Flushing Financial (FFIC) 10-Q 2021 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2021

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  __	Accelerated filer  X
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 July 31, 2021 was 30,936,504.

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	7
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	45
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk	60
ITEM 4. Controls and Procedures	60
PART II  — OTHER INFORMATION
ITEM 1. Legal Proceedings	61
ITEM 1A. Risk Factors	61
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds	61
ITEM 3. Defaults Upon Senior Securities	61
ITEM 4. Mine Safety Disclosures	61
ITEM 5. Other Information	61
ITEM 6. Exhibits	62
SIGNATURES	64

i

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Consolidated Statements of Financial Condition

(Unaudited)

Item 1.   Financial Statements

	June 30,		December 31,
	2021		2020
	(Dollars in thousands, except per share data)
Assets
Cash and due from banks	$	145,971	$	157,388
Securities held-to-maturity:
Mortgage-backed securities (including assets pledged of $5,760 and $5,853 at June 30, 2021 and December 31, 2020, respectively; fair value of $8,848 and $8,991 at June 30, 2021 and December 31, 2020, respectively)		7,904		7,914
Other securities, net of allowance for credit losses of $844 and $907 at June 30, 2021 and December 31, 2020, respectively, (NaN pledged; fair value of $53,598 and $54,538 at June 30, 2021 and December 31, 2020, respectively)		49,986		49,918
Securities available for sale, at fair value:
Mortgage-backed securities (including assets pledged of $287,288 and $264,968 at June 30, 2021 and December 31, 2020, respectively; $441 and $505 at fair value pursuant to the fair value option at June 30, 2021 and December 31, 2020, respectively)		596,661		404,460
Other securities (including asset pledged of $6,000 and $6,453 at June 30, 2021 and December 31, 2020, respectively; $14,080 and $13,998 at fair value pursuant to the fair value option at June 30, 2021 and December 31, 2020, respectively)		224,784		243,514
Loans:
Multi-family residential		2,542,010		2,533,952
Commercial real estate		1,726,895		1,754,754
One-to-four family - mixed-use property		582,211		602,981
One-to-four family - residential		288,652		245,211
Co-operative apartments		7,883		8,051
Construction		62,802		83,322
Small Business Administration		215,158		167,376
Taxi medallion		—		2,757
Commercial business and other		1,291,526		1,303,225
Net unamortized premiums and unearned loan fees		1,669		3,045
Allowance for Credit losses - Loans		(42,670)		(45,153)
Net loans		6,676,136		6,659,521
Interest and dividends receivable		43,803		44,041
Bank premises and equipment, net		26,438		28,179
Federal Home Loan Bank of New York stock, at cost		41,630		43,439
Bank owned life insurance		183,715		181,710
Goodwill		17,636		17,636
Core deposit intangibles		2,859		3,172
Right of Use Asset		51,972		50,743
Other assets		89,850		84,759
Total assets	$	8,159,345	$	7,976,394
Liabilities
Due to depositors:
Non-interest bearing	$	945,491	$	778,672
Interest-bearing		5,353,299		5,312,061
Total Deposits		6,298,790		6,090,733
Mortgagors' escrow deposits		58,230		45,622
Borrowed funds:
Federal Home Loan Bank advances		831,932		887,579
Subordinated debentures		90,081		90,180
Junior subordinated debentures, at fair value		49,814		43,136
Total borrowed funds		971,827		1,020,895
Operating lease liability		56,151		59,100
Other liabilities		119,180		141,047
Total liabilities		7,504,178		7,357,397
Stockholders' Equity
Preferred stock ($0.01 par value; 5,000,000 shares authorized; NaN issued)		—		—
Common stock ($0.01 par value; 100,000,000 shares authorized; 34,087,623 shares issued at June 30, 2021 and December 31, 2020; 30,961,504 shares and 30,775,854 shares outstanding at June 30, 2021 and December 31, 2020, respectively)		341		341
Additional paid-in capital		260,958		261,533
Treasury stock, at average cost (3,126,119 shares and 3,373,389 shares at June 30, 2021 and December 31, 2020, respectively)		(65,335)		(69,400)
Retained earnings		467,620		442,789
Accumulated other comprehensive loss, net of taxes		(8,417)		(16,266)
Total stockholders' equity		655,167		618,997
Total liabilities and stockholders' equity	$	8,159,345	$	7,976,394

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

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Consolidated Statements of Income

(Unaudited)

	For the three months ended					For the six months ended
	June 30,					June 30,
(Dollars in thousands, except per share data)	2021		2020			2021		2020
Interest and dividend income
Interest and fees on loans	$	67,999	$	60,557		$	137,020	$	121,666
Interest and dividends on securities:
Interest		3,685		4,182			6,757		9,438
Dividends		7		11			15		26
Other interest income		51		22			87		312
Total interest and dividend income		71,742		64,772			143,879		131,442
Interest expense
Deposits		5,539		9,971			11,644		28,749
Other interest expense		5,164		6,084			10,304		13,150
Total interest expense		10,703		16,055			21,948		41,899
Net interest income		61,039		48,717			121,931		89,543
(Benefit) provision for credit losses		(1,598)		9,619			1,222		16,797
Net interest income after (benefit) provision for credit losses		62,637		39,098			120,709		72,746
Non-interest income
Banking services fee income		1,233		944			3,958		1,742
Net gain (loss) on sale of securities		123		(54)			123		(91)
Net gain on sale of loans		127		—			158		42
Net gain on disposition of assets		—		—			621		0
Net gain (loss) from fair value adjustments		(6,548)		10,205			(5,566)		4,212
Life insurance proceeds		—		659			0		659
Federal Home Loan Bank of New York stock dividends		500		881			1,189		1,845
Bank owned life insurance		1,009		932			2,006		1,875
Other income		346		170			612		589
Total non-interest income (loss)		(3,210)		13,737			3,101		10,873
Non-interest expense
Salaries and employee benefits		19,879		16,184			42,543		34,804
Occupancy and equipment		3,522		2,827			6,889		5,667
Professional services		1,988		1,985			4,388		4,847
FDIC deposit insurance		729		737	��		1,942		1,387
Data processing		1,419		1,813			3,528		3,507
Depreciation and amortization		1,638		1,555			3,277		3,091
Other real estate owned/foreclosure expense (recoveries)		22		45			12		(119)
Other operating expenses		4,814		3,609			9,591		7,951
Total non-interest expense		34,011		28,755			72,170		61,135
Income before income taxes		25,416		24,080			51,640		22,484
Provision for income taxes
Federal		4,857		4,307			9,928		5,296
State and local		1,301		1,501			3,415		306
Total taxes		6,158		5,808			13,343		5,602
Net income	$	19,258	$	18,272		$	38,297	$	16,882
Basic earnings per common share	$	0.61	$	0.63		$	1.21	$	0.58
Diluted earnings per common share	$	0.61	$	0.63		$	1.21	$	0.58
Dividends per common share	$	0.21	$	0.21		$	0.42	$	0.42

