract modifications that replace a reference rate reform and contemporaneous modifications of other terms related to the replacement of the reference rate.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussions and Analysis of

Financial Condition and Results of Operations

ITEM 2.        MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Quarterly Report should be read in conjunction with the more detailed and comprehensive disclosures included in our Annual Report on Form 10-K for the year ended December 31, 2019. In addition, please read this section in conjunction with our Consolidated Financial Statements and Notes to Consolidated Financial Statements contained herein.

As used in this Quarterly Report, the words “we,” “us,” “our” and the “Company” are used to refer to Flushing Financial Corporation and its direct and indirect wholly owned subsidiaries, Flushing Bank (the “Bank”), Flushing Preferred Funding Corporation, Flushing Service Corporation, and FSB Properties Inc.

Statements contained in this Quarterly Report relating to plans, strategies, objectives, economic performance and trends, projections of results of specific activities or investments and other statements that are not descriptions of historical facts may be forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking information is inherently subject to risks and uncertainties and actual results could differ materially from those currently anticipated due to a number of factors, which include, but are not limited to, factors discussed elsewhere in this Quarterly Report and in other documents filed by us with the Securities and Exchange Commission from time to time, including, without limitation, our Annual Report on Form 10-K for the year ended December 31, 2019. Forward-looking statements may be identified by terms such as “may,” “will,” “should,” “could,” “expects,” “plans,” “intends,” “anticipates,” “believes,” “estimates,” “predicts,” “forecasts,” “goals,” “potential” or “continue” or similar terms or the negative of these terms. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We have no obligation to update these forward-looking statements.

Impact of COVID-19

Overview

In March 2020, the World Health Organization recognized the outbreak of the novel Coronavirus Disease 2019 (“COVID-19”) as a pandemic. The Spread of COVID-19 has created a global public health crisis that has resulted in unprecedented uncertainty, volatility and disruption in financial markets and in governmental, commercial and consumer activity in the United States and globally, including the markets we serve. In response to the pandemic, the government placed orders for shelter in place, maintaining social distancing and closed businesses that are not deemed essential.

Legislative Developments

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was signed in to law. It contains substantial tax and spending provisions intended to address the impact of the COVID-19 pandemic. The CARES Act includes a provision for the Company to opt out of applying the “troubled-debt restructuring” (“TDR”) accounting guidance in Accounting Standards Codification (“ASC”) 310-40 for certain loan modifications. Loan modifications made between March 1, 2020 and the earlier of i) December 30, 2020 or ii) 60 days after the President declares a termination of the COVID-19 national emergency are eligible for this relief if the related loans were not more than 30 days past due as of December 31, 2019. The CARES Act includes the Paycheck Protection Program (“PPP”), a program to aid small and medium- sized businesses through federally guaranteed loans distributed through banks. These loans are intended to guarantee eight weeks of payroll and other costs to help those businesses remain viable and allow their workers to pay their bills.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussions and Analysis of

Financial Condition and Results of Operations

During these tumultuous times, we are actively assisting our customers by providing short-term forbearances in the form of deferrals of interest, principal and/or escrow for terms ranging from one to twelve months. At September 30, 2020, we have 509 active forbearances for loans with an aggregate outstanding loan balance of approximately $846.2 million resulting in total deferment of $28.4 million in principal, interest and escrow. Given the pandemic and current economic environment, we continue to work with our customers to modify loans. We actively participated in the PPP, closing $111.6 million of these loans through September 30, 2020. We are one of nine banks in the State of New York participating in the Main Street Lending Program. We are also a proud participant in the FHLBNY Small Business Recovery Grant Program, helping our customers and communities navigate through the current environment.

Impact on Our Financial Statements and Results of operations

Financial institutions are dependent upon the ability of their loan customers to meet their loan obligations and the availability of their workforce and vendors. Early in the second quarter of 2020,  shelter-at-home mandates and other remediation from the COVID-19 pandemic were enacted. The pandemic and these remediation measures have directly impacted the communities we serve, where commercial activity decreased significantly. As of September 30, 2020, that commercial activity had improved but not returned to pre-pandemic levels. This continuing impact on commercial activity may have continuing adverse results, including on our customers’ ability to meet their obligations to us.

In addition, the economic pressures and uncertainties related to the COVID-19 pandemic have resulted in changes in consumer spending behaviors in the communities we serve, which may negatively impact the demand for loans and other services we offer. However, the Company’s capital and financial resources have not been materially impacted by the pandemic, as our results of operations depend primarily on net interest income, which benefited from the actions taken by the Federal Reserve to counteract the negative economic impact of the pandemic. Future operating results and near-and-long-term financial condition are subject to significant uncertainty. Our funding sources have not changed significantly and we expect to continue to be able to timely service our debts and its obligations.

The Company has elected that loans temporarily modified for borrowers directly impacted by COVID-19 are not considered TDR, assuming that CARES Act criteria is met and as such, these loans are considered current and continue to accrue interest at its original contractual terms. The Company was quick to respond to the pandemic with new health and safety measures, including social distancing, appointment banking and expansion of our remote capabilities. Our staff responded to these changes in a superb fashion and continue to provide our customers with excellent service. Today our staff is returning to work with A and B schedules to maintain social distancing. On any given day, as many as 85% of staff have the capability to work from home. The Federal Reserve’s dramatic 150 basis point drop in rates provided the country with much needed liquidity to counteract the negative economic effects of the pandemic.

Executive Summary

We are a Delaware corporation organized in May 1994. The Bank was organized in 1929 as a New York State-chartered mutual savings bank. Today the Bank operates as a full-service New York State commercial bank. The Bank’s primary regulator is the New York State Department of Financial Services, and its primary federal regulator is the Federal Deposit Insurance Corporation (“FDIC”). Deposits are insured to the maximum allowable amount by the FDIC. Additionally, the Bank is a member of the Federal Home Loan Bank system. The primary business of Flushing Financial Corporation has been the operation of the Bank. The Bank owns three subsidiaries: Flushing Preferred Funding Corporation, Flushing Service Corporation, and FSB Properties Inc. The Bank also operates an internet branch, which operates under the brands of iGObanking.com® and BankPurely® (the “Internet Branch”). The activities of Flushing Financial Corporation are primarily funded by dividends, if any, received from the Bank, issuances of subordinated debt, junior subordinated debt, and issuances of equity securities. Flushing Financial Corporation’s common stock is traded on the NASDAQ Global Select Market under the symbol “FFIC.”

