FLUSHING FINANCIAL CORP - Quarter Report: 2021 September (Form 10-Q)

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2021

Commission file number 001-33013

FLUSHING FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

Delaware

(State or other jurisdiction of incorporation or organization)

11-3209278

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

220 RXR Plaza, Uniondale, New York 11556

(Address of principal executive offices)

(718) 961-5400

(Registrant’s telephone number, including area code)

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


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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. X Yes __No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). X Yes __No

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


Large accelerated filer __	Accelerated filer X
Non-accelerated filer __	Smaller reporting company __
Emerging growth company __

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

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

The number of shares of the registrant’s Common Stock outstanding as of October 31, 2021 was 30,676,195.

Table of Contents

TABLE OF CONTENTS

	PAGE
PART I — FINANCIAL INFORMATION
ITEM 1. Financial Statements - (Unaudited)
Consolidated Statements of Financial Condition	1
Consolidated Statements of Income	2
Consolidated Statements of Comprehensive Income	3
Consolidated Statements of Cash Flows	4
Consolidated Statements of Changes in Stockholders’ Equity	6
Notes to Consolidated Financial Statements	8
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	50
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk	66
ITEM 4. Controls and Procedures	66
PART II — OTHER INFORMATION
ITEM 1. Legal Proceedings	67
ITEM 1A. Risk Factors	67
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds	67
ITEM 3. Defaults Upon Senior Securities	67
ITEM 4. Mine Safety Disclosures	67
ITEM 5. Other Information	67
ITEM 6. Exhibits	68
SIGNATURES	70

Table of Contents

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Consolidated Statements of Financial Condition

Item 1. Financial Statements


	September 30,		December 31,
	2021		2020
	(Unaudited)

	(Dollars in thousands, except per share data)
Assets
Cash and due from banks	$	178,598	$	157,388
Securities held-to-maturity:
Mortgage-backed securities (including assets pledged of $5,663 and $5,853 at September 30, 2021 and December 31, 2020, respectively; fair value of $8,698 and $8,991 at September 30, 2021 and December 31, 2020, respectively)		7,899		7,914
Other securities, net of allowance for credit losses of $843 and $907 at September 30, 2021 and December 31, 2020, respectively, (none pledged; fair value of $52,753 and $54,538 at September 30, 2021 and December 31, 2020, respectively)		49,989		49,918
Securities available for sale, at fair value:
Mortgage-backed securities (including assets pledged of $233,695 and $264,968 at September 30, 2021 and December 31, 2020, respectively; $412 and $505 at fair value pursuant to the fair value option at September 30, 2021 and December 31, 2020, respectively)		584,145		404,460
Other securities (none pledged and $6,453 at September 30, 2021 and December 31, 2020, respectively; $14,120 and $13,998 at fair value pursuant to the fair value option at September 30, 2021 and December 31, 2020, respectively)		212,654		243,514
Loans:
Multi-family residential		2,498,980		2,533,952
Commercial real estate		1,745,855		1,754,754
One-to-four family - mixed-use property		579,100		602,981
One-to-four family - residential		280,343		245,211
Co-operative apartments		7,804		8,051
Construction		71,464		83,322
Small Business Administration		148,855		167,376
Taxi medallion		—		2,757
Commercial business and other		1,294,688		1,303,225
Net unamortized premiums and unearned loan fees		3,265		3,045
Allowance for Credit losses - Loans		(36,363)		(45,153)
Net loans		6,593,991		6,659,521
Interest and dividends receivable		40,912		44,041
Bank premises and equipment, net		24,018		28,179
Federal Home Loan Bank of New York stock, at cost		36,158		43,439
Bank owned life insurance		184,730		181,710
Goodwill		17,636		17,636
Core deposit intangibles		2,708		3,172
Right of Use Asset		50,155		50,743
Other assets		93,741		84,759
Total assets	$	8,077,334	$	7,976,394

Liabilities
Due to depositors:
Non-interest bearing	$	941,259	$	778,672
Interest-bearing		5,480,132		5,312,061
Total Deposits		6,421,391		6,090,733
Mortgagors' escrow deposits		67,207		45,622
Borrowed funds:
Federal Home Loan Bank advances		611,186		887,579
Subordinated debentures		90,161		90,180
Junior subordinated debentures, at fair value		51,578		43,136
Total borrowed funds		752,925		1,020,895
Operating lease liability		54,239		59,100
Other liabilities		113,476		141,047
Total liabilities		7,409,238		7,357,397

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; 34,087,623 shares issued at September 30, 2021 and December 31, 2020; 30,675,861 shares and 30,775,854 shares outstanding at September 30, 2021 and December 31, 2020, respectively)		341		341
Additional paid-in capital		262,009		261,533
Treasury stock, at average cost (3,411,762 shares and 3,373,389 shares at September 30, 2021 and December 31, 2020, respectively)		(71,738)		(69,400)
Retained earnings		486,418		442,789
Accumulated other comprehensive loss, net of taxes		(8,934)		(16,266)
Total stockholders' equity		668,096		618,997

Total liabilities and stockholders' equity	$	8,077,334	$	7,976,394

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

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Consolidated Statements of Income

(Unaudited)


	For the three months ended				For the nine months ended
	September 30,				September 30,
(Dollars in thousands, except per share data)	2021		2020		2021		2020

Interest and dividend income
Interest and fees on loans	$	69,198	$	60,367	$	206,218	$	182,033
Interest and dividends on securities:
Interest		3,706		3,525		10,463		12,963
Dividends		7		9		22		35
Other interest income		42		13		129		325
Total interest and dividend income		72,953		63,914		216,832		195,356
Interest expense
Deposits		4,705		7,093		16,349		35,842
Other interest expense		4,884		6,897		15,188		20,047
Total interest expense		9,589		13,990		31,537		55,889
Net interest income		63,364		49,924		185,295		139,467
(Benefit) provision for credit losses		(6,927)		2,470		(5,705)		19,267
Net interest income after (benefit) provision for credit losses		70,291		47,454		191,000		120,200
Non-interest income
Banking services fee income		865		1,316		4,823		3,058
Net (loss) gain on sale of securities		(10)		—		113		(91)
Net gain on sale of loans		131		—		289		42
Net gain on disposition of assets		—		—		621		—
Net (loss) gain from fair value adjustments		(2,289)		(2,225)		(7,855)		1,987
Life insurance proceeds		—		—		—		659
Federal Home Loan Bank of New York stock dividends		491		874		1,680		2,719
Bank owned life insurance		1,015		923		3,021		2,798
Other income		663		463		1,275		1,052
Total non-interest income		866		1,351		3,967		12,224
Non-interest expense
Salaries and employee benefits		20,544		17,335		63,087		52,139
Occupancy and equipment		3,534		3,021		10,423		8,688
Professional services		1,899		2,064		6,287		6,911
FDIC deposit insurance		618		727		2,560		2,114
Data processing		1,759		1,668		5,287		5,175
Depreciation and amortization		1,627		1,542		4,904		4,633
Other real estate owned/foreclosure expense		182		240		194		121
Other operating expenses		6,182		3,388		15,773		11,339
Total non-interest expense		36,345		29,985		108,515		91,120
Income before income taxes		34,812		18,820		86,452		41,304
Provision for income taxes
Federal		6,410		3,359		16,338		8,655
State and local		2,989		1,130		6,404		1,436
Total taxes		9,399		4,489		22,742		10,091
Net income	$	25,413	$	14,331	$	63,710	$	31,213

Basic earnings per common share	$	0.81	$	0.50	$	2.02	$	1.08
Diluted earnings per common share	$	0.81	$	0.50	$	2.02	$	1.08
Dividends per common share	$	0.21	$	0.21	$	0.63	$	0.63

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

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(Unaudited)


	For the three months ended				For the nine months ended
	September 30,				September 30,
(In thousands)	2021		2020		2021		2020

Net income	$	25,413	$	14,331	$	63,710	$	31,213
Other comprehensive income (loss), net of tax:
Amortization of actuarial losses, net of taxes of ($39) and ($30) for the three months ended September 30, 2021 and 2020, respectively, and of ($116) and ($91) for the nine months ended September 30, 2021 and 2020, respectively.		86		67		259		201
Amortization of prior service credits, net of taxes of $7 and $6 for the three months ended September 30, 2021 and 2020, respectively, and of $19 and $20 for the nine months ended September 30, 2021 and 2020, respectively.		(14)		(15)		(44)		(44)
Net unrealized gains (losses) on securities, net of taxes of $1,209 and ($1,449) for the three months ended September 30, 2021 and 2020, respectively, and of $1,518 and ($2,000) for the nine months ended September 30, 2021 and 2020, respectively.		(2,645)		3,185		(3,365)		4,397
Reclassification adjustment for net losses (gains) included in income, net of taxes of ($3) for the three months ended September 30, 2021, and net of taxes of $35 and ($29) for the nine months ended September 30, 2021 and 2020, respectively.		7		—		(78)		62
Net unrealized gains (losses) on cash flow hedges, net of taxes of ($910) and ($849) for the three months ended September 30, 2021 and 2020, respectively, and of ($4,485) and $6,253 for the nine months ended September 30, 2021 and 2020 respectively.		1,991		1,866		10,310		(13,744)
Change in fair value of liabilities related to instrument-specific credit risk, net of taxes of ($27) and ($50) for the three months ended September 30, 2021 and 2020, respectively, and of ($139) and ($280) for the nine months ended September 30, 2021 and 2020, respectively.		58		111		250		627

Total other comprehensive income (loss), net of tax		(517)		5,214		7,332		(8,501)

Comprehensive income	$	24,896	$	19,545	$	71,042	$	22,712

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

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)


	For the nine months ended September 30,
	2021		2020

	(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	63,710	$	31,213
Adjustments to reconcile net income to net cash provided by operating activities:
(Benefit) Provision for credit losses		(5,705)		19,267
Depreciation and amortization of bank premises and equipment		4,904		4,633
Amortization of premium, net of (accretion) of discount		(1,062)		4,721
Net (gain) loss from fair value adjustments		7,855		(1,987)
Net (gain) loss from fair value adjustments on qualifying hedges		(957)		2,208
Net gain from sale of loans		(289)		(42)
Net (gain) loss from sale of securities		(113)		91
Net gain from disposition of assets		(621)		—
Net loss from OREO		—		36
Income from bank owned life insurance		(3,021)		(2,798)
Life insurance proceeds		—		(659)
Amortization of core deposit intangibles		464		—
Stock-based compensation expense		5,516		5,510
Deferred compensation		(2,571)		(3,579)
Deferred income tax benefit		(762)		(4,174)
(Decrease) Increase in other liabilities		(8,524)		6,143
Decrease (Increase) in other assets		821		(15,043)
Net cash provided by operating activities		59,645		45,540
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of bank premises and equipment		(2,839)		(1,723)
Net redemptions (purchases) of Federal Home Loan Bank of New York shares		7,281		(198)
Proceeds from maturities and calls of securities held-to-maturity		—		180
Proceeds from prepayments of securities held-to-maturity		—		129
Purchases of securities available for sale		(508,402)		(130,397)
Proceeds from sales and calls of securities available for sale		58,613		143,376
Proceeds from maturities and prepayments of securities available for sale		294,004		142,320
Proceeds from bank owned life insurance		—		2,477
Net repayments (originations) of loans		232,391		(11,295)
Purchases of loans		(192,705)		(132,893)
Proceeds from sale of real estate owned		—		203
Proceeds from sale of loans		24,967		580
Net cash (used in) provided by investing activities		(86,690)		12,759

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Consolidated Statements of Cash Flows (Contd.)

(Unaudited)


	For the nine months ended September 30,
	2021		2020

	(In thousands)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in non-interest bearing deposits		162,587		172,882
Net increase (decrease) in interest-bearing deposits		168,174		(288,694)
Net increase in mortgagors' escrow deposits		21,585		12,761
Net proceeds from short-term borrowed funds		(25,000)		—
Proceeds from long-term borrowings		—		240,378
Repayment of long-term borrowings		(251,393)		(147,771)
Purchases of treasury stock		(7,778)		(3,872)
Cash dividends paid		(19,920)		(18,210)
Net cash provided by (used in) financing activities		48,255		(32,526)
Net increase in cash and cash equivalents		21,210		25,773
Cash and cash equivalents, beginning of period		157,388		49,787
Cash and cash equivalents, end of period	$	178,598	$	75,560
SUPPLEMENTAL CASH FLOW DISCLOSURE
Interest paid	$	30,727	$	57,334
Income taxes paid		21,419		13,594
Taxes paid if excess tax benefits on stock-based compensation were not tax deductible		21,083		13,404

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

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Consolidated Statement of Changes in Stockholders’ Equity

(Unaudited)


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

Balance at December 31, 2020	$	618,997	$	341	$	261,533	$	442,789	$	(69,400)	$	(16,266)

Net Income		19,039		—		—		19,039		—		—
Award of common shares released from Employee Benefit Trust (5,682 shares)		74		—		74		—		—		—
Vesting of restricted stock unit awards (248,896 shares)		—		—		(5,058)		(153)		5,211		—
Stock-based compensation expense		3,470		—		3,470		—		—		—
Repurchase of shares to satisfy tax obligation (70,292 shares)		(1,290)		—		—		—		(1,290)		—
Dividends on common stock ($0.21 per share)		(6,652)		—		—		(6,652)		—		—
Other comprehensive income		5,563		—		—		—		—		5,563
Balance at March 31, 2021		639,201		341		260,019		455,023		(65,479)		(10,703)

Net income		19,258		—		—		19,258		—		—
Award of common shares released from Employee Benefit Trust (6,445 shares)		91		—		91		—		—		—
Vesting of restricted stock unit awards (10,932 shares)		—		—		(221)		(8)		229		—
Stock-based compensation expense		1,069		—		1,069		—		—		—
Repurchase of shares to satisfy tax obligation (3,886 shares)		(85)		—		—		—		(85)		—
Dividends on common stock ($0.21 per share)		(6,653)		—		—		(6,653)		—		—
Other comprehensive income		2,286		—		—		—		—		2,286
Balance at June 30, 2021		655,167		341		260,958		467,620		(65,335)		(8,417)

Net income		25,413		—		—		25,413		—		—
Award of common shares released from Employee Benefit Trust (5,493 shares)		74		—		74		—		—		—
Stock-based compensation expense		977		—		977		—				—
Purchase of treasury shares (285,643 shares)		(6,403)		—		—		—		(6,403)		—
Dividends on common stock ($0.21 per share)		(6,615)		—		—		(6,615)		—		—
Other comprehensive loss		(517)		—		—		—		—		(517)
Balance at September 30, 2021	$	668,096	$	341	$	262,009	$	486,418	$	(71,738)	$	(8,934)

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

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

(Unaudited)


					Additional						Accumulated Other
			Common		Paid-in		Retained		Treasury		Comprehensive
(Dollars in thousands, except per share data)	Total		Stock		Capital		Earnings		Stock		Income (Loss)
Balance at December 31, 2019	$	579,672	$	315	$	226,691	$	433,960	$	(71,487)	$	(9,807)

Impact of adoption of ASC 326 - Credit Losses		(875)		—		—		(875)		—		—
Net loss		(1,390)		—		—		(1,390)		—		—
Award of common shares released from Employee Benefit Trust (116,414 shares)		1,398		—		1,398		—		—		—
Vesting of restricted stock unit awards (272,946 shares)		—		—		(5,626)		(156)		5,782		—
Stock-based compensation expense		3,430		—		3,430		—		—		—
Purchase of treasury shares (142,405 shares)		(2,342)		—		—		—		(2,342)		—
Repurchase of shares to satisfy tax obligation (74,145 shares)		(1,493)		—		—		—		(1,493)		—
Dividends on common stock ($0.21 per share)		(6,084)		—		—		(6,084)		—		—
Other comprehensive loss		(22,633)		—		—		—		—		(22,633)
Balance at March 31, 2020		549,683		315		225,893		425,455		(69,540)		(32,440)

Net income		18,272		—		—		18,272		—		—
Award of common shares released from Employee Benefit Trust (10,956 shares)		40		—		40		—		—		—
Vesting of restricted stock unit awards (6,390 shares)		—		—		(133)		(1)		134		—
Stock-based compensation expense		1,101		—		1,101		—		—		—
Repurchase of shares to satisfy tax obligation (2,558 shares)		(30)		—		—		—		(30)		—
Dividends on common stock ($0.21 per share)		(6,063)		—		—		(6,063)		—		—
Other comprehensive income		8,918		—		—		—		—		8,918
Balance at June 30, 2020		571,921		315		226,901		437,663		(69,436)		(23,522)

Net income		14,331		—		—		14,331		—		—
Award of common shares released from Employee Benefit Trust (5,015 shares)		31		—		31		—		—		—
Vesting of restricted stock unit awards (9,284 shares)		—		—		(34)		—		34		—
Stock-based compensation expense		979		—		979		—		—		—
Purchase of treasury shares (40,000 shares)		(7)		—		—		—		(7)		—
Repurchase of shares to satisfy tax obligation (0 shares)		—		—		—		—		—		—
Dividends on common stock ($0.21 per share)		(6,063)		—		—		(6,063)		—		—
Other comprehensive loss		5,214		—		—		—		—		5,214
Balance at September 30, 2020	$	586,406	$	315	$	227,877	$	445,931	$	(69,409)	$	(18,308)

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

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

1. Basis of Presentation

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

The unaudited consolidated financial statements presented in this Quarterly Report on Form 10-Q (“Quarterly Report”) include the collective results of the Holding Company and its direct and indirect wholly-owned subsidiaries, including the Bank, Flushing Preferred Funding Corporation, which was dissolved as of June 30, 2021, Flushing Service Corporation, and FSB Properties Inc., which are collectively herein referred to as “we,” “us,” “our” and the “Company.”

