FLUSHING FINANCIAL CORP - Quarter Report: 2018 March (Form 10-Q)

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 March 31, 2018

Commission file number 001-33013

FLUSHING FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

Delaware

(State or other jurisdiction of incorporation or organization)

11-3209278

(I.R.S. Employer Identification No.)

220 RXR Plaza, Uniondale, New York 11556

(Address of principal executive offices)

(718) 961-5400

(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. X Yes __ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). X Yes __ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer X

Non-accelerated filer __

Emerging growth company __

Accelerated filer __

Smaller reporting company __

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ___Yes X No

The number of shares of the registrant’s Common Stock outstanding as of April 30, 2018 was 28,522,021.

TABLE OF CONTENTS

	PAGE

PART I — FINANCIAL INFORMATION

ITEM 1. Financial Statements - (Unaudited)

Consolidated Statements of Financial Condition	1

Consolidated Statements of Income	2

Consolidated Statements of Comprehensive Income	3

Consolidated Statements of Cash Flows	4

Consolidated Statements of Changes in Stockholders’ Equity	5

Notes to Consolidated Financial Statements	6

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	41

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk	53

ITEM 4. Controls and Procedures	53

PART II — OTHER INFORMATION

ITEM 1. Legal Proceedings	54

ITEM 1A. Risk Factors	54

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds	54

ITEM 3. Defaults Upon Senior Securities	54

ITEM 4. Mine Safety Disclosures	54

ITEM 5. Other Information	54

ITEM 6. Exhibits	55

SIGNATURES	56

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Consolidated Statements of Financial Condition

(Unaudited)

Item 1. Financial Statements

	March 31,			December 31,
	2018			2017
	(Dollars in thousands, except per share data)
Assets
Cash and due from banks	$	91,959		$	51,546
Securities held-to-maturity:
Mortgage-backed securities (none pledged; fair value of $7,564 and $7,810 at March 31, 2018 and December 31, 2017, respectively)		7,968			7,973
Other securities (none pledged; fair value of $21,347 and $21,889 at March 31, 2018 and December 31, 2017, respectively)		23,267			22,913
Securities available for sale, at fair value:
Mortgage-backed securities (including assets pledged of $245,531 and $148,505 at March 31, 2018 and December 31, 2017, respectively; $1,505 and $1,590 at fair value pursuant to the fair value option at March 31, 2018 and December 31, 2017, respectively)		512,781			509,650
Other securities (including assets pledged of $41,647 and $44,052 at March 31, 2018 and December 31, 2017, respectively; $12,612 and $12,685 at fair value pursuant to the fair value option at March 31, 2018 and December 31, 2017, respectively)		216,480			228,704
Loans:
Multi-family residential		2,286,803			2,273,595
Commercial real estate		1,426,847			1,368,112
One-to-four family ― mixed-use property		566,930			564,206
One-to-four family ― residential		190,115			180,663
Co-operative apartments		6,826			6,895
Construction		23,887			8,479
Small Business Administration		20,004			18,479
Taxi medallion		6,617			6,834
Commercial business and other		768,440			732,973
Net unamortized premiums and unearned loan fees		16,395			16,763
Allowance for loan losses		(20,542	)		(20,351	)
Net loans		5,292,322			5,156,648
Interest and dividends receivable		22,578			21,405
Bank premises and equipment, net		31,314			30,836
Federal Home Loan Bank of New York stock, at cost		54,045			60,089
Bank owned life insurance		130,653			131,856
Goodwill		16,127			16,127
Other assets		83,277			61,527
Total assets	$	6,482,771		$	6,299,274

Liabilities
Due to depositors:
Non-interest bearing	$	377,861		$	385,269
Interest-bearing		4,257,942			3,955,403
Mortgagors' escrow deposits		65,979			42,606
Borrowed funds:
Federal Home Loan Bank advances		1,064,641			1,198,968
Subordinated debentures		73,768			73,699
Junior subordinated debentures, at fair value		38,692			36,986
Total borrowed funds		1,177,101			1,309,653
Other liabilities		68,581			73,735
Total liabilities		5,947,464			5,766,666

Stockholders' Equity
Preferred stock ($0.01 par value; 5,000,000 shares authorized; none issued)		-			-
Common stock ($0.01 par value; 100,000,000 shares authorized; 31,530,595 shares issued at March 31, 2018 and December 31, 2017; 28,546,443 shares and 28,588,266 shares outstanding at March 31, 2018 and December 31, 2017, respectively)		315			315
Additional paid-in capital		219,115			217,906
Treasury stock, at average cost (2,984,152 shares and 2,942,329 at March 31, 2018 and December 31, 2017, respectively)		(60,737	)		(57,675	)
Retained earnings		387,793			381,048
Accumulated other comprehensive loss, net of taxes		(11,179	)		(8,986	)
Total stockholders' equity		535,307			532,608

Total liabilities and stockholders' equity	$	6,482,771		$	6,299,274

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

- 1 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Consolidated Statements of Income

(Unaudited)

	For the three months
	ended March 31,
(Dollars in thousands, except per share data)	2018			2017
Interest and dividend income
Interest and fees on loans	$	55,017		$	50,885
Interest and dividends on securities:
Interest		5,468			6,095
Dividends		14			121
Other interest income		287			153
Total interest and dividend income		60,786			57,254

Interest expense
Deposits		12,110			8,980
Other interest expense		6,067			4,885
Total interest expense		18,177			13,865

Net interest income		42,609			43,389
Provision for loan losses		153			-
Net interest income after provision for loan losses		42,456			43,389

Non-interest income
Banking services fee income		948			874
Net (loss) gain on sale of loans		(263	)		210
Net loss from fair value adjustments		(100	)		(378	)
Federal Home Loan Bank of New York stock dividends		876			823
Gain from life insurance proceeds		776			1,161
Bank owned life insurance		762			795
Other income		201			204
Total non-interest income		3,200			3,689

Non-interest expense
Salaries and employee benefits		18,455			17,104
Occupancy and equipment		2,577			2,496
Professional services		2,185			1,996
FDIC deposit insurance		500			326
Data processing		1,401			1,203
Depreciation and amortization		1,389			1,165
Other real estate owned/foreclosure expense		96			351
Net gain from sales of real estate owned		-			(50	)
Other operating expenses		4,691			4,973
Total non-interest expense		31,294			29,564

Income before income taxes		14,362			17,514

Provision for income taxes
Federal		2,607			4,749
State and local		343			505
Total taxes		2,950			5,254

Net income	$	11,412		$	12,260

Basic earnings per common share	$	0.39		$	0.42
Diluted earnings per common share	$	0.39		$	0.42
Dividends per common share	$	0.20		$	0.18

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
	March 31,
(In thousands)	2018			2017

Net income	$	11,412		$	12,260

Other comprehensive income (loss), net of tax:
Amortization of actuarial losses, net of taxes of ($41) and ($64) for the three months ended March 31, 2018 and 2017, respectively.		91			87
Amortization of prior service credits, net of taxes of $3 and $4 for the three months ended March 31, 2018 and 2017, respectively.		(7	)		(7	)
Net unrealized (losses) gains on securities, net of taxes of $3,055 and ($811) for the three months ended March 31, 2018 and 2017, respectively.		(6,640	)		1,148
Net unrealized gain on cash flow hedges, net of taxes of ($2,604) for the three months ended March 31, 2018.		5,661			-

Total other comprehensive income (loss), net of tax		(895	)		1,228

Comprehensive income	$	10,517		$	13,488

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 three months ended
	March 31,
(In thousands)	2018			2017
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	11,412		$	12,260
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		153			-
Depreciation and amortization of bank premises and equipment		1,389			1,165
Amortization of premium, net of accretion of discount		2,018			1,903
Net loss from fair value adjustments		100			378
Net loss (gain) from sale of loans		263			(210	)
Net gain from sale of OREO		-			(50	)
Income from bank owned life insurance		(762	)		(795	)
Gain from life insurance proceeds		(776	)		(1,161	)
Stock-based compensation expense		3,452			3,085
Deferred compensation		(1,238	)		(1,431	)
Deferred income tax expense		350			2,501
Increase in other liabilities		(118	)		2,709
Decrease (increase) in other assets		(955	)		(4,314	)
Net cash provided by operating activities		15,288			16,040

CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of bank premises and equipment		(1,867	)		(630	)
Net redemptions of Federal Home Loan Bank of New York shares		6,044			1,789
Purchases of securities held-to-maturity		(353	)		-
Proceeds from maturities of securities held-to-maturity		-			1,330
Purchases of securities available for sale		(32,646	)		(40,581	)
Proceeds from sales and calls of securities available for sale		10,000			-
Proceeds from maturities and prepayments of securities available for sale		20,943			18,691
Proceeds from bank owned life insurance		2,741			651
Net originations of loans		(83,734	)		(129,764	)
Purchases of loans		(68,818	)		(15,621	)
Proceeds from sale of real estate owned		-			583
Proceeds from sale of loans		2,464			5,190
Net cash used in investing activities		(145,226	)		(158,362	)

CASH FLOWS FROM FINANCING ACTIVITIES
Net (decrease) increase in non-interest bearing deposits		(7,408	)		10,865
Net increase in interest-bearing deposits		302,438			172,471
Net increase in mortgagors' escrow deposits		23,373			21,612
Net repayments from short-term borrowed funds		(10,500	)		(68,500	)
Proceeds from long-term borrowings		-			80,000
Repayment of long-term borrowings		(123,794	)		(51,254	)
Purchases of treasury stock		(7,963	)		(2,268	)
Cash dividends paid		(5,795	)		(5,246	)
Net cash provided by financing activities		170,351			157,680

Net increase in cash and cash equivalents		40,413			15,358
Cash and cash equivalents, beginning of period		51,546			35,857
Cash and cash equivalents, end of period	$	91,959		$	51,215

SUPPLEMENTAL CASH FLOW DISCLOSURE
Interest paid	$	15,233		$	12,491
Income taxes paid		1,103			1,000
Taxes paid if excess tax benefits were not tax deductible		1,691			2,194
Non-cash activities:
Loans transferred to Other Real Estate Owned or Other Assets		744			-

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

- 4 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Consolidated Statements of Changes in Stockholders’ Equity

For the three months ended March 31, 2018 and 2017

(Unaudited)

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

Balance at December 31, 2017	$	532,608		$	315	$	217,906		$	381,048		$	(57,675	)	$	(8,986	)
Reclassification of the Income Tax Effects of the Tax Cuts and Jobs Act from Accumulated Other Comprehensive Income (Loss) to Retained Earnings		-			-		-			2,073			-			(2,073	)
Impact of adoption of Accounting Standard Update 2016-01		-			-		-			(775	)		-			775
Net Income		11,412			-		-			11,412			-			-
Award of common shares released from Employee Benefit Trust (116,229 shares)		2,488			-		2,488			-			-			-
Vesting of restricted stock unit awards (248,877 shares)		-			-		(4,731	)		(170	)		4,901			-
Stock-based compensation expense		3,452			-		3,452			-			-			-
Purchase of treasury shares (217,863 shares)		(5,913	)		-		-			-			(5,913	)		-
Repurchase of shares to satisfy tax obligation (72,837 shares)		(2,050	)		-		-			-			(2,050	)		-
Dividends on common stock ($0.20 per share)		(5,795	)		-		-			(5,795	)		-			-
Other comprehensive loss		(895	)		-		-			-			-			(895	)
Balance at March 31, 2018	$	535,307		$	315	$	219,115		$	387,793		$	(60,737	)	$	(11,179	)

Balance at December 31, 2016	$	513,853		$	315	$	214,462		$	361,192		$	(53,754	)	$	(8,362	)
Net Income		12,260			-		-			12,260			-			-
Award of common shares released from Employee Benefit Trust (107,605 shares)		2,280			-		2,280			-			-			-
Vesting of restricted stock unit awards (256,810 shares)		-			-		(4,536	)		(262	)		4,798			-
Stock-based compensation expense		3,295			-		3,295			-			-			-
Repurchase of shares to satisfy tax obligation (78,554 shares)		(2,268	)		-		-			-			(2,268	)		-
Dividends on common stock ($0.18 per share)		(5,246	)		-		-			(5,246	)		-			-
Other comprehensive income		1,228			-		-			-			-			1,228
Balance at March 31, 2017	$	525,402		$	315	$	215,501		$	367,944		$	(51,224	)	$	(7,134	)

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

- 5 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

Basis of Presentation

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

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

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

The accompanying unaudited consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and general practices within the banking industry. The information furnished in these interim statements reflects all adjustments that are, in the opinion of management, necessary for a fair statement of the results for such presented periods of the Company. Such adjustments are of a normal recurring nature, unless otherwise disclosed in this Quarterly Report. All inter-company balances and transactions have been eliminated in consolidation. The results of operations in the interim statements are not necessarily indicative of the results that may be expected for the full year.