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

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(Unaudited)

	For the three months ended				For the six months ended
	June 30,				June 30,
(In thousands)	2021		2020		2021		2020
Net income	$	19,258	$	18,272	$	38,297		16,882
Other comprehensive income (loss), net of tax:
Amortization of actuarial losses, net of taxes of ($41) and ($31) for the three months ended June 30, 2021 and 2020, respectively, and of ($77) and ($61) for the six months ended June 30, 2021 and 2020, respectively.		92		67		173		134
Amortization of prior service credits, net of taxes of $6 and $8 for the three months ended June 30, 2021 and 2020, respectively, and of $13 and $14 for the six months ended June 30, 2021 and 2020, respectively.		(15)		(15)		(30)		(29)
Net unrealized gains (losses) on securities, net of taxes of ($664) and ($5,193) for the three months ended June 30, 2021 and 2020, respectively, and of $322 and ($551) for the six months ended June 30, 2021 and 2020, respectively.		1,497		11,414		(720)		1,212
Reclassification adjustment for net losses included in income, net of taxes of $38 and ($17) for the three months ended June 30, 2021 and 2020, respectively and of $38 and ($29) for the six months ended June 30, 2021 and 2020, respectively.		(85)		37		(85)		62
Net unrealized gains (losses) on cash flow hedges, net of taxes of ($120) and $912 for the three months ended June 30, 2021 and 2020 respectively, and of ($3,574) and $7,102 for the six months ended June 30, 2021 and 2020 respectively.		521		(2,005)		8,319		(15,610)
Change in fair value of liabilities related to instrument-specific credit risk, net of taxes of ($147) and $259 for the three months ended June 30, 2021 and 2020, respectively, and of ($112) and ($230) for the six months ended June 30, 2021 and 2020, respectively.		276		(580)		192		516
Total other comprehensive income (loss), net of tax		2,286		8,918		7,849		(13,715)
Comprehensive income	$	21,544	$	27,190	$	46,146	$	3,167

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

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)

	For the six months ended June 30,
	2021		2020
	(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	38,297	$	16,882
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses		1,222		16,797
Depreciation and amortization of bank premises and equipment		3,277		3,091
Amortization of premium, net of accretion of discount		(190)		3,235
Net (gain) loss from fair value adjustments		5,566		(4,212)
Net (gain) loss from fair value adjustments on qualifying hedges		(763)		2,438
Net gain from sale of loans		(158)		(42)
Net (gain) loss from sale of securities		(123)		91
Net gain from disposition of asset		(621)		0
Net loss from OREO		0		31
Income from bank owned life insurance		(2,006)		(1,875)
Life insurance proceeds		0		(659)
Amortization of core deposit intangibles		313		0
Stock-based compensation expense		4,539		4,531
Deferred compensation		(2,057)		(3,060)
Deferred income tax benefit		(762)		(2,546)
Decrease in other liabilities		(5,384)		(1,411)
Increase in other assets		(5,175)		(3,398)
Net cash provided by operating activities		35,975		29,893
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of bank premises and equipment		(1,536)		(1,433)
Net redemptions of Federal Home Loan Bank of New York shares		1,809		521
Proceeds from maturities and calls of securities held-to-maturity		0		180
Proceeds from prepayments of securities held-to-maturity		0		300
Purchases of securities available for sale		(478,155)		(130,344)
Proceeds from sales and calls of securities available for sale		38,623		139,741
Proceeds from maturities and prepayments of securities available for sale		263,640		87,658
Net repayments (originations) of loans		89,937		(72,371)
Purchases of loans		(130,706)		(112,245)
Proceeds from sale of loans		18,584		580
Net cash used in investing activities		(197,804)		(87,413)

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Consolidated Statements of Cash Flows (Contd.)

(Unaudited)

	For the six months ended June 30,
	2021		2020
	(In thousands)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in non-interest bearing deposits		166,819		146,809
Net increase (decrease) in interest-bearing deposits		41,312		(119,076)
Net increase in mortgagors' escrow deposits		12,608		4,150
Net proceeds from short-term borrowed funds		150,000		0
Proceeds from long-term borrowings		0		204,378
Repayment of long-term borrowings		(205,647)		(127,762)
Purchases of treasury stock		(1,375)		(3,865)
Cash dividends paid		(13,305)		(12,147)
Net cash provided by financing activities		150,412		92,487
Net (decrease) increase in cash and cash equivalents		(11,417)		34,967
Cash and cash equivalents, beginning of period		157,388		49,787
Cash and cash equivalents, end of period	$	145,971	$	84,754
SUPPLEMENTAL CASH FLOW DISCLOSURE
Interest paid	$	22,217	$	44,272
Income taxes paid		10,207		4,664
Taxes paid if excess tax benefits on stock-based compensation were not tax deductible		9,877		4,446

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

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Consolidated 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, 2020	$	618,997	$	341	$	261,533	$	442,789	$	(69,400)	$	(16,266)
Net Income		19,039		—		—		19,039		—		—
Award of common shares released from Employee Benefit Trust (5,682 shares)		74		—		74		—		—		—
Vesting of restricted stock unit awards (248,896 shares)		—		—		(5,058)		(153)		5,211		—
Stock-based compensation expense		3,470		—		3,470		—		—		—
Repurchase of shares to satisfy tax obligation (70,292 shares)		(1,290)		—		—		—		(1,290)		—
Dividends on common stock ($0.21 per share)		(6,652)		—		—		(6,652)		—		—
Other comprehensive income		5,563		—		—		—		—		5,563
Balance at March 31, 2021		639,201		341		260,019		455,023		(65,479)		(10,703)
Net income		19,258		—		—		19,258		—		—
Award of common shares released from Employee Benefit Trust (6,445 shares)		91		—		91		—		—		—
Vesting of restricted stock unit awards (10,932 shares)		—		—		(221)		(8)		229		—
Stock-based compensation expense		1,069		—		1,069		—		—		—
Repurchase of shares to satisfy tax obligation (3,886 shares)		(85)		—		—		—		(85)		—
Dividends on common stock ($0.21 per share)		(6,653)		—		—		(6,653)		—		—
Other comprehensive income		2,286		—		—		—		—		2,286
Balance at June 30, 2021	$	655,167	$	341	$	260,958	$	467,620	$	(65,335)	$	(8,417)

					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)

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

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

1.     Basis of Presentation

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

The unaudited consolidated financial statements presented in this Quarterly Report on Form 10-Q (“Quarterly Report”) include the collective results of the Holding Company and its direct and indirect wholly-owned subsidiaries, including the Bank, Flushing Preferred Funding Corporation, which was dissolved as of June 30, 2021. 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, 2020.