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

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

The accompanying unaudited consolidated financial statements have been prepared in conformity with the instructions to Quarterly Report on Form 10-Q and Article 10, Rule 10-01 of Regulation S-X for interim financial statements. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The unaudited consolidated interim financial information should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

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

2. Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements, and reported amounts of revenue and expenses during the reporting period. Estimates that are particularly susceptible to change in the near term, including novel Coronavirus Disease 2019 and its associated variants (“COVID-19”) related changes, are used in connection with the determination of the allowance for credit losses, the evaluation of goodwill for impairment, the review of the need for a valuation allowance of the Company’s deferred tax assets and the fair value of financial instruments.

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Table of Contents

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

In response to COVID-19, the Company actively assist customers by providing modifications in the form of deferrals of interest, principal and/or escrow for terms ranging from one to thirty months. At September 30, 2021, we had 38 active forbearances for loans with an aggregate outstanding loan balance of approximately $162.0 million resulting in total deferment of $9.5 million in principal, interest and escrow, down from 134 active forbearances for loans with an aggregate outstanding loan balance of $364.4 million at December 31, 2020. The Company actively participated in the Paycheck Protection Program (“PPP”), under the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”), closing $310.3 million of these loans since the beginning of the program, with $179.5 million of those PPP loans forgiven by the SBA as of September 30, 2021, of which $66.5 million were forgiven during the recent quarter. Pursuant to the CARES Act and later modified by Consolidated Appropriations Act, certain loan modifications are not classified as “troubled debt restructuring” (“TDR”), if the related loans were not more than 30 days past due as of December 31, 2019. The Company has elected not to consider as TDR loans temporarily modified for borrowers directly impacted by COVID-19 where the above criteria was met. As such, these loans are considered current and continue to accrue interest at their original contractual terms until the completion of the applicable deferred periods, following which the borrowers will resume making payments and normal delinquency-based non-accrual policies will apply. The majority of the active forbearances are expected to be resolved by the end of 2021.

3. Earnings Per Share

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


	For the three months ended						For the nine months ended
	September 30,						September 30,
	2021			2020			2021			2020

	(In thousands, except per share data)
Net income	$	25,413		$	14,331		$	63,710		$	31,213
Divided by:
Total weighted average common shares outstanding and common stock equivalents		31,567			28,874			31,616			28,865
Basic earnings per common share	$	0.81		$	0.50		$	2.02		$	1.08
Diluted earnings per common share ⁽¹⁾	$	0.81		$	0.50		$	2.02		$	1.08
Dividend payout ratio		25.9	%		42.0	%		31.2	%		58.3	%

(1)	For the three and nine months ended September 30, 2021 and 2020, there were no common stock equivalents and there were no common stock equivalents that were anti-dilutive.

4. Securities

The Company did not hold any trading securities at September 30, 2021 and December 31, 2020. Securities available for sale are recorded at fair value. Securities held-to-maturity (“HTM”) are recorded at amortized cost.

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Table of Contents

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

Allowance for credit losses

The Company’s estimate of expected credit losses for held-to-maturity debt securities is based on historical information, current conditions and a reasonable and supportable forecast. The Company’s portfolio is made up of three securities totaling $58.7 million (before allowance for credit losses): the first with an amortized cost of $29.9 million structured similar to a commercial owner occupied loan and modeled for credit losses similar to commercial business loans secured by real estate with an allowance for credit losses of $0.2 million at September 30, 2021; the second with an amortized cost of $21.0 million that currently is under forbearance with an individually evaluated allowance for credit loss of $0.6 million at September 30, 2021; and the third with an amortized cost of $7.9 million issued and guaranteed by Fannie Mae, which is a government sponsored enterprise that has a credit rating and perceived credit risk comparable to the U.S. government. Accordingly, the Company assumes a zero loss expectation from the portfolio. The security currently in forbearance is considered current and as such, continues to accrue interest at its original contractual terms. Accrued interest receivable on held-to-maturity securities totaled $0.1 million at September 30, 2021 and December 31, 2020 and is excluded from estimates of credit losses.

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


					Gross		Gross
	Amortized				Unrecognized		Unrecognized
	Cost		Fair Value		Gains		Losses

	(In thousands)
Securities held-to-maturity:
Municipals	$	50,832	$	52,753	$	2,078	$	157
Total other securities		50,832		52,753		2,078		157

FNMA		7,899		8,698		799		—
Total mortgage-backed securities		7,899		8,698		799		—

Allowance for Credit Losses		(843)		—		—		—
Total	$	57,888	$	61,451	$	2,877	$	157

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


					Gross		Gross
	Amortized				Unrecognized		Unrecognized
	Cost		Fair Value		Gains		Losses

	(In thousands)
Securities held-to-maturity:
Municipals	$	50,825	$	54,538	$	3,713	$	—
Total other securities		50,825		54,538		3,713		—

FNMA		7,914		8,991		1,077		—
Total mortgage-backed securities		7,914		8,991		1,077		—

Allowance for Credit Losses		(907)		—		—		—
Total	$	57,832	$	63,529	$	4,790	$	—

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Table of Contents

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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


					Gross		Gross
	Amortized				Unrealized		Unrealized
	Cost		Fair Value		Gains		Losses

	(In thousands)
Securities available for sale:
U.S Government Agencies	$	5,643	$	5,645	$	5	$	3
Corporate		107,421		105,956		189		1,654
Mutual funds		12,572		12,572		—		—
Collateralized loan obligations		87,167		86,933		5		239
Other		1,548		1,548		—		—
Total other securities		214,351		212,654		199		1,896
REMIC and CMO		229,499		229,890		2,372		1,981
GNMA		11,362		11,088		38		312
FNMA		194,973		195,030		1,815		1,758
FHLMC		149,751		148,137		445		2,059
Total mortgage-backed securities		585,585		584,145		4,670		6,110
Total securities available for sale	$	799,936	$	796,799	$	4,869	$	8,006

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


					Gross		Gross
	Amortized				Unrealized		Unrealized
	Cost		Fair Value		Gains		Losses

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

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

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

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Table of Contents

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The following tables detail the amortized cost and fair value of the Company’s securities classified as held-to-maturity and available for sale at September 30, 2021, by contractual maturity. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.


	Amortized
Securities held-to-maturity:	Cost		Fair Value

	(In thousands)
Due after ten years	$	50,832	$	52,753
Total other securities		50,832		52,753
Mortgage-backed securities		7,899		8,698
Total held-to-maturity securities		58,731		61,451
Allowance for Credit Losses		(843)		—
Total held-to-maturity securities, net of allowance for credit losses	$	57,888	$	61,451


	Amortized
Securities available for sale:	Cost		Fair Value

	(In thousands)
Due after one year through five years	$	20,000	$	19,932
Due after five years through ten years		169,572		167,957
Due after ten years		12,207		12,193
Total		201,779		200,082
Mutual funds		12,572		12,572
Total other securities		214,351		212,654
Mortgage-backed securities		585,585		584,145
Total available for sale securities	$	799,936	$	796,799

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Table of Contents

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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


	At September 30, 2021
	Total					Less than 12 months				12 months or more
				Unrealized				Unrealized				Unrealized
	Count	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses

	(Dollars in thousands)
Held-to-maturity securities

Municipals	1	$	20,819	$	157	$	20,819	$	157	$	—	$	—
Total other securities	1		20,819		157		20,819		157		—		—

Total securities held-to-maturity	1	$	20,819	$	157	$	20,819	$	157	$	—	$	—

Available for sale securities

U.S Government Agencies	1	$	4,489	$	3	$	4,489	$	3	$	—	$	—
Corporate	11		80,792		1,654		51,698		748		29,094		906
Collateralized loan obligations	3		21,027		239		—		—		21,027		239
Total other securities	15		106,308		1,896		56,187		751		50,121		1,145

REMIC and CMO	12		110,359		1,981		110,359		1,981		—		—
GNMA	2		10,196		312		10,196		312		—		—
FNMA	17		136,324		1,758		136,324		1,758		—		—
FHLMC	15		123,759		2,059		123,759		2,059		—		—

Total mortgage-backed securities	46		380,638		6,110		380,638		6,110		—		—

Total securities available for sale	61	$	486,946	$	8,006	$	436,825	$	6,861	$	50,121	$	1,145


	At December 31, 2020
	Total					Less than 12 months				12 months or more
				Unrealized				Unrealized				Unrealized
	Count	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses

	(Dollars in thousands)
Available for sale securities

U.S Government Agencies	1	$	4,988	$	1	$	4,988	$	1	$	—	$	—
Corporate	14		113,734		6,266		—		—		113,734		6,266
Collateralized loan obligations	13		99,199		1,363		7,441		52		91,758		1,311
Total other securities	28		217,921		7,630		12,429		53		205,492		7,577

GNMA	1		10,341		22		10,341		22		—		—
FNMA	5		32,463		31		23,864		28		8,599		3
FHLMC	3		30,095		83		30,095		83		—		—
Total mortgage-backed securities	9		72,899		136		64,300		133		8,599		3

Total securities available for sale	37	$	290,820	$	7,766	$	76,729	$	186	$	214,091	$	7,580

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The Company reviewed each available for sale security that had an unrealized loss at September 30, 2021 and December 31, 2020. At September 30, 2021 and December 31, 2020, the Company evaluated whether the decline in fair value of a debt security resulted from credit losses or other factors under Accounting Standards Codification (“ASC”) Topic 326, Credit Losses also referred to as Current Expected Credit Losses (“CECL”). The Company does not have the intent to sell these securities and it is more likely than not the Company will not be required to sell the securities before recovery of the securities’ amortized cost basis. This conclusion is based upon considering the Company’s cash and working capital requirements and contractual and regulatory obligations, none of which the Company believes would cause the sale of the securities. All of these securities are rated investment grade or above and have a long history of no credit losses. It is not anticipated that these securities would be settled at a price that is less than the amortized cost of the Company’s investment.

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

The Company reviewed the held-to-maturity security that had an unrealized loss at September 30, 2021 as part of its quarterly CECL process. This security is currently under forbearance with an allowance for credit losses of $0.6 million at September 30, 2021.

Accrued interest receivable on available-for-sale debt securities totaled $1.6 million and $1.3 million at September 30, 2021 and December 31, 2020, respectively, and is excluded from the estimate of credit losses.

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


	Other Securities
	For the three months ended				For the nine months ended
	September 30,				September 30,
	2021		2020		2021		2020
	(In thousands)
Beginning balance	$	844	$	402	$	907	$	340
Provision (benefit)		(1)		—		(64)		62

Allowance for credit losses	$	843	$	402	$	843	$	402

Realized gains and losses on the sales of securities are determined using the specific identification method. The Company sold $20.0 million and $45.0 million in corporate securities during the three and nine months ended September 30, 2021, respectively. The Company sold $130.8 million in mortgage-backed securities during the nine months ended September 30, 2020. The Company did not sell any securities during the three months ended September 30, 2020.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The following table represents the gross gains and gross losses realized from the sale of securities available for sale for the periods indicated:


	For the three months ended				For the nine months ended
	September 30,				September 30,
	2021		2020		2021		2020

	(In thousands)
Gross gains from the sale of securities	$	—	$	—	$	123	$	1,476
Gross losses from the sale of securities		(10)		—		(10)		(1,567)

Net gains (losses) from the sale of securities	$	(10)	$	—	$	113	$	(91)

5. Loans

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

Interest on loans is recognized on the accrual basis. Accrued interest receivable totaled $38.0 million and $41.5 million at September 30, 2021 and December 31, 2020, respectively, and was reported in “Interest and dividends receivable” on the Consolidated Statements of Financial Condition. The accrual of income on loans is generally discontinued when certain factors, such as contractual delinquency of 90 days or more, indicate reasonable doubt as to the timely collectability of such income. Uncollected interest previously recognized on non-accrual loans is reversed from interest income at the time the loan is placed on non-accrual status. A non-accrual loan can be returned to accrual status when contractual delinquency returns to less than 90 days delinquent. Payments received on non-accrual loans that do not bring the loan to less than 90 days delinquent are recorded on a cash basis. Payments can also be applied first as a reduction of principal until all principal is recovered and then subsequently to interest, if in management’s opinion, it is evident that recovery of all principal due is likely to occur.

Allowance for credit losses

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

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

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

During the three months ended September 30, 2021, the Company recorded a benefit for credit losses on loans totaling $6.9 million compared to a provision for credit losses on loans of $2.5 million for the three months ending September 30, 2020. The Company recorded a benefit for credit losses on loans totaling $5.6 million for the nine months ended September 30, 2021 compared to a provision of $19.2 million for the nine months ended September 30, 2020. The benefit recorded during the three months ended September 30, 2021 was driven by the improving economic outlook. During the three months ended September 30, 2021, the Company made no changes to the reasonable and supportable forecast period or the reversion period from what was used for the June 30, 2021 ACL. The ACL - loans totaled $36.4 million at September 30, 2021 compared to $45.2 million at December 31, 2020. At September 30, 2021, the ACL - loans represented 0.55% of gross loans and 179.9% of non-performing loans. At December 31, 2020, the ACL - loans represented 0.67% of gross loans and 214.3% of non-performing loans.

Pursuant to the CARES Act and later modified by Consolidated Appropriations Act, certain loan modifications are not classified as TDR, if the related loans were not more than 30 days past due as of December 31, 2019. The Company has elected that loans temporarily modified for borrowers directly impacted by COVID-19 are not considered TDR, assuming the above criteria is met. As such, these loans are considered current and continue to accrue interest at its original contractual terms until the completion of the deferred period. Once the deferred period is over, the borrower will resume making payment and normal delinquency-based non-accrual policies will apply.

The Company may restructure loans that are not directly impacted by COVID-19 to enable a borrower experiencing financial difficulties to continue making payments when it is deemed to be in the Company’s best long-term interest. This restructure may include reducing the interest rate or amount of the monthly payment for a specified period of time, after which the interest rate and repayment terms revert to the original terms of the loan. We classify these loans as TDR.

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

The allocation of a portion of the ACL for a performing TDR loan is based upon the present value of the future expected cash flows discounted at the loan’s original effective rate, or for a non-performing TDR loan which is collateral dependent, the fair value of the collateral. At September 30, 2021, 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 ACL.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

During the nine months ended September 30, 2021 there was one commercial business TDR loan totaling $0.3 million that defaulted within 12 months of its modification date. During the nine months ended September 30, 2020, there were no TDR loans that defaulted within 12 months of their modification date. During the three months ended September 30, 2021 and 2020, there were no TDR loans that defaulted within 12 months of their modification date.