Our principal business is attracting retail deposits from the general public and investing those deposits together with funds generated from ongoing operations and borrowings, primarily in (1) originations and purchases of multi-family residential loans, commercial business loans, commercial real estate mortgage loans and, to a lesser extent, one-to-four family loans

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussions and Analysis of

Financial Condition and Results of Operations

(focusing on mixed-use properties, which are properties that contain both residential dwelling units and commercial units); (2) Small Business Administration (“SBA”) loans and other small business loans; (3) construction loans; (4) mortgage loan surrogates such as mortgage-backed securities; and (5) U.S. government securities, corporate fixed-income securities and other marketable securities. We also originate certain other consumer loans including overdraft lines of credit. Our results of operations depend primarily on net interest income, which is the difference between the income earned on our interest-earning assets and the cost of our interest-bearing liabilities. Net interest income is the result of our net interest rate margin, which is the difference between the average yield earned on interest-earning assets and the average cost of interest-bearing liabilities, adjusted for the difference in the average balance of interest-earning assets as compared to the average balance of interest-bearing liabilities. We also generate non-interest income primarily from loan fees, service charges on deposit accounts, mortgage servicing fees, and other fees, income earned on Bank Owned Life Insurance (“BOLI”), dividends on Federal Home Loan Bank of New York (“FHLB-NY”) stock and net gains and losses on sales of securities and loans. Our operating expenses consist principally of employee compensation and benefits, occupancy and equipment costs, other general and administrative expenses and income tax expense. Our results of operations also can be significantly affected by changes in the fair value of financial assets and financial liabilities for which changes in value are recorded through earnings, our periodic provision for credit losses and specific provision for losses on real estate owned.

Our investment policy, which is approved by the Board of Directors, is designed primarily to manage the interest rate sensitivity of our overall assets and liabilities, to generate a favorable return without incurring undue interest rate risk and credit risk, to complement our lending activities and to provide and maintain liquidity. In establishing our investment strategies, we consider our business and growth strategies, the economic environment, our interest rate risk exposure, our interest rate sensitivity “gap” position, the types of securities to be held and other factors. We classify our investment securities as available for sale or held-to-maturity.

We carry a portion of our financial assets and financial liabilities under the fair value option and record changes in their fair value through earnings in non-interest income on our Consolidated Statements of Income and Comprehensive Income. A description of the financial assets and financial liabilities that are carried at fair value through earnings can be found in Note 11 (“Fair Value of Financial Instruments”) of the Notes to the Consolidated Financial Statements.

During the three months ended September 30, 2020, we reported net income of $14.3 million, or $0.50 per diluted common share.  We successfully executed on our strategic objective to manage our cost of funds and improve funding mix. We achieved record net interest income for the second consecutive quarter as a result of the cost of funds decreasing 10 basis points from the previous quarter with additional opportunity to further reduce funding costs in the fourth quarter. Adding to the reduction of cost of funds in the third quarter, non-interest bearing deposits increased 4% while the net interest margin expanded 13 basis points from the previous quarter.

Given the current economic environment at the end of the quarter, we adjusted our economic forecast in our current expected credit loss (“CECL”) model resulting in a provision for credit losses of $2.5 million, or $0.07 per diluted share, after-tax. At September 30, 2020 our allowance for credit losses stands at 65 basis points of gross loans and 155% of non-performing loans. CECL requires consideration of a broader range of information in order to update expected credit losses to capture life of loan and held-to-maturity debt securities estimated losses. These losses are estimated using historical loss experience, current conditions, and a reasonable and supportable forecast that affect the collectability of the reported amount.

During the three months ended September 30, 2020, the yield on interest-earning assets increased three basis points, while the cost of interest-bearing liabilities decreased 11 basis points from the three months ended June 30, 2020, which resulted in an increase of 13 bps in net interest margin to 3.00% from 2.87% in the same period. This improvement in the net interest margin resulted in our net interest income increasing $1.2 million to a record $49.9 million for the three months ended September 30, 2020 from $48.7 million for the three months ended June 2020.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussions and Analysis of

Financial Condition and Results of Operations

Non-performing assets at the end of the quarter were 35 basis points of total assets. Our loan portfolio is 88% collateralized by real estate with an average loan to value of less than 40%. Despite the current economic environment due to COVID-19, we have a long history and foundation built upon disciplined underwriting, good credit quality and a resilient seasoned loan portfolio with strong asset protection. Net charge-offs totaled $0.8 million for the three months ended September 30, 2020, primarily due to taxi medallion loans. The average loan-to-value on our non-performing real estate loans at September 30, 2020 remained conservative at approximately 30.6%.

The Bank and Company remain well capitalized under current capital regulations and are subject to the same regulatory capital requirements. See Note 15 (“Regulatory Capital”) of the Notes to the Consolidated Financial Statements.

COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2020 and 2019

General. Net income for the three months ended September 30, 2020 was $14.3 million, an increase of $3.6 million, or 33.6%, compared to $10.7 million for the three months ended September 30, 2019. Diluted earnings per common share were $0.50 for the three months ended September 30, 2020, an increase of $0.13, or 35.1%, from $0.37 for the three months ended September 30, 2019.

Return on average equity increased to 9.9% for the three months ended September 30, 2020 from 7.6% for the three months ended September 30, 2019. Return on average assets increased to 0.8% for the three months ended September 30, 2020 from 0.6% for the three months ended September 30, 2019.

Interest Income. Interest and dividend income decreased $5.5 million, or 7.9%, to $63.9 million for the three months ended September 30, 2020 from $69.4 million for the three months ended September 30, 2019. The decrease in interest income was primarily attributable to a decrease in the yield of average interest earning assets of 38 basis points, partially offset by an increase of $86.4 million in the average balance of interest-earning assets to $6,675.9 million for the three months ended September 30, 2020 from $6,589.5 million for the comparable prior year period. The decrease in the yield on interest-earning assets was primarily due to decreases of 36 basis points and 93 basis points in the yield of total loans and taxable securities, respectively, partially offset by an improvement in asset mix, as the average balance of higher yielding total loans increased $258.5 million, while the average balance of lower yielding taxable securities decreased $161.9 million. The decrease of 36 basis points in the yield on the total loans, net, was primarily due to loans being both originated and repriced at lower rates. The decrease in the yield of securities was primarily due to higher yielding securities replaced by lower yielding securities. Excluding prepayment penalty income from loans and securities, recovered interest from loans and net gains from fair value adjustments on qualifying hedges, the yield on total loans, net, would have decreased 42 basis points to 3.98% for the three months ended September 30, 2020 from 4.40% for the three months ended September 30, 2019.

Interest Expense. Interest expense decreased $16.5 million, or 54.0%, to $14.0 million for the three months ended September 30, 2020 from $30.4 million for the three months ended September 30, 2019. The decrease in interest expense was primarily due to a decrease of 109 basis points in the average cost of interest-bearing liabilities to 0.98% for the three months ended September 30, 2020 from 2.07% for the three months ended September 30, 2019, coupled with a decrease of $145.8 million in the average balance of interest-bearing liabilities to $5,731.9 million for the three months ended September 30, 2020 from $5,877.7 million for the comparable prior year period. The decrease in the cost of interest-bearing liabilities was primarily due to the Company’s quick response to the Federal Reserve lowering rates.