The accompanying unaudited consolidated financial statements have been prepared in conformity with the instructions to Quarterly Report on Form 10-Q and Article 10, Rule 10-01 of Regulation S-X for interim financial statements. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The unaudited consolidated interim financial information should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

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

2.	Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements, and reported amounts of revenue and expenses during the reporting period. Estimates that are particularly susceptible to change in the near term are used in connection with the determination of the allowance for loan losses (“ALLL”), the evaluation of goodwill for impairment, the review of the need for a valuation allowance of the Company’s deferred tax assets, the fair value of financial instruments and the evaluation of other-than-temporary impairment (“OTTI”) on securities. Actual results could differ from these estimates.

3.	Earnings Per Share

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

	For the three months ended
	March 31,
	2018			2017
	(Dollars in thousands, except per share data)
Net income, as reported	$	11,412		$	12,260
Divided by:
Weighted average common shares outstanding		28,974			29,019
Weighted average common stock equivalents		1			4
Total weighted average common shares outstanding and common stock equivalents		28,975			29,023

Basic earnings per common share	$	0.39		$	0.42
Diluted earnings per common share ⁽¹⁾	$	0.39		$	0.42
Dividend payout ratio		51.3	%		42.9	%

(1)

For the three months ended March 31, 2018 and 2017, there were no common stock equivalents that were anti-dilutive.

- 6 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

4.	Debt and Equity Securities

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

The following table summarizes the Company’s portfolio of securities held-to-maturity at March 31, 2018:

					Gross		Gross
	Amortized				Unrealized		Unrealized
	Cost		Fair Value		Gains		Losses
	(In thousands)
Securities held-to-maturity:
Municipals	$	23,267	$	21,347	$	-	$	1,920

Total other securities		23,267		21,347		-		1,920

FNMA		7,968		7,564		-		404

Total mortgage-backed securities		7,968		7,564		-		404
Total	$	31,235	$	28,911	$	-	$	2,324

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

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

Total municipals		22,913		21,889		-		1,024

FNMA		7,973		7,810		-		163

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

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

- 7 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The following table summarizes the Company’s portfolio of securities available for sale at March 31, 2018:

					Gross		Gross
	Amortized				Unrealized		Unrealized
	Cost		Fair Value		Gains		Losses
	(In thousands)
Corporate	$	110,000	$	101,578	$	-	$	8,422
Municipals		101,129		102,289		1,191		31
Mutual funds		11,451		11,451		-		-
Other		1,162		1,162		-		-
Total other securities		223,742		216,480		1,191		8,453
REMIC and CMO		346,414		338,368		188		8,234
GNMA		940		1,004		64		-
FNMA		131,918		128,535		68		3,451
FHLMC		45,938		44,874		15		1,079
Total mortgage-backed securities		525,210		512,781		335		12,764
Total securities available for sale	$	748,952	$	729,261	$	1,526	$	21,217

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

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

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

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

- 8 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The following tables detail the amortized cost and fair value of the Company’s securities classified as held-to-maturity and available for sale at March 31, 2018, by contractual maturity. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Amortized
Securities held-to-maturity:	Cost		Fair Value
	(In thousands)
Due in one year or less	$	1,398	$	1,398
Due after ten years		21,869		19,949
Total other securities		23,267		21,347
Mortgage-backed securities		7,968		7,564
Total	$	31,235	$	28,911

	Amortized
Securities available for sale:	Cost		Fair Value
	(In thousands)
Due in one year or less	$	-	$	-
Due after one year through five years		4,277		4,299
Due after five years through ten years		125,670		117,351
Due after ten years		82,344		83,379
Total other securities		212,291		205,029
Mutual funds		11,451		11,451
Mortgage-backed securities		525,210		512,781
Total	$	748,952	$	729,261

- 9 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

	At March 31, 2018
			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)
Held-to-maturity securities
Municipals		1	$	19,949	$	1,920	$	-	$	-	$	19,949	$	1,920
Total other securities		1		19,949		1,920		-		-		19,949		1,920

FNMA		1		7,564		404		7,564		404		-		-
Total mortgage-backed securities		1		7,564		404		7,564		404		-		-
Total		2	$	27,513	$	2,324	$	7,564	$	404	$	19,949	$	1,920

Available for sale securities
Corporate		14	$	101,578	$	8,422	$	9,469	$	531	$	92,109	$	7,891
Municipals		3		5,107		31		5,107		31		-		-
Total other securities		17		106,685		8,453		14,576		562		92,109		7,891

REMIC and CMO		46		306,808		8,234		223,172		4,458		83,636		3,776
FNMA		20		126,645		3,451		116,149		2,971		10,496		480
FHLMC		2		44,001		1,079		41,061		961		2,940		118
Total mortgage-backed securities		68		477,454		12,764		380,382		8,390		97,072		4,374
Total		85	$	584,139	$	21,217	$	394,958	$	8,952	$	189,181	$	12,265

	At December 31, 2017
			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)
Held-to-maturity securities
Municipals		1	$	20,844	$	1,024	$	20,844	$	1,024	$	-	$	-
Total other securities		1		20,844		1,024		20,844		1,024		-		-

FNMA		1		7,810		163		7,810		163		-		-
Total mortgage-backed securities		1		7,810		163		7,810		163		-		-
Total securities held-to-maturity		2	$	28,654	$	1,187	$	28,654	$	1,187	$	-	$	-

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

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

- 10 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

OTTI losses on impaired securities must be fully recognized in earnings if an investor has the intent to sell the debt security or if it is more likely than not that the investor will be required to sell the debt security before recovery of its amortized cost. However, even if an investor does not expect to sell a debt security in an unrealized loss position, the investor must evaluate the expected cash flows to be received and determine if a credit loss has occurred. In the event that a credit loss has occurred, only the amount of impairment associated with the credit loss is recognized in earnings in the Consolidated Statements of Income. Amounts relating to factors other than credit losses are recorded in accumulated other comprehensive loss (“AOCL”) within Stockholders’ Equity. Unrealized losses on available for sale securities, that are deemed to be temporary, are recorded in AOCL, net of tax.

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

It is not anticipated that these securities would be settled at a price that is less than the amortized cost of the Company’s investment. Each of these securities is performing according to its terms and, in the opinion of management, will continue to perform according to its terms. The Company does not have the intent to sell these securities and it is more likely than not the Company will not be required to sell the securities before recovery of the securities’ amortized cost basis. This conclusion is based upon considering the Company’s cash and working capital requirements and contractual and regulatory obligations, none of which the Company believes would cause the sale of the securities. Therefore, the Company did not consider these investments to be other-than-temporarily impaired at March 31, 2018 and December 31, 2017.

The Company did not sell any securities during the three months ended March 31, 2018 and 2017.

Loans

Loans are reported at their outstanding principal balance net of any unearned income, charge-offs, deferred loan fees and costs on originated loans and unamortized premiums or discounts on purchased loans. Loan fees and certain loan origination costs are deferred. Net loan origination costs and premiums or discounts on loans purchased are amortized into interest income over the contractual life of the loans using the level-yield method. Prepayment penalties received on loans which pay in full prior to their scheduled maturity are included in interest income in the period they are collected.

Interest on loans is recognized on the accrual basis. The accrual of income on loans is generally discontinued when certain factors, such as contractual delinquency of 90 days or more, indicate reasonable doubt as to the timely collectability of such income. Uncollected interest previously recognized on non-accrual loans is reversed from interest income at the time the loan is placed on non-accrual status. A non-accrual loan can be returned to accrual status when contractual delinquency returns to less than 90 days delinquent. Payments received on non-accrual loans that do not bring the loan to less than 90 days delinquent are recorded on a cash basis. Payments can also be applied first as a reduction of principal until all principal is recovered and then subsequently to interest, if in management’s opinion, it is evident that recovery of all principal due is likely to occur.

The Company recognizes a loan as non-performing when the borrower has demonstrated the inability to bring the loan current, or due to other circumstances which, in management’s opinion, indicate the borrower will be unable to bring the loan current within a reasonable time. All loans classified as non-performing, which includes all loans past due 90 days or more, are classified as non-accrual unless there is, in our opinion, compelling evidence the borrower will bring the loan current in the immediate future. Prior to a loan becoming 90 days delinquent, an updated appraisal is ordered and/or an internal evaluation is prepared.

A loan is considered impaired when, based upon current information, the Company believes it is probable that it will be unable to collect all amounts due, both principal and interest, in accordance with the original terms of the loan. Impaired loans are measured based on the present value of the expected future cash flows discounted at the loan’s effective interest rate or at the loan’s observable market price or, as a practical expedient, the fair value of the collateral if the loan is collateral dependent. All non-accrual loans are considered impaired.

- 11 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The Company maintains an allowance for loan losses at an amount, which, in management’s judgment, is adequate to absorb probable estimated losses inherent in the loan portfolio. Management’s judgment in determining the adequacy of the allowance is based on evaluations of the collectability of loans. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revisions as more information becomes available. An unallocated component may at times be maintained to cover uncertainties that could affect management's estimate of probable losses. When necessary an unallocated component of the allowance will reflect the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio. The allowance is established through charges to earnings in the form of a provision for loan losses based on management’s evaluation of the risk inherent in the various components of the loan portfolio and other factors, including historical loan loss experience (which is updated quarterly), current economic conditions, delinquency and non-accrual trends, classified loan levels, risk in the portfolio and volumes and trends in loan types, recent trends in charge-offs, changes in underwriting standards, experience, ability and depth of the Company’s lenders, collection policies and experience, internal loan review function and other external factors. Increases and decreases in the allowance other than charge-offs and recoveries are included in the provision for loan losses. When a loan or a portion of a loan is determined to be uncollectible, the portion deemed uncollectible is charged against the allowance, and subsequent recoveries, if any, are credited to the allowance.

The determination of the amount of the allowance for loan losses includes estimates that are susceptible to significant changes due to changes in appraisal values of collateral, national and local economic conditions and other factors. We review our loan portfolio by separate categories with similar risk and collateral characteristics. Impaired loans are segregated and reviewed separately.

The Company reviews each impaired loan on an individual basis to determine if either a charge-off or a valuation allowance needs to be allocated to the loan. The Company does not charge-off or allocate a valuation allowance to loans for which management has concluded the current value of the underlying collateral will allow for recovery of the loan balance through the sale of the loan or by foreclosure and sale of the property.

The Company considers fair value of collateral dependent loans to be 85% of the appraised or internally estimated value of the property. The 85% is based on the actual net proceeds the Bank has received from the sale of other real estate owned (“OREO”) as a percentage of OREO’s appraised value. For collateral dependent taxi medallion loans, the Company considers fair value to be the value of the underlying medallion based upon the most recently reported arm’s length sales transaction. When there is no recent sale activity, the fair value is calculated using capitalization rates. For both collateral dependent mortgage loans and taxi medallion loans, the amount by which the loan’s book value exceeds fair value is charged-off.

The Company segregated its loans into two portfolios based on year of origination. One portfolio was reviewed for loans originated after December 31, 2009 and a second portfolio for loans originated prior to January 1, 2010. Our decision to segregate the portfolio based upon origination dates was based on changes made in our underwriting standards during 2009. By the end of 2009, all loans were being underwritten based on revised and tightened underwriting standards. Loans originated prior to 2010 have a higher delinquency rate and loss history. Each of the years in the portfolio for loans originated prior to 2010 has a similar delinquency rate. For the three months ended March 31, 2018, the Company used a loss emergence period of 1.33 years. The Company’s Board of Directors reviews and approves management’s evaluation of the adequacy of the allowance for loan losses on a quarterly basis.