The following table shows loans modified as TDR during the periods indicated:


	For the three months ended
	September 30, 2021				September 30, 2020
(Dollars in thousands)	Number	Balance		Modification description	Number	Balance		Modification description
One-to-four family - mixed-use property	—	$	—		1	$	270	Below market interest rate
Commercial business and other	—		—		—		—
Total	—	$	—		1	$	270


	For the nine months ended
	September 30, 2021				September 30, 2020
(Dollars in thousands)	Number	Balance		Modification description	Number	Balance		Modification description
One-to-four family - mixed-use property	—	$	—		1	$	270	Below market interest rate
Commercial business and other	2		674	Amortization period extended	—		—
Total	2	$	674		1	$	270

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


	September 30, 2021			December 31, 2020
	Number	Amortized		Number	Amortized
(Dollars in thousands)	of contracts	Cost		of contracts	Cost
Multi-family residential	6	$	1,681	6	$	1,700
Commercial real estate	1		7,572	1		7,702
One-to-four family - mixed-use property ⁽¹⁾	5		1,655	5		1,731
One-to-four family - residential	3		489	3		507
Taxi medallion ⁽²⁾	—		—	2		440
Commercial business and other ⁽¹⁾	4		1,740	8		3,831
Total performing troubled debt restructured	19	$	13,137	25	$	15,911

(1)

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

(2)

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

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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


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

(1)

These loans were completely charged off during the three months ended March 31, 2021. Subsequently, recoveries totaling $1.5 million have been recorded as of September 30, 2021.

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


	At or for the nine months ended September 30, 2021
(In thousands)		Non-Accrual Amortized Cost Beginning of Reporting Period		Non-Accrual Amortized Cost Ending of Reporting Period		Non-Accrual with no related Allowance		Interest Income Recognized		Loans ninety days or more past due and still accruing:
Multi-family residential	$	2,576	$	4,461	$	4,461	$	19	$	—
Commercial real estate		1,766		640		640		—		—
One-to-four family - mixed-use property ⁽¹⁾		1,706		2,510		2,510		4		—
One-to-four family - residential		5,313		7,509		7,509		1		—
Construction		—		—		—		—		873
Small Business Administration		1,168		991		991		—		—
Taxi medallion⁽²⁾		2,758		—		—		—		—
Commercial business and other⁽¹⁾		5,660		2,500		875		63		1,052
Total	$	20,947	$	18,611	$	16,986	$	87	$	1,925

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

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

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)


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

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

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


	For the three months ended				For the nine months ended
	September 30,				September 30,
	2021		2020		2021		2020

	(In thousands)
Interest income that would have been recognized had the loans performed in accordance with their original terms	$	415	$	491	$	1,330	$	1,296
Less: Interest income included in the results of operations		156		78		480		240
Total foregone interest	$	259	$	413	$	850	$	1,056

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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


	September 30, 2021
					Greater
	30 - 59 Days		60 - 89 Days		than		Total Past
(In thousands)	Past Due		Past Due		90 Days		Due		Current		Total Loans
Multi-family residential	$	16,453	$	—	$	4,461	$	20,914	$	2,480,107	$	2,501,021
Commercial real estate		1,119		838		640		2,597		1,745,136		1,747,733
One-to-four family - mixed-use property		1,657		172		2,246		4,075		578,268		582,343
One-to-four family - residential		372		504		7,509		8,385		280,858		289,243
Construction		—		—		873		873		70,495		71,368
Small Business Administration		2,085		—		2,043		4,128		141,506		145,634
Taxi medallion		—		—		—		—		—		—
Commercial business and other		458		—		1,960		2,418		1,290,594		1,293,012
Total	$	22,144	$	1,514	$	19,732	$	43,390	$	6,586,964	$	6,630,354


	December 31, 2020
					Greater
	30 - 59 Days		60 - 89 Days		than		Total Past
(In thousands)	Past Due		Past Due		90 Days		Due		Current		Total Loans
Multi-family residential	$	7,582	$	3,186	$	2,777	$	13,545	$	2,522,432	$	2,535,977
Commercial real estate		17,903		5,123		4,313		27,339		1,731,045		1,758,384
One-to-four family - mixed-use property		5,673		1,132		1,433		8,238		598,647		606,885
One-to-four family - residential		3,087		805		5,313		9,205		243,486		252,691
Construction loans		750		—		—		750		82,411		83,161
Small Business Administration		1,823		—		1,168		2,991		162,579		165,570
Taxi medallion		—		—		2,318		2,318		279		2,597
Commercial business and other		129		1,273		1,593		2,995		1,296,414		1,299,409
Total	$	36,947	$	11,519	$	18,915	$	67,381	$	6,637,293	$	6,704,674

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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


	September 30, 2021
					One-to-four
					family -		One-to-four								Commercial
	Multi-family		Commercial		mixed-use		family -		Construction		Small Business		Taxi		business and
(In thousands)	residential		real estate		property		residential		loans		Administration		medallion		other		Total
Allowance for credit losses:
Beginning balance	$	6,559	$	5,868	$	1,492	$	716	$	185	$	2,302	$	—	$	25,548	$	42,670
Charge-offs		—		—		—		—		—		—		—		(1,019)		(1,019)
Recoveries		—		—		123		147		—		8		1,235		125		1,638
Benefit		(161)		(112)		(169)		(232)		(17)		(646)		(1,235)		(4,354)		(6,926)
Ending balance	$	6,398	$	5,756	$	1,446	$	631	$	168	$	1,664	$	—	$	20,300	$	36,363


	September 30, 2020
					One-to-four
					family -		One-to-four								Commercial
	Multi-family		Commercial		mixed-use		family -		Construction		Small Business		Taxi		business and
(In thousands)	residential		real estate		property		residential		loans		Administration		medallion		other		Total
Allowance for credit losses:
Beginning balance	$	8,935	$	6,971	$	2,826	$	1,161	$	183	$	1,386	$	—	$	15,248	$	36,710
Charge-offs		—		—		—		—		—		—		(951)		(13)		(964)
Recoveries		14		—		60		2		—		47		—		4		127
Provision (benefit)		(1,553)		1,576		(1,208)		(483)		35		450		951		2,702		2,470
Ending balance	$	7,396	$	8,547	$	1,678	$	680	$	218	$	1,883	$	—	$	17,941	$	38,343

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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


	September 30, 2021
					One-to-four
					family -		One-to-four				Small				Commercial
	Multi-family		Commercial		mixed-use		family -		Construction		Business		Taxi		business and
(In thousands)	residential		real estate		property		residential		loans		Administration		medallion		other		Total

Allowance for credit losses:
Beginning balance	$	6,557	$	8,327	$	1,986	$	869	$	497	$	2,251	$	—	$	24,666	$	45,153
Charge-off's		(43)		(64)		(32)		—		—		—		(2,758)		(2,230)		(5,127)
Recoveries		10		—		133		154		—		27		1,457		198		1,979
Provision (benefit)		(126)		(2,507)		(641)		(392)		(329)		(614)		1,301		(2,334)		(5,642)
Ending balance	$	6,398	$	5,756	$	1,446	$	631	$	168	$	1,664	$	—	$	20,300	$	36,363


	September 30, 2020
					One-to-four
					family -		One-to-four				Small				Commercial
	Multi-family		Commercial		mixed-use		family -		Construction		Business		Taxi		business and
(In thousands)	residential		real estate		property		residential		loans		Administration		medallion		other		Total

Allowance for credit losses:
Beginning balance	$	5,391	$	4,429	$	1,817	$	756	$	441	$	363	$	—	$	8,554	$	21,751
Impact of CECL Adoption		(650)		1,170		(55)		(160)		(279)		1,180		—		(827)		379
Charge-off's		—		—		(3)		—		—		(178)		(951)		(2,121)		(3,253)
Recoveries		27		—		138		10		—		67		—		18		260
Provision (benefit)		2,628		2,948		(219)		74		56		451		951		12,317		19,206
Ending balance	$	7,396	$	8,547	$	1,678	$	680	$	218	$	1,883	$	—	$	17,941	$	38,343

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The following table summarizes the risk category of mortgage and non-mortgage loans by loan portfolio segments and class of loans by year of origination at September 30, 2021:



														Revolving Loans,		Lines of Credit
														Amortized Cost		converted to
(In thousands)		2021		2020		2019		2018		2017		Prior		Basis		term loans		Total
1-4 Family Residential
Pass	$	53,687	$	31,937	$	35,424	$	32,594	$	21,016	$	73,993	$	10,907	$	15,953	$	275,511
Watch		—		—		725		—		2,216		1,229		146		847		5,163
Special Mention		—		—		—		278		—		350		—		337		965
Substandard		—		—		—		1,841		1,117		3,845		—		801		7,604
Total 1-4 Family Residential	$	53,687	$	31,937	$	36,149	$	34,713	$	24,349	$	79,417	$	11,053	$	17,938	$	289,243
1-4 Family Mixed-Use
Pass	$	32,110	$	35,677	$	70,360	$	73,236	$	52,100	$	298,763	$	—	$	—	$	562,246
Watch		—		—		—		2,834		6,131		7,088		—		—		16,053
Special Mention		—		—		—		—		—		1,279		—		—		1,279
Substandard		—		—		—		506		760		1,499		—		—		2,765
Total 1-4 Family Mixed Use	$	32,110	$	35,677	$	70,360	$	76,576	$	58,991	$	308,629	$	—	$	—	$	582,343
Commercial Real Estate
Pass	$	131,648	$	167,334	$	254,288	$	247,434	$	184,502	$	660,127	$	—	$	—	$	1,645,333
Watch		4,191		932		4,472		12,499		2,643		67,755		—		—		92,492
Special Mention		—		—		—		—		—		1,632		—		—		1,632
Substandard		—		—		7,572		—		—		704		—		—		8,276
Total Commercial Real Estate	$	135,839	$	168,266	$	266,332	$	259,933	$	187,145	$	730,218	$	—	$	—	$	1,747,733
Construction
Pass	$	3,477	$	25,417	$	14,798	$	1,993	$	—	$	—	$	4,233	$	—	$	49,918
Watch		—		—		2,115		9,125		5,880		—		—		—		17,120
Special Mention		—		—		—		857		2,600		—		—		—		3,457
Substandard		—		—		—		873		—		—		—		—		873
Total Construction	$	3,477	$	25,417	$	16,913	$	12,848	$	8,480	$	—	$	4,233	$	—	$	71,368
Multifamily
Pass	$	218,819	$	237,600	$	334,594	$	430,396	$	352,582	$	884,680	$	5,300	$	—	$	2,463,971
Watch		—		2,885		3,707		13,649		—		9,987		398		—		30,626
Special Mention		—		973		—		—		—		—		—		—		973
Substandard		—		—		1,176		2,549		984		742		—		—		5,451
Total Multifamily	$	218,819	$	241,458	$	339,477	$	446,594	$	353,566	$	895,409	$	5,698	$	—	$	2,501,021
Commercial Business - Secured by RE
Pass	$	131,864	$	92,989	$	38,483	$	45,725	$	27,927	$	96,840	$	—	$	—	$	433,828
Watch		—		23,346		51,319		18,546		12,064		46,477		—		—		151,752
Special Mention		—		—		598		—		—		—		—		—		598
Substandard		—		—		—		—		—		3,639		—		—		3,639
Total Commercial Business - Secured by RE	$	131,864	$	116,335	$	90,400	$	64,271	$	39,991	$	146,956	$	—	$	—	$	589,817
Commercial Business
Pass	$	86,496	$	68,366	$	84,638	$	73,370	$	28,721	$	52,443	$	190,737	$	—	$	584,771
Watch		17		1,676		22,545		18,947		32,250		37		12,697		—		88,169
Special Mention		—		—		—		2,433		34		—		13,128		—		15,595
Substandard		—		4,897		31		315		5,253		1,458		1,490		—		13,444
Doubtful		—		—		—		—		—		—		1,085		—		1,085
Total Commercial Business	$	86,513	$	74,939	$	107,214	$	95,065	$	66,258	$	53,938	$	219,137	$	—	$	703,064
Small Business Administration
Pass	$	104,557	$	28,148	$	1,273	$	1,545	$	640	$	2,875	$	—	$	—	$	139,038
Watch		—		—		59		2,583		2,076		833		—		—		5,551
Special Mention		—		—		—		—		—		48		—		—		48
Substandard		—		—		—		—		991		6		—		—		997
Total Small Business Administration	$	104,557	$	28,148	$	1,332	$	4,128	$	3,707	$	3,762	$	—	$	—	$	145,634
Other
Pass	$	—	$	—	$	—	$	—	$	—	$	52	$	79	$	—	$	131
Total Other	$	—	$	—	$	—	$	—	$	—	$	52	$	79	$	—	$	131

Total Loans	$	766,866	$	722,177	$	928,177	$	994,128	$	742,487	$	2,218,381	$	240,200	$	17,938	$	6,630,354

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

Included within net loans as of September 30, 2021 and December 31, 2020 were $9.3 million and $5.9 million, respectively, of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings were in process according to local requirements of the applicable jurisdiction.

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


	Collateral Type
	September 30, 2021				December 31, 2020
(In thousands)		Real Estate		Business Assets		Real Estate		Business Assets
Multi-family residential	$	4,461	$	—	$	2,576	$	—
Commercial real estate		1,166		—		2,994		—
One-to-four family - mixed-use property		2,510		—		1,706		—
One-to-four family - residential		7,509		—		5,313		—
Small Business Administration		—		991		—		1,168
Commercial business and other		—		1,974		—		3,482
Taxi Medallion		—		—		—		2,758
Total	$	15,646	$	2,965	$	12,589	$	7,408

Off-Balance Sheet Credit Losses

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

Commitments to extend credit (principally real estate mortgage loans) and lines of credit (principally home equity lines of credit and business lines of credit) totaled $445.9 million and $474.0 million at September 30, 2021 and December 31, 2020, respectively.

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


	For the three months ended				For the nine months ended
	September 30,				September 30,
	2021		2020		2021		2020

	(In thousands)
Balance at beginning of period	$	1,570	$	1,264	$	1,815	$	—
Off-Balance Sheet - CECL Adoption		—		—		—		553
Off-Balance Sheet- Provision (Benefit)		(259)		295		(504)		1,006
Allowance for Off-Balance Sheet - Credit losses ⁽¹⁾	$	1,311	$	1,559	$	1,311	$	1,559

(1)

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

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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 September 30, 2021 and December 31, 2020, the Bank did not have any loans held for sale.

The Company has implemented a strategy of selling certain delinquent and non-performing loans. Once the Company has decided to sell a loan, the sale usually closes in a short period of time, generally within the same quarter. Loans designated held for sale are reclassified from loans held for investment to loans held for sale. Terms of sale include cash due upon the closing of the sale, no contingencies or recourse to the Company and servicing is released to the buyer. Additionally, at times the Company may sell participating interests in performing loans. There were no loans sold for the three months ended September 30, 2020.

The following tables show loans sold during the period indicated:


	For the three months ended September 30, 2021
				Net Recoveries
(Dollars in thousands)	Loans sold	Proceeds		(Charge-offs)		Net gain
Delinquent and non-performing loans
Multi-family residential	2	$	1,316	$	—	$	15
Commercial real estate	1		4,344		—		87
One-to-four family - mixed-use property	3		723		—		29
Total	6	$	6,383	$	—	$	131


	For the nine months ended September 30, 2021
				Net Recoveries
(Dollars in thousands)	Loans sold	Proceeds		(Charge-offs)		Net gain
Delinquent and non-performing loans
Multi-family residential	10	$	12,069	$	(43)	$	78
Commercial real estate	4		7,380		(64)		104
One-to-four family - mixed-use property	13		5,518		(14)		107
Total	27	$	24,967	$	(121)	$	289


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

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

7. Leases

The Company has 28 operating leases for branches (including headquarters) and office spaces, ten operating leases for vehicles, and one operating lease for equipment. Our leases have remaining lease terms ranging from one month to approximately 15 years, none of which has a renewal option reasonably certain of exercise, which has been reflected in the Company’s calculation of lease term.