Net Interest Income. Net interest income for the three months ended September 30, 2020 was $49.9 million, an increase of $11.0 million, or 28.2%, from $38.9 million for the three months ended September 30, 2019. The increase in net interest income was primarily due to an increase of 63 basis points in the net interest margin to 3.00% for the quarter ended September 30, 2020 compared to the quarter ended September 30, 2019. Included in net interest income was prepayment penalty income from loans and securities totaling $1.4 million and $1.7 million for the three months ended September 30, 2020 and 2019, respectively, recovered interest from non-accrual loans totaling $0.1 million and $0.3 million for the three months ended September 30, 2020 and 2019, respectively, and net gains (losses) from fair value adjustments on

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussions and Analysis of

Financial Condition and Results of Operations

qualifying hedges totaling $0.2 million and ($1.3) million for three months ended September 30, 2020 and 2019, respectively. Excluding prepayment penalty income, recovered interest, and net losses from fair value adjustment on qualifying hedges, the net interest margin for the three months ended September 30, 2020 was 2.89%, an increase of 56 basis points, from to 2.33% for the three months ended September 30, 2019.

Provision for Credit Losses. During the three months ended September 30, 2020, a provision for credit losses was recorded totaling $2.5 million, compared to $0.7 million for the three months ended September 30, 2019. The provision was primarily the result of economic deterioration resulting from the impact of COVID-19. During the three months ended September 30, 2020, the Bank recorded net charge-offs totaling $0.8 million, while non-accrual loans increased $12.0 million to $24.8 million from $12.8 million at December 31, 2019. The current average loan-to-value ratio for our non-performing loans collateralized by real estate was 30.6% at September 30, 2020. The Bank continues to maintain conservative underwriting standards. See “Allowance for Credit Losses” below, Note 5 (“Loans”) and Note 17 (“New Authoritative Accounting Pronouncements”) of the Notes to the Consolidated Financial Statements.

Non-Interest Income. Non-interest income for the three months ended September 30, 2020 was $1.4 million, an increase of $0.3 million from the prior year comparable period primarily due to increase in other fee income of $0.5 million.

Non-Interest Expense. Non-interest expense increased $3.9 million, or 15.1%, to $30.0 million for the three months ended September 30, 2020 from $26.0 million for the three months ended September 30, 2019. The increase in non-interest expense was primarily due to the growth of the Company, coupled with 3Q19 including FDIC small business assessment credit.

Income before Income Taxes. Income before the provision for income taxes increased $5.6 million, or 41.9%, to $18.8 million for the three months ended September 30, 2020 from $13.3 million for the three months ended September 30, 2019 for the reasons discussed above.

Provision for Income Taxes. The provision for income taxes was $4.5 million for the three months ended September 30, 2020, an increase of $2.0 million, or 77.0%, from $2.5 million for the three months ended September 30, 2019. The increase was primarily due to an increase in income before income taxes. The effective tax rate for the three months ended September 30, 2020 was 23.9% compared to 19.1% for the three months ended September 30, 2019.

COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2020 and 2019

General. Net income for the nine months ended September 30, 2020 was $31.2 million, an increase of $2.9 million, or 10.1%, compared to $28.3 million for the nine months ended September 30, 2019. Diluted earnings per common share were $1.08 for the nine months ended September 30, 2020, an increase of $0.09, or 9.1%, from $0.99 for the nine months ended September 30, 2019.

Return on average equity increased to 7.3% for the nine months ended September 30, 2020 from 6.8% for the nine months ended September 30, 2019. Return on average assets was 0.6% for each of the nine months ended September 30, 2020 and 2019.

Interest Income. Interest and dividend income decreased $13.4 million, or 6.4%, to $195.4 million for the nine months ended September 30, 2020 from $208.8 million for the nine months ended September 30, 2019. The decrease in interest income was primarily attributable to a decrease in the yield of average interest earning assets of 38 basis points, partially offset by an increase of $184.5 million in the average balance of interest-earning assets to $6,735.0 million for the nine months ended September 30, 2020 from $6,550.5 million for the comparable prior year period. The decrease in the yield on interest-earning assets was primarily due to decreases of 34 basis points and 84 basis points in the yield of total loans and taxable securities, respectively, partially offset by an improvement in asset mix, as the average balance of higher yielding total loans increased $296.4 million, while the average balance of lower yielding taxable securities decreased $115.1 million. The decrease of 34 basis points in the yield on the total loans, net, was primarily due to loans being both

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussions and Analysis of

Financial Condition and Results of Operations

originated and repriced at lower rates. The decrease in the yield of securities was primarily due to higher yielding securities replaced by lower yielding securities. Excluding prepayment penalty income, recovered interest from loans and net losses from fair value adjustments on qualifying hedges, the yield on total loans, net, would have decreased 32 basis points to 4.10% for the nine months ended September 30, 2020 from 4.42% for the nine months ended September 30, 2019.

Interest Expense. Interest expense decreased $32.1 million, or 36.5%, to $55.9 million for the nine months ended September 30, 2020 from $88.0 million for the nine months ended September 30, 2019. The decrease in interest expense was primarily due to a decrease of 74 basis points in the average cost of interest-bearing liabilities to 1.27% for the nine months ended September 30, 2020 from 2.01% for the nine months ended September 30, 2019, partially offset by an increase of $26.7 million in the average balance of interest-bearing liabilities to $5,865.0 million for the nine months ended September 30, 2020 from $5,838.3 million for the comparable prior year period. The decrease in the cost of interest-bearing liabilities was primarily due to the Company’s quick response to the Federal Reserve lowering rates.

Net Interest Income. Net interest income for the nine months ended September 30, 2020 was $139.5 million, an increase of $18.7 million, or 15.5%, from $120.8 million for the nine months ended September 30, 2019. The increase in net interest income was primarily due to an increase of 30 basis points in the net interest margin to 2.77% for the nine months ended September 30, 2020 compared to 2.47% for the nine months ended September 30, 2019. Included in net interest income was prepayment penalty income from loans and securities totaling $2.9 million and $3.6 million for the nine months ended September 30, 2020 and 2019, respectively, recovered interest from non-accrual loans totaling $0.6 million and $1.5 million for the nine months ended September 30, 2020 and 2019, respectively, and net losses from fair value adjustments on qualifying hedges totaling $2.2 million and $2.7 million for nine months ended September 30, 2020 and 2019, respectively. Excluding prepayment penalty income, recovered interest, and net losses from fair value adjustment on qualifying hedges, the net interest margin for the nine months ended September 30, 2020 was 2.74%, an increase of 32 basis points, from to 2.42% for the nine months ended September 30, 2019.

Provision for Credit Losses. During the nine months ended September 30, 2020, a provision for credit losses was recorded totaling $19.3 million, compared to $3.1 million for the nine months ended September 30, 2019. The provision was primarily the result of economic deterioration resulting from the impact of COVID-19. During the nine months ended September 30, 2020, the Bank recorded net charge-offs totaling $3.0 million, while non-accrual loans increased $12.0 million to $24.8 million from $12.8 million at December 31, 2019. The current average loan-to-value ratio for our non-performing loans collateralized by real estate was 30.6% at September 30, 2020. The Bank continues to maintain conservative underwriting standards. See “Allowance for Credit Losses” below, Note 5 (“Loans”) and Note 17 (“New Authoritative Accounting Pronouncements”) of the Notes to the Consolidated Financial Statements.