The Company evaluates the underlying collateral through a third party appraisal, or when a third party appraisal is not available, the Company will use an internal evaluation. The internal evaluations are prepared using an income approach or a sales approach. The income approach is used for income producing properties and uses current revenues less operating expenses to determine the net cash flow of the property. Once the net cash flow is determined, the value of the property is calculated using an appropriate capitalization rate for the property. The sales approach uses comparable sales prices in the market. When an internal evaluation is used, we place greater reliance on the income approach to value the collateral.

The Company may restructure a loan to enable a borrower experiencing financial difficulties to continue making payments when it is deemed to be in the Company’s best long-term interest. This restructure may include reducing the interest rate or amount of the monthly payment for a specified period of time, after which the interest rate and repayment terms revert to the original terms of the loan. We classify these loans as Troubled Debt Restructured (“TDR”).

These restructurings have not included a reduction of principal balance. The Company believes that restructuring these loans in this manner will allow certain borrowers to become and remain current on their loans. All loans classified as TDR are considered impaired, however TDR loans which have been current for six consecutive months at the time they are restructured as TDR remain on accrual status and are not included as part of non-performing loans. Loans which were delinquent at the time they are restructured as a TDR are placed on non-accrual status and reported as non-accrual performing TDR loans until they have made timely payments for six consecutive months.

- 12 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The allocation of a portion of the allowance for loan losses for a performing TDR loan is based upon the present value of the future expected cash flows discounted at the loan’s original effective rate, or for a non-performing TDR which is collateral dependent, the fair value of the collateral. At March 31, 2018, there were no commitments to lend additional funds to borrowers whose loans were modified to a TDR. The modification of loans to a TDR did not have a significant effect on our operating results, nor did it require a significant allocation of the allowance for loan losses.

The Company did not modify any loans as TDR during the three months ended March 31, 2018 and March 31, 2017.

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

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

Multi-family residential		9	$	2,503		9	$	2,518
Commercial real estate		-		-		2		1,986
One-to-four family - mixed-use property		5		1,740		5		1,753
One-to-four family - residential		3		567		3		572
Taxi medallion		19		5,712		20		5,916
Commercial business and other		2		407		2		462
Total performing troubled debt restructured		38	$	10,929		41	$	13,207

During the three months ended March 31, 2018, we sold one commercial real estate TDR totaling $1.8 million, for a loss of $0.3 million and foreclosed on one taxi medallion TDR of $0.1 million, which is included in “Other Assets”. There were no TDRs that defaulted during the period, which were within 12 months of their modification date.

- 13 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

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

Multi-family residential		1	$	383		1	$	383

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

During the three months ended March 31, 2018, one taxi medallion TDR was foreclosed upon and transferred to non-performing status. There were no TDR loans transferred to non-performing status during the three months ended March 31, 2017.

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

	March 31,		December 31,
(In thousands)	2018		2017

Loans ninety days or more past due and still accruing:
Commercial real estate	$	1,668	$	2,424
Total		1,668		2,424

Non-accrual mortgage loans:
Multi-family residential		2,193		3,598
Commercial real estate		1,894		1,473
One-to-four family - mixed-use property		2,396		1,867
One-to-four family - residential		7,542		7,808
Total		14,025		14,746

Non-accrual non-mortgage loans:
Small Business Administration		41		46
Taxi medallion		906		918
Total		947		964
Total non-accrual loans		14,972		15,710
Total non-performing loans	$	16,640	$	18,134

- 14 -

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 March 31,
	2018		2017
	(In thousands)
Interest income that would have been recognized had the loans performed in accordance with their original terms	$	406	$	414
Less: Interest income included in the results of operations		158		127
Total foregone interest	$	248	$	287

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

	March 31, 2018
					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	$	2,748	$	-	$	2,193	$	4,941	$	2,281,862	$	2,286,803
Commercial real estate		-		-		3,563		3,563		1,423,284		1,426,847
One-to-four family - mixed-use property		2,659		-		2,396		5,055		561,875		566,930
One-to-four family - residential		1,449		151		7,542		9,142		180,973		190,115
Co-operative apartments		-		-		-		-		6,826		6,826
Construction loans		-		730		-		730		23,157		23,887
Small Business Administration		-		-		-		-		20,004		20,004
Taxi medallion		-		-		-		-		6,617		6,617
Commercial business and other		200		5		-		205		768,235		768,440
Total	$	7,056	$	886	$	15,694	$	23,636	$	5,272,833	$	5,296,469

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

- 15 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

March 31, 2018
(In thousands)	Multi-family residential			Commercial real estate			One-to-four family - mixed-use property			One-to-four family - residential			Construction loans		Small Business Administration			Taxi medallion		Commercial business and other			Total

Allowance for credit losses:
Beginning balance	$	5,823		$	4,643		$	2,545		$	1,082		$	68	$	669		$	-	$	5,521		$	20,351
Charge-off's		(53	)		-			-			(1	)		-		(25	)		-		(6	)		(85	)
Recoveries		2			-			-			108			-		6			-		7			123
Provision (benefit)		(22	)		(41	)		(75	)		(148	)		123		25			-		291			153
Ending balance	$	5,750		$	4,602		$	2,470		$	1,041		$	191	$	675		$	-	$	5,813		$	20,542

March 31, 2017
(In thousands)	Multi-family residential			Commercial real estate			One-to-four family - mixed-use property			One-to-four family - residential			Construction loans		Small Business Administration			Taxi medallion			Commercial business and other			Unallocated		Total

Allowance for credit losses:
Beginning balance	$	5,923		$	4,487		$	2,903		$	1,015		$	92	$	481		$	2,243		$	4,492		$	593	$	22,229
Charge-off's		(14	)		-			(34	)		-			-		(65	)		(54	)		(12	)		-		(179	)
Recoveries		30			68			-			-			-		41			-			22			-		161
Provision (benefit)		(32	)		(70	)		(178	)		(36	)		2		(140	)		24			208			222		-
Ending balance	$	5,907		$	4,485		$	2,691		$	979		$	94	$	317		$	2,213		$	4,710		$	815	$	22,211

- 16 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

March 31, 2018
(In thousands)	Multi-family residential		Commercial real estate		One-to-four family - mixed- use property		One-to-four family- residential		Co-operative apartments		Construction loans		Small Business Administration		Taxi medallion		Commercial business and other		Total
Financing Receivables:
Ending Balance	$	2,286,803	$	1,426,847	$	566,930	$	190,115	$	6,826	$	23,887	$	20,004	$	6,617	$	768,440	$	5,296,469
Ending balance: individually evaluated for impairment	$	6,785	$	6,727	$	5,592	$	8,848	$	-	$	-	$	99	$	6,617	$	407	$	35,075
Ending balance: collectively evaluated for impairment	$	2,280,018	$	1,420,120	$	561,338	$	181,267	$	6,826	$	23,887	$	19,905	$	-	$	768,033	$	5,261,394

Allowance for credit losses:
Ending balance: individually evaluated for impairment	$	158	$	-	$	167	$	55	$	-	$	-	$	-	$	-	$	5	$	385
Ending balance: collectively evaluated for impairment	$	5,592	$	4,602	$	2,303	$	986	$	-	$	191	$	675	$	-	$	5,808	$	20,157

December 31, 2017
(In thousands)	Multi-family residential		Commercial real estate		One-to-four family - mixed- use property		One-to-four family- residential		Co-operative apartments		Construction loans		Small Business Administration		Taxi medallion		Commercial business and other		Total
Financing Receivables:
Ending Balance	$	2,273,595	$	1,368,112	$	564,206	$	180,663	$	6,895	$	8,479	$	18,479	$	6,834	$	732,973	$	5,160,236
Ending balance: individually evaluated for impairment	$	7,311	$	9,089	$	5,445	$	9,686	$	-	$	-	$	137	$	6,834	$	661	$	39,163
Ending balance: collectively evaluated for impairment	$	2,266,284	$	1,359,023	$	558,761	$	170,977	$	6,895	$	8,479	$	18,342	$	-	$	732,312	$	5,121,073

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

- 17 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

	March 31, 2018						December 31, 2017
			Unpaid						Unpaid
	Recorded		Principal		Related		Recorded		Principal		Related
	Investment		Balance		Allowance		Investment		Balance		Allowance
	(In thousands)
With no related allowance recorded:
Mortgage loans:
Multi-family residential	$	4,577	$	5,078	$	-	$	5,091	$	5,539	$	-
Commercial real estate		6,727		6,727		-		7,103		7,103		-
One-to-four family mixed-use property		4,375		4,711		-		4,218		4,556		-
One-to-four family residential		8,437		9,442		-		9,272		10,489		-
Non-mortgage loans:
Small Business Administration		99		135		-		137		151		-
Taxi medallion		6,617		17,561		-		6,834		18,063		-
Commercial business and other		79		449		-		313		682		-
Total loans with no related allowance recorded		30,911		44,103		-		32,968		46,583		-

With an allowance recorded:
Mortgage loans:
Multi-family residential		2,208		2,208		158		2,220		2,220		205
Commercial real estate		-		-		-		1,986		1,986		177
One-to-four family mixed-use property		1,217		1,217		167		1,227		1,227		198
One-to-four family residential		411		411		55		414		414		56
Non-mortgage loans:
Commercial business and other		328		328		5		348		348		6
Total loans with an allowance recorded		4,164		4,164		385		6,195		6,195		642

Total Impaired Loans:
Total mortgage loans	$	27,952	$	29,794	$	380	$	31,531	$	33,534	$	636
Total non-mortgage loans	$	7,123	$	18,473	$	5	$	7,632	$	19,244	$	6

- 18 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The following table shows our average recorded investment and interest income recognized for impaired loans for the three months ended March 31, 2018 and 2017:

	March 31, 2018				March 31, 2017
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized
	(In thousands)
With no related allowance recorded:
Mortgage loans:
Multi-family residential	$	4,834	$	20	$	3,354	$	23
Commercial real estate		6,915		74		5,925		95
One-to-four family mixed-use property		4,297		41		6,048		37
One-to-four family residential		8,855		15		9,851		26
Construction		-		-		301		7
Non-mortgage loans:
Small Business Administration		118		1		293		2
Taxi medallion		6,726		82		3,646		30
Commercial business and other		196		2		2,159		44
Total loans with no related allowance recorded		31,941		235		31,577		264

With an allowance recorded:
Mortgage loans:
Multi-family residential		2,214		29		2,257		29
Commercial real estate		993		-		2,056		24
One-to-four family mixed-use property		1,222		9		2,013		18
One-to-four family residential		413		4		427		4
Non-mortgage loans:
Small Business Administration		-		-		761		-
Taxi medallion		-		-		13,911		43
Commercial business and other		338		5		411		6
Total loans with an allowance recorded		5,180		47		21,836		124

Total Impaired Loans:
Total mortgage loans	$	29,743	$	192	$	32,232	$	263
Total non-mortgage loans	$	7,378	$	90	$	21,181	$	125

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

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

	March 31, 2018
(In thousands)	Special Mention		Substandard		Doubtful		Loss		Total

Multi-family residential	$	4,124	$	4,282	$	-	$	-	$	8,406
Commercial real estate		1,892		6,727		-		-		8,619
One-to-four family - mixed-use property		1,277		3,852		-		-		5,129
One-to-four family - residential		1,018		8,282		-		-		9,300
Construction loans		730		-		-		-		730
Small Business Administration		525		73		-		-		598
Taxi medallion		-		6,617		-		-		6,617
Commercial business and other		21,142		328		-		-		21,470
Total loans	$	30,708	$	30,161	$	-	$	-	$	60,869

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

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

Commitments to extend credit (principally real estate mortgage loans) and lines of credit (principally home equity lines of credit and business lines of credit) amounted to $79.6 million and $254.8 million, respectively, at March 31, 2018.

- 20 -

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 March 31, 2018 and December 31, 2017, the Bank did not have any loans held for sale.