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

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 novel Coronavirus Disease 2019 (“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.

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 thirty months. At June 30, 2021, we had 69 active forbearances for loans with an aggregate outstanding loan balance of approximately $245.8 million resulting in total deferment of $16.2 million in principal, interest and escrow, down from 134 active forbearances for loans with an aggregate outstanding loan balance of $364.4 million at December 31, 2020. Given the pandemic and current economic environment, we continue to work with our customers to modify loans although the pace of requests slowed down. The Company actively participated in the Paycheck Protection Program (“PPP”), under the Coronavirus Aid, Relief and Economic

-7-

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

Security Act (the “CARES Act”), closing $138.7 million of these loans during the three months ended June 30, 2021, with $69.2 million in PPP loans forgiven by the SBA during the same time period. We are also a participant in the Main Street Lending Program in order to assist customers. Pursuant to the CARES Act and later modified by Consolidated Appropriations Act, certain loan modifications are not classified as “troubled debt restructuring” (“TDR”), 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 the deferred period. Once the deferred period is over, the borrower will resume making payment and normal delinquency-based non-accrual policies will apply.

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.

3.     Earnings Per Share

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

	For the three months ended						For the six months ended
	June 30,						June 30,
	2021			2020			2021			2020
	(In thousands, except per share data)
Net income	$	19,258		$	18,272		$	38,297		$	16,882
Divided by:
Total weighted average common shares outstanding and common stock equivalents		31,677			28,867			31,641			28,860
Basic earnings per common share	$	0.61		$	0.63		$	1.21		$	0.58
Diluted earnings per common share (1)	$	0.61		$	0.63		$	1.21		$	0.58
Dividend payout ratio		34.4	%		33.3	%		34.7	%		72.4	%

(1) For the three and six months ended June 30, 2021 and 2020, there were 0 common stock equivalents and there were 0 common stock equivalents that were anti-dilutive.

4.     Securities

The Company did 0t hold any trading securities at June 30, 2021 and December 31, 2020. Securities available for sale are recorded at fair value. Securities held-to-maturity (“HTM”) are recorded at amortized cost.

-8-

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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 3 securities totaling $58.7 million (before allowance for credit losses) : the first with an amortized cost of $29.9 million structured similar to a commercial owner occupied loan and modeled for credit losses similar to commercial business loans secured by real estate with a reserve of $0.2 million at June 30, 2021; the second with an amortized cost of $20.0 million that currently is under forbearance with a specific reserve of $0.6 million at June 30, 2021; and the third with an amortized cost of $7.9 million 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. Accordingly, the Company assumes a zero loss expectation from the portfolio. The security currently in forbearance 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 June 30, 2021 and December 31, 2020 and is excluded from estimates of credit losses.

The following table summarizes the Company’s portfolio of securities held-to-maturity at June 30, 2021:

					Gross		Gross
	Amortized				Unrecognized		Unrecognized
	Cost		Fair Value		Gains		Losses
	(In thousands)
Securities held-to-maturity:
Municipals	$	50,830	$	53,598	$	2,768	$	0
Total other securities		50,830		53,598		2,768		0
FNMA		7,904		8,848		944		0
Total mortgage-backed securities		7,904		8,848		944		0
Allowance for Credit Losses		(844)		—		—		—
Total	$	57,890	$	62,446	$	3,712	$	0

The following table summarizes the Company’s portfolio of securities held-to-maturity at December 31, 2020:

					Gross		Gross
	Amortized				Unrecognized		Unrecognized
	Cost		Fair Value		Gains		Losses
	(In thousands)
Securities held-to-maturity:
Municipals	$	50,825	$	54,538	$	3,713	$	—
Total other securities		50,825		54,538		3,713		—
FNMA		7,914		8,991		1,077		—
Total mortgage-backed securities		7,914		8,991		1,077		—
Allowance for Credit Losses		(907)		—		—		—
Total	$	57,832	$	63,529	$	4,790	$	—

-9-

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The following table summarizes the Company’s portfolio of securities available for sale at June 30, 2021:

					Gross		Gross
	Amortized				Unrealized		Unrealized
	Cost		Fair Value		Gains		Losses
	(In thousands)
Securities available for sale:
U.S Government Agencies	$	6,206	$	6,218	$	15	$	3
Corporate		117,420		117,602		461		279
Mutual funds		12,585		12,585		0		0
Collateralized loan obligations		87,148		86,884		18		282
Other		1,495		1,495		0		0
Total other securities		224,854		224,784		494		564
REMIC and CMO		222,748		224,065		3,042		1,725
GNMA		12,033		11,802		39		270
FNMA		205,159		205,782		1,783		1,160
FHLMC		155,944		155,012		589		1,521
Total mortgage-backed securities		595,884		596,661		5,453		4,676
Total securities available for sale	$	820,738	$	821,445	$	5,947	$	5,240

The following table summarizes the Company’s portfolio of securities available for sale at December 31, 2020:

					Gross		Gross
	Amortized				Unrealized		Unrealized
	Cost		Fair Value		Gains		Losses
	(In thousands)
Securities available for sale:
U.S Government Agencies	$	6,452	$	6,453	$	2	$	1
Corporate		130,000		123,865		131		6,266
Mutual funds		12,703		12,703		0		0
Collateralized loan obligations		100,561		99,198		0		1,363
Other		1,295		1,295		0		0
Total other securities		251,011		243,514		133		7,630
REMIC and CMO		175,142		180,877		5,735		0
GNMA		13,009		13,053		66		22
FNMA		143,154		146,169		3,046		31
FHLMC		63,796		64,361		648		83
Total mortgage-backed securities		395,101		404,460		9,495		136
Total securities available for sale	$	646,112	$	647,974	$	9,628	$	7,766

We did 0t hold any private issue CMO’s that are collateralized by commercial real estate mortgages at June 30, 2021 and December 31, 2020.