Non-Interest Income. Non-interest income for the nine months ended September 30, 2020 was $12.2 million, an increase of $7.8 million from the prior year comparable period. The increase in non-interest income was primarily due to an increase of $8.1 million in net gains from fair value adjustments and life insurance proceeds of $0.6 million for nine months ended September 30, 2020, partially offset by net gain on sale of asset totaling $0.8 million recorded during the nine months ended September 30, 2019. The increase in net gains was primarily due to net gains recorded on our junior subordinated debentures, as credit spreads had widened due to the COVID-19 crisis.

Non-Interest Expense. Non-interest expense for the nine months ended September 30, 2020 was $91.1 million, an increase of $5.5 million, or 6.4% from $85.6 million for the prior year comparable period. The increase in non-interest expense was primarily due to the growth of the Company coupled with the prior comparable period including FDIC small business assessment credit.

Income before Income Taxes. Income before the provision for income taxes increased $4.9 million, or 13.3%, to $41.3 million for the nine months ended September 30, 2020 from $36.4 million for the nine months ended September 30, 2019 for the reasons discussed above.

Provision for Income Taxes. The provision for income taxes for the nine months ended September 30, 2020 was $10.1 million, an increase of $2.0 million or 24.7% from $8.1 million for the nine months ended September 30, 2019. The

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussions and Analysis of

Financial Condition and Results of Operations

effective tax rate for the nine months ended September 30, 2020 was 24.4% compared to 22.2% for the nine months ended September 30, 2019.

FINANCIAL CONDITION

Assets. Total assets at September 30, 2020 were $7,063.1 million, an increase of $45.3 million, or 0.6%, from $7,017.8 million at December 31, 2019. Total loans, net increased $152.6 million, or 2.7%, during the nine months ended September 30, 2020, to $5,903.1 million from $5,750.5 million at December 31, 2019. Loan originations and purchases were $688.1 million for the nine months ended September 30, 2020, a decrease of $204.5 million, or 22.9%, from $892.6 million for the nine months ended September 30, 2019. In response to the COVID-19 pandemic, we have originated $111.6 million of PPP loans. We continue to focus on the origination of multi-family residential, commercial real estate and commercial business loans with a full banking relationship. The loan pipeline was $394.1 million at September 30, 2020, compared to $324.5 million at December 31, 2019.

The following table shows loan originations and purchases for the periods indicated:

	For the three months				For the nine months
	ended September 30,				ended September 30,
(In thousands)	2020		2019		2020		2019
Multi-family residential (1)	$	33,733	$	60,454	$	160,705	$	143,297
Commercial real estate (2)		26,644		66,648		134,218		123,289
One-to-four family – mixed-use property		3,867		18,167		25,439		47,475
One-to-four family – residential		2,296		7,421		13,383		19,191
Co-operative apartments		—		1,817		704		2,117
Construction (3)		5,420		5,761		14,990		30,377
Small Business Administration (4)		18,456		121		111,754		2,705
Commercial business and other (5)		65,160		237,754		226,895		524,113
Total	$	155,576	$	398,143	$	688,088	$	892,564

(1) Includes purchases of $3.1 million for the nine months ended September 30, 2020.

(2) Includes purchases of $30.0 million for nine months ended September 30, 2020.

(3) Includes purchases of $1.2 million and $4.6 million for the three and nine months ended September 30, 2020, respectively. Includes purchases of $0.9 million and $16.9 million for the three and nine months ended September 30, 2019, respectively.

(4) Includes $18.4 million and $111.6 million of PPP loans for the three and nine months ended September 30, 2020, respectively.

(5) Includes purchases of $19.5 million and $95.2 million for the three and nine months ended September 30, 2020, respectively. Includes purchases of $77.3 million  and $176.8 for the three and nine months ended September 30, 2019, respectively.

The Bank maintains its conservative underwriting standards that include, among other things, a loan-to-value ratio of 75% or less and a debt coverage ratio of at least 125%. Multi-family residential (excluding underlying co-operative mortgages), commercial real estate and one-to-four family mixed-use property mortgage loans originated and purchased during the nine months ended September 30, 2020 had an average loan-to-value ratio of 45.3% and an average debt coverage ratio of 184%.

The Bank’s non-performing assets totaled $24.8 million at September 30, 2020, an increase of $11.3 million, or 83.5%, from $13.5 million at December 31, 2019. Total non-performing assets as a percentage of total assets were 0.35% at September 30, 2020 compared to 0.19% at December 31, 2019. The ratio of allowance for loan losses to total non-performing loans was 154.7% at September 30, 2020 and 164.1% at December 31, 2019.

During the nine months ended September 30, 2020, mortgage-backed securities decreased $137.6 million, or 25.9%, to $394.2 million from $531.8 million at December 31, 2019. The decrease in mortgage-backed securities during the nine months ended September 30, 2020 was primarily due to the sale of securities totaling $130.8 million, that at the time of sale, due to increased prepayment speeds, had a negative weighted average book yield and principal repayments of $142.3

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussions and Analysis of

Financial Condition and Results of Operations

million, partially offset by purchase of securities totaling $130.2 million at an average rate of 1.84% and an increase in the fair value of $8.1 million.

During the nine months ended September 30,, 2020, other securities, decreased $14.6 million, or 4.9%, to $285.0 million from $299.6 million at December 31, 2019. The decrease in other securities during the nine months ended September 30, 2020, was primarily due to the calls totaling $12.6 million coupled with a decrease in the fair value of other securities of $1.5 million. At September 30, 2020 other securities primarily consist of securities issued by mutual or bond funds that invest in government and government agency securities, municipal bonds, corporate bonds and CLO’s.

Liabilities. Total liabilities were $6,476.7 million at September 30, 2020, an increase of $38.5 million, or 0.6%, from $6,438.1 million at December 31, 2019. During the nine months ended September 30, 2020, due to depositors decreased $115.7 million, or 2.3%, to $4,906.4 million due to a decrease of $386.2 million in certificates of deposit, partially offset by an increase of $270.6 million in non-maturity deposits. The decrease in certificates of deposit was due to management’s decision to allow these deposits to mature and replace with lower cost funding. The increase in non-maturity deposits was due to increases of $339.3 and $172.9 million in NOW and demand deposits accounts, respectively, partially offset by decreases of $210.5 million and $31.2 million in money market accounts and savings accounts, respectively. Included in deposits were brokered deposits totaling $684.3 million, an increase of $295.5 million from $388.8 million at December 31, 2019.  Borrowed funds increased $86.7 million during the nine months ended September 30, 2020. The increase in borrowed funds was primarily due to an increase in wholesale borrowings, partially offset by a decrease in the fair value on junior subordinate debentures.