The Company has elected the short-term lease recognition exemption such that the Company will not recognize Right of Use (“ROU”) assets or lease liabilities for leases with a term of less than 12 months from the commencement date. The Company’s operating lease expense totaled $2.2 million and $1.9 million and was recorded in Occupancy and equipment on the Consolidated Statements of Income for the three month periods ended September 30, 2021 and 2020, respectively. The Company’s operating lease expense totaled $6.6 million and $5.7 million and was recorded in Occupancy and equipment on the Consolidated Statements of Income for the nine month periods ended September 30, 2021 and 2020, respectively.

The Company has one agreement that qualifies as a short-term lease with expense totaling approximately $34,000 for each of the three month periods ended September 30, 2021 and 2020 and approximately $129,000 and $102,000 for the nine month periods ended September 30, 2021 and 2020, included in Professional services on the Consolidated Statements of Income. The Company has $0.2 million and $0.3 million in variable lease payments, which include insurance and real estate tax expenses and was recorded in Occupancy and equipment on the Consolidated Statements of Income, for each of the three months ended September 30, 2021 and 2020. The Company has $0.8 million in variable lease payments, which include insurance and real estate tax expenses and was recorded in Occupancy and equipment on the Consolidated Statements of Income, for each of the nine months ended September 30, 2021 and 2020. At September 30, 2021, the weighted-average remaining lease term for our operating leases is approximately eight years and the weighted average discount rate is 3.2%. Our lease agreements do not contain any residual value guarantees.

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

Supplemental balance sheet information related to leases was as follows:




(Dollars in thousands)	September 30, 2021			December 31, 2020

Operating lease ROU asset	$	50,155		$	50,743

Operating lease liability	$	54,239		$	59,100

Weighted-average remaining lease term-operating leases		7.5 years			8.3 years
Weighted average discount rate-operating leases		3.2	%		3.2	%

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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


	For the three months ended
(Dollars in thousands)	September 30, 2021		September 30, 2020

Lease Cost
Operating lease cost	$	2,217	$	1,895
Short-term lease cost		34		34
Variable lease cost		230		281
Total lease cost	$	2,481	$	2,210

Other information
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	2,435	$	2,101
Right-of-use assets obtained in exchange for new operating lease liabilities	$	28	$	6,772


	For the nine months ended
(Dollars in thousands)	September 30, 2021		September 30, 2020

Lease Cost
Operating lease cost	$	6,565	$	5,676
Short-term lease cost		129		102
Variable lease cost		826		832
Total lease cost	$	7,520	$	6,610

Other information
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	10,483	$	6,283
Right-of-use assets obtained in exchange for new operating lease liabilities	$	4,827	$	6,822

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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


	Minimum Rental
	(In thousands)
Years ended December 31:
2021	$	1,995
2022		9,162
2023		9,292
2024		9,127
2025		8,479
Thereafter		22,897
Total minimum payments required		60,952
Less: Implied interest		6,713
Total lease obligations	$	54,239

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


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

8. Stock-Based Compensation

The Company has long-term incentive compensation program for certain Company executive officers that includes grants of performance-based restricted stock units (“PRSUs”) in addition to time-based restricted stock units (“RSU”). Under the terms of the PRSU Agreement, the number of PRSUs that may be earned depends on the extent to which performance goals for the award are achieved over a three-year performance period, as determined by the Compensation Committee of the Board. As of September 30, 2021, PRSUs granted in 2021 and 2020 are being accrued at target and PRSUs granted in 2019 are being accrued above target.

On May 18, 2021, stockholders approved an amendment to the 2014 Omnibus Plan (the “Amendment”) authorizing an additional 1,100,000 shares available for future issuance. Including the additional shares authorized from the Amendment, 1,171,343 shares were available for future issuance under the 2014 Omnibus Plan at September 30, 2021.

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FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

For the three months ended September 30, 2021 and 2020, the Company’s net income, as reported, included $1.2 million and $0.9 million, respectively, of stock-based compensation costs, including the benefit or expense of phantom stock awards, and $0.3 million and $0.2 million of income tax benefit, respectively, related to the stock-based compensation plans. For the nine months ended September 30, 2021 and 2020, the Company’s net income, as reported, included $6.3 million and $4.3 million, respectively, of stock-based compensation costs, including the benefit or expense of phantom stock awards, and $1.7 million and $1.0 million of income tax benefit, respectively, related to the stock-based compensation plans.

During the three months ended September 30, 2021 and 2020, the Company did not grant any RSU or PRSU’s. During the nine months ended September 30, 2021 and 2020, the Company granted 238,985 and 172,728 RSU, respectively. During the nine months ended September 30, 2021 and 2020, the Company granted 62,790 and 72,143 in PRSU awards, respectively.

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

The following table summarizes the Company’s RSU and PRSU awards at or for the nine months ended September 30, 2021:


	RSU Awards			PRSU Awards
		Weighted-Average			Weighted-Average
		Grant-Date			Grant-Date
	Shares	Fair Value		Shares	Fair Value

Non-vested at December 31, 2020	336,898	$	23.48	66,580	$	21.26
Granted	238,985		18.44	62,790		18.46
Vested	(250,056)		21.26	(41,570)		19.08
Forfeited	(5,597)		21.36	—		—
Non-vested at September 30, 2021	320,230	$	21.48	87,800	$	20.29
Vested but unissued at September 30, 2021	224,709	$	21.08	108,685	$	20.48

As of September 30, 2021, there was $5.3 million of total unrecognized compensation cost related to RSU and PRSU awards granted. That cost is expected to be recognized over a weighted-average period of 2.4 years. The total fair value of awards vested for the three months ended September 30, 2021 and 2020 was $0.4 million and $0.2 million, respectively. The total fair value of awards vested for the nine months ended September 30, 2021 and 2020 was $5.4 million and $5.2 million, respectively. The vested but unissued RSU and PRSU awards consist of awards made to employees and directors who are eligible for retirement. According to the terms of these awards, which provide for vesting upon retirement, these employees and directors have no risk of forfeiture. These shares will be issued at the original contractual vesting and settlement dates.

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

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FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The following table summarizes the Phantom Stock Plan at or for the nine months ended September 30, 2021:


Phantom Stock Plan	Shares	Fair Value
Outstanding at December 31, 2020	120,248	$	16.64
Granted	10,232		19.85
Forfeited	(11)		18.25
Distributions	(2,606)		19.03
Outstanding at September 30, 2021	127,863	$	22.60
Vested at September 30, 2021	127,763	$	22.60

The Company recorded stock-based compensation expense (benefit) for the Phantom Stock Plan of $0.2 million and ($0.1) million for the three months ended September 30, 2021 and 2020, respectively. The total fair value of the distributions from the Phantom Stock Plan was $24,000 and $3,000 for the three months ended September 30, 2021 and 2020, respectively.

The Company recorded stock-based compensation expense (benefit) for the Phantom Stock Plan of $0.8 million and ($1.2) million for the nine months ended September 30, 2021 and 2020, respectively. The total fair value of the distributions from the Phantom Stock Plan was $50,000 and $10,000 for the nine months ended September 30, 2021 and 2020, respectively.

9. Pension and Other Postretirement Benefit Plans

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


	Three months ended				Nine months ended
	September 30,				September 30,
(In thousands)	2021		2020		2021		2020

Employee Pension Plan:
Interest cost	$	128	$	163	$	384	$	489
Amortization of actuarial loss		122		111		366		333
Expected return on plan assets		(274)		(257)		(822)		(771)
Net employee pension (benefit) expense	$	(24)	$	17	$	(72)	$	51

Outside Director Pension Plan:
Service cost	$	4	$	4	$	12	$	11
Interest cost		12		16		36		48
Amortization of actuarial gain		(5)		(14)		(15)		(41)
Amortization of past service liability		—		—		—		—
Net outside director pension expense	$	11	$	6	$	33	$	18

Other Postretirement Benefit Plans:
Service cost	$	73	$	69	$	219	$	206
Interest cost		58		64		174		194
Amortization of actuarial gain		8		—		24		—
Amortization of past service credit		(21)		(21)		(63)		(64)
Net other postretirement expense	$	118	$	112	$	354	$	336

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FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The Company previously disclosed in its Consolidated Financial Statements for the year ended December 31, 2020 that it expects to contribute $0.3 million to each of the Outside Director Pension Plan (the “Outside Director Pension Plan”) and the other postretirement benefit plans (the “Other Postretirement Benefit Plans”), during the year ending December 31, 2021. The Company does not expect to make a contribution to the Employee Pension Plan (the “Employee Pension Plan”). As of September 30, 2021, the Company had contributed $108,000 to the Outside Director Pension Plan and $97,000 in contributions were made to the Other Postretirement Benefit Plans. As of September 30, 2021, the Company has not revised its expected contributions for the year ending December 31, 2021.

10. Fair Value of Financial Instruments

The Company carries certain financial assets and financial liabilities at fair value in accordance with GAAP which defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. GAAP permits entities to choose to measure many financial instruments and certain other items at fair value. At September 30, 2021, the Company carried financial assets and financial liabilities under the fair value option with fair values of $14.5 million and $51.6 million, respectively. At December 31, 2020, the Company carried financial assets and financial liabilities under the fair value option with fair values of $14.5 million and $43.1 million, respectively. The Company did not elect to carry any additional financial assets or financial liabilities under the fair value option during the three and nine months ended September 30, 2021 and 2020.

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


	Fair Value		Fair Value		Changes in Fair Values For Items Measured at Fair Value
	Measurements		Measurements		Pursuant to Election of the Fair Value Option
	at September 30,		at December 31,		Three Months Ended				Nine Months Ended
(In thousands)	2021		2020		September 30, 2021		September 30, 2020		September 30, 2021		September 30, 2020

Mortgage-backed securities	$	412	$	505	$	(1)	$	(1)	$	(3)	$	1
Other securities		14,120		13,998		6		83		7		120
Borrowed funds		51,578		43,136		(1,849)		(2,897)		(8,837)		5,086
Net gain (loss) from fair value adjustments ⁽¹⁾⁽²⁾					$	(1,844)	$	(2,815)	$	(8,833)	$	5,207

(1)	The net gain (loss) from fair value adjustments presented in the above table does not include net gains (losses) of ($0.4) million and $0.6 million for the three months ended September 30, 2021 and 2020, respectively, from the change in the fair value of interest rate swaps.

(2)	The net gain (loss) from fair value adjustments presented in the above table does not include net gains (losses) of $1.0 million and ($3.2) million for the nine months ended September 30, 2021 and 2020, respectively, from the change in the fair value of interest rate swaps.

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

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

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Notes to Consolidated Financial Statements

(Unaudited)

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

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

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

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

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

Level 1 – when quoted market prices are available in an active market. At September 30, 2021 and December 31, 2020, 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 September 30, 2021 and December 31, 2020, Level 2 included mortgage-backed securities, CLOs, corporate debt, municipals and interest rate swaps.

Level 3 – when there is limited activity or less transparency around inputs to the valuation, financial instruments are classified as Level 3. At September 30, 2021 and December 31, 2020, Level 3 included trust preferred securities owned and junior subordinated debentures issued by the Company.

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

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Notes to Consolidated Financial Statements

(Unaudited)

The following table sets forth the Company’s assets and liabilities that are carried at fair value on a recurring basis, including those reported at fair value under the fair value option, and the level that was used to determine their fair value, at September 30, 2021 and December 31, 2020:


	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
	2021		2020		2021		2020		2021		2020		2021		2020

	(In thousands)
Assets:
Securities available for sale
Mortgage-backed Securities	$	—	$	—	$	584,145	$	404,460	$	—	$	—	$	584,145	$	404,460
Other securities		12,572		12,703		198,534		229,516		1,548		1,295		212,654		243,514
Interest rate swaps		—		—		7,393		1,319		—		—		7,393		1,319

Total assets	$	12,572	$	12,703	$	790,072	$	635,295	$	1,548	$	1,295	$	804,192	$	649,293

Liabilities:
Borrowings	$	—	$	—	$	—	$	—	$	51,578	$	43,136	$	51,578	$	43,136
Interest rate swaps		—		—		33,196		60,987		—		—		33,196		60,987

Total liabilities	$	—	$	—	$	33,196	$	60,987	$	51,578	$	43,136	$	84,774	$	104,123

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 periods indicated:


	For the three months ended
	September 30, 2021				September 30, 2020
	Trust preferred		Junior subordinated		Trust preferred		Junior subordinated
	securities		debentures		securities		debentures

	(In thousands)

Beginning balance	$	1,495	$	49,814	$	1,068	$	35,570
Net gain from fair value adjustment of financial assets ⁽¹⁾		53		—		82		—
Net loss from fair value adjustment of financial liabilities ⁽¹⁾		—		1,850		—		2,897
Decrease in accrued interest receivable		—		—		(1)		—
Decrease in accrued interest payable		—		(1)		—		(19)
Change in unrealized gains included in other comprehensive income		—		(85)		—		(161)
Ending balance	$	1,548	$	51,578	$	1,149	$	38,287

Changes in unrealized gains held at period end	$	—		3,058		—		2,384

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

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Notes to Consolidated Financial Statements

(Unaudited)


	For the nine months ended
	September 30, 2021				September 30, 2020
	Trust preferred		Junior subordinated		Trust preferred		Junior subordinated
	securities		debentures		securities		debentures

	(In thousands)
Beginning balance	$	1,295	$	43,136	$	1,332	$	44,384
Net gain (loss) from fair value adjustment of financial assets ⁽¹⁾		254		—		(180)		—
Net loss (gain) from fair value adjustment of financial liabilities⁽¹⁾		—		8,837		—		(5,086)
Decrease in accrued interest receivable		(1)		—		(3)		—
Decrease in accrued interest payable		—		(6)		—		(104)
Change in unrealized gains included in other comprehensive income		—		(389)		—		(907)
Ending balance	$	1,548	$	51,578	$	1,149	$	38,287

Changes in unrealized gains held at period end	$	—		3,058		—		2,384

________________________________________

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

During the three and nine months ended September 30, 2021 and 2020, there were no transfers between Levels 1, 2 and 3.

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

September 30, 2021

Fair Value

Valuation Technique

Unobservable Input

Range

Weighted Average

(Dollars in thousands)

Assets:

Trust preferred securities

1,548

Discounted cash flows

Discount rate

n/a

2.9

Liabilities:

Junior subordinated debentures

51,578

Discounted cash flows

Discount rate

n/a

2.9

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Notes to Consolidated Financial Statements

(Unaudited)

December 31, 2020

Fair Value

Valuation Technique

Unobservable Input

Range

Weighted Average

(Dollars in thousands)

Assets:

Trust preferred securities

1,295

Discounted cash flows

Discount rate

n/a

4.2

Liabilities:

Junior subordinated debentures

43,136

Discounted cash flows

Discount rate

n/a

4.2

The significant unobservable inputs used in the fair value measurement of the Company’s trust preferred securities and junior subordinated debentures valued under Level 3 at September 30, 2021 and December 31, 2020, are the effective yields used in the cash flow models. Significant increases or decreases in the effective yield in isolation would result in a significantly lower or higher fair value measurement.