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

The following tables show loans sold during the period indicated:

	For the three months ended March 31, 2018
(Dollars in thousands)	Loans sold		Proceeds		Net loss
Delinquent and non-performing loans
Multi-family residential		3	$	964	$	-
Commercial real estate.		1		1,500		(263	)
Total		4	$	2,464	$	(263	)

	For the three months ended March 31, 2017
(Dollars in thousands)	Loans sold		Proceeds		Net charge-offs			Net gain
Delinquent and non-performing loans
One-to-four family - mixed-use property		5	$	1,790	$	(33	)	$	28
Total		5	$	1,790	$	(33	)	$	28

Performing loans
Small Business Administration		3	$	3,400	$	-		$	182
Total		3	$	3,400	$	-		$	182

- 21 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

Other Real Estate Owned

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

	For the three months ended
	March 31,
	2018		2017
	(In thousands)
Balance at beginning of period	$	-	$	533
Acquisitions		638		-
Sales		-		(533	)
Balance at end of period	$	638	$	-

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
	March 31,
	2018		2017
	(In thousands)
Gross gains	$	-	$	50

At March 31, 2018, we held one foreclosed residential real estate property totaling $0.6 million. Also, we held one taxi medallion for $0.1 million acquired through foreclosure, which is included in “Other Assets.” Included within net loans as of March 31, 2018 and December 31, 2017 was a recorded investment of $10.3 million and $10.5 million, respectively, of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings were in process according to local requirements of the applicable jurisdiction.

Stock-Based Compensation

For the three months ended March 31, 2018 and 2017, the Company’s net income, as reported, includes $3.4 million and $3.1 million, respectively, of stock-based compensation costs and $0.7 million and $1.0 million of income tax benefits, respectively, related to the stock-based compensation plans in each of the periods. During the three months ended March 31, 2018 and 2017, the Company granted 274,990 and 276,900 restricted stock units, respectively. There were no stock options granted or exercised during the three months ended March 31, 2018 and 2017. The Company has not granted stock options since 2009. At March 31, 2018, the Company had 1,200 stock options, all 100% vested, outstanding, at an average exercise price of $13.91 per share.

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.

- 22 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The following table summarizes the Company’s restricted stock unit (“RSU”) awards at or for the three months ended March 31, 2018:

				Weighted-Average
				Grant-Date
	Shares			Fair Value
Non-vested at December 31, 2017		497,322		$	22.46
Granted		274,990			28.21
Vested		(238,249	)		23.64
Forfeited		(6,005	)		25.24
Non-vested at March 31, 2018		528,058		$	24.89

Vested but unissued at March 31, 2018		233,449		$	25.15

As of March 31, 2018, there was $11.9 million of total unrecognized compensation cost related to RSU awards granted. That cost is expected to be recognized over a weighted-average period of 3.3 years. The total fair value of awards vested for the three months ended March 31, 2018 and 2017 was $6.7 and $7.0 million, respectively. The vested but unissued RSU awards consist of awards made to employees and directors who are eligible for retirement. According to the terms of these awards, which provide for vesting upon retirement, these employees and directors have no risk of forfeiture. These shares will be issued at the original contractual vesting and settlement dates.

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

The following table summarizes the Phantom Stock Plan at or for the three months ended March 31, 2018:

Phantom Stock Plan	Shares			Fair Value
Outstanding at December 31, 2017		89,180		$	27.50
Granted		8,200			27.90
Forfeited		-			-
Distributions		(24	)		27.57
Outstanding at March 31, 2018		97,356		$	26.96
Vested at March 31, 2018		96,509		$	26.96

The Company recorded stock-based compensation benefit for the Phantom Stock Plan of $37,000 and $0.2 million for the three months ended March 31, 2018 and 2017, respectively. The total fair value of the distributions from the Phantom Stock Plan was $1,000 and $6,000 for the three months ended March 31, 2018 and 2017, respectively.

- 23 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

Pension and Other Postretirement Benefit Plans

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

	Three months ended
	March 31,
(In thousands)	2018			2017

Employee Pension Plan:
Interest cost	$	195		$	216
Amortization of unrecognized loss		155			174
Expected return on plan assets		(363	)		(348	)
Net employee pension ( benefit) expense	$	(13	)	$	42

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

Other Postretirement Benefit Plans:
Service cost	$	88		$	79
Interest cost		77			76
Amortization of unrecognized loss		-			-
Amortization of past service credit		(13	)		(21	)
Net other postretirement expense	$	152		$	134

The Company previously disclosed in its Consolidated Financial Statements for the year ended December 31, 2017 that it expects to contribute $0.2 million to each of the Outside Director Pension Plan (the “Outside Director Pension Plan”) and the other postretirement benefit plans (the “Other Postretirement Benefit Plans”), during the year ending December 31, 2018. The Company does not expect to make a contribution to the Employee Pension Plan (the “Employee Pension Plan”). As of March 31, 2018, the Company has contributed $24,000 to the Outside Director Pension Plan and $20,000 in contributions were made to the Other Postretirement Benefit Plans. As of March 31, 2018, the Company has not revised its expected contributions for the year ending December 31, 2018.

10.

Fair Value of Financial Instruments

The Company carries certain financial assets and financial liabilities at fair value in accordance with GAAP which defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, establishes a framework for measuring fair value and expands disclosures about fair value measurements. GAAP permits entities to choose to measure many financial instruments and certain other items at fair value. At March 31, 2018, the Company carried financial assets and financial liabilities under the fair value option with fair values of $14.1 million and $38.7 million, respectively. At December 31, 2017, the Company carried financial assets and financial liabilities under the fair value option with fair values of $14.3 million and $37.0 million, respectively. The Company did not elect to carry any additional financial assets or financial liabilities under the fair value option during the three months ended March 31, 2018.

- 24 -

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 March 31,		at December 31,		Three Months Ended
(In thousands)	2018		2017		March 31, 2018			March 31, 2017

Mortgage-backed securities	$	1,505	$	1,590	$	(11	)	$	(7	)
Other securities		12,612		12,685		(138	)		32
Borrowed funds		38,692		36,986		(1,681	)		(570	)
Net loss from fair value adjustments ⁽¹⁾					$	(1,830	)	$	(545	)

(1)

The net loss from fair value adjustments presented in the above table does not include net gains of $1.7 million and $0.2 million for the three months ended March 31, 2018 and 2017, respectively, from the change in the fair value of interest rate swaps.

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

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

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

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

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

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

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

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

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

- 25 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

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

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

	Quoted Prices
	in Active Markets				Significant Other				Significant Other
	for Identical Assets				Observable Inputs				Unobservable Inputs				Total carried at fair value
	(Level 1)				(Level 2)				(Level 3)				on a recurring basis
	2018		2017		2018		2017		2018		2017		2018		2017
	(In thousands)
Assets:
Mortgage-backed Securities	$	-	$	-	$	512,781	$	509,650	$	-	$	-	$	512,781	$	509,650
Other securities		11,451		11,575		203,867		216,019		1,162		1,110		216,480		228,704
Interest rate swaps		-		-		21,854		7,388		-		-		21,854		7,388

Total assets	$	11,451	$	11,575	$	738,502	$	733,057	$	1,162	$	1,110	$	751,115	$	745,742

Liabilities:
Borrowings	$	-	$	-	$	-	$	-	$	38,692	$	36,986	$	38,692	$	36,986
Interest rate swaps		-		-		1,653		3,758		-		-		1,653		3,758

Total liabilities	$	-	$	-	$	1,653	$	3,758	$	38,692	$	36,986	$	40,345	$	40,744

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

	For the three months ended
	March 31, 2018				March 31, 2017
	Trust preferred		Junior subordinated		Trust preferred		Junior subordinated
	securities		debentures		securities		debentures
	(In thousands)
Beginning balance	$	1,110	$	36,986	$	7,361	$	33,959
Net gain from fair value adjustment of financial assets ⁽¹⁾		51		-		32		-
Net loss from fair value adjustment of financial liabilities ⁽¹⁾		-		1,681		-		570
Increase in accrued interest receivable		1		-		-		-
Increase in accrued interest payable		-		25		-		7
Change in unrealized gains included in other comprehensive income		-		-		1		-
Ending balance	$	1,162	$	38,692	$	7,394	$	34,536

Changes in unrealized gains held at period end	$	-	$	-	$	1	$	-

⁽¹⁾

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

During the three months ended March 31, 2018 and 2017, there were no transfers between Levels 1, 2 and 3.

- 26 -

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:

March 31, 2018

Fair Value

Valuation Technique

Unobservable Input

Range

Weighted Average

(Dollars in thousands)

Assets:

Trust preferred securities

1,162

Discounted cash flows

Discount rate

n/a

5.6

Liabilities:

Junior subordinated debentures

38,692

Discounted cash flows

Discount rate

n/a

5.6

December 31, 2017

Fair Value

Valuation Technique

Unobservable Input

Range

Weighted Average

(Dollars in thousands)

Assets:

Trust preferred securities

1,110

Discounted cash flows

Discount rate

n/a

5.7

Liabilities:

Junior subordinated debentures

36,986

Discounted cash flows

Discount rate

n/a

5.7

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 March 31, 2018 and December 31, 2017, 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 their respective category in the fair value hierarchy at March 31, 2018 and December 31, 2017:

	Quoted Prices
	in Active Markets				Significant Other				Significant Other
	for Identical Assets				Observable Inputs				Unobservable Inputs				Total carried at fair value
	(Level 1)				(Level 2)				(Level 3)				on a recurring basis
	2018		2017		2018		2017		2018		2017		2018		2017
	(In thousands)
Assets:
Impaired loans	$	-	$	-	$	-	$	-	$	14,892	$	16,027	$	14,892	$	16,027
Other real estate owned		-		-		-		-		638		-		638		-
Other repossesed assets		-		-		-		-		106		-		106		-

Total assets	$	-	$	-	$	-	$	-	$	15,636	$	16,027	$	15,636	$	16,027

- 27 -

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:

	March 31, 2018
	Fair Value		Valuation Technique	Unobservable Input	Range				Weighted Average
	(Dollars in thousands)
Assets:

Impaired loans	$	1,809	Income approach	Capitalization rate		6.0%	to	7.5%		6.8	%
				Reduction for planned expedited disposal			15.0%			15.0	%

Impaired loans	$	8,896	Sales approach	Adjustment to sales comparison value to reconcile differences between comparable sales		-50.0%	to	16.2%		-1.4	%
				Reduction for planned expedited disposal		-44.9%	to	15.0%		7.7	%

Impaired loans	$	4,187	Blended income and sales approach	Adjustment to sales comparison value to reconcile differences between comparable sales		-30.0%	to	25.0%		-0.4	%
				Capitalization rate		5.0%	to	9.8%		7.2	%
				Reduction for planned expedited disposal			15.0%			15.0	%

Other real estate owned	$	638	Sales approach	Adjustment to sales comparison value to reconcile differences between comparable sales		-3.5%	to	14.1%		5.3	%

Other repossesed assets	$	106	Sales approach	Reduction for planned expediated disposal			10.0%			10.0	%

	December 31, 2017
	Fair Value		Valuation Technique	Unobservable Input	Range				Weighted Average
	(Dollars in thousands)
Assets:

Impaired loans	$	1,818	Income approach	Capitalization rate		6.5%	to	7.5%		6.8	%
				Reduction planned for expedited disposal			15.0%			15.0	%

Impaired loans	$	10,003	Sales approach	Adjustment to sales comparison value to reconcile differences between comparable sales		-50.0%	to	16.2%		-0.8	%
				Reduction planned for expedited disposal		-30.9%	to	15.0%		8.7	%

Impaired loans	$	4,206	Blended income and sales approach	Adjustment to sales comparison value to reconcile differences between comparable sales		-30.0%	to	25.0%		-1.2	%
				Capitalization rate		5.0%	to	9.8%		7.2	%
				Reduction planned for expedited disposal			15.0%			15.0	%

The Company did not have any liabilities that were carried at fair value on a non-recurring basis at March 31, 2018 and December 31, 2017.

The methods and assumptions used to estimate fair value at March 31, 2018 and December 31, 2017 are as follows:

Securities:

The fair values of securities are contained in Note 4 of 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.

- 28 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

Impaired 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 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.

Other Real Estate Owned and Other Repossessed Assets:

OREO and other repossessed assets are carried at fair value less selling costs. 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.

Junior Subordinated Debentures:

The fair value of the junior subordinated debentures was developed using a credit spread based on the subordinated debt issued by the Company adjusting for differences in the junior subordinated debt’s credit rating, liquidity and time to maturity.