Equity. Total stockholders’ equity increased $6.7 million, or 1.2%, to $586.4 million at September 30, 2020 from $579.7 million at December 31, 2019. Stockholders’ equity increased due to net income totaling $31.2 million and the net impact of vesting and exercising of shares of employee and director stock plans totaling $5.4 million. The increases were partially offset by declaration and payment of dividends on the Company’s common stock of $0.63 per common share totaling $18.2 million, an increase in accumulated comprehensive net loss of $8.5 million combined with the purchase of 142,405 treasury shares, at an average cost of $16.45 per share, totaling $2.3 million and the adoption of CECL totaling $0.9 million. Book value per common share was $20.78 at September 30, 2020 compared to $20.59 at December 31, 2019.

Cash flow. During the nine months ended September 30, 2020, funds provided by the Company’s operating activities amounted to $45.5 million. These funds, combined with $12.8 million from investing activities and $49.8 million available from the beginning of the period were utilized to fund $32.5 million used in financing activities. The Company’s primary business objective is the origination and purchase of multi-family residential loans, commercial business loans and commercial real estate mortgage loans and to a lesser extent one-to-four family (including mixed-use properties) and SBA loans. During the nine months ended September 30, 2020, the net total of loan originations and purchases less loan repayments and sales was $143.6 million. During the nine months ended September 30, 2020, the Company also funded $130.4 million in purchases of securities available for sale. During the nine months ended September 30, 2020, funds were provided by sales, calls, prepayments and maturities of available for sale securities totaling $285.7 million. During the nine months ended September 30, 2020, funds were provided by increases of $240.4 million in proceeds from long-term borrowings, partially offset by decreases in deposit of $103.1 million. The funds were used to repay $147.8 million in long-term borrowings. The Company also used funds of $18.2 million for dividend payments and $3.9 million in purchases of treasury stock during the nine months ended September 30, 2020.

INTEREST RATE RISK

The Consolidated Statements of Financial Position have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”), which require the measurement of financial position and operating results in terms of historical dollars without considering the changes in fair value of certain investments due to changes in interest rates. Generally, the fair value of financial investments such as loans and securities fluctuates inversely with changes in interest rates. As a result, increases in interest rates could result in decreases in the fair value of the Company’s interest-earning assets which could adversely affect the Company’s results of operations if such assets were sold, or, in the

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussions and Analysis of

Financial Condition and Results of Operations

case of securities classified as available for sale, decreases in the Company’s stockholders’ equity, if such securities were retained.

The Company manages the mix of interest-earning assets and interest-bearing liabilities on a continuous basis to maximize return and adjust its exposure to interest rate risk. On a quarterly basis, management prepares the “Earnings and Economic Exposure to Changes in Interest Rate” report for review by the Asset Liability Committee of the Board of Directors, as summarized below. This report quantifies the potential changes in net interest income and net portfolio value should interest rates go up or down (shocked) 200 basis points, assuming the yield curves of the rate shocks will be parallel to each other. The Company’s regulators currently place focus on the net portfolio value, focusing on a rate shock up or down of 200 basis points. Net portfolio value is defined as the market value of assets net of the market value of liabilities. The market value of assets and liabilities is determined using a discounted cash flow calculation. The net portfolio value ratio is the ratio of the net portfolio value to the market value of assets. All changes in income and value are measured as percentage changes from the projected net interest income and net portfolio value at the base interest rate scenario. The base interest rate scenario assumes interest rates at September 30, 2020. Various estimates regarding prepayment assumptions are made at each level of rate shock. However, prepayment penalty income is excluded from this analysis. Actual results could differ significantly from these estimates. At September 30, 2020, the Company was within the guidelines set forth by the Board of Directors for each interest rate level.

The following table presents the Company’s interest rate shock as of September 30, 2020:

	Projected Percentage Change In				Net Portfolio
Change in Interest Rate	Net Interest Income		Net Portfolio Value		Value Ratio
-200 Basis points	1.07	%	1.99	%	9.11	%
-100 Basis points	2.73		10.68		9.90
Base interest rate	—		—		9.19
+100 Basis points	(5.61)		(14.63)		8.11
+200 Basis points	(10.92)		(22.28)		7.57

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussions and Analysis of

Financial Condition and Results of Operations

AVERAGE BALANCES

Net interest income represents the difference between income on interest-earning assets and expense on interest-bearing liabilities. Net interest income depends upon the relative amount of interest-earning assets and interest-bearing liabilities and the interest rate earned or paid on them. The following tables sets forth certain information relating to the Company’s Consolidated Statements of Financial Condition and Consolidated Statements of Income for the three and nine months ended September 30, 2020 and 2019, and reflects the average yield on assets and average cost of liabilities for the periods indicated. Such yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods shown. Average balances are derived from average daily balances. The yields include amortization of fees which are considered adjustments to yields.

	For the three months ended September 30,
	2020						2019
	Average				Yield/		Average				Yield/
	Balance		Interest		Cost		Balance		Interest		Cost
Assets	(Dollars in thousands)
Interest-earning assets:
Mortgage loans, net	$	4,721,742	$	49,814	4.22	%	$	4,598,898	$	50,462	4.39	%
Other loans, net		1,182,309		10,553	3.57			1,046,605		12,363	4.72
Total loans, net (1) (2)		5,904,051		60,367	4.09			5,645,503		62,825	4.45
Taxable securities:
Mortgage-backed securities		413,902		1,928	1.86			574,756		3,765	2.62
Other securities		243,754		1,166	1.91			244,757		1,982	3.24
Total taxable securities		657,656		3,094	1.88			819,513		5,747	2.81
Tax-exempt securities: (3)
Other securities		51,652		557	4.31			65,709		706	4.30
Total tax-exempt securities		51,652		557	4.31			65,709		706	4.30
Interest-earning deposits and federal funds sold		62,537		13	0.08			58,773		259	1.76
Total interest-earning assets		6,675,896		64,031	3.84			6,589,498		69,537	4.22
Other assets		407,132						382,905
Total assets	$	7,083,028					$	6,972,403
Liabilities and Equity
Deposits:
Savings accounts	$	160,100		65	0.16		$	194,736		344	0.71
NOW accounts		1,625,109		1,242	0.31			1,347,145		5,654	1.68
Money market accounts		1,461,996		2,108	0.58			1,306,634		6,859	2.10
Certificate of deposit accounts		1,106,355		3,700	1.34			1,573,535		9,321	2.37
Total due to depositors		4,353,560		7,115	0.65			4,422,050		22,178	2.01
Mortgagors' escrow accounts		55,868		(22)	(0.16)			60,084		66	0.44
Total deposits		4,409,428		7,093	0.64			4,482,134		22,244	1.99
Borrowed funds		1,322,471		6,897	2.09			1,395,606		8,196	2.35
Total interest-bearing liabilities		5,731,899		13,990	0.98			5,877,740		30,440	2.07
Non interest-bearing deposits		589,674						400,762
Other liabilities		184,943						129,646
Total liabilities		6,506,516						6,408,148
Equity		576,512						564,255
Total liabilities and equity	$	7,083,028					$	6,972,403
Net interest income / net interest rate spread (tax equivalent) (3)			$	50,041	2.86	%			$	39,097	2.15	%
Net interest-earning assets / net interest margin(tax equivalent)	$	943,997			3.00	%	$	711,758			2.37	%
Ratio of interest-earning assets to interest-bearing liabilities					1.16	X					1.12	X

(1) Loan interest income includes loan fee income (which includes net amortization of deferred fees and costs, late charges, and prepayment penalties) of approximately $0.8 million and $0.9 million for the three months ended September 30, 2020 and 2019, respectively.