The following table sets forth the Company’s assets and liabilities that are carried at fair value on a non-recurring basis and the level that was used to determine their fair value at September 30, 2021 and December 31, 2020:


	Quoted Prices
	in Active Markets				Significant Other				Significant Other
	for Identical Assets				Observable Inputs				Unobservable Inputs				Total carried at fair value
	(Level 1)				(Level 2)				(Level 3)				on a non-recurring basis
	2021		2020		2021		2020		2021		2020		2021		2020

	(In thousands)
Assets
Non-accrual loans	$	—	$	—	$	—	$	—	$	11,614	$	11,980	$	11,614	$	11,980

Total assets	$	—	$	—	$	—	$	—	$	11,614	$	11,980	$	11,614	$	11,980

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Notes to Consolidated Financial Statements

(Unaudited)

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


	September 30, 2021
	Fair Value		Valuation Technique	Unobservable Input	Range	Weighted Average

	(Dollars in thousands)
Assets:

Non-accrual loans	$	11,163	Sales approach	Reduction for planned expedited disposal	8.0% to 15.0%	11.8%

Non-accrual loans	$	451	Discounted Cashflow	Discount Rate	4.3%	4.3%
				Probability of Default	35.0%	35.0%


	At December 31, 2020
	Fair Value		Valuation Technique	Unobservable Input	Range	Weighted Average

	(Dollars in thousands)
Assets:

Non-accrual loans	$	10,690	Sales approach	Reduction for planned expedited disposal	(100.0%) to 15.0%	6.8%


Non-accrual loans	$	1,290	Discounted Cashflow	Discount Rate	4.3% to 5.5%	4.9%
				Probability of Default	20.0% to 35.0%	27.4%

The Company did not have any liabilities that were carried at fair value on a non-recurring basis at September 30, 2021 and December 31, 2020.

The methods and assumptions used to estimate fair value at September 30, 2021 and December 31, 2020 are as follows:

Securities:

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

Non-accrual Loans:

For non-accruing loans, fair value is generally estimated by discounting management’s estimate of future cash flows with a discount rate commensurate with the risk associated with such assets or, for collateral dependent loans, 85% of the appraised or internally estimated value of the property. See Note 5 (“Loans”) of the Notes to the Consolidated Financial Statements.

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Notes to Consolidated Financial Statements

(Unaudited)

Junior Subordinated Debentures:

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

Interest Rate Swaps:

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

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


	September 30, 2021
	Carrying		Fair
	Amount		Value		Level 1		Level 2		Level 3

	(In thousands)
Assets:

Cash and due from banks	$	178,598	$	178,598	$	178,598	$	-	$	-
Securities held-to-maturity
Mortgage-backed securities		7,899		8,698		-		8,698		-
Other securities		50,832		52,753		-		-		52,753
Securities available for sale
Mortgage-backed securities		584,145		584,145		-		584,145		-
Other securities		212,654		212,654		12,572		198,534		1,548
Loans		6,630,354		6,722,201		-		-		6,722,201
FHLB-NY stock		36,158		36,158		-		36,158		-
Accrued interest receivable		40,912		40,912		2		1,591		39,319
Interest rate swaps		7,393		7,393		-		7,393		-

Liabilities:
Deposits	$	6,488,598	$	6,491,487	$	5,448,500	$	1,042,987	$	-
Borrowings		752,925		753,952		-		702,374		51,578
Accrued interest payable		5,698		5,698		-		5,698		-
Interest rate swaps		33,196		33,196		-		33,196		-

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Notes to Consolidated Financial Statements

(Unaudited)


	December 31, 2020
	Carrying		Fair
	Amount		Value		Level 1		Level 2		Level 3

	(In thousands)
Assets:

Cash and due from banks	$	157,388	$	157,388	$	157,388	$	—	$	—
Securities held-to-maturity
Mortgage-backed securities		7,914		8,991		—		8,991		—
Other securities		50,825		54,538		—		—		54,538
Securities available for sale
Mortgage-backed securities		404,460		404,460		—		404,460		—
Other securities		243,514		243,514		12,703		229,516		1,295
Loans		6,704,674		6,793,985		—		—		6,793,985
FHLB-NY stock		43,439		43,439		—		43,439		—
Accrued interest receivable		44,041		44,041		2		1,389		42,650
Interest rate swaps		1,319		1,319		—		1,319		—

Liabilities:
Deposits	$	6,136,355	$	6,141,775	$	4,997,994	$	1,143,781	$	—
Borrowings		1,020,895		1,017,573		—		974,437		43,136
Accrued interest payable		4,755		4,755		—		4,755		—
Interest rate swaps		60,987		60,987		—		60,987		—

11. Derivative Financial Instruments

At September 30, 2021 and December 31, 2020, the Company’s derivative financial instruments consisted 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 certain fixed rate loans totaling $308.4. million and $316.1 million at September 30, 2021 and December 31, 2020, respectively; 2) to facilitate risk management strategies for our loan customers with $229.7 million of swaps outstanding, which include $114.8 million with customers and $114.8 million with bank counterparties at September 30, 2021 and $125.6 million of swaps outstanding, which include $62.8 million with customers and $62.8 million with bank counterparties at December 31, 2020; and 3) to mitigate exposure to rising interest rates on certain short-term advances and brokered CD’s totaling $996.5 million and $1,021.5 million at September 30, 2021 and December 31, 2020, respectively. Additionally, at December 31, 2020, the Company had swaps outstanding 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. These swaps were terminated during the three months ended September 30, 2021, realizing a loss of $4.7 million upon termination.

At September 30, 2021 and December 31, 2020, we held derivatives designated as cash flow hedges, fair value hedges and certain derivatives not designated as hedges.

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

At September 30, 2021 and December 31, 2020, derivatives with a combined notional amount of $229.7 million and $143.6 million, respectively, were not designated as hedges. At September 30, 2021 and December 31, 2020, derivatives with a combined notional amount of $308.4 million and $316.1 million, respectively, were designated as fair value hedges. At September 30, 2021 and December 31, 2020, derivatives with a combined notional amount of $996.5 million and $1,021.5 million, respectively, were designated as cash flow hedges.

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Notes to Consolidated Financial Statements

(Unaudited)

For cash flow hedges, the changes in the fair value of the derivative is reported in accumulated other comprehensive income (loss), net of tax. Amounts in accumulated other comprehensive income (loss) are reclassified into earnings in the same period during which the hedged forecasted transaction effects earnings. During the three months ended September 30, 2021 and 2020, $2.6 million and $1.4 million, respectively, were reclassified from accumulated other comprehensive loss to interest expense. During the nine months ended September 30, 2021 and 2020, $7.9 million and $2.1 million, respectively, were reclassified from accumulated other comprehensive loss to interest expense. The estimated amount to be reclassified in the next 12 months out of accumulated other comprehensive income (loss) is $10.5 million.

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

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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


	September 30, 2021				December 31, 2020
	Notional		Net Carrying		Notional		Net Carrying
	Amount		Value ⁽¹⁾		Amount		Value ⁽¹⁾

	(In thousands)
Interest rate swaps (non-hedge)	$	114,835	$	3,225	$	62,779	$	1,319
Interest rate swaps (cash flow hedge)		355,000		4,168		—		—
Interest rate swaps (fair value hedge)		308,350		(15,296)		316,051		(28,689)
Interest rate swaps (cash flow hedge)		641,500		(14,675)		1,021,500		(25,300)
Interest rate swaps (non-hedge)		114,835		(3,225)		80,779		(6,998)
Total derivatives	$	1,534,520	$	(25,803)	$	1,481,109	$	(59,668)

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

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


		For the three months ended				For the nine months ended
		September 30,				September 30,
(In thousands)	Affected Line Item in the Statement Where Net income is Presented	2021		2020		2021		2020
Financial Derivatives:
	Other interest expense	$	(33)	$	(132)	$	(305)	$	(298)
	Net gain (loss) from fair value adjustments		(445)		590		978		(3,220)
Interest rate swaps (non-hedge)			(478)		458		673		(3,518)

Interest rate swaps (fair value hedge)	Interest and fees on loans		(1,206)		(1,158)		(3,231)		(4,863)

Interest rate swaps (cash flow hedge)	Other interest expense		(2,737)		(2,511)		(7,942)		(4,057)

Net loss		$	(4,421)	$	(3,211)	$	(10,500)	$	(12,438)

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

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

September 30, 2021

Gross Amounts Not Offset in the

Consolidated Statement of

Gross Amount Offset in

Net Amount of Assets

Condition

Gross Amount of

the Statement of

Presented in the Statement of

Financial

Cash Collateral

(In thousands)

Recognized Assets

Condition

Instruments

Received

Net Amount

Interest rate swaps

7,393

—

7,393

—

7,393

Gross Amounts Not Offset in the

Consolidated Statement of

Gross Amount of

Gross Amount Offset in

Net Amount of Liabilities

Condition

Recognized

the Statement of

Presented in the Statement of

Financial

Cash Collateral

(In thousands)

Liabilities

Condition

Instruments

Pledged

Net Amount

Interest rate swaps

33,196

—

33,196

—

29,067

4,129

December 31, 2020

Gross Amounts Not Offset in the

Consolidated Statement of

Gross Amount Offset in

Net Amount of Assets

Condition

Gross Amount of

the Statement of

Presented in the Statement of

Financial

Cash Collateral

(In thousands)

Recognized Assets

Condition

Instruments

Received

Net Amount

Interest rate swaps

1,319

—

1,319

—

1,319

Gross Amounts Not Offset in the

Consolidated Statement of

Gross Amount of

Gross Amount Offset in

Net Amount of Liabilities

Condition

Recognized

the Statement of

Presented in the Statement of

Financial

Cash Collateral

(In thousands)

Liabilities

Condition

Instruments

Pledged

Net Amount

Interest rate swaps

60,987

—

60,987

63,517

(2,629)

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

12. Accumulated Other Comprehensive Income (Loss):

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


	For the three months ended September 30, 2021
	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	$	485	$	(9,202)	$	(1,741)	$	2,041	$	(8,417)

Other comprehensive income before reclassifications, net of tax		(2,645)		179		—		58		(2,408)

Amounts reclassified from accumulated other comprehensive income, net of tax		7		1,812		72		—		1,891

Net current period other comprehensive income, net of tax		(2,638)		1,991		72		58		(517)

Ending balance, net of tax	$	(2,153)	$	(7,211)	$	(1,669)	$	2,099	$	(8,934)

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)


	For the three months ended September 30, 2020
	Unrealized Gains		Unrealized Gains
	(Losses) on		(Losses) on				Fair Value
	Available for Sale		Cash flow		Defined Benefit		Option Elected
	Securities		Hedges		Pension Items		on Liabilities		Total

	(In thousands)

Beginning balance, net of tax	$	(2,708)	$	(21,473)	$	(878)	$	1,537	$	(23,522)

Other comprehensive income before reclassifications, net of tax		3,185		937		—		111		4,233

Amounts reclassified from accumulated other comprehensive income, net of tax		—		929		52		—		981

Net current period other comprehensive income (loss), net of tax		3,185		1,866		52		111		5,214

Ending balance, net of tax	$	477	$	(19,607)	$	(826)	$	1,648	$	(18,308)


	For the nine months ended September 30, 2021
	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	$	1,290	$	(17,521)	$	(1,884)	$	1,849	$	(16,266)

Other comprehensive income before reclassifications, net of tax		(3,365)		4,885		—		250		1,770

Amounts reclassified from accumulated other comprehensive income, net of tax		(78)		5,425		215		—		5,562

Net current period other comprehensive income (loss), net of tax		(3,443)		10,310		215		250		7,332

Ending balance, net of tax	$	(2,153)	$	(7,211)	$	(1,669)	$	2,099	$	(8,934)

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FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)


	For the nine months ended September 30, 2020
	Unrealized Gains		Unrealized Gains
	(Losses) on		(Losses) on				Fair Value
	Available for Sale		Cash flow		Defined Benefit		Option Elected
	Securities		Hedges		Pension Items		on Liabilities		Total

	(In thousands)

Beginning balance, net of tax	$	(3,982)	$	(5,863)	$	(983)	$	1,021	$	(9,807)

Other comprehensive income before reclassifications, net of tax		4,397		(15,215)		—		627		(10,191)

Amounts reclassified from accumulated other comprehensive income (loss), net of tax		62		1,471		157		—		1,690

Net current period other comprehensive income, net of tax		4,459		(13,744)		157		627		(8,501)

Ending balance, net of tax	$	477	$	(19,607)	$	(826)	$	1,648	$	(18,308)

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


For the three months ended September 30, 2021
	Amounts Reclassified from
Details about Accumulated Other	Accumulated Other			Affected Line Item in the Statement
Comprehensive Loss Components	Comprehensive Loss			Where Net Income is Presented
(In thousands)
Unrealized loss on available for sale securities	$	(10)		Net loss on sale of securities
		3		Provision for income taxes
	$	(7)		Net of tax
Cash flow hedges:
Interest rate swaps	$	(2,640)		Other interest expense
		828		Provision for income taxes
	$	(1,812)		Net of tax
Amortization of defined benefit pension items:
Actuarial losses	$	(125)	⁽¹⁾	Other operating expense
Prior service credits		21	⁽¹⁾	Other operating expense
		(104)		Total before tax
		32		Provision for income taxes
	$	(72)		Net of tax

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)


For the three months ended September 30, 2020
	Amounts Reclassified from
Details about Accumulated Other	Accumulated Other			Affected Line Item in the Statement
Comprehensive Loss Components	Comprehensive Loss			Where Net Income is Presented
(In thousands)

Cash flow hedges:
Interest rate swaps	$	(1,352)		Other interest expense
		423		Provision for income taxes
	$	(929)		Net of tax

Amortization of defined benefit pension items:
Actuarial losses	$	(97)	⁽¹⁾	Other operating expense
Prior service credits		21	⁽¹⁾	Other operating expense
		(76)		Total before tax
		24		Provision for income taxes
	$	(52)		Net of tax

(1)	These accumulated other comprehensive loss components are included in the computation of net periodic pension cost. See Note 9 (“Pension and Other Postretirement Benefit Plans”) for additional information.


For the nine months ended September 30, 2021
	Amounts Reclassified from
Details about Accumulated Other	Accumulated Other			Affected Line Item in the Statement
Comprehensive Loss Components	Comprehensive Loss			Where Net Income is Presented
(In thousands)
Unrealized gains on available for sale securities	$	113		Net gains on sale of securities
		(35)		Provision for income taxes
	$	78		Net of tax
Cash flow hedges:
Interest rate swaps	$	(7,883)		Other interest expense
		2,458		Tax benefit
	$	(5,425)		Net of tax
Amortization of defined benefit pension items:
Actuarial losses	$	(375)	⁽¹⁾	Other operating expense
Prior service credits		63	⁽¹⁾	Other operating expense
		(312)		Total before tax
		97		Provision for income taxes
	$	(215)		Net of tax

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)


For the nine months ended September 30, 2020
	Amounts Reclassified from
Details about Accumulated Other	Accumulated Other			Affected Line Item in the Statement
Comprehensive Loss Components	Comprehensive Loss			Where Net Income is Presented
(In thousands)

Unrealized losses on available for sale securities	$	(91)		Net loss on sale of securities
		29		Provision for income taxes
	$	(62)		Net of tax

Cash flow hedges:
Interest rate swaps	$	(2,140)		Other interest expense
		669		Provision for income taxes
	$	(1,471)		Net of tax

Amortization of defined benefit pension items:
Actuarial losses	$	(292)	⁽¹⁾	Other operating expense
Prior service credits		64	⁽¹⁾	Other operating expense
		(228)		Total before tax
		71		Provision for income taxes
	$	(157)		Net of tax

(1)	These accumulated other comprehensive loss components are included in the computation of net periodic pension cost. See Note 9 (“Pension and Other Postretirement Benefit Plans”) for additional information.

13. Regulatory Capital

Under current capital regulations, the Bank is required to comply with four separate capital adequacy standards and a Capital Conservation Buffer (“CCB”). As of September 30, 2021, the Bank 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 Bank at September 30, 2021 and December 31, 2020 was 5.46% and 4.30%, respectively.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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


	September 30, 2021				December 31, 2020
			Percent of				Percent of
	Amount		Assets		Amount		Assets

	(Dollars in thousands)
Tier I (leverage) capital:
Capital level	$	800,352	9.93	%	$	733,010	9.27	%
Requirement to be well capitalized		403,092	5.00			395,510	5.00
Excess		397,260	4.93			337,500	4.27

Common Equity Tier I risk-based capital:
Capital level	$	800,352	12.91	%	$	733,010	11.65	%
Requirement to be well capitalized		402,849	6.50			408,929	6.50
Excess		397,503	6.41			324,081	5.15

Tier 1 risk-based capital:
Capital level	$	800,352	12.91	%	$	733,010	11.65	%
Requirement to be well capitalized		495,814	8.00			503,297	8.00
Excess		304,538	4.91			229,713	3.65

Total risk-based capital:
Capital level	$	834,131	13.46	%	$	773,807	12.30	%
Requirement to be well capitalized		619,768	10.00			629,121	10.00
Excess		214,363	3.46			144,686	2.30

The Holding Company is subject to the same regulatory capital requirements as the Bank. As of September 30, 2021, the Holding Company continues to be categorized as “well-capitalized” under the prompt corrective action regulations and continues to exceed all regulatory capital requirements. The CCB for the Holding Company at September 30, 2021 and December 31, 2020 was 5.44% and 4.54%, respectively.