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:

	March 31, 2018
	Carrying		Fair
	Amount		Value		Level 1		Level 2		Level 3
	(In thousands)
Assets:

Cash and due from banks	$	91,959	$	91,959	$	91,959	$	-	$	-
Securities held-to-maturity
Mortgage-backed securities		7,968		7,564		-		7,564		-
Other securities		23,267		21,347		-		-		21,347
Securities available for sale
Mortgage-backed securities		512,781		512,781		-		512,781		-
Other securities		216,480		216,480		11,451		203,867		1,162
Loans		5,312,864		5,283,891		-		-		5,283,891
FHLB-NY stock		54,045		54,045		-		54,045		-
Accrued interest receivable		22,578		22,578		10		1,874		20,694
Interest rate swaps		21,854		21,854		-		21,854		-

Liabilities:
Deposits	$	4,701,782	$	4,695,084	$	3,202,456	$	1,492,628	$	-
Borrowings		1,177,101		1,165,487		-		1,126,795		38,692
Accrued interest payable		5,288		5,288		-		5,288		-
Interest rate swaps		1,653		1,653		-		1,653		-

- 29 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

	December 31, 2017
	Carrying		Fair
	Amount		Value		Level 1		Level 2		Level 3
	(In thousands)
Assets:

Cash and due from banks	$	51,546	$	51,546	$	51,546	$	-	$	-
Securities held-to-maturity
Mortgage-backed securities		7,973		7,810		-		7,810		-
Other securities		22,913		21,889		-		-		21,889
Securities available for sale
Mortgage-backed securities		509,650		509,650		-		509,650		-
Other securities		228,704		228,704		11,575		216,019		1,110
Loans		5,176,999		5,169,108		-		-		5,169,108
FHLB-NY stock		60,089		60,089		-		60,089		-
Accrued interest receivable		21,405		21,405		16		1,916		19,473
Interest rate swaps		7,388		7,388		-		7,388		-

Liabilities:
Deposits	$	4,383,278	$	4,380,174	$	3,031,345	$	1,348,829	$	-
Borrowings		1,309,653		1,310,487		-		1,273,501		36,986
Accrued interest payable		2,659		2,659		-		2,659		-
Interest rate swaps		3,758		3,758		-		3,758		-

11.

Derivative Financial Instruments

At March 31, 2018 and December 31, 2017, the Company’s derivative financial instruments consist of interest rate swaps. The Company’s interest rate swaps are used for three 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 March 31, 2018 and December 31, 2017; 2) to mitigate the Company’s exposure to rising interest rates on certain fixed rate loans totaling $281.6 million and $280.2 million at March 31, 2018 and December 31, 2017, respectively; and 3) to mitigate exposure to rising interest rates on certain short-term advances totaling $441.5 million at March 31, 2018 and December 31, 2017.

At March 31, 2018 and December 31, 2017, 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 March 31, 2018 and December 31, 2017, derivatives with a combined notional amount of $36.3 million were not designated as hedges. At March 31, 2018 and December 31, 2017, derivatives with a combined notional amount of $263.3 million and $261.9 million were designated as fair value hedges. At March 31, 2018 and December 31, 2017, derivatives with a combined notional amount of $441.5 million were designated as cash flow hedges.

For cash flow hedges, the effective portion of changes in the fair value of the derivative is reported in AOCL, net of tax, with the ineffective portion of changes in the fair value of the derivative is recognized directly in earnings. Amounts in accumulated other comprehensive income are reclassified into earnings in the same period during which the hedged forecasted transaction effects earnings. During the three months ended March 31, 2018, $0.3 million was reclassified from accumulated other comprehensive loss to interest expense.

- 30 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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:

	March 31, 2018					December 31, 2017
	Notional		Net Carrying			Notional		Net Carrying
(In thousands)	Amount		Value ⁽¹⁾			Amount		Value ⁽¹⁾
Interest rate swaps (fair value hedge)	$	253,784	$	13,179		$	199,341	$	6,971
Interest rate swaps (fair value hedge)		9,508		(99	)		62,564		(921	)
Interest rate swaps (cash flow hedge)		441,500		8,675			250,000		417
Interest rate swaps (cash flow hedge)		-		-			191,500		(7	)
Interest rate swaps (non-hedge)		36,321		(1,554	)		36,321		(2,830	)
Total derivatives	$	741,113	$	20,201		$	739,726	$	3,630

(1)	Derivatives in a net positive position are recorded as “Other assets” and derivatives in a net 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
	March 31,
(In thousands)	2018		2017
Financial Derivatives:
Interest rate swaps (non-hedge)	$	1,276	$	232
Interest rate swaps (fair value hedge)		454		(66	)
Net gain ⁽¹⁾	$	1,730	$	166

(1)	Net gains and losses are recorded as part of “Net gain/loss from fair value adjustments” in the Consolidated Statements of Income.

During the three months ended March 31, 2018 and 2017, the Company did not record any hedge ineffectiveness.

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

- 31 -

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:

	March 31, 2018
							Gross Amounts Not Offset in the Consolidated Statement of Condition
(In thousands)	Gross Amount of Recognized Assets		Gross Amount Offset in the Statement of Condition		Net Amount of Assets Presented in the Statement of Condition		Financial Instruments		Cash Collateral Received		Net Amount

Interest rate swaps	$	21,854	$	-	$	21,854	$	-	$	20,940	$	914

							Gross Amounts Not Offset in the Consolidated Statement of Condition
(In thousands)	Gross Amount of Recognized Liabilities		Gross Amount Offset in the Statement of Condition		Net Amount of Liabilities Presented in the Statement of Condition		Financial Instruments		Cash Collateral Pledged		Net Amount

Interest rate swaps	$	1,653	$	-	$	1,653	$	-	$	-	$	1,653

	December 31, 2017
							Gross Amounts Not Offset in the Consolidated Statement of Condition
(In thousands)	Gross Amount of Recognized Assets		Gross Amount Offset in the Statement of Condition		Net Amount of Assets Presented in the Statement of Condition		Financial Instruments		Cash Collateral Received		Net Amount

Interest rate swaps	$	7,388	$	-	$	7,388	$	-	$	3,660	$	3,728

- 32 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

							Gross Amounts Not Offset in the Consolidated Statement of Condition
(In thousands)	Gross Amount of Recognized Liabilities		Gross Amount Offset in the Statement of Condition		Net Amount of Liabilities Presented in the Statement of Condition		Financial Instruments		Cash Collateral Pledged		Net Amount

Interest rate swaps	$	3,758	$	-	$	3,758	$	-	$	-	$	3,758

12.

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.

Income tax provisions are summarized as follows:

	For the three months
	ended March 31,
(In thousands)	2018		2017
Federal:
Current	$	2,411	$	2,952
Deferred		197		1,797
Total federal tax provision		2,608		4,749
State and Local:
Current		189		(199	)
Deferred		153		704
Total state and local tax provision		342		505

Total income tax provision	$	2,950	$	5,254

On December 22, 2017, the Tax Cuts and Jobs Act (the “TCJA”) was enacted, which among other things, reduced the federal income tax rate for corporations from 35% to 21% effective January 1, 2018. As a result of TCJA, the Company re-measured its deferred tax assets and liabilities based on the rates these items are expected to reverse at in the future. This re-measurement caused $2.1 million of stranded tax effects at December 31, 2017. Effective January 1, 2018, these stranded effects were reclassified from accumulated other comprehensive income to retained earnings.

- 33 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

13.

Accumulated Other Comprehensive Income (Loss):

The following table sets forth the changes in accumulated other comprehensive loss by component for the three months ended March 31, 2018:

	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	$	(5,522	)	$	231	$	(3,695	)	$	-	$	(8,986	)
Reclassification of the Income Tax Effects of the Tax Cuts and Jobs Act from AOCL to Retained Earnings		(1,325	)		50		(798	)		-		(2,073	)
Impact of adoption of Accounting Standard Update 2016-01		-			-		-			775		775

Other comprehensive income before reclassifications, net of tax		(6,640	)		5,481		-			-		(1,159	)

Amounts reclassified from accumulated other comprehensive income, net of tax		-			180		84			-		264

Net current period other comprehensive income, net of tax		(6,640	)		5,661		84			-		(895	)

Ending balance, net of tax	$	(13,487	)	$	5,942	$	(4,409	)	$	775	$	(11,179	)

The following table sets forth the changes in accumulated other comprehensive loss by component for the three months ended March 31, 2017:

	Unrealized Gains
	(Losses) on
	Available for Sale			Defined Benefit
	Securities			Pension Items			Total
	(In thousands)
Beginning balance, net of tax	$	(3,859	)	$	(4,503	)	$	(8,362	)
Other comprehensive income before reclassifications, net of tax		1,148			-			1,148

Amounts reclassified from accumulated other comprehensive income, net of tax		-			80			80

Net current period other comprehensive income, net of tax		1,148			80			1,228

Ending balance, net of tax	$	(2,711	)	$	(4,423	)	$	(7,134	)

- 34 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

For the three months ended March 31, 2018
	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:	$	(263	)		Interest expense
Interest rate swaps		83			Tax benefit
	$	(180	)		Net of tax

Amortization of defined benefit pension items:
Actuarial losses	$	(132	)	⁽¹⁾	Other operating expense
Prior service credits		10		⁽¹⁾	Other operating expense
		(122	)		Total before tax
		38			Tax benefit
	$	(84	)		Net of tax

For the three months ended March 31, 2017
	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)
Amortization of defined benefit pension items:
Actuarial losses	$	(151	)	⁽¹⁾	Other operating expense
Prior service credits		11		⁽¹⁾	Other operating expense
		(140	)		Total before tax
		60			Tax benefit
	$	(80	)		Net of tax

(1)

These accumulated other comprehensive loss components are included in the computation of net periodic pension cost (See Note 8 of the Notes to Consolidated Financial Statements “Pension and Other Postretirement Benefit Plans”.)

- 35 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

14.

Regulatory Capital

Under current capital regulations, the Bank is required to comply with four separate capital adequacy standards. As of March 31, 2018, the Bank continues to be categorized as “well-capitalized” under the prompt corrective action regulations and continues to exceed all regulatory capital requirements. In 2016, a Capital Conservation Buffer (“CCB”) requirement became effective for banks. 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 in 2018 is 1.875% and increases 0.625% annually through 2019 to 2.5%. The CCB for the Bank at March 31, 2018 was 5.82%.

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

	March 31, 2018					December 31, 2017
			Percent of					Percent of
	Amount		Assets			Amount		Assets
	(Dollars in thousands)
Tier I (leverage) capital:
Capital level	$	637,091		9.92	%	$	631,285		10.11	%
Requirement to be well capitalized		321,195		5.00			312,343		5.00
Excess		315,896		4.92			318,942		5.11

Common Equity Tier I risk-based capital:
Capital level	$	637,091		13.39	%	$	631,285		13.87	%
Requirement to be well capitalized		309,368		6.50			295,937		6.50
Excess		327,723		6.89			335,348		7.37

Tier 1 risk-based capital:
Capital level	$	637,091		13.39	%	$	631,285		13.87	%
Requirement to be well capitalized		380,760		8.00			364,230		8.00
Excess		256,331		5.39			267,055		5.87

Total risk-based capital:
Capital level	$	657,633		13.82	%	$	651,636		14.31	%
Requirement to be well capitalized		475,950		10.00			455,288		10.00
Excess		181,683		3.82			196,348		4.31

- 36 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The Holding Company is subject to the same regulatory capital requirements as the Bank. As of March 31, 2018, 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 March 31, 2018 was 5.95%.

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

	March 31, 2018					December 31, 2017
			Percent of					Percent of
	Amount		Assets			Amount		Assets
	(Dollars in thousands)
Tier I (leverage) capital:
Capital level	$	568,635		8.86	%	$	563,426		9.02	%
Requirement to be well capitalized		321,057		5.00			312,278		5.00
Excess		247,578		3.86			251,148		4.02

Common Equity Tier I risk-based capital:
Capital level	$	531,305		11.17	%	$	527,727		11.59	%
Requirement to be well capitalized		309,286		6.50			295,865		6.50
Excess		222,019		4.67			231,862		5.09

Tier 1 risk-based capital:
Capital level	$	568,635		11.95	%	$	563,426		12.38	%
Requirement to be well capitalized		380,660		8.00			364,141		8.00
Excess		187,975		3.95			199,285		4.38

Total risk-based capital:
Capital level	$	664,177		13.96	%	$	658,777		14.47	%
Requirement to be well capitalized		475,824		10.00			455,177		10.00
Excess		188,353		3.96			203,600		4.47

- 37 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

15.