(2) Loan interest income includes net gains (losses) from fair value adjustments on qualifying hedges of $0.2 million and ($1.3) million for the three months ended September 30, 2020 and 2019, respectively.

(3) Interest and yields are calculated on the tax equivalent basis using the statutory federal income tax rate of 21% for the periods presented totaling $0.1 million in each period.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussions and Analysis of

Financial Condition and Results of Operations

	For the nine months ended September 30,
	2020						2019
	Average				Yield/		Average				Yield/
	Balance		Interest		Cost		Balance		Interest		Cost
Assets	(Dollars in thousands)
Interest-earning assets:
Mortgage loans, net	$	4,727,094	$	148,945	4.20	%	$	4,602,896	$	151,513	4.39	%
Other loans, net		1,154,764		33,088	3.82			982,549		35,915	4.87
Total loans, net (1) (2)		5,881,858		182,033	4.13			5,585,445		187,428	4.47
Taxable securities:
Mortgage-backed securities		462,216		7,295	2.10			578,020		12,238	2.82
Other securities		243,782		4,221	2.31			243,071		6,328	3.47
Total taxable securities		705,998		11,516	2.17			821,091		18,566	3.01
Tax-exempt securities: (3)
Other securities		58,464		1,876	4.28			60,010		1,895	4.21
Total tax-exempt securities		58,464		1,876	4.28			60,010		1,895	4.21
Interest-earning deposits and federal funds sold		88,659		325	0.49			83,963		1,286	2.04
Total interest-earning assets		6,734,979		195,750	3.88			6,550,509		209,175	4.26
Other assets		396,871						360,568
Total assets	$	7,131,850					$	6,911,077
Liabilities and Equity
Deposits:
Savings accounts	$	180,829		420	0.31		$	200,246		1,053	0.70
NOW accounts		1,495,473		7,989	0.71			1,458,801		18,326	1.67
Money market accounts		1,579,712		12,358	1.04			1,340,841		20,654	2.05
Certificate of deposit accounts		1,186,188		15,031	1.69			1,537,981		26,326	2.28
Total due to depositors		4,442,202		35,798	1.07			4,537,869		66,359	1.95
Mortgagors' escrow accounts		69,427		44	0.08			68,678		181	0.35
Total deposits		4,511,629		35,842	1.06			4,606,547		66,540	1.93
Borrowed funds		1,353,416		20,047	1.97			1,231,760		21,476	2.32
Total interest-bearing liabilities		5,865,045		55,889	1.27			5,838,307		88,016	2.01
Non interest-bearing deposits		533,563						398,085
Other liabilities		163,044						115,476
Total liabilities		6,561,652						6,351,868
Equity		570,198						559,209
Total liabilities and equity	$	7,131,850					$	6,911,077
Net interest income / net interest rate spread (tax equivalent) (3)			$	139,861	2.61	%			$	121,159	2.25	%
Net interest-earning assets / net interest margin(tax equivalent)	$	869,934			2.77	%	$	712,202			2.47	%
Ratio of interest-earning assets to interest-bearing liabilities					1.15	X					1.12	X

(1) Loan interest income includes loan fee income (which includes net amortization of deferred fees and costs, late charges, and prepayment penalties) of approximately $1.3 million and $1.7 million for the nine months ended September 30, 2020 and 2019, respectively.

(2) Loan interest income includes net losses from fair value adjustments on qualifying hedges of $2.2 million and $2.7 million for the nine months ended September 30, 2020 and 2019, respectively.

(3) Interest and yields are calculated on the tax equivalent basis using the statutory federal income tax rate of 21% for the periods presented totaling $0.4 million for each of the nine month periods ended September 30, 2020 and 2019.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussions and Analysis of

Financial Condition and Results of Operations

LOANS

The following table sets forth the Company’s loan originations (including the net effect of refinancing) and the changes in the Company’s portfolio of loans, including purchases, sales and principal reductions for the periods indicated.

	For the nine months ended September 30,
(In thousands)	2020		2019
Mortgage Loans
At beginning of period	$	4,677,703	$	4,638,784
Mortgage loans originated:
Multi-family residential		157,577		143,297
Commercial real estate		104,213		123,289
One-to-four family – mixed-use property		25,439		47,475
One-to-four family – residential		13,383		19,191
Co-operative apartments		704		2,117
Construction		10,384		13,483
Total mortgage loans originated		311,700		348,852
Mortgage loans purchased:
Multi-family residential		3,128		—
Commercial real estate		30,005		—
Construction		4,606		16,894
Total mortgage loans purchased		37,739		16,894
Less:
Principal and other reductions		289,356		366,197
Sales		498		1,353
Charge-offs		3		—
Loans transferred to OREO		—		239
At end of period	$	4,737,285	$	4,636,741
Non-Mortgage Loans
At beginning of period	$	1,079,232	$	897,512
Other loans originated:
Small Business Administration (1)		111,754		2,705
Commercial business		128,079		345,895
Other		3,662		1,409
Total other loans originated		243,495		350,009
Other loans purchased:
Commercial business		95,154		176,809
Total other loans purchased		95,154		176,809
Less:
Principal and other reductions		224,236		303,079
Sales		—		5,213
Charge-offs		3,250		2,379
At end of period	$	1,190,395	$	1,113,659

(1) Includes SBA PPP originations totaling $111.6 million for the nine months ended September 30, 2020.