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


	September 30, 2021				December 31, 2020
			Percent of				Percent of
	Amount		Assets		Amount		Assets

	(Dollars in thousands)
Tier I (leverage) capital:
Capital level	$	711,276	8.83	%	$	662,987	8.38	%
Requirement to be well capitalized		402,936	5.00			395,439	5.00
Excess		308,340	3.83			267,548	3.38

Common Equity Tier I risk-based capital:
Capital level	$	661,340	10.68	%	$	621,247	9.88	%
Requirement to be well capitalized		402,623	6.50			408,694	6.50
Excess		258,717	4.18			212,553	3.38

Tier 1 risk-based capital:
Capital level	$	711,276	11.48	%	$	662,987	10.54	%
Requirement to be well capitalized		495,537	8.00			503,008	8.00
Excess		215,739	3.48			159,979	2.54

Total risk-based capital:
Capital level	$	832,255	13.44	%	$	794,034	12.63	%
Requirement to be well capitalized		619,421	10.00			628,760	10.00
Excess		212,834	3.44			165,274	2.63

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

14. New Authoritative Accounting Pronouncements

Accounting Standards Pending Adoption:

In January 2021, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2021-01, “Reference Rate Reform” (Topic 848), which clarifies that certain optional expedients and exceptions in ASC 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. ASU 2021-01 also amends the expedients and exceptions in ASC 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by discounting transition. ASU 2021-01 was effective upon issuance and generally can be applied through December 31, 2022.

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

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussions and Analysis of

Financial Condition and Results of Operations

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

This Quarterly Report should be read in conjunction with the more detailed and comprehensive disclosures included in our Annual Report on Form 10-K for the year ended December 31, 2020. 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, which was dissolved as of June 30, 2021, 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, 2020. Forward-looking statements may be identified by terms such as “may,” “will,” “should,” “could,” “expects,” “plans,” “intends,” “anticipates,” “believes,” “estimates,” “predicts,” “forecasts,” “goals,” “potential” or “continue” or similar terms or the negative of these terms. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We have no obligation to update these forward-looking statements.

Impact of COVID-19

Update

In response to the novel Coronavirus Disease 2019 and its associated variants (“COVID-19”), the Company actively assists customers by providing modifications in the form of deferrals of interest, principal and/or escrow for terms ranging from one to thirty months. At September 30, 2021, we had 38 active forbearances for loans with an aggregate outstanding loan balance of approximately $162.0 million (including $121.8 million making interest-only payments) resulting in total deferment of $9.5 million in principal, interest and escrow, down from 134 active forbearances for loans with an aggregate outstanding loan balance of $364.4 million at December 31, 2020. The Company actively participated in the Paycheck Protection Program (“PPP”), under the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”), closing $310.3 million of these loans since the beginning of the program, with $179.5 million of those PPP loans forgiven by the SBA as of September 30, 2021, of which $66.5 million of were forgiven during the recent quarter. Pursuant to the CARES Act and later modified by Consolidated Appropriations Act, certain loan modifications are not classified as “troubled debt restructuring” (“TDR”), if the related loans were not more than 30 days past due as of December 31, 2019. The Company has elected not to consider as TDR loans temporarily modified for borrowers directly impacted by COVID-19 where the above criteria was met. As such, these loans are considered current and continue to accrue interest at their original contractual terms until the completion of the applicable deferred periods, following which the borrowers will resume making payments and normal delinquency-based non-accrual policies will apply. Over 57% of the active forbearances are expected to be resolved by year end 2021.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussions and Analysis of

Financial Condition and Results of Operations

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

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. At June 30, 2021, the Bank owns two subsidiaries: 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; (4) mortgage loan surrogates such as mortgage-backed securities; and (5) U.S. government securities, corporate fixed-income securities and other marketable securities. We also originate certain other consumer loans including overdraft lines of credit. Our results of operations depend primarily on net interest income, which is the difference between the income earned on our interest-earning assets and the cost of our interest-bearing liabilities. Net interest income is the result of our net interest rate margin, which is the difference between the average yield earned on interest-earning assets and the average cost of interest-bearing liabilities, adjusted for the difference in the average balance of interest-earning assets as compared to the average balance of interest-bearing liabilities. We also generate non-interest income primarily from loan fees, service charges on deposit accounts, mortgage servicing fees, and other fees, income earned on Bank Owned Life Insurance (“BOLI”), dividends on Federal Home Loan Bank of New York (“FHLB-NY”) stock and net gains and losses on sales of securities and loans. Our operating expenses consist principally of employee compensation and benefits, occupancy and equipment costs, other general and administrative expenses and income tax expense. Our results of operations also can be significantly affected by changes in the fair value of financial assets and financial liabilities for which changes in value are recorded through earnings, our periodic provision for credit losses and specific provision for losses on real estate owned.

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

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FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussions and Analysis of

Financial Condition and Results of Operations

We carry a portion of our financial assets and financial liabilities under the fair value option and record changes in their fair value through earnings in non-interest income on our Consolidated Statements of Income and Comprehensive Income. A description of the financial assets and financial liabilities that are carried at fair value through earnings can be found in Note 10 (“Fair Value of Financial Instruments”) of the Notes to the Consolidated Financial Statements.

For the three months ended September 30, 2021, we reported net income of $25.4 million, or $0.81 per diluted common share, an increase of $6.2 million, or $0.20 per diluted common share from June 30, 2021. During the three months ended September 30, 2021, we produced record net interest income for the sixth consecutive quarter totaling $63.4 million. The record results were achieved primarily through a reduction in the cost of funds, an increase in net gains from qualifying hedges and purchase accounting accretion.

During the three months ended September 30, 2021, the yield on interest-earning assets increased 15 basis points, while the cost of interest-bearing liabilities decreased five basis points from the three months ended June 30, 2021, which resulted in an increase of 20 basis points in net interest margin to 3.34% from 3.14% for the three months ended June 30, 2021. Excluding net gains/losses from qualifying hedges and purchase accounting adjustments, the net interest margin increased 13 basis points to 3.27% for the three months ended September 30, 2021 from 3.14% for the three months ended June 30, 2021.

Our loan portfolio is greater than 87% collateralized by real estate with an average loan to value of less than 38%. We have a long history and foundation built upon disciplined underwriting, good credit quality and a resilient seasoned loan portfolio with strong asset protection. The average loan-to-value on our non-performing real estate loans at September 30, 2021 remained conservative at approximately 35%. At September 30 2021, our ACL - loans stands at 55 basis points of gross loans and 180% of non-performing loans. Non-performing assets at the end of the quarter were 25 basis points of total assets.

The Bank and Company remain well capitalized under current capital regulations and are subject to the same regulatory capital requirements. See Note 13 (“Regulatory Capital”) of the Notes to the Consolidated Financial Statements.

COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020

General. Net income for the three months ended September 30, 2021 was $25.4 million, an increase of $11.1 million from $14.3 million for the three months ended September 30, 2020. Diluted earnings per common share were $0.81 for the three months ended September 30, 2021, an increase of $0.31 from $0.50 for the three months ended September 30, 2020.

Return on average equity increased to 15.42% for the three months ended September 30, 2021 from 9.94% for the three months ended September 30, 2020. Return on average assets increased to 1.26% for the three months ended September 30, 2021 from 0.81% for the three months ended September 30, 2020.

Interest Income. Interest and dividend income increased $9.0 million, or 14.1%, to $73.0 million for the three months ended September 30, 2021 from $63.9 million for the three months ended September 30, 2020. The increase in interest income was primarily attributable to an increase of $932.4 million in the average balance of interest-earning assets to $7,608.3 million for the three months ended September 30, 2021 from $6,675.9 million for the comparable prior year period. The increase in the average balance was primarily driven by the acquisition of Empire Bancorp, Inc. (“Empire”) in the fourth quarter of 2020 coupled with organic growth throughout 2021. Excluding prepayment penalty income from loans, net recoveries/reversals of interest from non-accrual loans, net gains from fair value adjustments on qualifying hedges, and purchase accounting adjustments, the yield on total loans, net, decreased two basis points to 3.96% for the three months ended September 30, 2021 from 3.98% for the three months ended September 30, 2020.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussions and Analysis of

Financial Condition and Results of Operations

Interest Expense. Interest expense decreased $4.4 million, or 31.5%, to $9.6 million for the three months ended September 30, 2021 from $14.0 million for the three months ended September 30, 2020. The decrease in interest expense was primarily due to a decline of 37 basis points in the average cost of interest-bearing liabilities to 0.61% for the three months ended September 30, 2021 from 0.98% for the three months ended September 30, 2020, partially offset by an increase of $579.0 million in the average balance of interest-bearing liabilities to $6,310.9 million for the three months ended September 30, 2021 from $5,731.9 million for the comparable prior year period. The decrease in the cost of interest-bearing liabilities was primarily due to the Company’s response to the Federal Reserve lowering rates.

Net Interest Income. Net interest income for the three months ended September 30, 2021 was $63.4 million, an increase of $13.4 million, or 26.9%, from $49.9 million for the three months ended September 30, 2020. The increase in net interest income was primarily due to an increase of 34 basis points in the net interest margin to 3.34% for the quarter ended September 30, 2021 compared to 3.00% for the quarter ended September 30, 2020, coupled with net interest-earning assets growing $353.5 million to $1,297.5 million during the same period. Included in net interest income was prepayment penalty income from loans totaling $1.8 million and $1.4 million for the three months ended September 30, 2021 and 2020, respectively, net gains from fair value adjustments on qualifying hedges totaling $0.2 million for both the three months ended September 30, 2021 and 2020, and purchase accounting income adjustments of $1.1 million for the three months ended September 30, 2021. Excluding all of these items and other immaterial items, the net interest margin for the three months ended September 30, 2021 was 3.15%, an increase of 26 basis points, from to 2.89% for the three months ended September 30, 2020.

(Benefit) Provision for Credit Losses. During the three months ended September 30, 2021, a benefit for credit losses was recorded totaling $6.9 million, compared to a provision of $2.5 million for the three months ended September 30, 2020. The benefit recorded during the three months ended September 30, 2021 was driven by the improving economic conditions. During the three months ended September 30, 2021, non-accrual loans increased $0.9 million to $18.3 million from $17.4 million at June 30, 2021. The current average loan-to-value ratio for our non-performing loans collateralized by real estate was 35% at September 30, 2021. The Bank continues to maintain conservative underwriting standards.

Non-Interest Income. Non-interest income for the three months ended September 30, 2021 was $0.9 million, a decrease of $0.5 million from income of $1.4 million recorded in the prior year comparable period. The decrease was primarily due to a decrease in banking services fee income.

Non-Interest Expense. Non-interest expense for the three months ended September 30, 2021 was $36.3 million, an increase of $6.4 million, or 21.2%, from $30.0 million for the three months ended September 30, 2020. The increase in non-interest expense was primarily due to the growth of the Company, which includes the impact of the acquisition of Empire, and merger charges of $2.1 million for the three months ended September 30, 2021.

Income before Income Taxes. Income before income taxes for the three months ended September 30, 2021 was $34.8 million, an increase of $16.0 million, or 85.0%, from $18.8 million for the three months ended September 30, 2020 for the reasons discussed above.

Provision for Income Taxes. The provision for income taxes was $9.4 million for the three months ended September 30, 2021, an increase of $4.9 million, or 109.4%, from $4.5 million for the three months ended September 30, 2020. The increase was primarily due to an increase in income before income taxes. The effective tax rate for three months ended September 30, 2021 was 27.0% compared to 23.9% for the three months ended September 30, 2020. The increase in the effective tax rate for the three months ended September 30, 2021, reflects the discontinuation of New York State and New York City tax benefits provided by the Company’s subsidiary, Flushing Preferred Funding Corporation. Due to regulations, the benefit is not available to banks with average assets of greater than $8.0 billion. Flushing Preferred Funding Corporation was dissolved as of June 30, 2021.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussions and Analysis of

Financial Condition and Results of Operations

COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020

General. Net income for the nine months ended September 30, 2021 was $63.7 million, an increase of $32.5 million, or 104.1%, from $31.2 million for the nine months ended September 30, 2020. Diluted earnings per common share were $2.02 for the nine months ended September 30, 2021, an increase of $0.94, or 87.0%, from $1.08 for the nine months ended September 30, 2020.

Return on average equity increased to 13.24% for the nine months ended September 30, 2021 from 7.30% for the nine months ended September 30, 2020. Return on average assets increased to 1.04% for the nine months ended September 30, 2021 from 0.58% for the nine months ended September 30, 2020.

Interest Income. Interest and dividend income increased $21.5 million, or 11.0%, to $216.8 million for the nine months ended September 30, 2021 from $195.4 million for the nine months ended September 30, 2020. The increase in interest income was primarily attributable to an increase of $953.4 million in the average balance of interest-earning assets to $7,688.4 million for the nine months ended September 30, 2021 from $6,735.0 million for the comparable prior year period, partially offset by a decrease of 11 basis points in the yield of average interest earning assets. The increase in the average balance was primarily driven by the acquisition of Empire in the fourth quarter of 2020 coupled with organic growth. The decrease in the yield on interest-earning assets was primarily due to decreases of 60 basis points in the yield of taxable securities from the repayment of higher yielding securities being replaced by lower yielding securities. Excluding prepayment penalty income from loans and securities, net recoveries/(reversals) of interest from non-accrual loans, net gains (losses) from fair value adjustments on qualifying hedges, and purchase accounting adjustments, the yield on total loans, net, decreased 16 basis points to 3.94% for the nine months ended September 30, 2021 from 4.10% for the nine months ended September 30, 2020.

Interest Expense. Interest expense decreased $24.4 million, or 43.6%, to $31.5 million for the nine months ended September 30, 2021 from $55.9 million for the nine months ended September 30, 2020. The decrease in interest expense was primarily due to a decline of 62 basis points in the cost of average interest-bearing liabilities to 0.65% for the nine months ended September 30, 2021 from 1.27% for the nine months ended September 30, 2020, partially offset by an increase of $574.9 million in the average balance of interest-bearing liabilities to $6,439.9 million for the nine months ended September 30, 2021 from $5,865.0 million for the comparable prior year period. The decrease in the cost of interest-bearing liabilities was primarily due to the Company’s response to the Federal Reserve lowering rates.

Net Interest Income. Net interest income for the nine months ended September 30, 2021 was $185.3 million, an increase of $45.8 million, or 32.9%, from $139.5 million for the nine months ended September 30, 2020. The increase in net interest income was primarily due to an increase of $378.5 million in net interest-earning assets to $1,248.4 million for the nine months ended September 30, 2021 from $869.9 million for the comparable prior year period, coupled with a 45 basis point increase in the net interest margin to 3.22% for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020. Included in net interest income was prepayment penalty income from loans and securities totaling $4.9 million and $2.9 million for the nine months ended September 30, 2021 and 2020, respectively, net recovered interest from non-accrual loans totaling $0.2 million and $0.6 million for the nine months ended September 30, 2021 and 2020, respectively, net gains (losses) from fair value adjustments on qualifying hedges totaling $1.0 million and ($2.2) million for nine months ended September 30, 2021 and 2020, respectively, and purchase accounting income adjustments of $2.6 million for the nine months ended September 30, 2021. Excluding all of these items, the net interest margin for the nine months ended September 30, 2021 was 3.07%, an increase of 33 basis points, from to 2.74% for the nine months ended September 30, 2020.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussions and Analysis of

Financial Condition and Results of Operations

(Benefit) Provision for Credit Losses. During the nine months ended September 30, 2021, a benefit for credit losses was recorded totaling $5.7 million, compared to a provision of $19.3 million for the nine months ended September 30, 2020. The benefit recorded during the nine months ended September 30, 2021 was primarily driven by improving economic conditions, partially offset by net charge-offs totaling $3.1 million. During the nine months ended September 30, 2021, non-accrual loans were stable $18.3 million. The current average loan-to-value ratio for our non-performing loans collateralized by real estate was 35% at September 30, 2021. The Bank continues to maintain conservative underwriting standards.

Non-Interest Income. Non-interest income for the nine months ended September 30, 2021 was $4.0 million, a decrease of $8.3 million from the comparable prior year period. The decrease was primarily due to an increase in net losses from fair value adjustments to a net loss totaling $7.9 million for the nine months ended September 30, 2021 compared to net gains of $2.0 million for the same period in 2020.

Non-Interest Expense. Non-interest expense for the nine months ended September 30, 2021 was $108.5 million, an increase of $17.4 million, or 19.1%, from $91.1 million for the nine months ended September 30, 2020. The increase in non-interest expense was primarily due to the growth of the Company, which includes the impact of the acquisition of Empire.

Income before Income Taxes. Income before income taxes increased $45.1 million, to $86.5 million for the nine months ended September 30, 2021 from $41.3 million for the nine months ended September 30, 2020 for the reasons discussed above.

Provision for Income Taxes. The provision for income taxes was $22.7 million for the nine months ended September 30, 2021, an increase of $12.7 million from $10.1 million for the nine months ended September 30, 2020. The increase was primarily due to an increase in income before income taxes. The effective tax rate for nine months ended September 30, 2021 was 26.3% compared to 24.4% for the nine months ended September 30, 2020. The increase in the effective tax rate for the nine months ended September 30, 2021, reflects the discontinuation of New York State and New York City tax benefits provided by the Company’s subsidiary, Flushing Preferred Funding Corporation. Due to regulations, the benefit is not available to banks with average assets of greater than $8.0 billion. Flushing Preferred Funding Corporation was dissolved as of June 30, 2021.

FINANCIAL CONDITION

Assets. Total assets at September 30, 2021 were $8,077.3 million, an increase of $100.9 million, or 1.3%, from $7,976.4 million at December 31, 2020. Total loans, net decreased $65.5 million, or 1.0%, during the nine months ended September 30, 2021, to $6,594.0 million from $6,659.5 million at December 31, 2020. The decrease was primarily due to PPP loan forgiveness totaling $159.8 million during the nine months ended September 30, 2021. Loan originations and purchases were $891.2 million for the nine months ended September 30, 2021, an increase of $203.1 million, or 29.5%, from $688.1 million for the nine months ended September 30, 2020. In order to support our customers during this COVID-19 pandemic, we originated $138.7 million of PPP loans during the nine months ended September 30, 2021. We continue to focus on the origination of multi-family residential, commercial real estate and commercial business loans with a full banking relationship. The loan pipeline was $530.7 million at September 30, 2021, compared to $354.6 million at December 31, 2020.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussions and Analysis of

Financial Condition and Results of Operations

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


	For the three months				For the nine months
	ended September 30,				ended September 30,
(In thousands)	2021		2020		2021		2020
Multi-family residential ⁽¹⁾	$	41,850	$	33,733	$	167,316	$	160,705
Commercial real estate ⁽²⁾		48,447		26,644		103,566		134,218
One-to-four family – mixed-use property		12,823		3,867		28,670		25,439
One-to-four family – residential ⁽³⁾		2,761		2,296		65,386		13,383
Co-operative apartments		—		—		—		704
Construction ⁽⁴⁾		8,687		5,420		21,091		14,990
Small Business Administration⁽⁵⁾		415		18,456		143,093		111,754
Commercial business and other ⁽⁶⁾		128,946		65,160		362,100		226,895
Total	$	243,929	$	155,576	$	891,222	$	688,088

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

(2)	Includes purchases of $13.9 million for the three months ended September 30, 2021. Includes purchase of $13.9 million and $30.0 million for the nine months ended September 30, 2021 and 2020, respectively.

(3)	Includes purchases of $58.0 million for the nine months ended September 30, 2021.

(4)	Includes purchases of $2.3 million and $1.2 million for the three months ended September 30, 2021 and 2020, respectively. Includes purchases of $9.2 million and $0.9 million for the nine months ended September 30, 2021 and 2020, respectively.

(5)	Includes $18.4 million of SBA PPP loans for the three months ended September 30, 2020 Includes $138.7 million and $111.6 million of SBA PPP loans for the nine months ended September 30, 2021 and 2020, respectively.

(6)	Includes purchases of $45.8 million and $19.5 million for the three months ended September 30, 2021 and 2020, respectively. Includes purchases of $111.6 million and $77.3 million for the nine months ended September 30, 2021 and 2020, respectively.

The Bank maintains its conservative underwriting standards that include, among other things, a loan-to-value ratio of 75% or less and a debt coverage ratio of at least 125%. Multi-family residential (excluding underlying co-operative mortgages), commercial real estate and one-to-four family mixed-use property mortgage loans originated and purchased during the nine months ended September 30, 2021 had an average loan-to-value ratio of 45.3% and an average debt coverage ratio of 183.3%.

The Bank’s non-performing assets totaled $20.2 million at September 30, 2021, a decrease of $0.9 million, or 4.2%, from $21.1 million at December 31, 2020. Total non-performing assets as a percentage of total assets were 0.25% at September 30, 2021 and 0.26% at December 31, 2020. The ratio of ACL - loans to total non-performing loans was 179.9% at September 30, 2021 and 214.3% at December 31, 2020.

During the nine months ended September 30, 2021, mortgage-backed securities increased $179.7 million, or 43.6%, to $592.0 million from $412.4 million at December 31, 2020. The increase in mortgage-backed securities during the nine months ended September 30, 2021 was primarily due to the purchase of securities totaling $310.9 million at an average rate of 1.28%, partially offset by maturities and principal repayments of securities totaling $118.2 million, and the decline in the fair value of the securities totaling $10.8 million.

During the nine months ended September 30, 2021, other securities, decreased $30.8 million, or 10.5%, to $262.6 million from $293.4 million at December 31, 2020. The decrease in other securities during the nine months ended September 30, 2021, was primarily due to maturities, sales and calls totaling $233.5 million, partially offset by purchases of $197.5 million at an average rate of 0.53% and an increase in the fair value of other securities of $5.8 million. At September 30, 2021 other securities primarily consist of securities issued by mutual or bond funds that invest in government and government agency securities, municipal bonds, corporate bonds and CLOs.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussions and Analysis of

Financial Condition and Results of Operations

Liabilities. Total liabilities were $7,409.2 million at September 30, 2021, an increase of $51.8 million, or 0.7%, from $7,357.4 million at December 31, 2020. During the nine months ended September 30, 2021, due to depositors increased $330.7 million, or 5.4%, to $6,421.4 million due to an increase of $428.9 million in non-maturity deposits, partially offset by a decrease of $98.3 million in certificates of deposit. The decrease in certificates of deposit was due to management’s decision to allow these deposits to mature and replace with lower cost funding. The increase in non-maturity deposits was due to increases of $469.7 million and $162.6 million in money market accounts and demand deposits accounts, respectively, partially offset by a decrease of $187.5 million and $15.9 million in NOW accounts and savings accounts, respectively. Included in deposits were brokered deposits totaling $605.8 million, a decrease of $468.2 million from $1,074.1 million at December 31, 2020. Borrowed funds decreased $268.0 million during the nine months ended September 30, 2021, as the increase in deposits funded balance sheet growth.

Equity. Total stockholders’ equity increased $49.1 million, or 7.9%, to $668.1 million at September 30, 2021 from $619.0 million at December 31, 2020. Stockholders’ equity increased due to net income totaling $63.7 million, an increase in accumulated other comprehensive income of $7.3 million and the net impact of vesting and exercising of shares of employee and director stock plans totaling $4.4 million. These increases were partially offset by declaration and payment of dividends on the Company’s common stock of $0.63 per common share totaling $19.9 million and 285,643 shares repurchased totaling $6.4 million. Book value per common share improved to $21.78 at September 30, 2021 compared to $20.11 at December 31, 2020.

Cash flow. During the nine months ended September 30, 2021, funds provided by the Company’s operating and financing activities amounted to $59.6 million and $48.3 million, respectively. These funds were utilized to fund $86.7 million in investing activities. The Company’s primary business objective is the origination and purchase of multi-family residential loans, commercial business loans and commercial real estate mortgage loans and to a lesser extent one-to-four family (including mixed-use properties) and SBA loans. During the nine months ended September 30, 2021, the net total of loan purchases, originations, loan repayments and sales was an inflow of $64.7 million. During the nine months ended September 30, 2021, the Company funded $508.4 million in purchases of securities available for sale. During the nine months ended September 30, 2021, funds were provided by sales, calls, prepayments and maturities of available for sale securities totaling $352.6 million. During the nine months ended September 30, 2021, funds were provided by an increase in deposits totaling $352.3 million. The funds were used to repay $251.4 million in long-term borrowings and $25.0 million in short-term borrowings. The Company also used funds totaling $19.9 million for dividend payments and $7.8 million for purchases of treasury stock during the nine months ended September 30, 2021.

INTEREST RATE RISK

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

The Company quantifies the net portfolio value should interest rates immediately go up 200 basis points or down 100 basis points, assuming the yield curves of the rate shocks will be parallel to each other. 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. The changes in value are measured as percentage changes from the net portfolio value at the base interest rate scenario. The base interest rate scenario assumes interest rates at September 30, 2021. Various estimates regarding prepayment assumptions are made at each level of rate shock. At September 30, 2021, the Company was within the guidelines set forth by the Board of Directors for each interest rate level.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussions and Analysis of

Financial Condition and Results of Operations

The following table presents the Company’s interest rate shock as of September 30, 2021:



Change in Interest Rate	Net Portfolio Value		Net Portfolio Value Ratio
-100 Basis points	(6.63)	%	10.78	%
Base interest rate	—		11.73
+100 Basis points	(4.55)		11.46
+200 Basis points	(9.87)		11.08

Income Simulation Analysis. 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 provides a report for review by the ALCO Investment Committee of the Board of Directors. This report quantifies the potential changes in net interest income and net portfolio value through various interest rate scenarios.

The starting point for the net interest income simulation is an estimate of the next twelve month’s net interest income assuming that both interest rates and the Company’s interest-sensitive assets and liabilities remain at period-end levels. The net interest income simulation assumes that changes in interest rates change gradually in equal increments over the twelve-month period. Prepayment penalty income is excluded from this analysis. Based on these assumptions, net interest income would be reduced by 3.4% from a 100 basis point increase in rates over the next twelve months. Actual results could differ significantly from these estimates.

At September 30, 2021, the Company had a derivative portfolio with a notional value totaling $1.5 billion. This portfolio is designed to provide protection against rising interest rates. See Note 11 (“Derivative Financial Instruments”) of the Notes to the Consolidated Financial Statements.

A portion of this portfolio is comprised of forward swaps on certain short-term advances and brokered CDs totaling $996.5 million. At September 30, 2021, $591.5 million of the forward swaps are effective swaps at a weighted average rate of 1.95% that largely mature by the end of 2023 and $405.0 million of the forward swaps become effective at different points through 2024, at an average rate of 0.77%. A summary of maturity dates and effective dates of our forward swaps on short-term advances and brokered CDs held at September 30, 2021, are shown in the table below:


		2022				2023				2024				2025
(Dollars in thousands)		Notional	Weighted Average Rate			Notional	Weighted Average Rate			Notional	Weighted Average Rate			Notional	Weighted Average Rate

Effective Swaps Maturity	$	125,000	1.86	%	$	321,000	2.09	%	$	121,000	1.96	%	$	25,000	0.47	%
Forward Starting Swaps		125,000	0.88			230,000	0.70			50,000	0.80			—	—

The net interest income simulation incorporates the next twelve months (through September 30, 2022) and only a portion of the effective swap maturities and the forward starting swaps are included in this period. Assuming another equal increment ramp of 100 basis points increase in rates in the second year (through September 30, 2023), for a total of 200 basis points over two years, the total derivative portfolio has a 1.7% benefit to net interest income (versus the base case) in the first year and a cumulative benefit of 4.8% by the second year.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussions and Analysis of

Financial Condition and Results of Operations

AVERAGE BALANCES

Net interest income represents the difference between income on interest-earning assets and expense on interest-bearing liabilities. Net interest income depends upon the relative amount of interest-earning assets and interest-bearing liabilities and the interest rate earned or paid on them. The following tables sets forth certain information relating to the Company’s Consolidated Statements of Financial Condition and Consolidated Statements of Income for the three and nine months ended September 30, 2021 and 2020, and reflects the average yield on assets and average cost of liabilities for the periods indicated. Such yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods shown. Average balances are derived from average daily balances. The yields include amortization of fees which are considered adjustments to yields.


	For the three months ended September 30,
	2021						2020
	Average				Yield/		Average				Yield/
	Balance		Interest		Cost		Balance		Interest		Cost

Assets	(Dollars in thousands)
Interest-earning assets:
Mortgage loans, net	$	5,158,213	$	55,114	4.27	%	$	4,721,742	$	49,814	4.22	%
Other loans, net		1,475,088		14,084	3.82			1,182,309		10,553	3.57
Total loans, net^{(1) (2)}		6,633,301		69,198	4.17			5,904,051		60,367	4.09
Taxable securities:
Mortgage-backed securities		590,732		2,279	1.54			413,902		1,928	1.86
Other securities		217,763		1,008	1.85			243,754		1,166	1.91
Total taxable securities		808,495		3,287	1.63			657,656		3,094	1.88
Tax-exempt securities: ⁽³⁾
Other securities		50,832		539	4.24			51,652		557	4.31
Total tax-exempt securities		50,832		539	4.24			51,652		557	4.31
Interest-earning deposits and federal funds sold		115,689		42	0.15			62,537		13	0.08
Total interest-earning assets		7,608,317		73,066	3.84			6,675,896		64,031	3.84
Other assets		464,601						407,132
Total assets	$	8,072,918					$	7,083,028
Liabilities and Equity
Interest-bearing liabilities
Deposits:
Savings accounts	$	153,120		61	0.16		$	160,100		65	0.16
NOW accounts		2,107,866		1,227	0.23			1,625,109		1,242	0.31
Money market accounts		2,107,473		1,683	0.32			1,461,996		2,108	0.58
Certificate of deposit accounts		1,037,964		1,734	0.67			1,106,355		3,700	1.34
Total due to depositors		5,406,423		4,705	0.35			4,353,560		7,115	0.65
Mortgagors' escrow accounts		68,562		—	—			55,868		(22)	(0.16)
Total deposits		5,474,985		4,705	0.34			4,409,428		7,093	0.64
Borrowed funds		835,874		4,884	2.34			1,322,471		6,897	2.09
Total interest-bearing liabilities		6,310,859		9,589	0.61			5,731,899		13,990	0.98
Non-interest-bearing deposits		933,443						589,674
Other liabilities		169,328						184,943
Total liabilities		7,413,630						6,506,516
Equity		659,288						576,512
Total liabilities and equity	$	8,072,918					$	7,083,028
Net interest income / net interest rate spread (tax equivalent) ⁽³⁾			$	63,477	3.23	%			$	50,041	2.86	%
Net interest-earning assets / net interest margin(tax equivalent)	$	1,297,458			3.34	%	$	943,997			3.00	%
Ratio of interest-earning assets to interest-bearing liabilities					1.21	X					1.16	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 $3.4 million and $0.8 million for the three months ended September 30, 2021 and 2020, respectively.