The corporate securities held by the Company at June 30, 2021 and December 31, 2020 are issued by U.S. banking institutions.

-10-

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The following tables detail the amortized cost and fair value of the Company’s securities classified as held-to-maturity and available for sale at June 30, 2021, 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	$	50,830	$	53,598
Total other securities		50,830		53,598
Mortgage-backed securities		7,904		8,848
Total held-to-maturity securities		58,734		62,446
Allowance for Credit Losses		(844)		—
Total held-to-maturity securities, net of allowance for credit losses	$	57,890	$	62,446

	Amortized
Securities available for sale:	Cost		Fair Value
	(In thousands)
Due after one year through five years	$	30,000	$	30,242
Due after five years through ten years		159,551		159,243
Due after ten years		22,718		22,714
Total		212,269		212,199
Mutual funds		12,585		12,585
Total other securities		224,854		224,784
Mortgage-backed securities		595,884		596,661
Total available for sale securities	$	820,738	$	821,445

-11-

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The following tables show the Company’s securities with gross unrealized losses and their fair value, aggregated by category and length of time that individual securities have been in a continuous unrealized loss position, at the dates indicated:

	At June 30, 2021
	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
U.S Government Agencies	1	$	4,897	$	3	$	4,897	$	3	$	0	$	0
Corporate	7		52,141		279		22,403		16		29,738		263
Collateralized loan obligations	6		44,633		282		0		0		44,633		282
Total other securities	14		101,671		564		27,300		19		74,371		545
REMIC and CMO	11		112,847		1,725		112,847		1,725		0		0
GNMA	4		11,404		270		11,404		270		0		0
FNMA	16		107,883		1,160		107,883		1,160		0		0
FHLMC	10		85,084		1,521		85,084		1,521		0		0
Total mortgage-backed securities	41		317,218		4,676		317,218		4,676		0		0
Total securities available for sale	55	$	418,889	$	5,240	$	344,518	$	4,695	$	74,371	$	545

	At December 31, 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
U.S Government Agencies	1	$	4,988	$	1	$	4,988	$	1	$	0	$	0
Corporate	14		113,734		6,266		0		0		113,734		6,266
Collateralized loan obligations	13		99,199		1,363		7,441		52		91,758		1,311
Total other securities	28		217,921		7,630		12,429		53		205,492		7,577
GNMA	1		10,341		22		10,341		22		0		0
FNMA	5		32,463		31		23,864		28		8,599		3
FHLMC	3		30,095		83		30,095		83		0		0
Total mortgage-backed securities	9		72,899		136		64,300		133		8,599		3
Total securities available for sale	37	$	290,820	$	7,766	$	76,729	$	186	$	214,091	$	7,580

The Company reviewed each available for sale debt security that had an unrealized loss at June 30, 2021 and December 31, 2020. At June 30, 2021 and December 31, 2020, the Company evaluated whether the decline in fair value of a debt security resulted from credit losses or other factors under Accounting Standards Codification (“ASC”) Topic 326, Credit Losses also referred to as Current Expected Credit Losses (“CECL”). 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.

-12-

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 0 allowance for credit loss was recorded.

Accrued interest receivable on available-for-sale debt securities totaled $1.7 million and $1.3 million at June 30, 2021 and December 31, 2020, respectively, and is excluded from the estimate of credit losses.

The following table presents the activity in the allowance for credit losses for debt securities held-to-maturity.

	Other Securities
	For the three months ended				For the six months ended
	June 30,				June 30,
	2021		2020		2021		2020
	(In thousands)
Beginning balance	$	915	$	402	$	907	$	340
Provision (benefit)		(71)		—		(63)		62
Allowance for credit losses	$	844	$	402	$	844	$	402

Realized gains and losses on the sales of securities are determined using the specific identification method. The Company sold $25.0 million in corporate securities during the three and six months ended June 30, 2021.The Company sold $66.2 million and $130.8 million in mortgage-backed securities during the three and six months ended June 30, 2020, 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 six months ended
	June 30,				June 30,
	2021		2020		2021		2020
	(In thousands)
Gross gains from the sale of securities	$	123	$	763	$	123	$	1,476
Gross losses from the sale of securities		0		(817)		0		(1,567)
Net gains (losses) from the sale of securities	$	123	$	(54)	$	123	$	(91)

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.

-13-

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

Interest on loans is recognized on the accrual basis. Accrued interest receivable totaled $40.6 million and $41.5 million at June 30, 2021 and December 31, 2020, respectively, 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.

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.

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.

During the three months ended June 30, 2021, the Company recorded a benefit for credit losses on loans totaling $1.5 million compared to a provision for credit losses on loans of $9.6 million for the three months ending June 30, 2020. The Company recorded a provision for credit losses on loans totaling $1.3 million and $16.7 million for the six months ended June 30, 2021 and 2020, respectively. The benefit recorded during the three months ended June 30, 2021 was driven by the improving economic outlook. During the three months ended June 30, 2021, the Company made an adjustment to decrease the reasonable and supportable forecast period and increase the reversion period to adjust for the model using a more favorable forecast based on national statistics compared to the Bank’s primary market area, the New York Tri-State area, where economic improvements lag behind the nation. This resulted in the ACL - loans totaling $42.7 million at June 30, 2021 compared to $45.2 million at December 31, 2020. At June 30, 2021, the ACL - loans represented 0.64% of gross loans and 242.6% of non-performing loans. At December 31, 2020, the ACL - loans represented 0.61% of gross loans and 181.9% of non-performing loans.

Pursuant to the CARES Act and later modified by Consolidated Appropriations Act, certain loan modifications are not classified as TDR, 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. As such, these loans are considered current and continue to accrue interest at its original contractual terms until the completion of the deferred period. Once the deferred period is over, the borrower will resume making payment and normal delinquency-based non-accrual policies will apply.