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PART I – FINANCIAL INFORMATION

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Management’s Discussions and Analysis of

Financial Condition and Results of Operations

TROUBLED DEBT RESTRUCTURED (“TDR”) AND NON-PERFORMING ASSETS

The following table shows loans classified as TDR at amortized cost that are performing according to their restructured terms at the periods indicated:

	September 30,
(In thousands)	2020
Accrual Status:
Multi-family residential	$	1,876
One-to-four family - mixed-use property		1,469
One-to-four family - residential		513
Total		3,858
Non-Accrual Status:
One-to-four family - mixed-use property		275
Commercial business and other		950
Taxi medallion		99
Total		1,324
Total performing troubled debt restructured	$	5,182

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

	December 31,
(In thousands)	2019
Accrual Status:
Multi-family residential	$	1,873
One-to-four family - mixed-use property		1,481
One-to-four family - residential		531
Total		3,885
Non-Accrual Status:
Commercial business and other		941
Taxi medallion		1,668
Total		2,609
Total performing troubled debt restructured	$	6,494

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussions and Analysis of

Financial Condition and Results of Operations

The following table shows our non-performing assets at amortized cost at the period indicated:

	September 30,
(In thousands)	2020
Non-accrual loans:
Multi-family residential		2,723
Commercial real estate		2,714
One-to-four family - mixed-use property (1)		1,429
One-to-four family - residential		5,922
Small business administration		1,169
Taxi medallion(1)		2,219
Commercial Business and other (1)		8,328
Total		24,504
Total non-performing loans		24,504
Other non-performing assets:
Other assets acquired through foreclosure		35
Total		35
Total non-performing assets	$	24,539
Non-performing assets to total assets		0.35	%
Allowance for loan losses to non-performing loans		154.66	%

(1) Not included in the above analysis are non-accrual performing mixed-use property loans totaling $0.3 million, non-accrual performing TDR taxi medallion loans totaling $0.1 million at September 30, 2020 and non-accrual performing TDR commercial business loans totaling $1.0 million at September 30, 2020.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussions and Analysis of

Financial Condition and Results of Operations

The following table shows non-performing assets at the period indicated:

	December 31,
(In thousands)	2019
Loans 90 days or more past due and still accruing:
Multi-family residential	$	445
Total		445
Non-accrual loans:
Multi-family residential		2,296
Commercial real estate		367
One-to-four family - mixed-use property		274
One-to-four family - residential		5,139
Small business administration		1,151
Taxi medallion(1)		1,641
Commercial business and other(1)		1,945
Total		12,813
Total non-performing loans		13,258
Other non-performing assets:
Real estate acquired through foreclosure		239
Other assets acquired through foreclosure		35
Total		274
Total non-performing assets	$	13,532
Non-performing assets to total assets		0.19	%
Allowance for loan losses to non-performing loans		164.05	%

(1) Not included in the above analysis are non-accrual performing TDR taxi medallion loans totaling $1.7 million at December 31, 2019, respectively and non-accrual performing TDR commercial business loans totaling $0.9 million at December 31, 2019, respectively.

CRITICIZED AND CLASSIFIED ASSETS

Our policy is to review our assets, focusing primarily on the loan portfolio, OREO and the investment portfolios, to ensure that credit quality is maintained at the highest levels. See Note 5 (“Loans”) of the Notes to the Consolidated Financial Statements for a description of how loans are determined to be criticized or classified and a table displaying criticized and classified loans at September 30, 2020 and December 31, 2019. The Company did not hold any criticized or classified investment securities at September 30, 2020 and December 31, 2019. Our total Criticized and Classified assets were $42.2 million at September 30, 2020, an increase of $3.9 million from $38.3 million at December 31, 2019. The company did not hold any OREO and held $35,000 in the other asset acquired through foreclosure at September 30, 2020. Included in classified assets are classified OREO and other assets acquired through foreclosure totaling $0.3 million at December 31, 2019, respectively.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussions and Analysis of

Financial Condition and Results of Operations

ALLOWANCE FOR CREDIT LOSSES

Upon adoption of CECL, the allowance for credit losses (“ACL”) increased by $1.3 million that included an increase of $0.6 million to the allowance for off-balance sheet credit losses, $0.4 million to the allowance for loan losses and $0.3 million to the allowance for HTM securities losses. We recorded $19.2 million provision for loan losses for the nine months ended September 30, 2020 utilizing the CECL methodology. The increase resulted primarily due to the effect of the COVID-19 pandemic on the economic forecast used in our CECL model, which includes adjusted reasonable and supportable period of four quarters and reversion period of four quarters. Additionally, it increased due to growth in the loan portfolio. The impact from the above resulted in the ACL totaling $40.3 million at September 30, 2020. We recorded $3.0 million in net charge-offs during the nine months ended September 30, 2020.

	At or for the nine months ended September 30,
(Dollars in thousands)		2020
Balance at beginning of period	$	21,751
Loans- CECL Adoption		379
Loans- Charge-off		(3,253)
Loans- Recovery		260
Loans- Provision		19,206
Allowance for loan losses	$	38,343
Balance at beginning of period	$	—
HTM Securities- CECL Adoption		340
HTM Securities- Provision		62
Allowance for HTM Securities losses	$	402
Balance at beginning of period	$	—
Off-Balance Sheet - CECL Adoption		553
Off-Balance Sheet- Provision		1,006
Allowance for Off-Balance Sheet losses	$	1,559
Allowance for Credit Losses	$	40,304

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussions and Analysis of

Financial Condition and Results of Operations

The following table sets forth the activity in the Company’s allowance for loan losses for the periods indicated:

	At or for the nine months ended September 30,
(Dollars in thousands)	2020			2019
Balance at beginning of period	$	21,751		$	20,945
CECL Adoption		379			—
Provision for loan losses		19,206			3,129
Loans charged-off:
Multi-family residential		—			(190)
One-to-four family - residential		—			(113)
One-to-four family - mixed-use property		(3)			(1)
Construction		—			—
Small Business Administration		(178)			—
Taxi medallion		(951)			—
Commercial business and other		(2,121)			(2,379)
Total loans charged-off		(3,253)			(2,683)
Recoveries:
Multi-family residential		27			30
Commercial real estate		—			7
One-to-four family - mixed-use property		138			228
One-to-four family - residential		10			10
Small Business Administration		67			52
Taxi medallion		—			134
Commercial business and other		18			183
Total recoveries		260			644
Net charge-offs		(2,993)			(2,039)
Balance at end of period	$	38,343		$	22,035
Ratio of net charge-offs during the period to average loans outstanding during the period		0.07	%		0.05	%
Ratio of allowance for loan losses to gross loans at end of period		0.65	%		0.38	%
Ratio of allowance for loan losses to non-performing assets at end of period		154.44	%		147.11	%
Ratio of allowance for loan losses to non-performing loans at end of period		154.66	%		149.85	%

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

ITEM 3.       QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

For a discussion of the qualitative and quantitative disclosures about market risk, see the information under the caption "Management’s Discussion and Analysis of Financial Condition and Results of Operations - Interest Rate Risk."

ITEM 4.       CONTROLS AND PROCEDURES

The Company carried out, under the supervision and with the participation of the Company’s management, including its Chief Executive Officer and Chief Financial Officer, an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this Quarterly Report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2020, the design and operation of these disclosure controls and procedures were effective. During the period covered by this Quarterly Report, there have been no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II – OTHER INFORMATIOMTION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

ITEM 1.       LEGAL PROCEEDINGS

The Company is a defendant in various lawsuits. Management of the Company, after consultation with outside legal counsel, believes that the resolution of these various matters will not result in any material adverse effect on the Company’s consolidated financial condition, results of operations and cash flows.