New Authoritative Accounting Pronouncements

Accounting Standards Adopted in 2018:

In February 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2018-02, “Income Statement – Reporting Comprehensive Income (Topic 220).” As a result of the Tax Cuts and Jobs Act (the “TCJA”), concerns arose regarding the guidance which requires deferred tax assets and liabilities to be adjusted for the effect of a change in tax laws or rates with the effect included in income from continuing operations in the reporting period that includes the enactment date. The amendments in this ASU require a reclassification for stranded tax effects from accumulated other comprehensive income to retained earnings, furthermore eliminating the stranded tax effects resulting from the TCJA. The amount of the reclassification is the difference between the previous corporate income tax rate of 35% and the newly enacted corporate income tax rate of 21%. The amendments of this ASU are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, with early adoption permitted in any interim period or fiscal year before the effective date. We have elected to early adopt this guidance as of January 1, 2018. Our Consolidated Statements of Financial Condition reflect adoption of this ASU and reclassification of $2.1 million in stranded tax effects from accumulated other comprehensive income to retained earnings. See Note 12 “Income Taxes” for additional information.

In August 2016, the FASB issued ASU No. 2016-15 “Classification of Certain Cash Receipts and Cash Payments”, to clarify how certain cash receipts and cash payments are presented and classified in the statements of cash flows. The amendments are intended to reduce diversity in practice by clarifying whether the following items should be categorized as operating, investing or financing in the statement of cash flows: (i) debt prepayments and extinguishment costs, (ii) settlement of zero-coupon debt, (iii) settlement of contingent consideration, (iv) insurance proceeds, (v) settlement of corporate-owned life insurance (COLI) and bank-owned life insurance (BOLI) policies, (vi) distributions from equity method investees, (vii) beneficial interests in securitization transactions, and (viii) receipts and payments with aspects of more than one class of cash flows. The ASU will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. This ASU was adopted on January 1, 2018 and did not have a significant impact on the presentation of our cash flows.

In January 2016, FASB issued ASU No. 2016-01 “Financial Instruments” which requires an entity to: (i) measure equity investments at fair value through net income, with certain exceptions; (ii) present in other comprehensive income the changes in instrument-specific credit risk for financial liabilities measured using the fair value option; (iii) present financial assets and financial liabilities by measurement category and form of financial asset; (iv) calculate the fair value of financial instruments for disclosure purposes based on an exit price and; (v) assess a valuation allowance on deferred tax assets related to unrealized losses of available for sale debt securities in combination with other deferred tax assets. The ASU provides an election to subsequently measure certain nonmarketable equity investments at cost less any impairment and adjusted for certain observable price changes. The ASU also requires a qualitative impairment assessment of such equity investments and amends certain fair value disclosure requirements. This ASU became effective for us on January 1, 2018. The adoption of the guidance resulted in a cumulative-adjustment totaling $0.8 million and did not have a significant impact on our results of operations, financial condition and cash flows.

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)”. This ASU establishes a comprehensive revenue recognition standard for virtually all industries under GAAP, including those that previously followed industry-specific guidance such as real estate, construction and software industries. The revenue standard’s core principle is built on the contract between a vendor and a customer for the provision of goods and services. It attempts to depict the exchange of rights and obligations between the parties in the pattern of revenue recognition based on the consideration to which the vendor is entitled. The guidance in this ASU for public companies is effective for the annual periods beginning after December 15, 2016, including interim periods therein. In August 2015, the FASB approved a one-year delay of the effective date of this standard to reporting periods beginning after December 15, 2017. This ASU allows for either full retrospective adoption or modified retrospective adoption. This ASU became effective for us on January 1, 2018. We adopted this standard through the modified retrospective transition method. The modified retrospective method requires application of ASU 2014-09 to uncompleted contracts at the date of adoption; however, periods prior to the date of adoption have not been retrospectively revised as the impact of the new standard on uncompleted contracts as the date of adoption was not material as such a cumulative effective adjustment to opening retained earnings was not deemed necessary.

Topic 606 does not apply to the majority of our revenue streams which are primarily comprised of interest and dividend income and associated fees within those revenue streams. The revenue streams derived by the Company that are within the scope of Topic 606 are primarily certain banking service fees, including wire transfer fees, ATM fees, account maintenance fees, overdraft fees and other deposit fees. We generally satisfy our performance obligations on contracts with customers as services are rendered, and the transaction prices are typically fixed and charged either on a periodic basis or based on activity. Being that performance obligations are satisfied as service are rendered and the transaction prices are fixed, there is little judgement involved in applying topic 606 that significantly affects the determination of the amount and timing of revenue from contracts with customers. Additionally, the Company will receive revenue from the sale of investment products through a third party as part of a revenue sharing agreement. This revenue is included in “Other Income” in the Consolidated Statements of Income. These fees are remitted to the Company monthly as our performance obligation is satisfied. We have evaluated the nature of our contracts with customers and determined that further disaggregation of revenue from contracts with customers into more granular categories beyond what is present in the Consolidated Statements of Income was not necessary.

- 38 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

Accounting Standards Pending Adoption:

In August 2017, the FASB issued ASU No. 2017-12, “Derivatives and Hedging (Topic 815)” providing targeted improvements to the accounting for hedging activities, which is effective January 1, 2019, with early adoption permitted in any interim period or fiscal year before the effective date. The guidance introduces a number of amendments, several of which are optional, that are designed to simplify the application of hedge accounting, improve financial statement transparency and more closely align hedge accounting with an entity’s risk management strategies. This ASU eliminates the requirement to separately measure and report hedge ineffectiveness and changes the presentation so that all items that affect earnings are in the same income statement line as the hedged item. We are currently evaluating the impact of adopting this new guidance on our consolidated results of operations, financial condition and cash flows.

In March 2017, the FASB issued ASU No. 2017-08, “Premium Amortization on Purchased Callable Debt Securities” which shortens the amortization period for premiums on purchased callable debt securities to the earliest call date, rather than amortizing over the full contractual term. The ASU does not change the accounting for securities held at a discount. The amendments in this ASU require companies to reset the effective yield using the payment terms of the debt security if the call option is not exercised on the earliest call date. If the security has additional future call dates, any excess of the amortized cost basis over the amount repayable by the issuer at the next call date should be amortized to the next call date. The amendments in this update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The guidance is not expected to have an impact on the Company's financial positions, results of operations or disclosures.

In January 2017, the FASB issued 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 is limited to the amount of goodwill allocated to that reporting unit. The amendments in this update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for goodwill impairment tests performed on testing dates after January 1, 2017. The guidance is not expected to have a significant impact on the Company's financial positions, results of operations or disclosures.

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses” which sets forth a “current expected credit loss” (“CECL”) model which requires the Company to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable supportable forecasts. This replaces the existing incurred loss model and will apply to the measurement of credit losses on financial assets measured at amortized cost and to some off-balance sheet credit exposures. This ASU will be effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company has begun collecting and evaluating data and system requirements to implement this standard. The adoption of this update could have a material impact on the Company’s consolidated results of operations and financial condition. The extent of the impact is still unknown and will depend on many factors, such as the composition of the Company’s loan portfolio and expected loss history at adoption. Management has engaged consultants to assess the preparedness of the Company and has developed inter-departmental steering and working committees to evaluate and implement CECL.

- 39 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

In February 2016, the FASB issued ASU No. 2016-02, “Leases”. From the lessee's perspective, the new standard establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement for a lessee. From the lessor's perspective, the new standard requires a lessor to classify leases as either sales-type, finance or operating. A lease will be treated as a sale if it transfers all of the risks and rewards, as well as control of the underlying asset, to the lessee. If risks and rewards are conveyed without the transfer of control, the lease is treated as a financing. If the lessor doesn’t convey risks and rewards or control, an operating lease results. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. A modified retrospective transition approach is required for lessors for sales-type, direct financing, and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company has not adopted a new accounting policy as of the filing date. Management is continuing to evaluate the standard and the Company’s outstanding inventory of leases determining the effect of recognizing most operating leases on the Consolidated Statements of Financial Condition is expected to be material. The Company expects to recognize right-of-use assets and lease liabilities for substantially all of its operating lease commitments based on the present value of unpaid lease payments as of the date of adoption.

- 40 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussion 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, 2017. 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, 2017. 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.

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 (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, primarily for residential properties; (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 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 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 loan losses and specific provision for losses on real estate owned.

- 41 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

Our strategy is to continue our focus on being an institution serving consumers, businesses, and governmental units in our local markets. In furtherance of this objective, we intend to:

•

Increase core deposits and continue to improve funding mix to manage cost of funds;

•

increase net interest income by leveraging loan pricing opportunities and portfolio mix;

•

enhance earnings power by improving scalability and efficiency;

•

manage credit risk;

•

remain well capitalized;

•

increase our commitment to the multi-cultural marketplace, with a particular focus on the Asian community in Queens;

•

manage enterprise-wide risk.

There can be no assurance that we will be able to effectively implement this strategy. Our strategy is subject to change by the Board of Directors.

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 at fair value 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 10 of the Notes to the Consolidated Financial Statements.

During the first quarter of 2018, we continued our strategy of focusing our origination efforts on higher yielding loans. Loan originations and purchases for the three months ended March 31, 2018 totaled $341.8 million, with multi-family real estate, commercial real estate and commercial business loans accounting for 85.5% of originations and purchases. Our total loan portfolio grew 2.6% (non-annualized) during the three months ended March 31, 2018 while holding our strong underwriting standards. Loan applications in process remains strong totaling $325.6 million at March 31, 2018, compared to $359.8 million at December 31, 2017 and $303.1 million at March 31, 2017.

The yield on loan production increased 12 basis points to 4.27% for the three months ended March 31, 2018, from 4.15% for the three months ended December 31, 2017 and 42 basis points from 3.85% for the comparable quarter of 2017. This marked the third consecutive quarter that the yield on new loans exceeded the quarterly average yield of the total loan portfolio, net of prepayment penalty income and recovered interest from delinquent loans. The increase in the yield of our loan production aided in improving our yield on interest-earning assets to 3.92% for the three months ended March 31, 2018, an increase of two basis points from the three months ended December 31, 2017 and 12 basis points from the three months ended March 31, 2017, excluding prepayment penalty income, accelerated accretion of discount upon the call of CLO securities and recovered interest from delinquent loans.

On the liability side of the balance sheet, we experienced deposit growth of 6.8% (non-annualized), reducing the loan-to-deposit ratio to 113% from 118% at December 31, 2017. The cost of interest-bearing liabilities increased due to an increase in rates, as we raised the rates we pay on certain deposit products to remain competitive in our market, resulting in the average cost of our interest-bearing liabilities increasing seven basis points from the three months ended December 31, 2017 and 28 basis points from March 31, 2017. To mitigate the impact of future rate increases, we have been actively extending the maturity on our liabilities and entered into forward interest rate swaps totaling $441.5 million to hedge against rising interest rates.

We continued our discipline regarding credit quality, as our non-performing assets have decreased by 4% during the three months ended March 31, 2018 and we had net recoveries of $38,000 during the same period.

The Bank and Company are subject to the same regulatory capital requirements. See Note 14 of the Notes to the Consolidated Financial Statements “Regulatory Capital.”

- 42 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 2018 AND 2017

General. Net income for the three months ended March 31, 2018 was $11.4 million, a decrease of $0.8 million, or 6.9%, compared to $12.3 million for the three months ended March 31, 2017. Diluted earnings per common share were $0.39 for the three months ended March 31, 2018, a decrease of $0.03, or 7.1%, from $0.42 for the three months ended March 31, 2017.

Return on average equity decreased to 8.6% for the three months ended March 31, 2018 from 9.5% for the three months ended March 31, 2017. Return on average assets decreased to 0.7% for the three months ended March 31, 2018 from 0.8% for the three months ended March 31, 2017.