(2)

Loan interest income includes net gains from fair value adjustments on qualifying hedges of $0.2 million for each of the three month periods ended September 30, 2021 and 2020.

(3)

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

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussions and Analysis of

Financial Condition and Results of Operations


	For the nine months ended September 30,
	2021						2020
	Average				Yield/		Average				Yield/
	Balance		Interest		Cost		Balance		Interest		Cost

Assets	(Dollars in thousands)
Interest-earning assets:
Mortgage loans, net	$	5,148,204	$	163,320	4.23	%	$	4,727,094	$	148,945	4.20	%
Other loans, net		1,525,105		42,898	3.75			1,154,764		33,088	3.82
Total loans, net^{(1) (2)}		6,673,309		206,218	4.12			5,881,858		182,033	4.13
Taxable securities:
Mortgage-backed securities		534,836		6,210	1.55			462,216		7,295	2.10
Other securities		249,899		3,008	1.60			243,782		4,221	2.31
Total taxable securities		784,735		9,218	1.57			705,998		11,516	2.17
Tax-exempt securities: ⁽³⁾
Other securities		50,830		1,604	4.21			58,464		1,876	4.28
Total tax-exempt securities		50,830		1,604	4.21			58,464		1,876	4.28
Interest-earning deposits and federal funds sold		179,480		129	0.10			88,659		325	0.49
Total interest-earning assets		7,688,354		217,169	3.77			6,734,979		195,750	3.88
Other assets		472,767						396,871
Total assets	$	8,161,121					$	7,131,850
Liabilities and Equity
Interest-bearing liabilities
Deposits:
Savings accounts	$	158,708		202	0.17		$	180,829		420	0.31
NOW accounts		2,182,660		4,432	0.27			1,495,473		7,989	0.71
Money market accounts		2,019,497		5,843	0.39			1,579,712		12,358	1.04
Certificate of deposit accounts		1,061,293		5,869	0.74			1,186,188		15,031	1.69
Total due to depositors		5,422,158		16,346	0.40			4,442,202		35,798	1.07
Mortgagors' escrow accounts		75,171		3	0.01			69,427		44	0.08
Total deposits		5,497,329		16,349	0.40			4,511,629		35,842	1.06
Borrowed funds		942,599		15,188	2.15			1,353,416		20,047	1.97
Total interest-bearing liabilities		6,439,928		31,537	0.65			5,865,045		55,889	1.27
Non-interest-bearing deposits		904,522						533,563
Other liabilities		175,317						163,044
Total liabilities		7,519,767						6,561,652
Equity		641,354						570,198
Total liabilities and equity	$	8,161,121					$	7,131,850
Net interest income / net interest rate spread (tax equivalent) ⁽³⁾			$	185,632	3.12	%			$	139,861	2.61	%
Net interest-earning assets / net interest margin(tax equivalent)	$	1,248,426			3.22	%	$	869,934			2.77	%
Ratio of interest-earning assets to interest-bearing liabilities					1.19	X					1.15	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 $8.2 million and $1.3 million for the nine months ended September 30, 2021 and 2020, respectively.

(2)

Loan interest income includes net gains (losses) from fair value adjustments on qualifying hedges of $1.0 million and ($2.2) million for the nine months ended September 30, 2021 and 2020, respectively.

(3)

Interest and yields are calculated on the tax equivalent basis using the statutory federal income tax rate of 21% for the periods presented totaling $0.3 million and $0.4 million for the nine months ended September 30, 2021 and 2020.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussions and Analysis of

Financial Condition and Results of Operations

LOANS

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


	For the nine months ended September 30,
(In thousands)	2021		2020

Mortgage Loans
At beginning of period	$	5,228,271	$	4,677,703

Mortgage loans originated:
Multi-family residential		167,316		157,577
Commercial real estate		89,678		104,213
One-to-four family – mixed-use property		28,670		25,439
One-to-four family – residential		7,434		13,383
Co-operative apartments		—		704
Construction		11,865		10,384
Total mortgage loans originated		304,963		311,700

Mortgage loans purchased:
Multi-family residential		—		3,128
Commercial real estate		13,888		30,005
One-to-four family - residential		57,952		—
Construction		9,226		4,606
Total mortgage loans purchased		81,066		37,739

Less:
Principal and other reductions		406,720		289,356
Sales		23,895		498
Charge-offs		139		3
At end of period	$	5,183,546	$	4,737,285

Non-Mortgage Loans
At beginning of period	$	1,473,358	$	1,079,232
Other loans originated:
Small Business Administration ⁽¹⁾		143,093		111,754
Commercial business		247,025		128,079
Other		3,436		3,662
Total other loans originated		393,554		243,495

Other loans purchased:
Commercial business		111,639		95,154
Total other loans purchased		111,639		95,154

Less:
Principal and other reductions		530,020		224,236
Charge-offs		4,988		3,250
At end of period	$	1,443,543	$	1,190,395

(1)	Includes SBA PPP originations totaling $138.7 million and $111.6 million for the nine months ended September 30, 2021 and 2020, respectively.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussions and Analysis of

Financial Condition and Results of Operations

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

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


	September 30,		December 31,
(In thousands)	2021		2020
Accrual Status:
Multi-family residential	$	1,681	$	1,700
Commercial real estate		7,572		7,702
One-to-four family - mixed-use property		1,391		1,459
One-to-four family - residential		489		507
Commercial business and other		1,726		1,588
Total		12,859		12,956

Non-Accrual Status:
One-to-four family - mixed-use property		264		272
Commercial business and other		14		2,243
Taxi medallion		—		440
Total		278		2,955

Total performing troubled debt restructured	$	13,137	$	15,911

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussions and Analysis of

Financial Condition and Results of Operations

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



	September 30,			December 31,
(In thousands)	2021			2020

Loans 90 days or more past due and still accruing:
Multi-family residential	$	—		$	201
Commercial real estate		—			2,547
Construction loans		873			—
Commercial Business and other		1,052			—
Total		1,925			2,748
Non-accrual loans:
Multi-family residential		4,192			2,524
Commercial real estate		613			1,683
One-to-four family - mixed-use property ⁽¹⁾		2,204			1,366
One-to-four family - residential		7,807			5,854
Small business administration		976			1,151
Taxi medallion⁽¹⁾		—			2,317
Commercial Business and other ⁽¹⁾		2,500			3,430
Total		18,292			18,325
Total non-performing loans		20,217			21,073
Other non-performing assets:
Other assets acquired through foreclosure		—			35
Total		—			35
Total non-performing assets	$	20,217		$	21,108

Non-performing assets to total assets		0.25	%		0.26	%
ACL - loans to non-performing loans		179.86	%		214.27	%

(1) Not included in the above analysis are non-accrual performing TDR mixed-use property loans totaling $0.3 million at September 30, 2021 and December 31, 2020; non-accrual performing TDR taxi medallion loans totaling $0.4 million at December 31, 2020 and non-accrual performing TDR commercial business loans totaling $14,000 at September 30, 2021 and $2.2 million December 31, 2020.

CRITICIZED AND CLASSIFIED ASSETS

Our policy is to review our assets, focusing primarily on the loan portfolio, OREO and the investment portfolios, to ensure that credit quality is maintained at the highest levels. See Note 5 (“Loans”) of the Notes to the Consolidated Financial Statements for a description of how loans are determined to be criticized or classified and a table displaying criticized and classified loans at September 30, 2021 and December 31, 2020. The Company did not hold any classified investment securities at September 30, 2021 and December 31, 2020. The Company had $21.0 million in criticized investment securities at September 30, 2021 and none at December 31, 2020 . Our total Criticized and Classified assets were $89.9 million at September 30, 2021, an increase of $18.0 million from $71.9 million at December 31, 2020.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussions and Analysis of

Financial Condition and Results of Operations

ALLOWANCE FOR CREDIT LOSSES

The following table shows allowance for credit losses at the period indicated:


	At or for the nine months ended September 30,
(Dollars in thousands)		2021		2020

Balance at beginning of period	$	45,153	$	21,751
Loans- CECL Adoption		—		379
Loans- Charge-off		(5,127)		(3,253)
Loans- Recovery		1,979		260
Loans- (Benefit) Provision		(5,642)		19,206
ACL - loans	$	36,363	$	38,343


Balance at beginning of period	$	907	$	—
HTM Securities- CECL Adoption		—		340
HTM Securities- (Benefit) Provision		(64)		62
ACL - HTM Securities	$	843	$	402


Balance at beginning of period	$	1,815	$	—
Off-Balance Sheet - CECL Adoption		—		553
Off-Balance Sheet- (Benefit) Provision		(504)		1,006
ACL - Off-Balance Sheet	$	1,311	$	1,559

Allowance for Credit Losses	$	38,517	$	40,304

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Table of Contents

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussions and Analysis of

Financial Condition and Results of Operations

The following table sets forth the activity in the Company’s ACL - loans for the periods indicated:


	At or for the nine months ended September 30,
(Dollars in thousands)	2021			2020

Balance at beginning of period	$	45,153		$	21,751
CECL Adoption		—			379
(Benefit) Provision for credit losses on loans		(5,642)			19,206

Loans charged-off:
Multi-family residential		(43)			—
Commercial real estate		(64)			—
One-to-four family - mixed-use property		(32)			(3)
Small Business Administration		—			(178)
Taxi medallion		(2,758)			(951)
Commercial business and other		(2,230)			(2,121)
Total loans charged-off		(5,127)			(3,253)

Recoveries:
Multi-family residential		10			27
One-to-four family - mixed-use property		133			138
One-to-four family - residential		154			10
Small Business Administration		27			67
Taxi medallion		1,457			—
Commercial business and other		198			18
Total recoveries		1,979			260

Net charge-offs		(3,148)			(2,993)
Balance at end of period	$	36,363		$	38,343

Ratio of net charge-offs during the period to average loans outstanding during the period		0.06	%		0.07	%
Ratio of ACL - loans to gross loans at end of period		0.31	%		0.65	%
Ratio of ACL - loans to non-performing assets at end of period		179.86	%		154.44	%
Ratio of ACL - loans to non-performing loans at end of period		179.86	%		154.66	%

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

ITEM 4. CONTROLS AND PROCEDURES

The Company carried out, under the supervision and with the participation of the Company’s management, including its Chief Executive Officer and Chief Financial Officer, an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this Quarterly Report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2021, the design and operation of these disclosure controls and procedures were effective. During the period covered by this Quarterly Report, there have been no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II – OTHER INFORMATIOMTION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

ITEM 1. LEGAL PROCEEDINGS

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

ITEM 1A. RISK FACTORS

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, 2020.

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

The following table sets forth information regarding the shares of common stock repurchased by the Company during the three months ended September 30, 2021:


					Maximum
				Total Number of	Number of
	Total			Shares Purchased	Shares That May
	Number			as Part of Publicly	Yet Be Purchased
	of Shares	Average Price		Announced Plans	Under the Plans
Period	Purchased	Paid per Share		or Programs	or Programs
July 1 to July 31, 2021	25,000	$	22.09	25,000	1,259,806
August 1 to August 31, 2021	130,541		22.47	130,541	1,129,265
September 1 to September 30, 2021	130,102		22.42	130,102	999,163
Total	285,643		22.42	285,643

During the quarter ended September 30, 2021, the Company repurchased 285,643 shares of the Company’s common stock. On September 30, 2021, 999,163 shares remained to be repurchased under the currently authorized stock repurchase program. Stock will be purchased under the current stock repurchase programs from time to time, in the open market or through private transactions, subject to market conditions. There is no expiration or maximum dollar amount under these authorizations.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

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PART II – OTHER INFORMATIOMTION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

ITEM 6. EXHIBITS


Exhibit No.		Description

3.1 P		Certificate of Incorporation of Flushing Financial Corporation (1)
3.2		Certificate of Amendment to Certificate of Incorporation of Flushing Financial Corporation (3)
3.3		Certificate of Amendment to Certificate of Incorporation of Flushing Financial Corporation (5)
3.4		Certificate of Designations of Series A Junior Participating Preferred Stock of Flushing Financial Corporation (4)
3.5		Certificate of Increase of Shares Designated as Series A Junior Participating Preferred Stock of Flushing Financial Corporation (2)
3.6		Amended and Restated By-Laws of Flushing Financial Corporation (6)
4.1		Subordinated Indenture, dated as of December 12, 2016, by and between the Company and Wilmington Trust, National Association, as Trustee. (7)
4.2		First Supplemental Indenture, dated as of December 12, 2016, by and between the Company and Wilmington Trust, National Association, as Trustee, including the form of the Notes attached as Exhibit A thereto. (7)
4.3		Flushing Financial Corporation has outstanding certain long-term debt. None of such debt exceeds ten percent of Flushing Financial Corporation's total assets; therefore, copies of constituent instruments defining the rights of the holders of such debt are not included as exhibits. Copies of instruments with respect to such long-term debt will be furnished to the Securities and Exchange Commission upon request.
10.1		Amended Flushing Financial Corporation 2014 Omnibus Plan (8)
31.1		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Chief Executive Officer (filed herewith)
31.2		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Chief Financial Officer (filed herewith)
32.1		Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002 by the Chief Executive Officer (furnished herewith)
32.2		Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002 by the Chief Financial Officer (furnished herewith)
101.INS		XBRL Instance Document -the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.SCH		XBRL Taxonomy Extension Schema Document (filed herewith)
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document (filed herewith)
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document (filed herewith)
101.LAB		XBRL Taxonomy Extension Label Linkbase Document (filed herewith)
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document (filed herewith)
104		Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)

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

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

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

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

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

September 30, 2002.

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

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

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

(8)	Incorporated by reference to Exhibit filed with Form 10-Q for the quarter ended June 30, 2021.

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FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

EXHIBIT INDEX


Exhibit No.		Description

3.1 P		Certificate of Incorporation of Flushing Financial Corporation (1)
3.2		Certificate of Amendment to Certificate of Incorporation of Flushing Financial Corporation (3)
3.3		Certificate of Amendment to Certificate of Incorporation of Flushing Financial Corporation (5)
3.4		Certificate of Designations of Series A Junior Participating Preferred Stock of Flushing Financial Corporation (4)
3.5		Certificate of Increase of Shares Designated as Series A Junior Participating Preferred Stock of Flushing Financial Corporation (2)
3.6		Amended and Restated By-Laws of Flushing Financial Corporation (6)
4.1		Subordinated Indenture, dated as of December 12, 2016, by and between the Company and Wilmington Trust, National Association, as Trustee. (7)
4.2		First Supplemental Indenture, dated as of December 12, 2016, by and between the Company and Wilmington Trust, National Association, as Trustee, including the form of the Notes attached as Exhibit A thereto. (7)
4.3		Flushing Financial Corporation has outstanding certain long-term debt. None of such debt exceeds ten percent of Flushing Financial Corporation's total assets; therefore, copies of constituent instruments defining the rights of the holders of such debt are not included as exhibits. Copies of instruments with respect to such long-term debt will be furnished to the Securities and Exchange Commission upon request.
10.1		Amended Flushing Financial Corporation 2014 Omnibus Plan (8)
31.1		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Chief Executive Officer (filed herewith)
31.2		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Chief Financial Officer (filed herewith)
32.1		Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002 by the Chief Executive Officer (furnished herewith)
32.2		Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002 by the Chief Financial Officer (furnished herewith)
101.INS		XBRL Instance Document -the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.SCH		XBRL Taxonomy Extension Schema Document (filed herewith)
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document (filed herewith)
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document (filed herewith)
101.LAB		XBRL Taxonomy Extension Label Linkbase Document (filed herewith)
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document (filed herewith)
104		Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)

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

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

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

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

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

September 30, 2002.

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

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

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

(8)	Incorporated by reference to Exhibit filed with Form 10-Q for the quarter ended June 30, 2021.

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FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

SIGNATURES

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

		Flushing Financial Corporation,



Dated:	November 5, 2021	By:	/s/John R. Buran
			John R. Buran
			President and Chief Executive Officer



Dated:	November 5, 2021	By:	/s/Susan K. Cullen
			Susan K. Cullen
			Senior Executive Vice President, Treasurer and
			Chief Financial Officer

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