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-

-14-

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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 ACL for a performing TDR loan is based upon the present value of the future expected cash flows discounted at the loan’s original effective rate, or for a non-performing TDR loan which is collateral dependent, the fair value of the collateral. At June 30, 2021, there were 0 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 ACL. There were 0 TDR loan modifications during the three and six months ended June 30, 2020.

	For the three and six months ended
	June 30, 2021
(Dollars in thousands)	Number	Balance		Modification description
Commercial business and other	2		674	Amortization period extended
Total	2	$	674

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

	June 30, 2021			December 31, 2020
	Number	Amortized		Number	Amortized
(Dollars in thousands)	of contracts	Cost		of contracts	Cost
Multi-family residential	6	$	1,673	6	$	1,700
Commercial real estate	1		7,583	1		7,702
One-to-four family - mixed-use property (1)	5		1,682	5		1,731
One-to-four family - residential	3		497	3		507
Taxi medallion (2)	—		—	2		440
Commercial business and other (1)	9		4,107	8		3,831
Total performing troubled debt restructured	24	$	15,542	25	$	15,911

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

(2) These loans were completely charged off during the three months ended March 31, 2021.

During the three and six months ended June 30, 2021 there was 1 commercial business TDR loan totaling $0.3 million that defaulted within 12 months of its modification date. During the three and six months ended June 30, 2020, there were 0 TDR loans that defaulted within 12 months of their modification date.

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

	June 30, 2021			December 31, 2020
	Number	Amortized		Number	Amortized
(Dollars in thousands)	of contracts	Cost		of contracts	Cost
Taxi medallion (1)	0	$	0	11	$	1,922
Commercial business and other	2		596	1		279
Total troubled debt restructurings that subsequently defaulted	2	$	596	12	$	2,201

(1) These loans were completely charged off during the three months ended March 31, 2021.

-15-

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 six months ended June 30, 2021
(In thousands)		Non-Accrual Amortized Cost Beginning of Reporting Period		Non-Accrual Amortized Cost Ending of Reporting Period		Non-Accrual with no related Allowance		Interest Income Recognized		Loans ninety days or more past due and still accruing:
Multi-family residential	$	2,576	$	4,850	$	4,850	$	5	$	201
Commercial real estate		1,766		35		35		—		—
One-to-four family - mixed-use property (1)		1,706		2,706		2,706		2		—
One-to-four family - residential		5,313		6,404		6,404		1		—
Construction		—		—		—		—		—
Small Business Administration		1,168		992		992		—		—
Taxi medallion(2)		2,758		—		—		—		—
Commercial business and other(1)		5,660		4,715		725		52		—
Total	$	20,947	$	19,702	$	15,712	$	60	$	201

(1)   Included in the above analysis are non-accrual performing TDR one-to-four family – mixed-use property totaling $0.3 million, and non-accrual performing TDR commercial business loans totaling $2.2 million at June 30, 2021.

(2)   Taxi medallion loans were completely charged off during the six months ended June 30, 2021.

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 twelve months ended December 31, 2020
(In thousands)		Non-Accrual Amortized Cost Beginning of Reporting Period		Non-Accrual Amortized Cost Ending of Reporting Period		Non-Accrual with no related Allowance		Interest Income Recognized		Loans ninety days or more past due and still accruing:
Multi-family residential	$	2,723	$	2,576	$	2,576	$	—	$	201
Commercial real estate		2,714		1,766		1,766		—		2,547
One-to-four family - mixed-use property (1)		1,704		1,706		1,706		—		—
One-to-four family - residential		9,992		5,313		5,313		—		—
Small Business Administration		1,169		1,168		1,168		—		—
Taxi medallion(1)		2,318		2,758		2,758		—		—
Commercial business and other(1)		7,406		5,660		1,593		58		—
Total	$	28,026	$	20,947	$	16,880	$	58	$	2,748

(1) Included in the above analysis are non-accrual performing TDR one-to-four family – mixed-use property totaling $0.3 million, non-accrual performing TDR taxi medallion loans totaling $0.4 million and non-accrual performing TDR commercial business loans totaling $2.2 million at December 31, 2020.

-16-

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

	For the three months ended				For the six months ended
	June 30,				June 30,
	2021		2020		2021		2020
	(In thousands)
Interest income that would have been recognized had the loans performed in accordance with their original terms	$	453	$	430	$	915	$	805
Less: Interest income included in the results of operations		163		73		323		162
Total foregone interest	$	290	$	357	$	592	$	643

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

	June 30, 2021
					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	$	14,894	$	1,259	$	5,051	$	21,204	$	2,522,555	$	2,543,759
Commercial real estate		7,213		0		35		7,248		1,722,659		1,729,907
One-to-four family - mixed-use property		787		1,089		2,439		4,315		581,434		585,749
One-to-four family - residential		988		1,373		6,404		8,765		288,926		297,691
Construction		7,089		0		0		7,089		55,622		62,711
Small Business Administration		81		199		992		1,272		209,246		210,518
Taxi medallion		0		0		0		0		0		0
Commercial business and other		588		64		1,942		2,594		1,285,877		1,288,471
Total	$	31,640	$	3,984	$	16,863	$	52,487	$	6,666,319	$	6,718,806

	December 31, 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	$	7,582	$	3,186	$	2,777	$	13,545	$	2,522,432	$	2,535,977
Commercial real estate		17,903		5,123		4,313		27,339		1,731,045		1,758,384
One-to-four family - mixed-use property		5,673		1,132		1,433		8,238		598,647		606,885
One-to-four family - residential		3,087		805		5,313		9,205		243,486		252,691
Construction loans		750		0		0		750		82,411		83,161
Small Business Administration		1,823		0		1,168		2,991		162,579		165,570
Taxi medallion		0		0		2,318		2,318		279		2,597
Commercial business and other		129		1,273		1,593		2,995		1,296,414		1,299,409
Total	$	36,947	$	11,519	$	18,915	$	67,381	$	6,637,293	$	6,704,674

-17-

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The following tables show the activity in the ACL on loans for the three month periods indicated:

	June 30, 2021
					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	$	7,144	$	8,356	$	1,873	$	710	$	750	$	2,127	$	—	$	24,139	$	45,099
Charge-offs		—		—		(3)		—		—		—		—		(1,183)		(1,186)
Recoveries		—		—		—		2		—		9		222		51		284
Provision (benefit)		(585)		(2,488)		(378)		4		(565)		166		(222)		2,541		(1,527)
Ending balance	$	6,559	$	5,868	$	1,492	$	716	$	185	$	2,302	$	—	$	25,548	$	42,670