Interest Income. Interest and dividend income increased $3.5 million, or 6.2%, to $60.8 million for the three months ended March 31, 2018 from $57.3 million for the three months ended March 31, 2017. The increase in interest income was primarily attributable to an increase of $224.9 million in the average balance of interest-earning assets to $6,098.7 million for the three months ended March 31, 2018 from $5,873.8 million for the comparable prior year period, combined with an increase of nine basis points in the yield of interest-earning assets to 3.99% for the three months ended March 31, 2018 from 3.90% in the comparable prior year period. The increase in the yield on interest-earning assets of nine basis points was primarily due to an increase of $363.3 million in the average balance of total loans, net, which have a higher yield than the yield of total interest-earning assets, combined with a decrease of $135.9 million in the average balance of total securities, which have a lower yield than the yield of total interest-earning assets. The yield of interest-earning assets also improved due to increases of three basis points, nine basis points and 11 basis points in the yields of total loans, net, taxable securities and tax-exempt securities, respectively, for the three months ended March 31, 2018 from the comparable prior year period. Additionally, the yield on interest-earning deposits sold increased 63 basis points for the three months ended March 31, 2018 from the comparable prior year period due to increases in the Federal Funds rate. The increases of three basis points in the yield on the total loans, net, nine basis points in taxable securities and 11 basis points in tax-exempt securities were primarily due to loans being originated and securities being purchased at higher yields than the existing portfolio yield. Excluding prepayment penalty income and recovered interest from loans, the yield on total loans, net, would have increased six basis points to 4.12% for the three months ended March 31, 2018 from 4.06% for the three months ended March 31, 2017.

Interest Expense. Interest expense increased $4.3 million, or 31.1%, to $18.2 million for the three months ended March 31, 2018 from $13.9 million for the three months ended March 31, 2017. The increase in interest expense was primarily due to an increase of 28 basis points in the average cost of interest-bearing liabilities to 1.34% for the three months ended March 31, 2018 from 1.06% for the three months ended March 31, 2017, combined with an increase of $187.9 million in the average balance of interest-bearing liabilities to $5,442.6 million for the three months ended March 31, 2018, from $5,254.6 million for the comparable prior year period. The 28 basis point increase in the cost of interest-bearing liabilities was primarily due to the Bank raising the rates we pay on some of our deposit products to stay competitive within our market and an increase in borrowing costs from the Bank extending maturities on borrowed funds to mitigate the impact of future rate increases. The cost was also impacted by the average balance of borrowed funds increasing $95.1 million to $1,207.1 million for the three months ended March 31, 2018, from $1,112.0 million for the comparable prior year period. The increase in the cost of interest-bearing liabilities was partially offset by an improvement in our deposit mix, as the combined average balance of lower costing savings, NOW and money market deposits increased $148.8 million to $2,832.1 million for the three months ended March 31, 2018 from $2,683.3 million for the comparable prior year period, while the average balance of higher costing certificates of deposit decreased $60.4 million to $1,344.4 million for the three months ended March 31, 2018 from $1,404.7 million for the comparable prior year period.

Net Interest Income. For the three months ended March 31, 2018, net interest income was $42.6 million, a decrease of $0.8 million, or 1.8%, from $43.4 million for the three months ended March 31, 2017. The decrease in net interest income was primarily due to the 28 basis point increase in the cost of interest-bearing liabilities to 1.34% for the three months ended March 31, 2018 from 1.06% for the comparable prior year period, partially offset by an increase of nine basis points in the yield of interest-earning assets to 3.99% for the three months ended March 31, 2018 as compared to 3.90% for the three months ended March 31, 2017. The effects of the above on both the net interest spread and net interest margin were decreases of 19 basis points to 2.65% and 16 basis points to 2.79%, respectively, for the quarter ended March 31, 2018, compared to the quarter ended March 31, 2017. Included in net interest income was prepayment penalty income from loans for the three months ended March 31, 2018 and 2017 totaling $0.9 million and $1.1 million, respectively, and recovered interest from non-accrual loans totaling $0.2 million and $0.5 million for each of the three months ended March 31, 2018 and 2017, respectively. Without the prepayment penalty income and recovered interest, the net interest margin for the three months ended March 31, 2018 would have been 2.72%, a decrease of 13 basis points, as compared to 2.85% for the three months ended March 31, 2017.

- 43 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

Provision for Loan Losses. During the three months ended March 31, 2018, a provision for loan losses was recorded for $0.2 million, primarily due to loan growth, compared to none for the comparable prior year period. During the three months ended March 31, 2018, the Bank recorded net recoveries totaling $38,000 and non-accrual loans decreased $0.7 million to $15.0 million from $15.7 million at December 31, 2017. The current average loan-to-value ratio for our non-performing loans collateralized by real estate was 36.7% at March 31, 2018. The Bank continues to maintain conservative underwriting standards. We anticipate that we will continue to see low loss content in our loan portfolio. See Note 5 of the Notes to the Consolidated Financial Statements “Loans” and “ALLOWANCE FOR LOAN LOSSES.”

Non-Interest Income. Non-interest income for the three months ended March 31, 2018 was $3.2 million, a decrease of $0.5 million, or 13.3%, from $3.7 million for the three months ended March 31, 2017. The decrease in non-interest income was primarily due to the recording of a loss on sale of one non-performing troubled debt restructured loan of $0.3 million during the three months ended March 31, 2018 compared to a gain on sale of $0.2 million recorded during the three months ended March 31, 2017. Additionally, the gain from life insurance proceeds was $0.4 million lower during the three months ended March 31, 2018 compared to the prior year period, partially offset by a decrease of $0.3 million in net losses from fair value adjustments as compared to March 31, 2017.

Non-Interest Expense. Non-interest expense was $31.3 million for the three months ended March 31, 2018, an increase of $1.7 million, or 5.9%, from $29.6 million for the three months ended March 31, 2017. The increase in non-interest expense was primarily due to annual salary increases and one-time bonuses totaling $0.5 million paid to non-executive employees during the three months ended March 31, 2018.

Income before Income Taxes. Income before the provision for income taxes decreased $3.2 million, or 18.0%, to $14.4 million for the three months ended March 31, 2018 from $17.5 million for the three months ended March 31, 2017 for the reasons discussed above.

Provision for Income Taxes. The provision for income taxes was $3.0 million for the three months ended March 31, 2018, a decrease of $2.3 million, or 43.9%, from $5.3 million for the three months ended March 31, 2017. The effective tax rate decreased to 20.5% for the three months ended March 31, 2018 from 30.0% in the comparable prior year period primarily due to the impact of the top federal tax rate declining to 21% in 2018 from 35% in 2017, as a result of the Tax Cuts and Jobs Act (the “TCJA”) .

Interpretive guidance of the TCJA is anticipated throughout 2018, and we may update our disclosure on a quarterly basis as interpretative guidance is received within each quarter that it is received. During the period ended March 31, 2018, the U.S. Treasury Department and the Internal Revenue Service did not issue further clarification or guidance applicable to us.

FINANCIAL CONDITION

Assets. Total assets at March 31, 2018 were $6,482.8 million, an increase of $183.5 million, or 2.9%, from $6,299.3 million at December 31, 2017. Total loans, net increased $135.7 million, or 2.6%, during the three months ended March 31, 2018 to $5,292.3 million from $5,156.6 million at December 31, 2017. Loan originations and purchases were $341.8 million for the three months ended March 31, 2018, an increase of $75.3 million, or 28.2%, from $266.6 million for the three months ended March 31, 2017. During the three months ended March 31, 2018, we continued to focus on the origination of multi-family residential, commercial real estate and commercial business loans with a full relationship. The loan pipeline totaled $325.6 million at March 31, 2018 compared to $359.8 million at December 31, 2017.

- 44 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

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

	For the three months
	ended March 31,
(In thousands)	2018		2017
Multi-family residential ⁽¹⁾	$	81,181	$	126,708
Commercial real estate		71,554		35,732
One-to-four family – mixed-use property		16,068		18,542
One-to-four family – residential ⁽²⁾		16,968		5,920
Construction		14,679		2,544
Small Business Administration		1,967		641
Commercial business and other ⁽³⁾		139,407		76,484
Total	$	341,824	$	266,571

(1)

Includes purchases of $13.3 million and $6.7 million for the three months ended March 31, 2018 and 2017, respectively.

(2)

Includes purchases of $0.9 million and none for the three months ended March 31, 2018 and 2017, respectively.

(3)

Includes purchases of $54.7 million and $8.9 million for the three months ended March 31, 2018 and 2017, 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 during the first quarter of 2018 had an average loan-to-value ratio of 47.9% and an average debt coverage ratio of 171%.

The Bank’s non-performing assets totaled $17.4 million at March 31, 2018, a decrease of $0.8 million, or 4.1%, from $18.1 million at December 31, 2017. Total non-performing assets as a percentage of total assets were 0.27% at March 31, 2018 compared to 0.29% at December 31, 2017. The ratio of allowance for loan losses to total non-performing loans was 123.45% at March 31, 2018 and 112.23% at December 31, 2017.

During the three months ended March 31, 2018, mortgage-backed securities including held-to-maturity increased $3.1 million, or 0.6%, to $520.7 million from $517.6 million at December 31, 2017. The increase in mortgage-backed securities during the three months ended March 31, 2018 was primarily due to purchases of $32.6 million at an average yield of 3.27%, partially offset by principal repayments of $20.9 million and a decline in the fair value of $8.1 million.

During the three months ended March 31, 2018, other securities, including held-to-maturity, decreased $11.9 million, or 4.7%, to $239.7 million from $251.6 million at December 31, 2017. The decrease in other securities during the three months ended March 31, 2018 was primarily due to the call of one CLO security at par for $10.0 million. At March 31, 2018, other securities primarily consist of securities issued by mutual or bond funds that invest in government and government agency securities, municipal bonds and corporate bonds.

Liabilities. Total liabilities were $5,947.5 million at March 31, 2018, an increase of $180.8 million, or 3.1%, from $5,766.7 million at December 31, 2017. During the three months ended March 31, 2018, due to depositors increased $295.1 million, or 6.8%, to $4,635.8 million, due to increases of $147.7 million in non-maturity deposits and $147.4 million in certificates of deposit. The increase in core deposits was due to increases of $146.1 million and $52.5 million in NOW and money market accounts, respectively, partially offset by decreases of $43.4 million and $7.4 million in savings and demand accounts, respectively. Borrowed funds decreased $132.6 million during the three months ended March 31, 2018. The decrease in borrowed funds was primarily due to a decrease in FHLB short-term borrowings as funding needs were provided by increased deposits.

Equity. Total stockholders’ equity increased $2.7 million, or 0.5%, to $535.3 million at March 31, 2018 from $532.6 million at December 31, 2017. Stockholders’ equity increased primarily due to net income of $11.4 million and the net impact of vesting and exercising of shares of employee and director stock plans totaling $3.9 million. These increases were partially offset by the purchase of 217,863 treasury shares, at an average cost of $27.14 per share, totaling $5.9 million, the declaration and payment of dividends on the Company’s common stock of $0.20 per common share totaling $5.8 million and a decrease of $0.9 million in other comprehensive loss. Book value per common share was $18.75 at March 31, 2018 compared to $18.63 at December 31, 2017.

- 45 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

Cash flow. During the three months ended March 31, 2018, funds provided by the Company's operating activities amounted to $15.3 million. These funds, combined with $170.4 million provided from financing activities, were utilized to fund net investing activities of $145.2 million. 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 three months ended March 31, 2018, the net total of loan originations and purchases less loan repayments and sales was $150.1 million. During the three months ended March 31, 2018, the Company also funded $32.6 million in purchases of securities available for sale and $0.4 million of securities held-to-maturity. During the three months ended March 31, 2018, funds were provided by a net increase in total deposits of $318.4 million. In addition to funding loan growth, these funds were used to repay $123.8 million in long-term borrowings and $10.5 million in net short-term borrowings. The Company also used funds of $8.0 million and $5.8 million for purchases of treasury stock and dividend payments, respectively, during the three months ended March 31, 2018.