ITEM 1A.     RISK FACTORS

Except as set forth below, there have been no material changes from the risk factors disclosed in the Company’s annual report on Form 10-K for the year ended December 31, 2019 as updated by the risk factors disclosed in the Company’s quarterly report on Form 10-Q for the quarter ended March 31, 2020.

ITEM 2.       UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table sets forth information regarding the shares of common stock repurchased by the Company during the three months ended September 30, 2020:

					Maximum
				Total Number of	Number of
	Total			Shares Purchased	Shares That May
	Number			as Part of Publicly	Yet Be Purchased
	of Shares	Average Price		Announced Plans	Under the Plans
Period	Purchased	Paid per Share		or Programs	or Programs
July 1 to July 31, 2020	—	$	—	—	284,806
August 1 to August 31, 2020	—		—	—	284,806
September 1 to September 30, 2020	—		—	—	284,806
Total	—		—	—

During the quarter ended September 30, 2020, the Company did not repurchase any shares of the Company’s common stock. On September 30, 2020, 284,806 shares remained to be repurchased under the currently authorized stock repurchase program. Stock will be purchased under the current stock repurchase programs from time to time, in the open market or through private transactions, subject to market conditions. There is no expiration or maximum dollar amount under these authorizations.

ITEM 3.       DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.        MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5.       OTHER INFORMATION

None.

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PART II – OTHER INFORMATIOMTION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

ITEM 6.       EXHIBITS

Exhibit No.	Description
3.1 P	Certificate of Incorporation of Flushing Financial Corporation (1)
3.2	Certificate of Amendment to Certificate of Incorporation of Flushing Financial Corporation (3)
3.3	Certificate of Amendment to Certificate of Incorporation of Flushing Financial Corporation (5)
3.4	Certificate of Designations of Series A Junior Participating Preferred Stock of Flushing Financial Corporation (4)
3.5	Certificate of Increase of Shares Designated as Series A Junior Participating Preferred Stock of Flushing Financial Corporation (2)
3.6	Amended and Restated By-Laws of Flushing Financial Corporation (6)
4.1	Subordinated Indenture, dated as of December 12, 2016, by and between the Company and Wilmington Trust, National Association, as Trustee. (7)
4.2	First Supplemental Indenture, dated as of December 12, 2016, by and between the Company and Wilmington Trust, National Association, as Trustee, including the form of the Notes attached as Exhibit A thereto. (7)
4.3	Flushing Financial Corporation has outstanding certain long-term debt. None of such debt exceeds ten percent of Flushing Financial Corporation's total assets; therefore, copies of constituent instruments defining the rights of the holders of such debt are not included as exhibits. Copies of instruments with respect to such long-term debt will be furnished to the Securities and Exchange Commission upon request.
31.1	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Chief Executive Officer (filed herewith)
31.2	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Chief Financial Officer (filed herewith)
32.1	Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002 by the Chief Executive Officer (furnished herewith)
32.2	Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002 by the Chief Financial Officer (furnished herewith)
101.INS	XBRL Instance Document -the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.SCH	XBRL Taxonomy Extension Schema Document (filed herewith)
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document (filed herewith)
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document (filed herewith)
101.LAB	XBRL Taxonomy Extension Label Linkbase Document (filed herewith)
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document (filed herewith)
104	Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)

(1) Incorporated by reference to Exhibits filed with the Registration Statement on Form S-1 filed

September 1, 1995, Registration No. 33-96488. (P: Indicates a filing submitted in paper)

(2) Incorporated by reference to Exhibit filed with Form 8-K filed September 27, 2006.

(3) Incorporated by reference to Exhibits filed with Form S-8 filed May 31, 2002.

(4) Incorporated by reference to Exhibits filed with Form 10-Q for the quarter ended

September 30, 2002.

(5) Incorporated by reference to Exhibit filed with Form 10-K for the year ended December 31, 2011.

(6) Incorporated by reference to Exhibit filed with Form 10-Q for the quarter ended June 30, 2014.

(7) Incorporated by reference to Exhibit filed with Form 8-K filed December 12, 2016.

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FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

EXHIBIT INDEX

Exhibit No.	Description
3.1 P	Certificate of Incorporation of Flushing Financial Corporation (1)
3.2	Certificate of Amendment to Certificate of Incorporation of Flushing Financial Corporation (3)
3.3	Certificate of Amendment to Certificate of Incorporation of Flushing Financial Corporation (5)
3.4	Certificate of Designations of Series A Junior Participating Preferred Stock of Flushing Financial Corporation (4)
3.5	Certificate of Increase of Shares Designated as Series A Junior Participating Preferred Stock of Flushing Financial Corporation (2)
3.6	Amended and Restated By-Laws of Flushing Financial Corporation (6)
4.1	Subordinated Indenture, dated as of December 12, 2016, by and between the Company and Wilmington Trust, National Association, as Trustee. (7)
4.2	First Supplemental Indenture, dated as of December 12, 2016, by and between the Company and Wilmington Trust, National Association, as Trustee, including the form of the Notes attached as Exhibit A thereto. (7)
4.3	Flushing Financial Corporation has outstanding certain long-term debt. None of such debt exceeds ten percent of Flushing Financial Corporation's total assets; therefore, copies of constituent instruments defining the rights of the holders of such debt are not included as exhibits. Copies of instruments with respect to such long-term debt will be furnished to the Securities and Exchange Commission upon request.
31.1	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Chief Executive Officer (filed herewith)
31.2	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Chief Financial Officer (filed herewith)
32.1	Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002 by the Chief Executive Officer (furnished herewith)
32.2	Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002 by the Chief Financial Officer (furnished herewith)
101.INS	XBRL Instance Document -the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.SCH	XBRL Taxonomy Extension Schema Document (filed herewith)
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document (filed herewith)
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document (filed herewith)
101.LAB	XBRL Taxonomy Extension Label Linkbase Document (filed herewith)
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document (filed herewith)
104	Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)

(1) Incorporated by reference to Exhibits filed with the Registration Statement on Form S-1 filed

September 1, 1995, Registration No. 33-96488. (P: Indicates a filing submitted in paper)

(2) Incorporated by reference to Exhibit filed with Form 8-K filed September 27, 2006.

(3) Incorporated by reference to Exhibits filed with Form S-8 filed May 31, 2002.

(4) Incorporated by reference to Exhibits filed with Form 10-Q for the quarter ended

September 30, 2002.

(5) Incorporated by reference to Exhibit filed with Form 10-K for the year ended December 31, 2011.

(6) Incorporated by reference to Exhibit filed with Form 10-Q for the quarter ended June 30, 2014.

(7) Incorporated by reference to Exhibit filed with Form 8-K filed December 12, 2016.

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FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		Flushing Financial Corporation,
Dated:	November 9, 2020	By:	/s/John R. Buran
			John R. Buran
			President and Chief Executive Officer
Dated:	November 9, 2020	By:	/s/Susan K. Cullen
			Susan K. Cullen
			Senior Executive Vice President, Treasurer and
			Chief Financial Officer

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