	June 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	$	5,895	$	6,791	$	2,170	$	892	$	185	$	1,528	$	—	$	10,637	$	28,098
Charge-offs		—		—		(3)		—		—		(178)		—		(849)		(1,030)
Recoveries		7		—		—		3		—		13		—		—		23
Provision (benefit)		3,033		180		659		266		(2)		23		—		5,460		9,619
Ending balance	$	8,935	$	6,971	$	2,826	$	1,161	$	183	$	1,386	$	—	$	15,248	$	36,710

-18-

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The following tables show the activity in the ACL on loans for the six month periods indicated:

	June 30, 2021
					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	$	6,557	$	8,327	$	1,986	$	869	$	497	$	2,251	$	—	$	24,666	$	45,153
Charge-off's		(43)		(64)		(32)		—		—		—		(2,758)		(1,211)		(4,108)
Recoveries		10		—		10		7		—		19		222		73		341
Provision (benefit)		35		(2,395)		(472)		(160)		(312)		32		2,536		2,020		1,284
Ending balance	$	6,559	$	5,868	$	1,492	$	716	$	185	$	2,302	$	—	$	25,548	$	42,670

	June 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)		—		(2,108)		(2,289)
Recoveries		13		—		78		8		—		20		—		14		133
Provision (benefit)		4,181		1,372		989		557		21		1		—		9,615		16,736
Ending balance	$	8,935	$	6,971	$	2,826	$	1,161	$	183	$	1,386	$	—	$	15,248	$	36,710

-19-

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 generally continued to be reported in the same category as they were reported immediately prior to modification.

-20-

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 at June 30, 2021:

														Revolving Loans,		Lines of Credit
														Amortized Cost		converted to
(In thousands)		2021		2020		2019		2018		2017		Prior		Basis		term loans		Total
1-4 Family Residential
Pass	$	57,316	$	31,897	$	36,253	$	32,818	$	20,935	$	75,903	$	10,524	$	15,288	$	280,934
Watch		—		481		724		280		2,430		1,541		190		2,287		7,933
Special Mention		—		—		—		—		1,115		517		160		—		1,792
Substandard		—		—		—		1,836		—		4,167		—		1,029		7,032
Total 1-4 Family Residential	$	57,316	$	32,378	$	36,977	$	34,934	$	24,480	$	82,128	$	10,874	$	18,604	$	297,691
1-4 Family Mixed-Use
Pass	$	18,221	$	35,902	$	71,259	$	75,193	$	54,249	$	308,869	$	—	$	—	$	563,693
Watch		—		—		—		3,092		6,118		7,668		—		—		16,878
Special Mention		—		—		—		—		761		1,438		—		—		2,199
Substandard		—		—		—		501		—		2,478		—		—		2,979
Total 1-4 Family Mixed Use	$	18,221	$	35,902	$	71,259	$	78,786	$	61,128	$	320,453	$	—	$	—	$	585,749
Commercial Real Estate
Pass	$	58,238	$	171,433	$	256,707	$	266,369	$	180,000	$	680,308	$	—	$	—	$	1,613,055
Watch		4,179		934		3,433		5,708		2,657		83,926		—		—		100,837
Special Mention		—		—		—		6,855		—		1,542		—		—		8,397
Substandard		—		—		7,583		—		—		35		—		—		7,618
Total Commercial Real Estate	$	62,417	$	172,367	$	267,723	$	278,932	$	182,657	$	765,811	$	—	$	—	$	1,729,907
Construction
Pass	$	3,079	$	23,121	$	14,797	$	1,960	$	—	$	—	$	—	$	—	$	42,957
Watch		—		—		2,115		8,284		5,904		—		—		—		16,303
Special Mention		—		—		—		859		2,592		—		—		—		3,451
Substandard		—		—		—		—		—		—		—		—		—
Total Construction	$	3,079	$	23,121	$	16,912	$	11,103	$	8,496	$	—	$	—	$	—	$	62,711
Multifamily
Pass	$	168,396	$	240,612	$	340,195	$	449,407	$	360,108	$	941,236	$	6,346	$	—	$	2,506,300
Watch		—		2,111		4,205		12,605		—		10,834		398		—		30,153
Special Mention		—		792		468		—		—		—		—		—		1,260
Substandard		—		—		703		2,599		1,803		740		201		—		6,046
Total Multifamily	$	168,396	$	243,515	$	345,571	$	464,611	$	361,911	$	952,810	$	6,945	$	—	$	2,543,759
Commercial Business - Secured by RE
Pass	$	96,311	$	93,588	$	38,733	$	52,180	$	28,173	$	99,637	$	—	$	—	$	408,622
Watch		—		23,623		51,501		18,557		11,979		47,442		—		—		153,102
Special Mention		—		—		604		—		—		—		—		—		604
Substandard		—		—		—		—		—		4,228		—		—		4,228
Total Commercial Business - Secured by RE	$	96,311	$	117,211	$	90,838	$	70,737	$	40,152	$	151,307	$	—	$	—	$	566,556
Commercial Business
Pass	$	51,015	$	72,432	$	90,417	$	76,675	$	29,154	$	73,507	$	207,786	$	—	$	600,986
Watch		6		1,683		22,505		19,308		33,143		43		22,493		—		99,181
Special Mention		—		—		45		2,488		103		—		3,207		—		5,843
Substandard		—		4,900		535		320		4,957		1,903		995		—		13,610
Doubtful		—		—		—		—		—		929		1,235		—		2,164
Total Commercial Business	$	51,021	$	79,015	$	113,502	$	98,791	$	67,357	$	76,382	$	235,716	$	—	$	721,784
Small Business Administration
Pass	$	130,255	$	67,148	$	1,292	$	1,560	$	654	$	2,920	$	—	$	—	$	203,829
Watch		—		—		61		2,588		1,946		849		—		—		5,444
Special Mention		—		—		—		—		140		107		—		—		247
Substandard		—		—		—		—		992		6		—		—		998
Total Small Business Administration	$	130,255	$	67,148	$	1,353	$	4,148	$	3,732	$	3,882	$	—	$	—	$	210,518
Other
Pass	$	—	$	—	$	—	$	—	$	—	$	52	$	79	$	—	$	131
Total Other	$	—	$	—	$	—	$	—	$	—	$	52	$	79	$	—	$	131
Total Loans	$	587,016	$	770,657	$	944,135	$	1,042,042	$	749,913	$	2,352,825	$	253,614	$	18,604	$	6,718,806

-21-

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

Included within net loans as of June 30, 2021 and December 31, 2020 were $9.3 million and $5.9 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.