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, 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 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 March 31, 2018. 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 March 31, 2018, 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 March 31, 2018:

	Projected Percentage Change In
	Net Interest			Net Portfolio			Net Portfolio
Change in Interest Rate	Income			Value			Value Ratio
-200 Basis points		3.84	%		7.23	%		13.41	%
-100 Basis points		3.42			3.54			13.35
Base interest rate		0.00			0.00			13.24
+100 Basis points		-4.23			-4.89			12.94
+200 Basis points		-8.47			-9.63			12.63

- 46 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussion 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 table sets forth certain information relating to the Company’s Consolidated Statements of Financial Condition and Consolidated Statements of Income for the three months ended March 31, 2018 and 2017, 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 March 31,
	2018							2017
	Average				Yield/			Average				Yield/
	Balance		Interest		Cost			Balance		Interest		Cost
Assets	(Dollars in thousands)
Interest-earning assets:
Mortgage loans, net	$	4,442,870		46,112		4.15	%	$	4,213,482		44,429		4.22	%
Other loans, net		788,507		8,905		4.52			654,566		6,456		3.95
Total loans, net ⁽¹⁾		5,231,377		55,017		4.21			4,868,048		50,885		4.18
Taxable securities:
Mortgage-backed securities		524,710		3,507		2.67			529,942		3,366		2.54
Other securities		131,078		1,121		3.42			239,345		1,882		3.15
Total taxable securities		655,788		4,628		2.82			769,287		5,248		2.73
Tax-exempt securities: ⁽²⁾
Other securities		124,125		854		2.75			146,502		968		2.64
Total tax-exempt securities		124,125		854		2.75			146,502		968		2.64
Interest-earning deposits and federal funds sold		87,416		287		1.31			89,962		153		0.68
Total interest-earning assets		6,098,706		60,786		3.99			5,873,799		57,254		3.90
Other assets		304,690							295,049
Total assets	$	6,403,396						$	6,168,848

Liabilities and Equity
Interest-bearing liabilities:
Deposits:
Savings accounts	$	265,895		389		0.59		$	254,255		307		0.48
NOW accounts		1,540,465		3,148		0.82			1,568,267		2,207		0.56
Money market accounts		1,025,727		3,075		1.20			860,779		1,499		0.70
Certificate of deposit accounts		1,344,370		5,463		1.63			1,404,730		4,940		1.41
Total due to depositors		4,176,457		12,075		1.16			4,088,031		8,953		0.88
Mortgagors' escrow accounts		58,960		35		0.24			54,616		27		0.20
Total deposits		4,235,417		12,110		1.14			4,142,647		8,980		0.87
Borrowed funds		1,207,137		6,067		2.01			1,111,993		4,885		1.76
Total interest-bearing liabilities		5,442,554		18,177		1.34			5,254,640		13,865		1.06
Non interest-bearing deposits		364,983							330,215
Other liabilities		66,578							66,193
Total liabilities		5,874,115							5,651,048
Equity		529,281							517,800
Total liabilities and equity	$	6,403,396						$	6,168,848

Net interest income / net interest rate spread				42,609		2.65	%				43,389		2.84	%

Net interest-earning assets / net interest margin	$	656,152				2.79	%	$	619,159				2.95	%

Ratio of interest-earning assets to interest-bearing liabilities						1.12	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 $0.1 million and $0.6 million for the three months ended March 31, 2018 and 2017, respectively.

(2)

Interest income on tax-exempt securities does not include the tax benefit of the tax-exempt securities.

- 47 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussion 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 three months ended March 31,
(In thousands)	2018		2017

Mortgage Loans

At beginning of period	$	4,401,950	$	4,187,818

Mortgage loans originated:
Multi-family residential		67,891		119,989
Commercial real estate		71,554		35,732
One-to-four family – mixed-use property		16,068		18,542
One-to-four family – residential		16,093		5,920
Construction		14,679		2,544
Total mortgage loans originated		186,285		182,727

Mortgage loans purchased:
Multi-family residential		13,290		6,719
One-to-four family – residential		875		-
Total mortgage loans purchased		14,165		6,719

Less:
Principal and other reductions		98,288		79,733
Sales		2,703		1,630

At end of period	$	4,501,409	$	4,295,901

Non-Mortgage Loans

At beginning of period	$	758,286	$	631,316

Other loans originated:
Small Business Administration		1,967		641
Commercial business		84,388		67,273
Other		366		309
Total other loans originated		86,721		68,223

Other loans purchased:
Commercial business		54,653		8,902
Total other loans purchased		54,653		8,902

Less:
Principal and other reductions		104,438		43,343
Sales		-		3,244
Other		162		-
At end of period	$	795,060	$	661,854

- 48 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

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

Management continues to adhere to the Company’s conservative underwriting standards. At times, the Company may restructure a loan to enable a borrower to continue making payments when it is deemed to be in the best long-term interest of the Company. See Note 5 of the Notes to the Consolidated Financial Statements “Loans”.

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

	March 31,		December 31,
(In thousands)	2018		2017
Accrual Status:
Multi-family residential	$	2,503	$	2,518
Commercial real estate		-		1,986
One-to-four family - mixed-use property		1,740		1,753
One-to-four family - residential		567		572
Commercial business and other		407		462
Total		5,217		7,291

Non-Accrual Status:
Taxi medallion		5,712		5,916
Total		5,712		5,916

Total performing troubled debt restructured	$	10,929	$	13,207

- 49 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

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

	March 31,			December 31,
(In thousands)	2018			2017
Loans 90 days or more past due and still accruing:
Commercial real estate	$	1,668		$	2,424
Total		1,668			2,424

Non-accrual loans:
Multi-family residential		2,193			3,598
Commercial real estate		1,894			1,473
One-to-four family - mixed-use property		2,396			1,867
One-to-four family - residential		7,542			7,808
Small business administration		41			46
Taxi medallion		906			918
Total		14,972			15,710

Total non-performing loans		16,640			18,134

Other non-performing assets:
Real estate acquired through foreclosure		638			-
Other assets acquired through foreclosure		106			-
Total		744			-

Total non-performing assets	$	17,384		$	18,134

Non-performing assets to total assets		0.27	%		0.29	%
Allowance for loan losses to non-performing loans		123.45	%		112.23	%

Included in loans over 90 days past due and still accruing were two loans totaling $1.7 million and three loans totaling $2.4 million at March 31, 2018 and December 31, 2017, respectively, which are past their respective maturity dates and are still remitting payments. The Bank is actively working with these borrowers to extend the loans maturity or repay these loans.

Included in non-performing loans was one loan totaling $0.4 million at March 31, 2018 and December 31, 2017 which was restructured as TDR and not performing in accordance with its restructured terms.

- 50 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

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 the credit quality is maintained at the highest levels. See Note 5 of the Notes to the Consolidated Financial Statements “Loans” for a description of how loans are determined to be criticized or classified and a table displaying criticized and classified loans at March 31, 2018 and December 31, 2017. The Company had classified OREO and other assets acquired through foreclosure totaling $0.7 million at March 31, 2018 and none at December 31, 2017. The Company did not hold any criticized or classified investment securities at March 31, 2018 and December 31, 2017. Our total Criticized and Classified assets were $61.6 million at March 31, 2018, a decrease of $1.1 million from $62.7 million at December 31, 2017.

On a quarterly basis, all collateral dependent loans that are classified as Substandard or Doubtful are internally reviewed for impairment, based on updated cash flows for income producing properties, or updated independent appraisals. The loan balances of collateral dependent loans reviewed for impairment are then compared to the loans updated fair value. We consider fair value of collateral dependent loans to be 85% of the 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 value of the underlying medallion based upon the most recently reported arm’s length transaction. When there is no recent sale activity, the fair value is calculated using capitalization rates. All taxi medallion loans are classified impaired. For collateral dependent mortgage loans and taxi medallion loans, the portion of the loan balance which exceeds fair value is generally charged-off. At March 31, 2018, the current average loan-to-value ratio on our collateral dependent loans reviewed for impairment was 42.4%.

ALLOWANCE FOR LOAN LOSSES

The ALL represents the expense charged to earnings based upon management’s quarterly analysis of credit risk. The amount of the ALL is based upon multiple factors that reflect management’s assessment of the credit quality of the loan portfolio. 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.

Management has developed a comprehensive analytical process to monitor the adequacy of the ALL. The process and guidelines were developed using, among other factors, the guidance from federal banking regulatory agencies and GAAP. The results of this process, along with the conclusions of our independent loan review officer, support management’s assessment as to the adequacy of the ALL at each balance sheet date. See Note 5 of the Notes to the Consolidated Financial Statements “Loans” for a detailed explanation of management’s methodology and policy.

During the three months ended March 31, 2018, the portion of the ALL related to the loss history declined, while the qualitative factors increased slightly, primarily due to growth in the loan portfolio. Charge-offs recorded in the past twelve quarters were minimal, with the exception of taxi medallion charge-offs recorded in the fourth quarter of 2017, as credit conditions remained stable. The percentage of loans originated prior to 2009, compared to the total loan portfolio, decreased as scheduled amortization and repayments occurred. As disclosed in Note 5 of the Notes to the Consolidated Financial Statements “Loans”, the loans originated prior to 2009 have a higher delinquency and loss rate. The impact from the above and the net recoveries recorded during the three months ended March 31, 2018 resulted in the ALL totaling $20.5 million, an increase of $0.2 million, or 0.94%, from December 31, 2017. Based upon management consistently applying the ALL methodology and review of the loan portfolio, management concluded a charge to earnings to increase the ALL was warranted. The ALL at March 31, 2018 and December 31, 2017, represented 0.39% of gross loans outstanding. The ALL represented 123.5% of non-performing loans at March 31, 2018 compared to 112.2% at December 31, 2017.

As a component of the credit risk assessment, 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, in our opinion, compelling evidence the borrower will bring the loan current in the immediate future.

Management recommends to the Board of Directors the amount of the ALL quarterly. The Board of Directors approves the ALL.

- 51 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussion 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:

	For the three months ended March 31,
(Dollars in thousands)	2018			2017

Balance at beginning of period	$	20,351		$	22,229

Provision for loan losses		153			-

Loans charged-off:
Multi-family residential		53			(14	)
One-to-four family – mixed-use property		-			(34	)
One-to-four family – residential		1			-
Small Business Administration		25			(65	)
Taxi medallion		-			(54	)
Commercial business and other		6			(12	)
Total loans charged-off		85			(179	)

Recoveries:
Multi-family residential		2			30
Commercial real estate		-			68
One-to-four family – residential		108			-
Small Business Administration		6			39
Commercial business and other		7			24
Total recoveries		123			161

Net recoveries (charge-offs)		38			(18	)

Balance at end of period	$	20,542		$	22,211

Ratio of net charge-offs (recoveries) during the period to average loans outstanding during the period		-	%		-	%
Ratio of allowance for loan losses to gross loans at end of period		0.39	%		0.45	%
Ratio of allowance for loan losses to non-performing assets at end of period		118.17	%		119.84	%
Ratio of allowance for loan losses to non-performing loans at end of period		123.45	%		119.84	%

- 52 -

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 March 31, 2018, 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.

- 53 -

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

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, 2017.

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 March 31, 2018:

							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
January 1 to January 31, 2018		-	$	-		-		254,280
February 1 to February 28, 2018		158,999		27.12		158,999		1,095,281
March 1 to March 31, 2018		58,864		27.19		58,864		1,036,417
Total		217,863		27.14		217,863

During the quarter ended March 31, 2018, the Company repurchased 217,863 shares of the Company’s common stock at an average cost of $27.14 per share. On February 27, 2018, the Company announced the authorization by the Board of Directors of a new common stock repurchase program, which authorizes the purchase of up to 1,000,000 shares of its common stock. On March 31, 2018, 1,036,417 shares may still be repurchased under the currently authorized stock repurchase programs. The Company will complete the purchase of the 36,417 shares remaining from its previous purchase authorization prior to purchasing shares under the new authorization. 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.

- 54 -

PART II – OTHER INFORMATIOMTION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

ITEM 6. EXHIBITS

Exhibit No.		Description

	3.1	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	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 (filed herewith)
	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)
(1) Incorporated by reference to Exhibits filed with the Registration Statement on Form S-1 filed
	September 1, 1995, Registration No. 33-96488.
(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.

- 55 -

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: May 10, 2018		By: /s/John R. Buran
		John R. Buran
		President and Chief Executive Officer


Dated: May 10, 2018		By: /s/Susan K. Cullen
		Susan K. Cullen
		Senior Executive Vice President, Treasurer and
		Chief Financial Officer

- 56 -

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	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 (filed herewith)
	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)
(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.

- 57 -