A loan is considered collateral dependent when the borrower is experiencing financial difficulties and repayment is expected to be substantially provided by the operation or sale of the collateral. The following table presents types of collateral-dependent loans by class of loans as of the periods indicated:

	Collateral Type
	June 30, 2021				December 31, 2020
(In thousands)		Real Estate		Business Assets		Real Estate		Business Assets
Multi-family residential	$	4,850	$	—	$	2,576	$	—
Commercial real estate		1,246		—		2,994		—
One-to-four family - mixed-use property		2,706		—		1,706		—
One-to-four family - residential		6,404		—		5,313		—
Small Business Administration		—		992		—		1,168
Commercial business and other		—		2,556		—		3,482
Taxi Medallion		—		—		—		2,758
Total	$	15,206	$	3,548	$	12,589	$	7,408

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.

Commitments to extend credit (principally real estate mortgage loans) and lines of credit (principally home equity lines of credit and business lines of credit) totaled $499.8 million and $474.0 million at June 30, 2021 and December 31, 2020, respectively.

The following table presents the activity in the allowance for off balance sheet credit losses for the three and six months ended June 30, 2021 and 2020.

	For the three months ended				For the six months ended
	June 30,				June 30,
	2021		2020		2021		2020
	(In thousands)
Balance at beginning of period	$	1,304	$	797	$	1,815	$	—
Off-Balance Sheet - CECL Adoption		—		—		—		553
Off-Balance Sheet- Provision (benefit)		266		467		(245)		711
Allowance for Off-Balance Sheet - Credit losses (1)	$	1,570	$	1,264	$	1,570	$	1,264

(1) Included in “Other liabilities” on the Consolidated Statements of Financial Condition.

-22-

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

6.     Loans held for sale

Loans held for sale are carried at the lower of cost or estimated fair value. At June 30, 2021 and December 31, 2020, the Bank did 0t 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 0 loans sold for the three months ended June 30, 2020.

The following tables show loans sold during the period indicated:

	For the three months ended June 30, 2021
				Net Recoveries
(Dollars in thousands)	Loans sold	Proceeds		(Charge-offs)		Net gain
Delinquent and non-performing loans
Multi-family residential	3	$	7,846	$	—	$	58
One-to-four family - mixed-use property	4		2,488		—		69
Total	7	$	10,334	$	—	$	127

	For the six months ended June 30, 2021
				Net Recoveries
(Dollars in thousands)	Loans sold	Proceeds		(Charge-offs)		Net gain
Delinquent and non-performing loans
Multi-family residential	8	$	10,752	$	(43)	$	63
Commercial real estate	3		3,036		(64)		17
One-to-four family - mixed-use property	10		4,796		(14)		78
Total	21	$	18,584	$	(121)	$	158

	For the six months ended June 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

-23-

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

7.     Leases

The Company has 28 operating leases for branches (including headquarters) and office spaces, 9 operating leases for vehicles, and 1 operating lease for equipment. Our leases have remaining lease terms ranging from four months to approximately 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.

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 $2.2 million and $1.9 million and was recorded in Occupancy and equipment on the Consolidated Statements of Income for the three month periods ended June 30, 2021 and 2020, respectively. The Company’s operating lease expense totaled $4.3 million and $3.8 million and was recorded in Occupancy and equipment on the Consolidated Statements of Income for the six month periods ended June 30, 2021 and 2020, respectively.

The Company has one agreement that qualifies as a short-term lease with expense totaling approximately $60,000 and $34,000 for the three month periods ended June 30, 2021 and 2020 and approximately $90,000 and $68,000 for the six month periods ended June 30, 2021 and 2020, included in Professional services on the Consolidated Statements of Income. The Company has $0.3 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 each of the three months ended June 30, 2021 and 2020. The Company has $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 each of the six months ended June 30, 2021 and 2020. At June 30, 2021, the weighted-average remaining lease term for our operating leases is approximately eight years and the weighted average discount rate is 3.2%. Our lease agreements do not contain any residual value guarantees.

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)	June 30, 2021			December 31, 2020
Operating lease ROU asset	$	51,972		$	50,743
Operating lease liability	$	56,151		$	59,100
Weighted-average remaining lease term-operating leases		7.7 years			8.3 years
Weighted average discount rate-operating leases		3.2	%		3.2	%

-24-

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)	June 30, 2021		June 30, 2020
Lease Cost
Operating lease cost	$	2,244	$	1,897
Short-term lease cost		60		34
Variable lease cost		298		287
Total lease cost	$	2,602	$	2,218
Other information
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	2,418	$	2,200
Right-of-use assets obtained in exchange for new operating lease liabilities	$	—	$	27

	For the six months ended
(Dollars in thousands)	June 30, 2021		June 30, 2020
Lease Cost
Operating lease cost	$	4,348	$	3,782
Short-term lease cost		95		68
Variable lease cost		596		552
Total lease cost	$	5,039	$	4,402
Other information
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	8,048	$	4,182
Right-of-use assets obtained in exchange for new operating lease liabilities	$	—	$	50

-25-

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The Company’s minimum annual rental payments for Bank facilities due under non-cancelable leases are as follows as of June 30, 2021:

	Minimum Rental
	(In thousands)
Years ended December 31:
2021	$	4,369
2022		9,149
2023		9,281
2024		9,121
2025		8,479
Thereafter		22,898
Total minimum payments required		63,297
Less: Implied interest		7,146
Total lease obligations	$	56,151

The Company’s minimum annual rental payments for Bank facilities due under non-cancelable leases are as follows as of December 31, 2020:

	Minimum Rental
	(In thousands)
Years ended December 31:
2021	$	8,757
2022		8,871
2023		9,006
2024		8,847
2024		8,212
Thereafter		23,547
Total minimum payments required	$	67,240
Less: Implied interest		8,140
Total lease obligations	$	59,100

8.     Stock-Based Compensation

The Company has 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. As of June 30, 2021, PRSUs granted in 2021 and 2020 are being accrued at target and PRSUs granted in 2019 are being accrued above target.

On May 18, 2021, stockholders approved an amendment to the 2014 Omnibus Plan (the “Amendment”) authorizing an additional 1,100,000 shares available for future issuance. Including the additional shares authorized from the Amendment, 1,170,408 shares were available for future issuance under the 2014 Omnibus Plan at June 30, 2021.

For the three months ended June 30, 2021 and 2020, the Company’s net income, as reported, included $1.1 million and $0.9 million, respectively, of stock-based compensation costs, including the benefit or expense of phantom stock awards, and $0.3 million and $0.2 million of income tax benefits, respectively, related to the stock-based compensation plans. For the six months ended June 30, 2021 and 2020, the Company’s net income, as reported, included $5.2 million and $3.4

-26-

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

million, respectively, of stock-based compensation costs, including the benefit or expense of phantom stock awards, and $1.4 million and $0.8 million of income tax benefits, respectively, related to the stock-based compensation plans.

During the three months ended June 30, 2021 and 2020, the Company did not grant any RSU or PRSU’s. During the six months ended June 30, 2021 and 2020, the Company granted 238,985 and 172,228 RSU, respectively. During the six months ended June 30, 2021 and 2020, the Company granted 62,790 and 72,143 in PRSU awards, respectively.

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 six months ended June 30, 2021:

	RSU Awards			PRSU Awards
		Weighted-Average			Weighted-Average
		Grant-Date			Grant-Date
	Shares	Fair Value		Shares	Fair Value
Non-vested at December 31, 2020	336,898	$	23.48	66,580	$	21.26
Granted	238,985		18.44	62,790		18.46
Vested	(240,176)		21.22	(35,070)		18.81
Forfeited	(4,662)		20.61	0		0
Non-vested at June 30, 2021	331,045	$	21.51	94,300	$	20.31
Vested but unissued at June 30, 2021	214,829	$	21.03	102,185	$	20.48

As of June 30, 2021, 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 June 30, 2021 and 2020 was $0.2 million and $0.1 million, respectively. The total fair value of awards vested for the six months ended June 30, 2021 and 2020 was $5.0 million and $5.1 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 six months ended June 30, 2021:

Phantom Stock Plan	Shares	Fair Value
Outstanding at December 31, 2020	120,248	$	16.64
Granted	9,042		19.52
Forfeited	(11)		18.25
Distributions	(1,483)		17.15
Outstanding at June 30, 2021	127,796	$	21.43
Vested at June 30, 2021	127,685	$	21.43

The Company recorded stock-based compensation expense (benefit) for the Phantom Stock Plan of $0.1 million and ($0.2) million for the three months ended June 30, 2021 and 2020, respectively. The total fair value of the distributions from the Phantom Stock Plan was $2,000 and $7,000 for the three months ended June 30, 2021 and 2020, respectively.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The Company recorded stock-based compensation expense (benefit) for the Phantom Stock Plan of $0.6 million and ($1.1) million for the six months ended June 30, 2021 and 2020, respectively. The total fair value of the distributions from the Phantom Stock Plan was $25,000 and $8,000 for the six months ended June 30, 2021 and 2020, respectively.

9.     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				Six months ended
	June 30,				June 30,
(In thousands)	2021		2020		2021		2020
Employee Pension Plan:
Interest cost	$	128	$	163	$	256	$	326
Amortization of actuarial loss		122		111		244		222
Expected return on plan assets		(274)		(257)		(548)		(514)
Net employee pension (benefit) expense	$	(24)	$	17	$	(48)	$	34
Outside Director Pension Plan:
Service cost	$	4	$	3	$	8	$	7
Interest cost		12		16		24		32
Amortization of actuarial gain		(5)		(13)		(10)		(27)
Amortization of past service liability		0		0		0		0
Net outside director pension expense	$	11	$	6	$	22	$	12
Other Postretirement Benefit Plans:
Service cost	$	73	$	68	$	146	$	137
Interest cost		58		65		116		130
Amortization of actuarial gain		16		—		16		—
Amortization of past service credit		(21)		(23)		(43)		(43)
Net other postretirement expense	$	126	$	110	$	235	$	224

The Company previously disclosed in its Consolidated Financial Statements for the year ended December 31, 2020 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, 2021. The Company does 0t expect to make a contribution to the Employee Pension Plan (the “Employee Pension Plan”). As of June 30, 2021, the Company had contributed $72,000 to the Outside Director Pension Plan and $70,000 in contributions were made to the Other Postretirement Benefit Plans. As of June 30, 2021, the Company has not revised its expected contributions for the year ending December 31, 2021.

10.     Fair Value of Financial Instruments

The Company carries certain financial assets and financial liabilities at fair value in accordance with GAAP which defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. GAAP permits entities to choose to measure many financial instruments and certain other items at fair value. At June 30, 2021, the Company carried financial assets and financial liabilities under the fair value option with fair values of $14.5 million and $49.8 million, respectively. At December 31, 2020, the Company carried financial assets and financial liabilities under the fair value option with fair values of $14.5 million and $43.1 million, respectively. The Company did not elect to carry any additional financial assets or financial liabilities under the fair value option during the three and six months ended June 30, 2021 and 2020.

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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 June 30,		at December 31,		Three Months Ended				Six Months Ended
(In thousands)	2021		2020		June 30, 2021		June 30, 2020		June 30, 2021		June 30, 2020
Mortgage-backed securities	$	441	$	505	$	(1)	$	(1)	$	(2)	$	2
Other securities		14,080		13,998		176		(182)		1		37
Borrowed funds		49,814		43,136		(5,528)		10,334		(6,988)		7,983
Net gain (loss) from fair value adjustments (1)(2)					$	(5,353)	$	10,151	$	(6,989)	$	8,022

(1) The net gain (loss) from fair value adjustments presented in the above table does not include net gains (losses) of ($1.2) million and $0.1 million for the three months ended June 30, 2021 and 2020, 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 gains (losses) of $1.4 million and ($3.8) million for the six months ended June 30, 2021 and 2020, respectively, from the change in the fair value of interest rate swaps.

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

The borrowed funds had a contractual principal amount of $61.9 million at both June 30, 2021 and December 31, 2020. The fair value of borrowed funds includes accrued interest payable of $0.1 million each at June 30, 2021 and December 31, 2020.

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 June 30, 2021 and December 31, 2020, 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 June 30, 2021 and December 31, 2020, 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 June 30, 2021 and December 31, 2020, 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 June 30, 2021 and December 31, 2020: