FLUSHING FINANCIAL CORP - Quarter Report: 2016 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2016

Commission file number 001-33013

FLUSHING FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

Delaware

(State or other jurisdiction of incorporation or organization)

11-3209278

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

220 RXR Plaza, Uniondale, New York 11556

(Address of principal executive offices)

(718) 961-5400

(Registrant's telephone number, including area code)

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

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

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

Large accelerated filer __

Non-accelerated filer __

Accelerated filer X

Smaller reporting company __

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, 2016 was 28,618,493.

TABLE OF CONTENTS

	PAGE
PART I — FINANCIAL INFORMATION
ITEM 1. Financial Statements - (Unaudited)
Consolidated Statements of Financial Condition	1
Consolidated Statements of Income	2
Consolidated Statements of Comprehensive Income	3
Consolidated Statements of Cash Flows	4
Consolidated Statements of Changes in Stockholders’ Equity	5
Notes to Consolidated Financial Statements	6
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	49
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk	67
ITEM 4. Controls and Procedures	67
PART II — OTHER INFORMATION
ITEM 1. Legal Proceedings	68
ITEM 1A. Risk Factors	68
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds	68
ITEM 3. Defaults Upon Senior Securities	68
ITEM 4. Mine Safety Disclosures	68
ITEM 5. Other Information	68
ITEM 6. Exhibits	69
SIGNATURES	70

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Consolidated Statements of Financial Condition

(Unaudited)

Item 1. Financial Statements

(Dollars in thousands, except share data)	September 30, 2016			December 31, 2015
ASSETS
Cash and due from banks	$	47,880		$	42,363
Securities held-to-maturity:
Other securities (none pledged) (fair value of $33,410 and $6,180 at September 30, 2016 and December 31, 2015, respectively)		33,274			6,180
Securities available for sale:
Mortgage-backed securities (including assets pledged of $133,470 and $496,121 at September 30, 2016 and December 31, 2015, respectively; $2,166 and $2,527 at fair value pursuant to the fair value option at September 30, 2016 and December 31, 2015, respectively)		545,067			668,740
Other securities (including assets pledged of $91,799 and none at September 30, 2016 and December 31, 2015, respectively; $28,551 and $28,205 at fair value pursuant to the fair value option at September 30, 2016 and December 31, 2015, respectively)		365,812			324,657
Loans:
Multi-family residential		2,171,289			2,055,228
Commercial real estate		1,195,266			1,001,236
One-to-four family ― mixed-use property		555,691			573,043
One-to-four family ― residential		183,993			187,838
Co-operative apartments		7,494			8,285
Construction		11,250			7,284
Small Business Administration		14,339			12,194
Taxi medallion		20,536			20,881
Commercial business and other		564,972			506,622
Net unamortized premiums and unearned loan fees		16,447			15,368
Allowance for loan losses		(21,795	)		(21,535	)
Net loans		4,719,482			4,366,444
Interest and dividends receivable		19,833			18,937
Bank premises and equipment, net		26,000			25,622
Federal Home Loan Bank of New York stock		65,185			56,066
Bank owned life insurance		115,807			115,536
Goodwill		16,127			16,127
Other assets		44,788			63,962
Total assets	$	5,999,255		$	5,704,634

LIABILITIES
Due to depositors:
Non-interest bearing	$	320,060		$	269,469
Interest-bearing:
Certificate of deposit accounts		1,384,551			1,403,302
Savings accounts		258,058			261,748
Money market accounts		733,361			472,489
NOW accounts		1,296,475			1,448,695
Total interest-bearing deposits		3,672,445			3,586,234
Mortgagors' escrow deposits		49,276			36,844
Borrowed funds ($27,791 and $29,018 at fair value pursuant to the fair value option at September 30, 2016 and December 31, 2015, respectively)		1,320,515			1,155,676
Securities sold under agreements to repurchase		40,000			116,000
Other liabilities		84,338			67,344
Total liabilities		5,486,634			5,231,567

Commitments and contingencies

STOCKHOLDERS' EQUITY
Preferred stock ($0.01 par value; 5,000,000 shares authorized; None issued)		-			-
Common stock ($0.01 par value; 100,000,000 shares authorized; 31,530,595 shares issued at September 30, 2016 and December 31, 2015; 28,632,796 shares and 28,830,558 shares outstanding at September 30, 2016 and December 31, 2015, respectively)		315			315
Additional paid-in capital		213,488			210,652
Treasury stock, at average cost (2,897,799 shares and 2,700,037 shares at September 30, 2016 and December 31, 2015, respectively)		(53,373	)		(48,868	)
Retained earnings		351,942			316,530
Accumulated other comprehensive income (loss), net of taxes		249			(5,562	)
Total stockholders' equity		512,621			473,067

Total liabilities and stockholders' equity	$	5,999,255		$	5,704,634

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 September 30,						For the nine months ended September 30,
(Dollars in thousands, except per share data)	2016			2015			2016			2015

Interest and dividend income
Interest and fees on loans	$	49,181		$	45,243		$	145,152		$	132,861
Interest and dividends on securities:
Interest		6,173			6,508			19,275			18,366
Dividends		121			119			360			355
Other interest income		49			43			191			96
Total interest and dividend income		55,524			51,913			164,978			151,678

Interest expense
Deposits		8,520			7,701			24,590			22,596
Other interest expense		5,291			4,902			15,653			14,078
Total interest expense		13,811			12,603			40,243			36,674

Net interest income		41,713			39,310			124,735			115,004
Benefit for loan losses		-			(370	)		-			(1,620	)
Net interest income after benefit for loan losses		41,713			39,680			124,735			116,624

Non-interest income
Banking services fee income		826			778			2,775			2,560
Net gain on sale of securities		-			103			2,363			167
Net gain on sale of loans		240			306			584			355
Net gain on sale of buildings		-			-			33,814			6,537
Net loss from fair value adjustments		(823	)		(1,094	)		(2,925	)		(921	)
Federal Home Loan Bank of New York stock dividends		665			480			1,870			1,455
Gain from life insurance proceeds		47			-			458			-
Bank owned life insurance		707			725			2,096			2,157
Other income		191			399			1,075			1,264
Total non-interest income		1,853			1,697			42,110			13,574

Non-interest expense
Salaries and employee benefits		14,795			12,648			45,024			40,471
Occupancy and equipment		2,576			2,443			7,298			7,791
Professional services		1,730			1,907			5,907			5,036
FDIC deposit insurance		536			817			2,380			2,377
Data processing		939			1,178			3,229			3,425
Depreciation and amortization		1,169			993			3,263			2,528
Other real estate owned/foreclosure expense		273			110			831			717
Prepayment penalty on borrowings		-			-			2,082			-
Other operating expenses		4,259			3,612			13,214			11,550
Total non-interest expense		26,277			23,708			83,228			73,895

Income before income taxes		17,289			17,669			83,617			56,303

Provision for income taxes
Federal		5,568			5,375			25,518			16,782
State and local		1,087			1,286			7,469			4,946
Total taxes		6,655			6,661			32,987			21,728

Net income	$	10,634		$	11,008		$	50,630		$	34,575


Basic earnings per common share	$	0.37		$	0.38		$	1.75		$	1.18
Diluted earnings per common share	$	0.37		$	0.38		$	1.75		$	1.18
Dividends per common share	$	0.17		$	0.16		$	0.51		$	0.48

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 September 30,						For the nine months ended September 30,
(In thousands)	2016			2015			2016			2015

Net income	$	10,634		$	11,008		$	50,630		$	34,575

Other comprehensive income (loss), net of tax:
Amortization of actuarial losses, net of taxes of ($82) and ($134) for the three months ended September 30, 2016 and 2015, respectively and of ($247) and ($402) for the nine months ended September 30, 2016 and 2015, respectively.		110			173			329			518
Amortization of prior service credits, net of taxes of $4 and $5 for the three months ended September 30, 2016 and 2015, respectively and of $14 and $15 for the nine months ended September 30, 2016 and 2015, respectively.		(7	)		(6	)		(20	)		(19	)
Reclassificaton adjustment for net gains included in income, net of taxes of $45 for the three months ended September 30, 2015 and of $1,013 and $73 for the nine months ended September 30, 2016 and 2015, respectively.		-			(58	)		(1,350	)		(94	)
Net unrealized gains (losses) on securities, net of taxes of $2,177 and ($3,063) for the three months ended September 30, 2016 and 2015, respectively and of ($5,103) and ($2,230) for the nine months ended September 30, 2016 and 2015, respectively.		(2,942	)		3,943			6,852			2,798

Total other comprehensive income (loss), net of tax		(2,839	)		4,052			5,811			3,203

Comprehensive income	$	7,795		$	15,060		$	56,441		$	37,778

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,
(Dollars in thousands)	2016			2015
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	50,630		$	34,575
Adjustments to reconcile net income to net cash provided by operating activities:
Benefit for loan losses		-			(1,620	)
Depreciation and amortization of bank premises and equipment		3,263			2,528
Amortization of premium, net of accretion of discount		6,344			6,804
Net (gain) loss from fair value adjustments		2,925			921
Net gain from sale of loans		(584	)		(355	)
Net gain from sale of securities		(2,363	)		(167	)
Net gain from sale of buildings		(33,814	)		(6,537	)
Income from bank owned life insurance		(2,096	)		(2,157	)
Gain from life insurance proceeds		(458	)		-
Stock-based compensation expense		4,169			4,222
Deferred compensation		(3,140	)		(2,768	)
Excess tax benefit from stock-based payment arrangements		(470	)		(467	)
Deferred income tax benefit		(1,228	)		(5,024	)
Increase in other liabilities		7,680			2,432
Decrease in other assets		6,549			2,065
Net cash provided by operating activities		37,407			34,452

CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of bank premises and equipment		(4,159	)		(9,933	)
Net purchases of Federal Home Loan Bank of New York shares		(9,119	)		(6,467	)
Purchases of securities held-to-maturity		(35,705	)		(3,100	)
Proceeds from maturities of securities held-to-maturity		8,475			1,390
Purchases of securities available for sale		(59,678	)		(294,453	)
Proceeds from sales and calls of securities		66,996			163,158
Proceeds from maturities and prepayments of securities		85,829			92,733
Proceeds from bank owned life insurance		2,236			-
Proceeds from sale of buildings		34,332			20,209
Net originations of loans		(210,506	)		(163,037	)
Purchases of loans		(137,994	)		(216,333	)
Proceeds from sale of real estate owned		853			2,185
Proceeds from sale of loans		11,499			10,363
Net cash used in investing activities		(246,941	)		(403,285	)

CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in non-interest bearing deposits		50,591			1,362
Net increase in interest-bearing deposits		85,616			207,653
Net increase in mortgagors' escrow deposits		12,432			9,021
Net proceeds from short-term borrowed funds		150,000			45,000
Proceeds from long-term borrowings		200,000			225,000
Repayment of long-term borrowings		(260,301	)		(90,000	)
Purchases of treasury stock		(9,102	)		(15,604	)
Excess tax benefit from stock-based payment arrangements		470			467
Proceeds from issuance of common stock upon exercise of stock options		132			142
Cash dividends paid		(14,787	)		(13,999	)
Net cash provided by financing activities		215,051			369,042

Net increase in cash and cash equivalents		5,517			209
Cash and cash equivalents, beginning of period		42,363			34,265
Cash and cash equivalents, end of period	$	47,880		$	34,474

SUPPLEMENTAL CASHFLOW DISCLOSURE
Interest paid	$	39,792		$	35,838
Income taxes paid		28,610			26,518
Taxes paid if excess tax benefits were not tax deductible		29,080			26,985
Non-cash activities:
Securities purchased not yet settled		2,000			-
Securities transferred from available for sale to held-to-maturity		-			4,510
Loans transferred to Other Real Estate Owned		486			1,588
Loans provided for the sale of Other Real Estate Owned		-			280
Loans held for investment transferred to loans held for sale		-			300

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 Changes in Stockholders’ Equity

For the nine months ended September 30, 2016 and 2015

(Unaudited)

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

Balance at December 31, 2015	$	473,067		$	315	$	210,652		$	316,530		$	(48,868	)	$	(5,562	)
Net Income		50,630			-		-			50,630			-			-
Award of common shares released from Employee Benefit Trust (138,519 shares)		1,984			-		1,984			-			-			-
Vesting of restricted stock unit awards (245,311 shares)		-			-		(4,049	)		(397	)		4,446			-
Exercise of stock options (41,670 shares)		132			-		15			(34	)		151			-
Stock-based compensation expense		4,416			-		4,416			-			-			-
Stock-based income tax benefit		470			-		470			-			-			-
Purchase of treasury shares (378,695 shares)		(7,492	)		-		-			-			(7,492	)		-
Repurchase of shares to satisfy tax obligation (77,994 shares)		(1,610	)		-		-			-			(1,610	)		-
Dividends on common stock ($0.51 per share)		(14,787	)		-		-			(14,787	)		-			-
Other comprehensive income		5,811			-		-			-			-			5,811
Balance at September 30, 2016	$	512,621		$	315	$	213,488		$	351,942		$	(53,373	)	$	249


Balance at December 31, 2014	$	456,247		$	315	$	206,437		$	289,623		$	(37,221	)	$	(2,907	)
Net Income		34,575			-		-			34,575			-			-
Award of common shares released from Employee Benefit Trust (143,809 shares)		2,031			-		2,031			-			-			-
Vesting of restricted stock unit awards (204,310 shares)		-			-		(3,076	)		(504	)		3,580			-
Exercise of stock options (45,125 shares)		142			-		(51	)		(179	)		372			-
Stock-based compensation expense		4,128			-		4,128			-			-			-
Stock-based income tax benefit		467			-		467			-			-			-
Purchase of treasury shares (735,599 shares)		(14,351	)		-		-			-			(14,351	)		-
Repurchase of shares to satisfy tax obligation (65,637 shares)		(1,253	)		-		-			-			(1,253	)		-
Dividends on common stock ($0.48 per share)		(13,999	)		-		-			(13,999	)		-			-
Other comprehensive income		3,203			-		-			-			-			3,203
Balance at September 30, 2015	$	471,190		$	315	$	209,936		$	309,516		$	(48,873	)	$	296

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)

Basis of Presentation

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

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

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

The accompanying unaudited consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and general practices within the banking industry. The information furnished in these interim statements reflects all adjustments which 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, 2015.

Use of Estimates

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

Earnings Per Share

Basic earnings per common share is computed by dividing net income available to common shareholders by the total weighted average number of common shares outstanding, which includes unvested participating securities. Unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and as such are included in the calculation of earnings per share. The Company’s unvested restricted stock unit awards are considered participating securities. Therefore, weighted average common shares outstanding used for computing basic earnings per common share includes common shares outstanding plus unvested restricted stock unit awards. The computation of diluted earnings per share includes the additional dilutive effect of stock options outstanding and other common stock equivalents during the period. Common stock equivalents that are anti-dilutive are not included in the computation of diluted earnings per common share. The numerator for calculating basic and diluted earnings per common share is net income available to common shareholders. The shares held in the Company’s Employee Benefit Trust are not included in shares outstanding for purposes of calculating earnings per common share.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

	For the three months ended September 30,						For the nine months ended September 30,
	2016			2015			2016			2015
	(In thousands, except per share data)
Net income, as reported	$	10,634		$	11,008		$	50,630		$	34,575
Divided by:
Weighted average common shares outstanding		28,861			28,927			28,993			29,188
Weighted average common stock equivalents		14			19			13			21
Total weighted average common shares outstanding and common stock equivalents		28,875			28,946			29,006			29,209

Basic earnings per common share	$	0.37		$	0.38		$	1.75		$	1.18
Diluted earnings per common share ⁽¹⁾	$	0.37		$	0.38		$	1.75		$	1.18
Dividend payout ratio		45.9	%		42.1	%		29.1	%		40.7	%

(1)

For the three and nine months ended September 30, 2016 and 2015, there were no stock options that were anti-dilutive.

Debt and Equity Securities

The Company’s investments in equity securities that have readily determinable fair values and all investments in debt securities are classified in one of the following three categories and accounted for accordingly: (1) trading securities, (2) securities available for sale and (3) securities held-to-maturity.

The Company did not hold any trading securities at September 30, 2016 and December 31, 2015. Securities available for sale are recorded at fair value. Securities held-to-maturity are recorded at amortized cost.

The following table summarizes the Company’s portfolio of securities held-to-maturity at September 30, 2016:

	Amortized Cost		Fair Value		Gross Unrealized Gains		Gross Unrealized Losses
	(In thousands)
Securites held-to-maturity:
Municipals	$	33,274	$	33,410	$	136	$	-

Total	$	33,274	$	33,410	$	136	$	-

The following table summarizes the Company’s portfolio of securities held-to-maturity at December 31, 2015:

	Amortized Cost		Fair Value		Gross Unrealized Gains		Gross Unrealized Losses
	(In thousands)
Securites held-to-maturity:
Municipals	$	6,180	$	6,180	$	-	$	-

Total	$	6,180	$	6,180	$	-	$	-

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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, 2016:

	Amortized Cost		Fair Value		Gross Unrealized Gains		Gross Unrealized Losses
	(In thousands)
Corporate	$	110,000	$	104,011	$	191	$	6,180
Municipals		125,667		130,380		4,713		-
Mutual funds		21,658		21,658		-		-
Collateralized loan obligations		101,660		102,572		920		8
Other		7,193		7,191		-		2
Total other securities		366,178		365,812		5,824		6,190
REMIC and CMO		383,912		389,426		6,144		630
GNMA		7,520		7,700		180		-
FNMA		129,791		132,831		3,085		45
FHLMC		14,802		15,110		308		-
Total mortgage-backed securities		536,025		545,067		9,717		675
Total securities available for sale	$	902,203	$	910,879	$	15,541	$	6,865

Mortgage-backed securities shown in the table above include one private issue collateralized mortgage obligation (“CMO”) that is collateralized by commercial real estate mortgages with an amortized cost and market value of $0.4 million at September 30, 2016.

The following table summarizes the Company’s portfolio of securities available for sale at December 31, 2015:

	Amortized Cost		Fair Value		Gross Unrealized Gains		Gross Unrealized Losses
	(In thousands)
Corporate	$	115,976	$	111,674	$	134	$	4,436
Municipals		127,696		131,583		3,887		-
Mutual funds		21,290		21,290		-		-
Collateralized loan obligations		53,225		52,898		-		327
Other		7,214		7,212		-		2
Total other securities		325,401		324,657		4,021		4,765
REMIC and CMO		469,987		469,936		3,096		3,147
GNMA		11,635		11,798		302		139
FNMA		170,327		170,057		1,492		1,762
FHLMC		16,961		16,949		87		99
Total mortgage-backed securities		668,910		668,740		4,977		5,147
Total securities available for sale	$	994,311	$	993,397	$	8,998	$	9,912

Mortgage-backed securities shown in the table above include one private issue CMO that is collateralized by commercial real estate mortgages with an amortized cost and market value of $7.7 million at December 31, 2015.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The following table details the amortized cost and fair value of the Company’s securities classified as held-to-maturity at September 30, 2016, 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 Cost		Fair Value
	(In thousands)

Due in one year or less	$	11,370	$	11,370
Due after one year through five years		40		40
Due after ten years		21,864		22,000

Total securities held-to-maturity	$	33,274	$	33,410

The amortized cost and fair value of the Company’s securities, classified as available for sale at September 30, 2016, by contractual maturity, are shown below. 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 Cost		Fair Value
	(In thousands)

Due in one year or less	$	-	$	-
Due after one year through five years		1,795		1,821
Due after five years through ten years		118,691		117,707
Due after ten years		224,034		224,626

Total other securities		344,520		344,154
Mutual funds		21,658		21,658
Mortgage-backed securities		536,025		545,067

Total securities available for sale	$	902,203	$	910,879

The following table shows the Company’s available for sale 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 September 30, 2016:

			Total				Less than 12 months				12 months or more
	Count		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
			(Dollars in thousands)
Corporate		13	$	93,820	$	6,180	$	19,294	$	706	$	74,526	$	5,474
Collateralized loan obligations		1		7,474		8		-		-		7,474		8
Other		1		299		2		-		-		299		2
Total other securities		15		101,593		6,190		19,294		706		82,299		5,484

REMIC and CMO		11		55,603		630		19,707		131		35,896		499
FNMA		1		6,694		45		-		-		6,694		45
Total mortgage-backed securities		12		62,297		675		19,707		131		42,590		544
Total securities available for sale		27	$	163,890	$	6,865	$	39,001	$	837	$	124,889	$	6,028

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

			Total				Less than 12 months				12 months or more
	Count		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
			(Dollars in thousands)
Corporate		12	$	85,563	$	4,436	$	76,218	$	3,782	$	9,345	$	654
Collateralized loan obligations		7		52,898		327		52,898		327		-		-
Other		1		298		2		-		-		298		2
Total other securities		20		138,759		4,765		129,116		4,109		9,643		656

REMIC and CMO		33		238,132		3,147		182,010		1,642		56,122		1,505
GNMA		1		6,977		139		6,977		139		-		-
FNMA		20		102,225		1,762		75,769		1,043		26,456		719
FHLMC		3		14,715		99		14,715		99		-		-
Total mortgage-backed securities		57		362,049		5,147		279,471		2,923		82,578		2,224
Total securities available for sale		77	$	500,808	$	9,912	$	408,587	$	7,032	$	92,221	$	2,880

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

The Company reviewed each investment that had an unrealized loss at September 30, 2016 and December 31, 2015. An unrealized loss exists when the current fair value of an investment is less than its amortized cost basis. Unrealized losses on available for sale securities, that are deemed to be temporary, are recorded in AOCI, net of tax.

The unrealized losses in total securities available for sale at September 30, 2016 and December 31, 2015 were caused by movements in interest rates. It is not anticipated that these securities would be settled at a price that is less than the amortized cost of the Company’s investment. Each of these securities is performing according to its terms and, in the opinion of management, will continue to perform according to its terms. The Company does not have the intent to sell these securities and it is more likely than not the Company will not be required to sell the securities before recovery of the securities’ amortized cost basis. This conclusion is based upon considering the Company’s cash and working capital requirements and contractual and regulatory obligations, none of which the Company believes would cause the sale of the securities. Therefore, the Company did not consider these investments to be other-than-temporarily impaired at September 30, 2016 and December 31, 2015.

The Company sold available for sale securities with book values at the time of sale totaling $64.6 million and $163.0 million during the nine months ended September 30, 2016 and 2015, respectively. The Company did not sell any available for sale securities during the three months ended September 30, 2016. The Company sold available for sale securities with book values at the time of sale totaling $138.0 million during the three months ended September 30, 2015.

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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 September 30,					For the nine months ended September 30,
	2016		2015			2016			2015
	(In thousands)
Gross gains from the sale of securities	$	-	$	2,666		$	2,370		$	2,899
Gross losses from the sale of securities		-		(2,563	)		(7	)		(2,732	)

Net gains from the sale of securities	$	-	$	103		$	2,363		$	167

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

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

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

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

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The Company recognizes a loan as non-performing when the borrower has demonstrated the inability to bring the loan current, or due to other circumstances which, in management’s opinion, indicate the borrower will be unable to bring the loan current within a reasonable time. All loans classified as non-performing, which includes all loans past due 90 days or more, are classified as non-accrual unless there is, in our opinion, compelling evidence the borrower will bring the loan current in the immediate future. Prior to a loan becoming 90 days delinquent an updated appraisal is ordered and/or an internal evaluation is prepared. The loan balances of collateral dependent impaired loans are compared to the property’s updated fair value. The Company considers fair value of collateral dependent loans to be 85% of the appraised or internally estimated value of the property. The balance which exceeds fair value is generally charged-off, except for taxi medallion loans. The fair value of the underlying collateral of taxi medallion loans is the value of the underlying medallion based upon the most recently reported arm’s length transaction. When there is no recent sale activity, the fair value is calculated using capitalization rates. In addition, taxi medallion loans with a loan-to-value greater than 100% are classified as impaired and allocated a portion of the ALL in the amount of the excess of the loan-to-value over the loan’s principal balance. The 85% is based on the actual net proceeds the Bank has received from the sale of other real estate owned (“OREO”) as a percentage of OREO’s appraised value.

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

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

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

In preparing internal evaluations of property values, the Company seeks to obtain current data on the subject property from various sources, including: (1) the borrower; (2) copies of existing leases; (3) local real estate brokers and appraisers; (4) public records (such as for real estate taxes and water and sewer charges); (5) comparable sales and rental data in the market; (6) an inspection of the property and (7) interviews with tenants. These internal evaluations primarily focus on the income approach and comparable sales data to value the property.

As of September 30, 2016, we utilized recent third party appraisals of the collateral to measure impairment for $45.3 million, or 88.2%, of collateral dependent impaired loans, and used internal evaluations of the property’s value for $6.1 million, or 11.8%, of collateral dependent impaired loans.

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

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

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The allocation of a portion of the allowance for loan losses for a performing TDR loan is based upon the present value of the future expected cash flows discounted at the loan’s original effective rate, or for a non-performing TDR which is collateral dependent, the fair value of the collateral. At September 30, 2016, there were no commitments to lend additional funds to borrowers whose loans were modified to a TDR. The modification of loans to a TDR did not have a significant effect on our operating results, nor did it require a significant allocation of the allowance for loan losses.

The following table shows loans modified and classified as TDR during the period indicated:

	For the nine months ended September 30, 2016					For the nine months ended September 30, 2015
(Dollars in thousands)	Number		Balance		Modification description	Number		Balance		Modification description


One-to-four family - residential		2	$	263	Received a below market interest rate and the loan amortizations were extended.		-	$	-
Commercial business and other		2		739	One received an amortization extension and one received a below market interest rate and an amortization extension.		-		-
Small Business Administration		-		-			1		41	Received a below market interest rate and the loan amortization was extended.
Total		4	$	1,002			1	$	41

The recorded investment of the loans modified and classified as TDR presented in the table above, were unchanged as there was no principal forgiven in this modification.

The Company did not modify and classify any loans as TDR during the three months ended September 30, 2016 or 2015.

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

	September 30, 2016				December 31, 2015
(Dollars in thousands)	Number of contracts		Recorded investment		Number of contracts		Recorded investment

Multi-family residential		9	$	2,586		9	$	2,626
Commercial real estate		2		2,074		3		2,371
One-to-four family - mixed-use property		5		1,809		6		2,052
One-to-four family - residential		3		596		1		343
Small business administration		-		-		1		34
Commercial business and other		3		1,139		4		2,083

Total performing troubled debt restructured		22	$	8,204		24	$	9,509

During the three months ended September 30, 2016 and 2015 and the nine months ended September 30, 2016, there were no TDR loans transferred to non-performing status. During the nine months ended September 30, 2015, one TDR loan of $0.4 million was transferred to non-performing status, which resulted in this loan being included in non-performing loans.

- 13 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

	September 30, 2016				December 31, 2015
(Dollars in thousands)	Number of contracts		Recorded investment		Number of contracts		Recorded investment

Multi-family residential		1	$	392		1	$	391

Total troubled debt restructurings that subsequently defaulted		1	$	392		1	$	391

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

(In thousands)	September 30, 2016		December 31, 2015

Loans ninety days or more past due and still accruing:
Multi-family residential	$	-	$	233
Commercial real estate		1,183		1,183
One-to-four family - mixed-use property		470		611
One-to-four family - residential		-		13
Construction		-		1,000
Commercial Business and other		-		220
Total		1,653		3,260

Non-accrual mortgage loans:
Multi-family residential		1,649		3,561
Commercial real estate		1,157		2,398
One-to-four family - mixed-use property		4,534		5,952
One-to-four family - residential		8,340		10,120
Total		15,680		22,031

Non-accrual non-mortgage loans:
Small business administration		2,132		218
Taxi medallion		3,971		-
Commercial business and other		99		568
Total		6,202		786

Total non-accrual loans		21,882		22,817

Total non-accrual loans and loans ninety days or more past due and still accruing	$	23,535	$	26,077

- 14 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

	For the three months ended September 30,				For the nine months ended September 30,
	2016		2015		2016		2015
	(In thousands)
Interest income that would have been recognized had the loans performed in accordance with their original terms	$	468	$	627	$	1,405	$	1,879
Less: Interest income included in the results of operations		99		153		391		540
Total foregone interest	$	369	$	474	$	1,014	$	1,339

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

	September 30, 2016
(In thousands)	30 - 59 Days Past Due		60 - 89 Days Past Due		Greater than 90 Days		Total Past Due		Current		Total Loans

Multi-family residential	$	5,441	$	917	$	1,649	$	8,007	$	2,163,282	$	2,171,289
Commercial real estate		3,052		377		2,340		5,769		1,189,497		1,195,266
One-to-four family - mixed-use property		4,396		746		5,004		10,146		545,545		555,691
One-to-four family - residential		1,081		427		8,146		9,654		174,339		183,993
Co-operative apartments		-		-		-		-		7,494		7,494
Construction loans		-		-		-		-		11,250		11,250
Small Business Administration		28		-		2,044		2,072		12,267		14,339
Taxi medallion		-		1,408		2,563		3,971		16,565		20,536
Commercial business and other		247		4		1		252		564,720		564,972
Total	$	14,245	$	3,879	$	21,747	$	39,871	$	4,684,959	$	4,724,830

	December 31, 2015
(In thousands)	30 - 59 Days Past Due		60 - 89 Days Past Due		Greater than 90 Days		Total Past Due		Current		Total Loans

Multi-family residential	$	9,421	$	804	$	3,794	$	14,019	$	2,041,209	$	2,055,228
Commercial real estate		2,820		153		3,580		6,553		994,683		1,001,236
One-to-four family - mixed-use property		8,630		1,258		6,563		16,451		556,592		573,043
One-to-four family - residential		4,261		154		10,134		14,549		173,289		187,838
Co-operative apartments		-		-		-		-		8,285		8,285
Construction loans		-		-		1,000		1,000		6,284		7,284
Small Business Administration		42		-		218		260		11,934		12,194
Taxi medallion		-		-		-		-		20,881		20,881
Commercial business and other		-		2		228		230		506,392		506,622
Total	$	25,174	$	2,371	$	25,517	$	53,062	$	4,319,549	$	4,372,611

- 15 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

September 30, 2016
(In thousands)	Multi-family residential			Commercial real estate		One-to-four family - mixed-use property			One-to-four family - residential			Construction loans		Small Business Administration			Taxi medallion		Commercial business and other			Unallocated			Total

Allowance for credit losses:
Beginning balance	$	6,177		$	4,445	$	3,326		$	1,044		$	75	$	574		$	1,042	$	4,669		$	846		$	22,198
Charge-off's		(90	)		-		(71	)		-			-		(361	)		-		(19	)		-			(541	)
Recoveries		11			11		47			-			-		44			-		25			-			138
Provision (Benefit)		(103	)		60		(234	)		(27	)		15		151			1,290		(477	)		(675	)		-
Ending balance	$	5,995		$	4,516	$	3,068		$	1,017		$	90	$	408		$	2,332	$	4,198		$	171		$	21,795

September 30, 2015
(In thousands)	Multi-family residential			Commercial real estate		One-to-four family - mixed-use property			One-to-four family - residential			Construction loans		Small Business Administration			Taxi medallion		Commercial business and other			Total

Allowance for credit losses:
Beginning balance	$	8,300		$	3,726	$	5,180		$	1,433		$	29	$	291		$	11	$	4,114		$	23,084
Charge-off's		(58	)		-		(99	)		-			-		(9	)		-		(10	)		(176	)
Recoveries		4			100		26			300			-		5			-		-			435
Provision (Benefit)		(596	)		331		(233	)		(371	)		16		(42	)		231		294			(370	)
Ending balance	$	7,650		$	4,157	$	4,874		$	1,362		$	45	$	245		$	242	$	4,398		$	22,973

- 16 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

September 30, 2016
(In thousands)	Multi-family residential			Commercial real estate		One-to-four family - mixed-use property			One-to-four family - residential			Construction loans		Small Business Administration			Taxi medallion		Commercial business and other			Unallocated		Total

Allowance for credit losses:
Beginning balance	$	6,718		$	4,239	$	4,227		$	1,227		$	50	$	262		$	343	$	4,469		$	-	$	21,535
Charge-off's		(155	)		-		(139	)		(74	)		-		(362	)		-		(59	)		-		(789	)
Recoveries		230			11		252			366			-		118			-		72			-		1,049
Provision (Benefit)		(798	)		266		(1,272	)		(502	)		40		390			1,989		(284	)		171		-
Ending balance	$	5,995		$	4,516	$	3,068		$	1,017		$	90	$	408		$	2,332	$	4,198		$	171	$	21,795

September 30, 2015
(In thousands)	Multi-family residential			Commercial real estate			One-to-four family - mixed-use property			One-to-four family - residential			Construction loans		Small Business Administration			Taxi medallion		Commercial business and other			Total

Allowance for credit losses:
Beginning balance	$	8,827		$	4,202		$	5,840		$	1,690		$	42	$	279		$	11	$	4,205		$	25,096
Charge-off's		(458	)		(32	)		(571	)		(244	)		-		(9	)		-		(62	)		(1,376	)
Recoveries		218			168			73			374			-		32			-		8			873
Provision (Benefit)		(937	)		(181	)		(468	)		(458	)		3		(57	)		231		247			(1,620	)
Ending balance	$	7,650		$	4,157		$	4,874		$	1,362		$	45	$	245		$	242	$	4,398		$	22,973

- 17 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

	September 30, 2016
(In thousands)	Multi-family residential		Commercial real estate		One-to-four family - mixed-use property		One-to-four family- residential		Co-operative apartments		Construction loans		Small Business Administration		Taxi Medallion		Commercial business and other		Unallocated		Total
Financing Receivables:
Ending Balance	$	2,171,289	$	1,195,266	$	555,691	$	183,993	$	7,494	$	11,250	$	14,339	$	20,536	$	564,972	$	-	$	4,724,830
Ending balance: individually evaluated for impairment	$	5,820	$	6,443	$	9,997	$	10,507	$	-	$	-	$	664	$	16,659	$	2,608	$	-	$	52,698
Ending balance: collectively evaluated for impairment	$	2,165,469	$	1,188,823	$	545,694	$	173,486	$	7,494	$	11,250	$	13,675	$	3,877	$	562,364	$	-	$	4,672,132
Allowance for credit losses:
Ending balance: individually evaluated for impairment	$	237	$	190	$	449	$	62	$	-	$	-	$	47	$	2,330	$	13	$	-	$	3,328
Ending balance: collectively evaluated for impairment	$	5,758	$	4,326	$	2,619	$	955	$	-	$	90	$	361	$	2	$	4,185	$	171	$	18,467

	December 31, 2015
(In thousands)	Multi-family residential		Commercial real estate		One-to-four family - mixed-use property		One-to-four family- residential		Co-operative apartments		Construction loans		Small Business Administration		Taxi Medallion		Commercial business and other		Unallocated		Total
Financing Receivables:
Ending Balance	$	2,055,228	$	1,001,236	$	573,043	$	187,838	$	8,285	$	7,284	$	12,194	$	20,881	$	506,622	$	-	$	4,372,611
Ending balance: individually evaluated for impairment	$	8,047	$	6,183	$	12,828	$	12,598	$	-	$	1,000	$	310	$	2,118	$	4,716	$	-	$	47,800
Ending balance: collectively evaluated for impairment	$	2,047,181	$	995,053	$	560,215	$	175,240	$	8,285	$	6,284	$	11,884	$	18,763	$	501,906	$	-	$	4,324,811
Allowance for credit losses:
Ending balance: individually evaluated for impairment	$	252	$	180	$	502	$	51	$	-	$	-	$	-	$	333	$	112	$	-	$	1,430
Ending balance: collectively evaluated for impairment	$	6,466	$	4,059	$	3,725	$	1,176	$	-	$	50	$	262	$	10	$	4,357	$	-	$	20,105

- 18 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

	September 30, 2016						December 31, 2015
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance

	(In thousands)
With no related allowance recorded:
Mortgage loans:
Multi-family residential	$	3,546	$	3,877	$	-	$	5,742	$	6,410	$	-
Commercial real estate		4,369		4,396		-		3,812		3,869		-
One-to-four family mixed-use property		7,366		8,418		-		10,082		11,335		-
One-to-four family residential		10,074		11,591		-		12,255		14,345		-
Co-operative apartments		-		-		-		-		-		-
Construction		-		-		-		1,000		1,000		-
Non-mortgage loans:
Small Business Administration		546		908		-		276		276		-
Taxi Medallion		10,106		10,106		-		-		-		-
Commercial Business and other		2,170		2,549		-		2,682		5,347		-

Total loans with no related allowance recorded		38,177		41,845		-		35,849		42,582		-

With an allowance recorded:
Mortgage loans:
Multi-family residential		2,274		2,274		237		2,305		2,305		252
Commercial real estate		2,074		2,074		190		2,371		2,371		180
One-to-four family mixed-use property		2,631		2,633		449		2,746		2,746		502
One-to-four family residential		433		433		62		343		343		51
Co-operative apartments		-		-		-		-		-		-
Construction		-		-		-		-		-		-
Non-mortgage loans:
Small Business Administration		118		118		47		34		34		-
Taxi Medallion		6,553		6,553		2,330		2,118		2,118		333
Commercial Business and other		438		439		13		2,034		2,034		112

Total loans with an allowance recorded		14,521		14,524		3,328		11,951		11,951		1,430

Total Impaired Loans:
Total mortgage loans	$	32,767	$	35,696	$	938	$	40,656	$	44,724	$	985

Total non-mortgage loans	$	19,931	$	20,673	$	2,390	$	7,144	$	9,809	$	445

- 19 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The following table shows our average recorded investment and interest income recognized for impaired loans for the three months ended September 30, 2016 and 2015:

	September 30, 2016				September 30, 2015
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized

	(In thousands)
With no related allowance recorded:
Mortgage loans:
Multi-family residential	$	4,639	$	23	$	8,034	$	14
Commercial real estate		4,661		55		4,930		35
One-to-four family mixed-use property		8,234		37		9,814		39
One-to-four family residential		10,204		19		13,040		28
Co-operative apartments		-		-		307		-
Construction		285		-		-		-
Non-mortgage loans:
Small Business Administration		404		13		301		6
Taxi Medallion		5,053		52		-		-
Commercial Business and other		2,211		45		3,363		51

Total loans with no related allowance recorded		35,691		244		39,789		173

With an allowance recorded:
Mortgage loans:
Multi-family residential		2,279		29		2,326		30
Commercial real estate		2,080		24		538		7
One-to-four family mixed-use property		2,567		35		3,054		42
One-to-four family residential		435		4		348		3
Co-operative apartments		-		-		-		-
Construction		-		-		-		-
Non-mortgage loans:
Small Business Administration		397		1		38		1
Taxi Medallion		6,459		17		1,065		16
Commercial Business and other		448		7		3,064		32

Total loans with an allowance recorded		14,665		117		10,433		131

Total Impaired Loans:
Total mortgage loans	$	35,384	$	226	$	42,391	$	198

Total non-mortgage loans	$	14,972	$	135	$	7,831	$	106

- 20 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The following table shows our average recorded investment and interest income recognized for impaired loans for the nine months ended September 30, 2016 and 2015:

	September 30, 2016				September 30, 2015
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized

	(In thousands)
With no related allowance recorded:
Mortgage loans:
Multi-family residential	$	5,129	$	69	$	9,470	$	46
Commercial real estate		4,841		162		5,748		107
One-to-four family mixed-use property		8,407		119		10,781		133
One-to-four family residential		10,457		69		13,125		101
Co-operative apartments		-		-		153		-
Construction		380		-		-		-
Non-mortgage loans:
Small Business Administration		353		38		230		18
Taxi Medallion		3,369		155		-		-
Commercial Business and other		2,265		136		3,937		170

Total loans with no related allowance recorded		35,201		748		43,444		575

With an allowance recorded:
Mortgage loans:
Multi-family residential		2,284		87		2,461		89
Commercial real estate		2,173		73		998		22
One-to-four family mixed-use property		2,622		107		3,069		126
One-to-four family residential		403		10		350		10
Co-operative apartments		-		-		-		-
Construction		-		-		-		-
Non-mortgage loans:
Small Business Administration		315		4		29		1
Taxi Medallion		5,009		91		532		49
Commercial Business and other		962		20		2,862		120

Total loans with an allowance recorded		13,768		392		10,301		417

Total Impaired Loans:
Total mortgage loans	$	36,696	$	696	$	46,155	$	634

Total non-mortgage loans	$	12,273	$	444	$	7,590	$	358

- 21 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

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

	September 30, 2016
(In thousands)	Special Mention		Substandard		Doubtful		Loss		Total

Multi-family residential	$	7,700	$	3,234	$	-	$	-	$	10,934
Commercial real estate		3,332		4,369		-		-		7,701
One-to-four family - mixed-use property		3,732		8,188		-		-		11,920
One-to-four family - residential		1,109		10,171		-		-		11,280
Co-operative apartments		-		-		-		-		-
Construction loans		-		-		-		-		-
Small Business Administration		702		607		-		-		1,309
Taxi Medallion		-		16,659		-		-		16,659
Commercial business and other		1,030		2,607		-		-		3,637
Total loans	$	17,605	$	45,835	$	-	$	-	$	63,440

	December 31, 2015
(In thousands)	Special Mention		Substandard		Doubtful		Loss		Total

Multi-family residential	$	4,361	$	5,421	$	-	$	-	$	9,782
Commercial real estate		1,821		3,812		-		-		5,633
One-to-four family - mixed-use property		3,087		10,990		-		-		14,077
One-to-four family - residential		1,437		12,255		-		-		13,692
Co-operative apartments		-		-		-		-		-
Construction loans		-		1,000		-		-		1,000
Small Business Administration		229		224		-		-		453
Taxi Medallion		-		2,118		-		-		2,118
Commercial business and other		-		3,123		-		-		3,123
Total loans	$	10,935	$	38,943	$	-	$	-	$	49,878

Commitments to extend credit (principally real estate mortgage loans) and lines of credit (principally home equity lines of credit and business lines of credit) amounted to $87.2 million and $231.8 million, respectively, at September 30, 2016.

- 22 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

Loans held for sale

Loans held for sale are carried at the lower of cost or estimated fair value. At September 30, 2016 and December 31, 2015, 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.

The following table shows delinquent and non-performing loans sold during the period indicated:

	For the three months ended September 30, 2016
(Dollars in thousands)	Loans sold		Proceeds		Net (charge-offs) recoveries		Net gain

Multi-family residential		3	$	632	$	-	$	1
One-to-four family - mixed-use property		8		2,507		-		239

Total		11	$	3,139	$	-	$	240

The following table shows delinquent and non-performing loans sold during the period indicated:

	For the three months ended September 30, 2015
(Dollars in thousands)	Loans sold		Proceeds		Net (charge-offs) recoveries			Net gain

Multi-family residential		4	$	1,539	$	(3	)	$	1
Commercial real estate		2		741		-			13

Total ⁽¹⁾		6	$	2,280	$	(3	)	$	14

(1)

The above table does not include one performing commercial real estate loan for $3.0 million, which sold for a net gain of $30,000, and four performing SBA loans totaling $3.8 million, which sold for a net gain of $0.3 million, during the three months ended September 30, 2015.

- 23 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The following table shows delinquent and non-performing loans sold during the period indicated:

	For the nine months ended September 30, 2016
(Dollars in thousands)	Loans sold		Proceeds		Net (charge-offs) recoveries			Net gain

Multi-family residential		9	$	2,680	$	(8	)	$	3
Commercial real estate		2		192		-			-
One-to-four family - mixed-use property		15		5,093		-			262

Total ⁽¹⁾		26	$	7,965	$	(8	)	$	265

(1)

The above table does not include the sale of six performing small business administration loans for proceeds totaling $3.5 million during the nine months ended September 30, 2016. These loans were sold for a net gain of $0.3 million.

The following table shows delinquent and non-performing loans sold during the period indicated:

	For the nine months ended September 30, 2015
(Dollars in thousands)	Loans sold		Proceeds		Net (charge-offs) recoveries		Net gain (loss)

Multi-family residential		8	$	3,420	$	134	$	(1	)
Commercial real estate		3		2,051		-		13
One-to-four family - mixed-use property		7		1,836		-		51

Total ⁽¹⁾		18	$	7,307	$	134	$	63

(1)

- 24 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

Other Real Estate Owned

The following are changes in OREO during the periods indicated:

	For the three months ended September 30,						For the nine months ended September 30,
	2016			2015			2016			2015
	(In thousands)

Balance at beginning of period	$	3,668		$	4,255		$	4,932		$	6,326
Acquisitions		-			816			486			1,588
Write-down of carrying value		(829	)		-			(1,763	)		(896	)
Sales		-			(216	)		(816	)		(2,163	)

Balance at end of period ⁽¹⁾	$	2,839		$	4,855		$	2,839		$	4,855

(1)

OREO are included in other assets on the Company’s Consolidated Statements of Financial Condition.

The following table shows the gross gains, gross losses and write-downs of OREO reported in the Consolidated Statements of Income during the periods indicated:

	For the three months ended September 30,					For the nine months ended September 30,
	2016			2015		2016			2015
	(In thousands)

Gross gains	$	-		$	4	$	37		$	306
Gross losses		-			-		-			(6	)
Write-down of carrying value		(829	)		-		(1,763	)		(896	)

Total net loss	$	(829	)	$	4	$	(1,726	)	$	(596	)

We may obtain physical possession of residential real estate collateralizing a consumer mortgage loan via foreclosure or an in-substance repossession. During the three and nine months ended September 30, 2016, we did not foreclose on any consumer mortgages through in-substance repossession. At September 30, 2016, we held two foreclosed residential real estate properties totaling $0.6 million and at December 31, 2015, we held one foreclosed residential real estate property for $0.l million. Included within net loans as of September 30, 2016 and December 31, 2015 was a recorded investment of $12.9 million and $15.2 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.

- 25 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

Repurchase Agreements

As part of the Company’s strategy to finance investment opportunities and manage its cost of funds, the Company enters into repurchase agreements with broker-dealers and the Federal Home Loan Bank of New York (“FHLB-NY”). These agreements are recorded as financing transactions and the obligations to repurchase are reflected as a liability in the consolidated financial statements. The securities underlying the agreements are delivered to the broker-dealers or the FHLB-NY who arrange the transaction. The securities remain registered in the name of the Company and are returned upon the maturity of the agreement. The Company retains the right of substitution of collateral throughout the terms of the agreements. As a condition of the repurchase agreements the Company is required to provide sufficient collateral. If the fair value of the collateral were to fall below the required level, the Company is obligated to pledge additional collateral. All the repurchase agreements are collateralized by mortgage-backed securities.

The following tables show the type of securities pledged and remaining maturity of repurchase agreements held at the periods indicated:

	At September 30, 2016
	Remaining Contractual Maturity of Agreements
	Less than 1 year		1 year to 3 years		Over 3 years		Total
	(In thousands)
Repurchase agreements:
Mortgage-backed securities	$	-	$	-	$	40,000	$	40,000

Total repurchase agreements	$	-	$	-	$	40,000	$	40,000

	At December 31, 2015
	Remaining Contractual Maturity of Agreements
	Less than 1 year		1 year to 3 years		Over 3 years		Total
	(In thousands)
Repurchase agreements:
Mortgage-backed securities	$	38,000	$	38,000	$	40,000	$	116,000

Total repurchase agreements	$	38,000	$	38,000	$	40,000	$	116,000

The fair value of the collateral pledged for the repurchase agreements above was $44.1 million and $131.4 million at September 30, 2016 and December 31, 2015, respectively.

During the nine months ended September 30, 2016, $38.0 million in repurchase agreements, at an average cost of 4.16%, which were scheduled to mature in late 2017, were pre-paid. A $2.1 million prepayment penalty was incurred as part of this transaction.

Stock-Based Compensation

For the three months ended September 30, 2016 and 2015, the Company’s net income, as reported, includes $1.1 million and $0.5 million, respectively, of stock-based compensation costs and $0.4 million and $0.2 million, respectively, of income tax benefits related to the stock-based compensation plans in each of the periods. For the nine months ended September 30, 2016 and 2015, the Company’s net income, as reported, includes $4.7 million and $4.2 million of stock-based compensation costs and $1.8 million and $1.6 million of income tax benefits related to the stock-based compensation plans. The Company did not issue any restricted stock units during the three months ended September 30, 2016 and 2015. During the nine months ended September 30, 2016 and 2015, the Company granted 337,175 and 318,120 restricted stock units, respectively. The Company has not granted any stock options since 2009.

- 26 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The Company estimated the fair value of stock options using the Black-Scholes valuation model. Key assumptions used to estimate the fair value of stock options included the exercise price of the award, the expected option term, the expected volatility of the Company’s stock price, the risk-free interest rate over the options’ expected term and the annual dividend yield. The Company uses the fair value of the common stock on the date of award to measure compensation cost for restricted stock unit awards. Compensation cost is recognized over the vesting period of the award using the straight line method.

The following table summarizes the Company’s restricted stock unit (“RSU”) awards under the 2014 Omnibus Plan and the Prior Plans in the aggregate at or for the nine months ended September 30, 2016:

	Shares			Weighted-Average Grant-Date Fair Value

Non-vested at December 31, 2015		415,909		$	18.10
Granted		337,175			19.85
Vested		(235,535	)		18.70
Forfeited		(17,010	)		18.50
Non-vested at September 30, 2016		500,539		$	18.98

Vested but unissued at September 30, 2016		280,450		$	19.28

As of September 30, 2016, there was $7.4 million of total unrecognized compensation cost related to non-vested full value awards granted under the 2014 Omnibus Plan and the Prior Plans. That cost is expected to be recognized over a weighted-average period of 3.3 years. The total fair value of awards vested for the three months ended September 30, 2016 and 2015 were $4,000 and $39,000, respectively. The total fair value of awards vested for the nine months ended September 30, 2016 and 2015 was $4.8 million and $4.9 million, respectively. The vested but unissued RSU awards consist of awards made to employees and directors who are eligible for retirement. According to the terms of these awards, which provide for vesting upon retirement, these employees and directors have no risk of forfeiture. These shares will be issued at the original contractual vesting and settlement dates.

The following table summarizes certain information regarding the stock option awards under the 2014 Omnibus Plan and the Prior Plans in the aggregate at or for the nine months ended September 30, 2016:

	Shares			Weighted- Average Exercise Price		Weighted-Average Remaining Contractual Term		Aggregate Intrinsic Value ($000)*

Outstanding at December 31, 2015		109,130		$	16.14
Granted		-			-
Exercised		(41,670	)		17.82
Forfeited		-			-
Outstanding at September 30, 2016		67,460		$	15.10		1.7	$	582

* The intrinsic value of a stock option is the difference between the market value of the underlying stock and the exercise price of the option.

- 27 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

Cash proceeds, fair value received, tax benefits, and intrinsic value related to stock options exercised, and the weighted average grant date fair value for options granted, during the three and nine months ended September 30, 2016 and 2015 are provided in the following table:

	For the three months ended September 30,					For the nine months ended September 30,
(In thousands)	2016			2015		2016			2015
Proceeds from stock options exercised	$	5		$	-	$	132		$	142
Fair value of shares received upon exercise of stock options		262			421		612			441
Tax benefit (expense) related to stock options exercised		(10	)		87		(12	)		324
Intrinsic value of stock options exercised		44			291		156			96

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

The following table summarizes the Phantom Stock Plan at or for the nine months ended September 30, 2016:

Phantom Stock Plan	Shares			Fair Value

Outstanding at December 31, 2015		79,440		$	21.64
Granted		11,543			20.09
Forfeited		-			-
Distributions		(1,364	)		20.28
Outstanding at September 30, 2016		89,619		$	23.72
Vested at September 30, 2016		89,435		$	23.72

The Company recorded stock-based compensation expense for the Phantom Stock Plan of $0.4 million and $0.1 million for the three months ended September 30, 2016 and 2015, respectively. There were no distributions for the three months ended September 30, 2016 and 2015.

For the nine months ended September 30, 2016 and 2015, the Company recorded stock-based compensation expense for the Phantom Stock Plan of $0.2 million and $29,000, respectively. The total fair value of the distributions from the Phantom Stock Plan during the nine months ended September 30, 2016 and 2015 was $28,000 and $9,000, respectively.

- 28 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

10.

Pension and Other Postretirement Benefit Plans

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

	Three months ended September 30,						Nine months ended September 30,
(In thousands)	2016			2015			2016			2015

Employee Pension Plan:
Interest cost	$	226		$	221		$	678		$	663
Amortization of unrecognized loss		201			291			604			872
Expected return on plan assets		(348	)		(350	)		(1,044	)		(1,050	)
Net employee pension expense	$	79		$	162		$	238		$	485

Outside Director Pension Plan:
Service cost	$	11		$	11		$	33		$	33
Interest cost		24			24			72			72
Amortization of unrecognized gain		(21	)		(14	)		(65	)		(42	)
Amortization of past service liability		9			10			30			30
Net outside director pension expense	$	23		$	31		$	70		$	93

Other Postretirement Benefit Plans:
Service cost	$	90		$	95		$	270		$	285
Interest cost		80			75			240			225
Amortization of unrecognized loss		12			30			36			90
Amortization of past service credit		(22	)		(21	)		(64	)		(64	)
Net other postretirement expense	$	160		$	179		$	482		$	536

The Company previously disclosed in its Consolidated Financial Statements for the year ended December 31, 2015 that it expects to contribute $0.3 million and $0.2 million to the Outside Director Pension Plan (the “Outside Director Pension Plan”) and the other postretirement benefit plans (the “Other Postretirement Benefit Plans”), respectively, during the year ending December 31, 2016. The Company does not expect to make a contribution to the Employee Pension Plan (the “Employee Pension Plan”). As of September 30, 2016, the Company has contributed $108,000 to the Outside Director Pension Plan and $48,000 to the Other Postretirement Benefit Plans. As of September 30, 2016, the Company has not revised its expected contributions for the year ending December 31, 2016.

11.

Fair Value of Financial Instruments

The Company carries certain financial assets and financial liabilities at fair value in accordance with GAAP which defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, establishes a framework for measuring fair value and expands disclosures about fair value measurements. GAAP permits entities to choose to measure many financial instruments and certain other items at fair value. At September 30, 2016, the Company carried financial assets and financial liabilities under the fair value option with fair values of $30.7 million and $27.8 million, respectively. At December 31, 2015, the Company carried financial assets and financial liabilities under the fair value option with fair values of $30.7 million and $29.0 million, respectively. The Company did not elect to carry any additional financial assets or financial liabilities under the fair value option during the three and nine months ended September 30, 2016.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

	Fair Value		Fair Value		Changes in Fair Values For Items Measured at Fair Value
	Measurements		Measurements		Pursuant to Election of the Fair Value Option
	at September 30,		at December 31,		Three Months Ended					Nine Months Ended
(Dollars in thousands)	2016		2015		September 30, 2016			September 30, 2015		September 30, 2016			September 30, 2015

Mortgage-backed securities	$	2,166	$	2,527	$	(6	)	$	-	$	(4	)	$	(36	)
Other securities		28,551		28,205		(30	)		59		156			148
Borrowed funds		27,791		29,018		(296	)		987		1,250			282
Net gain (loss) from fair value adjustments ^{(1) (2)}					$	(332	)	$	1,046	$	1,402		$	394

(1)

The net gain (loss) from fair value adjustments presented in the above table does not include net losses of $0.5 million and $2.1 million for the three months ended September 30, 2016 and 2015, respectively, from the change in the fair value of interest rate swaps.

(2)

The net gain (loss) from fair value adjustments presented in the above table does not include net losses of $4.3 million and $1.3 million for the nine months ended September 30, 2016 and 2015, 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, 2016 and December 31, 2015. The fair value of borrowed funds includes accrued interest payable of $0.1 million at both September 30, 2016 and December 31, 2015.

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

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

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

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

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

Level 1 – where quoted market prices are available in an active market. The Company did not value any of its assets or liabilities that are carried at fair value on a recurring basis as Level 1 at September 30, 2016 and December 31, 2015.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

Level 2 – when quoted market prices are not available, fair value is estimated using quoted market prices for similar financial instruments and adjusted for differences between the quoted instrument and the instrument being valued. Fair value can also be estimated by using pricing models, or discounted cash flows. Pricing models primarily use market-based or independently sourced market parameters as inputs, including, but not limited to, yield curves, interest rates, equity or debt prices and credit spreads. In addition to observable market information, models also incorporate maturity and cash flow assumptions. At September 30, 2016 and December 31, 2015, Level 2 included mortgage related securities, corporate debt, municipals and interest rate swaps.

Level 3 – when there is limited activity or less transparency around inputs to the valuation, financial instruments are classified as Level 3. At September 30, 2016 and December 31, 2015, Level 3 included trust preferred securities owned and junior subordinated debentures issued by the Company and a single issuer trust preferred security.

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

The following table sets forth the assets and liabilities that are carried at fair value on a recurring basis and the method that was used to determine their fair value, at September 30, 2016 and December 31, 2015:

	Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Other Unobservable Inputs (Level 3)				Total carried at fair value on a recurring basis
	2016		2015		2016		2015		2016		2015		2016		2015
	(In thousands)

Assets:
Mortgage-backed Securities	$	-	$	-	$	545,067	$	668,740	$	-	$	-	$	545,067	$	668,740
Other securities		-		-		358,621		317,445		7,191		7,212		365,812		324,657
Interest rate swaps		-		-		-		48		-		-		-		48

Total assets	$	-	$	-	$	903,688	$	986,233	$	7,191	$	7,212	$	910,879	$	993,445

Liabilities:
Borrowings	$	-	$	-	$	-	$	-	$	27,791	$	29,018	$	27,791	$	29,018
Interest rate swaps		-		-		15,426		4,314		-		-		15,426		4,314

Total liabilities	$	-	$	-	$	15,426	$	4,314	$	27,791	$	29,018	$	43,217	$	33,332

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

	For the three months ended September 30, 2016
	Trust preferred securities		Junior subordinated debentures
	(In thousands)

Beginning balance	$	7,167	$	27,485
Net gain from fair value adjustment of financial assets ⁽¹⁾		23		-
Net loss from fair value adjustment of financial liabilities ⁽¹⁾		-		296
Increase in accrued interest payable		-		10
Change in unrealized gains (losses) included in other comprehensive income		1		-
Ending balance	$	7,191	$	27,791

Changes in unrealized gains (losses) held at period end	$	1	$	-

(1)

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

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

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, classified within Level 3 of the valuation hierarchy for the period indicated:

	For the three months ended September 30, 2015
	Municipals			Trust preferred securities			Junior subordinated debentures
	(In thousands)

Beginning balance	$	7,899		$	7,226		$	29,476
Transfer to held-to-maturity		-			-			-
Principal repayments		(7,899	)		-			-
Maturities		-			-			-
Net loss from fair value adjustment of financial assets included in earnings ⁽¹⁾		-			(44	)		-
Net gain from fair value adjustment of financial liabilities included in earnings ⁽¹⁾		-			-			(988	)
Increase in accrued interest payable		-			-			3
Change in unrealized gains (losses) included in other comprehensive income		-			(1	)		-
Ending balance	$	-		$	7,181		$	28,491

Changes in unrealized gains (losses) held at period end	$	-		$	(1	)	$	-

(1)

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

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

	For the nine months ended September 30, 2016
	Trust preferred securities			Junior subordinated debentures


Beginning balance	$	7,212		$	29,018
Net loss from fair value adjustment of financial assets included in earnings ⁽¹⁾		(23	)		-
Net gain from fair value adjustment of financial liabilities included in earnings ⁽¹⁾		-			(1,250	)
Increase in accrued interest payable		1			23
Change in unrealized gains (losses) included in other comprehensive income		1			-
Ending balance	$	7,191		$	27,791

Changes in unrealized gains (losses) held at period end	$	1		$	-

(1)

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

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

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, classified within Level 3 of the valuation hierarchy for the period indicated:

	For the nine months ended September 30, 2015
	Municipals			Trust preferred securities		Junior subordinated debentures
	(In thousands)

Beginning balance	$	15,519		$	7,090	$	28,771
Transfer to held-to-maturity		(4,510	)		-		-
Purchases		1,000			-		-
Principal repayments		(8,009	)		-		-
Maturities		(4,000	)		-		-
Net gain from fair value adjustment of financial assets included in earnings ⁽¹⁾		-			86		-
Net gain from fair value adjustment of financial liabilities included in earnings ⁽¹⁾		-			-		(283	)
Increase in accrued interest payable		-			-		3
Change in unrealized gains (losses) included in other comprehensive income		-			5		-
Ending balance	$	-		$	7,181	$	28,491

Changes in unrealized gains (losses) held at period end	$	-		$	5	$	-

(1)

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

During the three and nine months ended September 30, 2016 and 2015, there were no transfers between Levels 1, 2 and 3.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

	September 30, 2016

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

Trust preferred securities	$	7,191	Discounted cash flows	Discount rate	7.0%	-	7.05%		7.0	%

Liabilities:

Junior subordinated debentures	$	27,791	Discounted cash flows	Discount rate		7.0%			7.0	%

	December 31, 2015

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

Trust preferred securities	$	7,212	Discounted cash flows	Discount rate	7.0%	-	7.07%		7.1	%

Liabilities:

Junior subordinated debentures	$	29,018	Discounted cash flows	Discount rate		7.0%			7.0	%

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, 2016 and December 31, 2015, 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 method that was used to determine their fair value at September 30, 2016 and December 31, 2015:

	Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Other Unobservable Inputs (Level 3)				Total carried at fair value on a recurring basis
	2016		2015		2016		2015		2016		2015		2016		2015
	(In thousands)
Assets:
Impaired loans	$	-	$	-	$	-	$	-	$	12,144	$	15,360	$	12,144	$	15,360
Other real estate owned		-		-		-		-		2,839		4,932		2,839		4,932

Total assets	$	-	$	-	$	-	$	-	$	14,983	$	20,292	$	14,983	$	20,292

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

	September 30, 2016

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

Impaired loans	$	2,472	Income approach	Capitalization rate	6.0%	to	7.1%		7.1	%
				Loss severity discount	8.7%	to	15.0%		14.0	%

Impaired loans	$	4,426	Sales approach	Adjustment to sales comparison value to reconcile differences between comparable sales	-40.0%	to	16.2%		-3.1	%
				Loss severity discount		15.0%			15.0	%


Impaired loans	$	5,246	Blended income and sales approach	Adjustment to sales comparison value to reconcile differences between comparable sales	-50.0%	to	25.0%		-2.4	%
				Capitalization rate	5.3%	to	11.0%		7.1	%
				Loss severity discount	6.9%	to	15.0%		13.8	%




Other real estate owned	$	2,839	Sales approach	Adjustment to sales comparison value to reconcile differences between comparable sales	-5.0%	to	25.0%		2.8	%

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

	December 31, 2015

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

Impaired loans	$	3,878	Income approach	Capitalization rate	7.3%	to	8.5%		7.7	%
				Loss severity discount		15.0%			15.0	%

Impaired loans	$	5,555	Sales approach	Adjustment to sales comparison value to reconcile differences between comparable sales	-50.0%	to	40.0%		-2.2	%
				Loss severity discount		15.0%			15.0	%


Impaired loans	$	5,927	Blended income and sales approach	Adjustment to sales comparison value to reconcile differences between comparable sales	-50.0%	to	25.0%		-2.2	%
				Capitalization rate	5.3%	to	9.0%		7.0	%
				Loss severity discount	5.2%	to	15.0%		13.7	%


Other real estate owned	$	3,750	Income approach	Capitalization rate		9.0%			9.0	%


Other real estate owned	$	366	Sales approach	Adjustment to sales comparison value to reconcile differences between comparable sales	-5.0%	to	25.0%		12.0	%


Other real estate owned	$	816	Blended income and sales approach	Adjustment to sales comparison value to reconcile differences between comparable sales	-10.0%	to	15.0%		2.5	%
				Capitalization rate		8.6%			8.6	%

The Company did not have any liabilities that were carried at fair value on a non-recurring basis at September 30, 2016 and December 31, 2015.

The fair value of each material class of financial instruments at September 30, 2016 and December 31, 2015 and the related methods and assumptions used to estimate fair value are as follows:

Cash and Due from Banks, Overnight Interest-Earning Deposits and Federal Funds Sold:

The fair values of financial instruments that are short-term or reprice frequently and have little or no risk are considered to have a fair value that approximates carrying value.

FHLB-NY stock:

The fair value is based upon the par value of the stock which equals its carrying value.

Securities:

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

Loans:

The fair value of loans is estimated by discounting the expected future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and remaining maturities.

For non-accruing loans, fair value is generally estimated by discounting management’s estimate of future cash flows with a discount rate commensurate with the risk associated with such assets or for collateral dependent loans 85% of the appraised or internally estimated value of the property, except for taxi medallion loans. The fair value of the underlying collateral of taxi medallion loans is the most recent reported arm’s length transaction. When there is no recent sale activity, the fair value is calculated using capitalization rates.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

Other Real Estate Owned:

OREO are carried at fair value less selling costs. The fair value is based on appraised value through a current appraisal, or sometimes through an internal review, additionally adjusted by the estimated costs to sell the property.

Accrued Interest Receivable:

The carrying amount is a reasonable estimate of fair value due to its short-term nature.

Due to Depositors:

The fair values of demand, passbook savings, NOW, money market deposits and escrow deposits are, by definition, equal to the amount payable on demand at the reporting dates (i.e. their carrying value). The fair value of certificates of deposits are estimated by discounting the expected future cash flows using the rates currently offered for deposits of similar remaining maturities.

Borrowings:

The fair value of borrowings is estimated by discounting the contractual cash flows using interest rates in effect for borrowings with similar maturities and collateral requirements or using a market-standard model.

Accrued Interest Payable:

The carrying amount is a reasonable estimate of fair value due to its short-term nature.

Interest Rate Swaps:

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

Other Financial Instruments:

The fair values of commitments to sell, lend or borrow are estimated using the fees currently charged or paid to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties or on the estimated cost to terminate them or otherwise settle with the counterparties at the reporting date. For fixed-rate loan commitments to sell, lend or borrow, fair values also consider the difference between current levels of interest rates and committed rates (where applicable). At September 30, 2016 and December 31, 2015, the fair values of the above financial instruments approximate the recorded amounts of the related fees and were not considered to be material.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The following tables set forth the 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, 2016
	Carrying Amount		Value		Level 1		Level 2		Level 3
	(In thousands)
Assets:

Cash and due from banks	$	47,880	$	47,880	$	47,880	$	-	$	-
Securities held-to-maturity
Other securities		33,274		33,410		-		-		33,410
Securities available for sale
Mortgage-backed securities		545,067		545,067		-		545,067		-
Other securities		365,812		365,812		-		358,621		7,191
Loans		4,741,277		4,780,500		-		-		4,780,500
FHLB-NY stock		65,185		65,185		-		65,185		-

Total assets	$	5,798,495	$	5,837,854	$	47,880	$	968,873	$	4,821,101


Liabilities:
Deposits	$	4,041,781	$	4,058,678	$	2,657,230	$	1,401,448	$	-
Borrowings		1,360,515		1,370,749		-		1,342,958		27,791
Interest rate swaps		15,426		15,426		-		15,426		-

Total liabilities	$	5,417,722	$	5,444,853	$	2,657,230	$	2,759,832	$	27,791

	December 31, 2015
	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
	(In thousands)
Assets:

Cash and due from banks	$	42,363	$	42,363	$	42,363	$	-	$	-
Securities held-to-maturity
Other securities		6,180		6,180		-		-		6,180
Securities available for sale
Mortgage-backed securities		668,740		668,740		-		668,740		-
Other securities		324,657		324,657		-		317,445		7,212
Loans		4,387,979		4,434,079		-		-		4,434,079
FHLB-NY stock		56,066		56,066		-		56,066		-
Interest rate swaps		48		48		-		48		-

Total assets	$	5,486,033	$	5,532,133	$	42,363	$	1,042,299	$	4,447,471


Liabilities:
Deposits	$	3,892,547	$	3,902,888	$	2,489,245	$	1,413,643	$	-
Borrowings		1,271,676		1,279,946		-		1,250,928		29,018
Interest rate swaps		4,314		4,314		-		4,314		-

Total liabilities	$	5,168,537	$	5,187,148	$	2,489,245	$	2,668,885	$	29,018

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

12. Derivative Financial Instruments

At September 30, 2016 and December 31, 2015, the Company’s derivative financial instruments consist of interest rate swaps. The Company’s interest rate swaps are used for two purposes. The first purpose is to mitigate the Company’s exposure to rising interest rates on a portion ($18.0 million) of its floating rate junior subordinated debentures that have a contractual value of $61.9 million at both September 30, 2016 and December 31, 2015. The second purpose is to mitigate the Company’s exposure to rising interest rates on certain fixed rate loans totaling $208.1 million and $146.9 million at September 30, 2016 and December 31, 2015, respectively.

At September 30, 2016 and December 31, 2015, derivatives with a combined notional amount of $36.3 million were not designated as hedges. At September 30, 2016 and December 31, 2015, derivatives with a combined notional amount of $189.8 million and $128.5 million were designated as fair value hedges. Changes in the fair value of interest rate swaps not designated as hedges are reflected in “Net gain (loss) from fair value adjustments” in the Consolidated Statements of Income.

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

	September 30, 2016					December 31, 2015
	Notional Amount		Net Carrying Value ⁽¹⁾			Notional Amount		Net Carrying Value ⁽¹⁾

Interest rate swaps (hedge)	$	-	$	-		$	28,588	$	48
Interest rate swaps (hedge)		189,791		(9,095	)		99,955		(1,515	)
Interest rate swaps (non-hedge)		36,321		(6,331	)		36,321		(2,799	)
Total derivatives	$	226,112	$	(15,426	)	$	164,864	$	(4,266	)

(1)	Derivatives in a net positive position are recorded as “Other assets” and derivatives in a net negative position are recorded as “Other liabilities” in the Consolidated Statements of Financial Condition. There were no unrealized losses at September 30, 2016 and December 31, 2015.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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 September 30,						For the nine months ended September 30,
(In thousands)	2016			2015			2016			2015

Financial Derivatives:
Interest rate swaps (non-hedge)	$	(111	)	$	(1,753	)	$	(3,532	)	$	(882	)
Interest rate swaps (hedge)		(380	)		(387	)		(795	)		(433	)
Net (loss) gain ⁽¹⁾	$	(491	)	$	(2,140	)	$	(4,327	)	$	(1,315	)

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

During the three months and nine months ended September 30, 2016 and 2015, the Company did not record any hedge ineffectiveness.

The Company’s interest rate swaps are subject to master netting arrangements and are all with the same counterparty. The Company has not made a policy election to offset its derivative positions.

The Company did not have derivative assets presented in the Consolidated Statements of Condition at September 30, 2016.

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

	December 31, 2015
							Gross Amounts Not Offset in the Consolidated Statement of Condition
(In thousands)	Gross Amount of Recognized Assets		Gross Amount Offset in the Statement of Condition		Net Amount of Assets Presented in the Statement of Condition		Financial Instruments		Cash Collateral Received		Net Amount

Interest rate swaps	$	48	$	-	$	48	$	48	$	-	$	-

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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 the master netting arrangements had on the presentation of the derivative liabilities in the Consolidated Statements of Condition as of the dates indicated:

	September 30, 2016
							Gross Amounts Not Offset in the Consolidated Statement of Condition
(In thousands)	Gross Amount of Recognized Liabilities		Gross Amount Offset in the Statement of Condition		Net Amount of Liabilities Presented in the Statement of Condition		Financial Instruments		Cash Collateral Pledged		Net Amount

Interest rate swaps	$	15,426	$	-	$	15,426	$	-	$	15,426	$	-

	December 31, 2015
							Gross Amounts Not Offset in the Consolidated Statement of Condition
(In thousands)	Gross Amount of Recognized Liabilities		Gross Amount Offset in the Statement of Condition		Net Amount of Liabilities Presented in the Statement of Condition		Financial Instruments		Cash Collateral Pledged		Net Amount

Interest rate swaps	$	4,314	$	-	$	4,314	$	48	$	4,266	$	-

13. Income Taxes

Flushing Financial Corporation files consolidated Federal and combined New York State and New York City income tax returns with its subsidiaries, with the exception of the Company’s trusts, which file separate Federal income tax returns as trusts, and Flushing Preferred Funding Corporation, which files a separate Federal income tax return as a real estate investment trust. Additionally, the Bank files New Jersey State tax returns.

Income tax provisions are summarized as follows:

	For the three months ended September 30,						For the nine months ended September 30,
(In thousands)	2016			2015			2016			2015
Federal:
Current	$	6,474		$	6,195		$	26,362		$	20,262
Deferred		(906	)		(820	)		(844	)		(3,480	)
Total federal tax provision		5,568			5,375			25,518			16,782
State and Local:
Current		1,492			1,635			7,853			6,490
Deferred		(405	)		(349	)		(384	)		(1,544	)
Total state and local tax provision		1,087			1,286			7,469			4,946

Total income tax provision	$	6,655		$	6,661		$	32,987		$	21,728

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The effective tax rate was 38.5% and 37.7% for the three months ended September 30, 2016 and 2015, respectively, and 39.5% and 38.6% for the nine months ended September 30, 2016 and 2015, respectively. The increase in the effective tax rate reflects the reduced impact of preferential tax items, as a result of the gain on sale of one of our properties in Flushing, Queens recorded during the nine months ended September 30, 2016.

The effective rates differ from the statutory federal income tax rate as follows:

	For the three months ended September 30,										For the nine months ended September 30,
(dollars in thousands)	2016					2015					2016					2015

Taxes at federal statutory rate	$	6,051		35.0	%	$	6,184		35.0	%	$	29,266		35.0	%	$	19,706		35.0	%
Increase (reduction) in taxes resulting from:
State and local income tax, net of Federal income tax benefit		707		4.1			836		4.7			4,855		5.8			3,215		5.7
Other		(103	)	(0.6	)		(359	)	(2.0	)		(1,134	)	(1.3	)		(1,193	)	(2.1	)
Taxes at effective rate	$	6,655		38.5	%	$	6,661		37.7	%	$	32,987		39.5	%	$	21,728		38.6	%

The Company has recorded a deferred tax asset of $34.8 million at September 30, 2016, which is included in “Other assets” in the Consolidated Statements of Financial Condition. This represents the net federal, state and local tax benefits expected to be realized in future years upon the utilization of the underlying tax attributes comprising this balance. The Company has reported taxable income for federal, state, and local tax purposes in each of the past three fiscal years. In management’s opinion, in view of the Company’s previous, current and projected future earnings trend, the probability that some of the Company’s $23.3 million deferred tax liability can be used to offset a portion of the deferred tax asset, as well as certain tax planning strategies, it is more likely than not that the deferred tax asset will be fully realized. Accordingly, no valuation allowance was deemed necessary for the deferred tax asset at September 30, 2016.

14. Accumulated Other Comprehensive Income:

The following table sets forth the changes in accumulated other comprehensive income by component for the three months ended September 30, 2016:

	Unrealized Gains and (Losses) on Available for Sale Securities			Defined Benefit Pension Items			Total
	(In thousands)

Beginning balance, net of tax	$	7,923		$	(4,835	)	$	3,088
Other comprehensive income (loss) before reclassifications, net of tax		(2,942	)		-			(2,942	)

Amounts reclassified from accumulated other comprehensive income, net of tax		-			103			103

Net current period other comprehensive income (loss), net of tax		(2,942	)		103			(2,839	)

Ending balance, net of tax	$	4,981		$	(4,732	)	$	249

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The following table sets forth the changes in accumulated other comprehensive income by component for the three months ended September 30, 2015:

	Unrealized Gains and (Losses) on Available for Sale Securities			Defined Benefit Pension Items			Total
	(In thousands)

Beginning balance, net of tax	$	2,211		$	(5,967	)	$	(3,756	)
Other comprehensive income before reclassifications, net of tax		3,943			-			3,943

Amounts reclassified from accumulated other comprehensive income, net of tax		(58	)		167			109

Net current period other comprehensive income, net of tax		3,885			167			4,052

Ending balance, net of tax	$	6,096		$	(5,800	)	$	296

The following table sets forth the changes in accumulated other comprehensive income by component for the nine months ended September 30, 2016:

	Unrealized Gains and (Losses) on Available for Sale Securities			Defined Benefit Pension Items			Total
	(In thousands)

Beginning balance, net of tax	$	(521	)	$	(5,041	)	$	(5,562	)
Other comprehensive income before reclassifications, net of tax		6,852			-			6,852

Amounts reclassified from accumulated other comprehensive income, net of tax		(1,350	)		309			(1,041	)

Net current period other comprehensive income, net of tax		5,502			309			5,811

Ending balance, net of tax	$	4,981		$	(4,732	)	$	249

The following table sets forth the changes in accumulated other comprehensive income by component for the nine months ended September 30, 2015:

	Unrealized Gains and (Losses) on Available for Sale Securities			Defined Benefit Pension Items			Total
	(In thousands)
Beginning balance, net of tax	$	3,392		$	(6,299	)	$	(2,907	)
Other comprehensive income before reclassifications, net of tax		2,798			-			2,798

Amounts reclassified from accumulated other comprehensive income, net of tax		(94	)		499			405

Net current period other comprehensive income, net of tax		2,704			499			3,203

Ending balance, net of tax	$	6,096		$	(5,800	)	$	296

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

For the three months ended September 30, 2016

Details about Accumulated Other Comprehensive Income Components	Amounts Reclassified from Accumulated Other Comprehensive Income				Affected Line Item in the Statement Where Net Income is Presented
	(In thousands)

Amortization of defined benefit pension items:
Net actuarial losses	$	(192	)	(1)	Other expense
Net prior service credits		11		(1)	Other expense
		(181	)		Total before tax
		78			Tax benefit
	$	(103	)		Net of tax

For the three months ended September 30, 2015

Details about Accumulated Other Comprehensive Income Components	Amounts Reclassified from Accumulated Other Comprehensive Income				Affected Line Item in the Statement Where Net Income is Presented
	(In thousands)

Net unrealized gains on available for sale securities	$	103			Net gain on sale of securities
		(45	)		Tax expense
	$	58			Net of tax

Amortization of defined benefit pension items:
Net actuarial losses	$	(307	)	(1)	Other expense
Net prior service credits		11		(1)	Other expense
		(296	)		Total before tax
		129			Tax benefit
	$	(167	)		Net of tax

(1)

These accumulated other comprehensive income components are included in the computation of net periodic pension cost (See Note 10 of the Notes to Consolidated Financial Statements “Pension and Other Postretirement Benefit Plans”.)

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

For the nine months ended September 30, 2016
Details about Accumulated Other Comprehensive Income Components	Amounts Reclassified from Accumulated Other Comprehensive Income				Affected Line Item in the Statement Where Net Income is Presented
	(In thousands)

Net unrealized gains on available for sale securities	$	2,363			Net gain on sale of securities
		(1,013	)		Tax expense
	$	1,350			Net of tax

Amortization of defined benefit pension items:
Net actuarial losses	$	(575	)	(1)	Other expense
Net prior service credits		33		(1)	Other expense
		(542	)		Total before tax
		233			Tax benefit
	$	(309	)		Net of tax

For the nine months ended September 30, 2015
Details about Accumulated Other Comprehensive Income Components	Amounts Reclassified from Accumulated Other Comprehensive Income				Affected Line Item in the Statement Where Net Income is Presented
	(in thousands)

Net unrealized gains on available for sale securities	$	167			Net gain on sale of securities
		(73	)		Tax expense
	$	94			Net of tax

Amortization of defined benefit pension items:
Net actuarial losses	$	(920	)	(1)	Other expense
Net prior service credits		34		(1)	Other expense
		(886	)		Total before tax
		387			Tax benefit
	$	(499	)		Net of tax

(1)

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

15. Regulatory Capital

Under current capital regulations, the Bank is required to comply with four separate capital adequacy standards. As of September 30, 2016, the Bank continues to be categorized as “well-capitalized” under the prompt corrective action regulations and continues to exceed all regulatory capital requirements. In 2016, a Capital Conservation Buffer (“CCB”) requirement became effective for banks. The CCB is designed to establish a capital range above minimum capital requirements and impose constraints on dividends, share buybacks and discretionary bonus payments when capital levels fall below prescribed levels. The minimum CCB in 2016 is 0.625% and increases 0.625% annually through 2019 to 2.5%. The CCB for the Bank at September 30, 2016 was 4.96%.

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

	September 30, 2016					December 31, 2015
	Amount		Percent of Assets			Amount		Percent of Assets
	(Dollars in thousands)

Tier I (leverage) capital:
Capital level	$	528,168		8.88	%	$	494,690		8.89	%
Requirement to be well capitalized		297,261		5.00			278,175		5.00
Excess		230,907		3.88			216,515		3.89

Common Equity Tier I risk-based capital:
Capital level	$	528,168		12.44	%	$	494,690		12.62
Requirement to be well capitalized		275,911		6.50			254,768		6.50
Excess		252,257		5.94			239,922		6.12

Tier 1 risk-based capital:
Capital level	$	528,168		12.44	%	$	494,690		12.62	%
Requirement to be well capitalized		339,583		8.00			313,560		8.00
Excess		188,585		4.44			181,130		4.62

Total risk-based capital:
Capital level	$	549,963		12.96	%	$	516,226		13.17	%
Requirement to be well capitalized		424,479		10.00			391,950		10.00
Excess		125,484		2.96			124,276		3.17

The Holding Company is subject to the same regulatory capital requirements as the Bank. As of September 30, 2016, 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, 2016 was 4.87%.

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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 Holding Company’s compliance with banking regulatory capital standards.

	September 30, 2016					December 31, 2015
	Amount		Percent of Assets			Amount		Percent of Assets
	(Dollars in thousands)

Tier I (leverage) capital:
Capital level	$	523,428		8.80	%	$	490,919		8.84	%
Requirement to be well capitalized		297,458		5.00			277,611		5.00
Excess		225,970		3.80			213,308		3.84

Common Equity Tier I risk-based capital:
Capital level	$	496,605		11.72	%	$	462,883		11.83
Requirement to be well capitalized		275,404		6.50			254,335		6.50
Excess		221,201		5.22			208,548		5.33

Tier 1 risk-based capital:
Capital level	$	523,428		12.35	%	$	490,919		12.55	%
Requirement to be well capitalized		338,958		8.00			313,028		8.00
Excess		184,470		4.35			177,891		4.55

Total risk-based capital:
Capital level	$	545,223		12.87	%	$	512,454		13.10	%
Requirement to be well capitalized		423,698		10.00			391,285		10.00
Excess		121,525		2.87			121,169		3.10

16. New Authoritative Accounting Pronouncements

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

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses” which sets forth a “current expected credit loss” (“CECL”) model which requires the Company to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable supportable forecasts. This replaces the existing incurred loss model and will apply to the measurement of credit losses on financial assets measured at amortized cost and to some off-balance sheet credit exposures. This ASU will be effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company is currently assessing the impact of the adoption of this ASU on its consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-09, “Compensation – Stock Compensation”, which introduces targeted amendments intended to simplify the accounting for stock compensation. Specifically, the ASU requires all excess tax benefits and tax deficiencies (including tax benefits of dividends on share-based payment awards) to be recognized as income tax expense or benefit in the income statement. The tax effects of exercised or vested awards should be treated as discrete items in the reporting period in which they occur. An entity also should recognize excess tax benefits, and assess the need for a valuation allowance, regardless of whether the benefit reduces taxes payable in the current period. That is, off balance sheet accounting for net operating losses stemming from excess tax benefits would no longer be required and instead such net operating losses would be recognized when they arise. Existing net operating losses that are currently tracked off balance sheet would be recognized, net of a valuation allowance if required, through an adjustment to opening retained earnings in the period of adoption. Entities will no longer need to maintain and track an additional paid in capital pool. The ASU also requires excess tax benefits to be classified along with other income tax cash flows as an operating activity in the statement of cash flows. In addition, the ASU elevates the statutory tax withholding threshold to qualify for equity classification up to the maximum statutory tax rates in the applicable jurisdiction(s). The ASU also clarifies that cash paid by an employer when directly withholding shares for tax withholding purposes should be classified as a financing activity. The ASU provides an optional accounting policy election (with limited exceptions), to be applied on an entity-wide basis, to either estimate the number of awards that are expected to vest (consistent with existing GAAP) or account for forfeitures when they occur. The amendments are effective for public business entities for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted. We are currently evaluating the impact of adopting this new guidance on our consolidated results of operations and financial condition.

In February 2016, the FASB issued ASU No. 2016-02, “Leases”. From the lessee's perspective, the new standard establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement for a lessee. From the lessor's perspective, the new standard requires a lessor to classify leases as either sales-type, finance or operating. A lease will be treated as a sale if it transfers all of the risks and rewards, as well as control of the underlying asset, to the lessee. If risks and rewards are conveyed without the transfer of control, the lease is treated as a financing. If the lessor doesn’t convey risks and rewards or control, an operating lease results. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. A modified retrospective transition approach is required for lessors for sales-type, direct financing, and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. We are currently evaluating the impact of adopting this new guidance on our consolidated results of operations and financial condition.

In January 2016, FASB issued ASU No. 2016-01 “Financial Instruments” which requires an entity to: (i) measure equity investments at fair value through net income, with certain exceptions; (ii) present in other comprehensive income the changes in instrument-specific credit risk for financial liabilities measured using the fair value option; (iii) present financial assets and financial liabilities by measurement category and form of financial asset; (iv) calculate the fair value of financial instruments for disclosure purposes based on an exit price and; (v) assess a valuation allowance on deferred tax assets related to unrealized losses of available for sale debt securities in combination with other deferred tax assets. The ASU provides an election to subsequently measure certain nonmarketable equity investments at cost less any impairment and adjusted for certain observable price changes. The ASU also requires a qualitative impairment assessment of such equity investments and amends certain fair value disclosure requirements. The amendments are effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is not permitted for the changes that affect the Company. We are currently evaluating the impact of adopting this new guidance on our consolidated results of operations and financial condition.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

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

This Quarterly Report should be read in conjunction with the more detailed and comprehensive disclosures included in our Annual Report on Form 10-K for the year ended December 31, 2015. In addition, please read this section in conjunction with our Consolidated Financial Statements and Notes to Consolidated Financial Statements contained herein.

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

Statements contained in this Quarterly Report relating to plans, strategies, objectives, economic performance and trends, projections of results of specific activities or investments and other statements that are not descriptions of historical facts may be forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking information is inherently subject to risks and uncertainties and actual results could differ materially from those currently anticipated due to a number of factors, which include, but are not limited to, factors discussed elsewhere in this Quarterly Report and in other documents filed by us with the Securities and Exchange Commission from time to time, including, without limitation, our Annual Report on Form 10-K for the year ended December 31, 2015. Forward-looking statements may be identified by terms such as “may,” “will,” “should,” “could,” “expects,” “plans,” “intends,” “anticipates,” “believes,” “estimates,” “predicts,” “forecasts,” “potential” or “continue” or similar terms or the negative of these terms. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We have no obligation to update these forward-looking statements.

Executive Summary

We are a Delaware corporation organized in May 1994. The Bank was organized in 1929 as a New York State-chartered mutual savings bank. The Bank converted from a federally chartered mutual savings bank to a federally chartered stock savings bank on November 21, 1995, at which time Flushing Financial Corporation acquired all of the stock of the Bank. In 2013, the Bank’s charter was changed to a full-service New York State chartered commercial bank, and its name was changed to Flushing Bank. As a result of the Bank’s change in charter to a full-service New York State chartered commercial bank, the Bank’s primary regulator became the New York State Department of Financial Services, and its primary federal regulator became the Federal Deposit Insurance Corporation (“FDIC”). Deposits are insured to the maximum allowable amount by the FDIC. Additionally, the Bank is a member of the Federal Home Loan Bank system. The primary business of Flushing Financial Corporation has been the operation of the Bank. The Bank owns three subsidiaries: Flushing Preferred Funding Corporation, Flushing Service Corporation, and FSB Properties Inc. The Bank also operates an internet branch, iGObanking.com^®. The activities of Flushing Financial Corporation are primarily funded by dividends, if any, received from the Bank, issuances of junior subordinated debt, and issuances of equity securities. Flushing Financial Corporation’s common stock is traded on the NASDAQ Global Select Market under the symbol “FFIC.”

Our principal business is attracting retail deposits from the general public and investing those deposits together with funds generated from ongoing operations and borrowings, primarily in (1) originations and purchases of multi-family residential loans, commercial business loans, commercial real estate mortgage loans and, to a lesser extent, one-to-four family loans (focusing on mixed-use properties, which are properties that contain both residential dwelling units and commercial units); (2) Small Business Administration (“SBA”) loans and other small business loans; (3) construction loans, primarily for residential properties; (4) mortgage loan surrogates such as mortgage-backed securities; and (5) U.S. government securities, corporate fixed-income securities and other marketable securities. We also originate certain other consumer loans including overdraft lines of credit. Our results of operations depend primarily on net interest income, which is the difference between the income earned on its interest-earning assets and the cost of our interest-bearing liabilities. Net interest income is the result of our interest rate margin, which is the difference between the average yield earned on interest-earning assets and the average cost of interest-bearing liabilities, adjusted for the difference in the average balance of interest-earning assets as compared to the average balance of interest-bearing liabilities. We also generate non-interest income from loan fees, service charges on deposit accounts, mortgage servicing fees, and other fees, income earned on Bank Owned Life Insurance (“BOLI”), dividends on Federal Home Loan Bank of New York stock and net gains and losses on sales of securities and loans. Our operating expenses consist principally of employee compensation and benefits, occupancy and equipment costs, other general and administrative expenses and income tax expense. Our results of operations also can be significantly affected by changes in the fair value of financial assets and financial liabilities for which changes in value are recorded through earnings, our periodic provision for loan losses and specific provision for losses on real estate owned.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

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

continue our emphasis on the origination of multi-family residential mortgage loans, commercial business loans and commercial real estate mortgage loans;

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

maintain asset quality;

manage deposit growth and maintain a low cost of funds through

business banking deposits,

personal accounts,

municipal deposits through government banking, and

new customer relationships via iGObanking.com®

building relationships with our lending and deposit customers;

take advantage of market disruptions to attract talent and customers from competitors;

manage interest rate risk and capital; and

manage enterprise-wide risk.

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

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

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

Our net interest margin for the third quarter of 2016 was 2.94%, a decrease of five basis points from the trailing quarter. Included in net interest income are prepayment penalties on loans and securities and interest recovered from non-accrual loans. Absent prepayment penalty income and recovered interest, the net interest margin would have decreased by six basis points to 2.81% for the third quarter of 2016 from 2.87% for the second quarter of 2016.

The trend of improving credit quality continued during the three months ended September 30, 2016, as we continued to see improvements in classified assets. Classified assets were $48.7 million at September 30, 2016, which was an increase of $3.9 million, or 8.7%, from June 30, 2016, while non-accrual loans increased $1.5 million, or 7.4%, during the third quarter to $21.9 million. Net charge-offs for the three months ended September 30, 2016 were $0.4 million. Our strong underwriting standards coupled with our practice of obtaining updated appraisals and recording charge-offs, when necessary, has resulted in a 54.5% average loan-to-value ratio on our collateral dependent loans reviewed for impairment at September 30, 2016.

Net loans increased $45.4 million, or 1.0%, during the third quarter of 2016. Loan originations for the three months ended September 30, 2016 totaled $233.2 million. During the three months ended September 30, 2016, originations were primarily multi-family real estate, commercial real estate and commercial business loans as originations of these loan types accounted for 92.1% of the quarter’s originations. The weighted average yield on loan originations and purchases was 3.74% for the third quarter of 2016 compared to 3.71% and 3.56% for the quarters ended June 30, 2016 and September 30, 2015, respectively. Loan applications in process were $289.3 million at September 30, 2016 compared to $329.8 million at June 30, 2016. We have begun to execute on the strategy change to increase net interest income through increasing rates as opposed to increasing volume. The interest rates on our mortgage loan pipeline increased 11 basis points to 4.05% from 3.94% at June 30, 2016. This strategy shift positions the Company to reap the benefits of an increase in rates.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

The Bank and Company are subject to the same regulatory capital requirements. At September 30, 2016, the Bank and Company were considered to be well-capitalized under all regulatory requirements. At September 30, 2016, the Bank’s capital ratios for Tier 1 leverage, Common Equity Tier 1, Tier 1 Risk-based, and Total Risk-based capital were 8.88%, 12.44%, 12.44% and 12.96%, respectively. At September 30, 2016, the Company’s capital ratios for Tier 1 leverage, Common Equity Tier 1, Tier 1 Risk-based, and Total Risk-based capital were 8.80%, 11.72%, 12.35% and 12.87%, respectively.

COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2016 AND 2015

General. Net income for the three months ended September 30, 2016 was $10.6 million, a decrease of $0.4 million, or 3.4%, compared to $11.0 million for the three months ended September 30, 2015. Diluted earnings per common share were $0.37 for the three months ended September 30, 2016, a decrease of $0.01, or 2.6%, from $0.38 for the three months ended September 30, 2015.

Return on average equity was 8.4% for the three months ended September 30, 2016 compared to 9.5% for the three months ended September 30, 2015. Return on average assets was 0.7% for the three months ended September 30, 2016 compared to 0.8% for the three months ended September 30, 2015.

Interest Income. Interest and dividend income increased $3.6 million, or 7.0%, to $55.5 million for the three months ended September 30, 2016 from $51.9 million for the three months ended September 30, 2015. The increase in interest income was primarily attributable to an increase of $533.4 million in the average balance of interest-earning assets to $5,684.4 million for the three months ended September 30, 2016 from $5,151.0 million for the comparable prior year period, partially offset by a decrease of 12 basis points in the yield on interest-earning assets to 3.91% for the three months ended September 30, 2016 from 4.03% in the comparable prior year period. The decline in the yield on interest-earning assets of 12 basis points was primarily due to a 25 basis point reduction in the yield on total loans, net to 4.20% for the three months ended September 30, 2016 from 4.45% for the three months ended September 30, 2015. The yield on interest-earning assets was positively impacted by an increase of $616.9 million in the average balance of higher yielding total loans, net to $4,686.6 million for the three months ended September 30, 2016 from $4,069.7 million for the comparable prior year period. Additionally, the yield on the securities portfolio increased two basis points to 2.66% for the three months ended September 30, 2016, from 2.64% for the comparable prior year period. The 25 basis point decrease in the yield on the total loans, net was primarily due to the decline in the rates earned on new loan originations and purchases, as compared to the existing portfolio, loans modifying to lower rates, and higher yielding loans prepaying. Excluding prepayment penalty income and recovered interest from loans, the yield on total loans, net, would have decreased 16 basis points to 4.05% for the three months ended September 30, 2016 from 4.21% for the three months ended September 30, 2015.

Interest Expense. Interest expense increased $1.2 million, or 9.6%, to $13.8 million for the three months ended September 30, 2016 from $12.6 million for the three months ended September 30, 2015. The increase in interest expense was primarily due to increases of $416.5 million in the average balance of interest-bearing liabilities to $5,059.6 million for the three months ended September 30, 2016, from $4,643.2 million for the comparable prior year period and four basis points in the cost of total deposits to 0.92% for the three months ended September 30, 2016 from 0.88% for the comparable prior year period. This increase in interest expense was partially offset by a decrease of 16 basis points in the cost of borrowed funds to 1.58% for the three months ended September 30, 2016 from 1.74% for the comparable prior year period. The increase in the cost of total deposits was primarily due to increases of 23 basis points, 10 basis points and two basis points in the cost of money market, NOW and savings accounts, respectively. The cost of money market accounts increased primarily due to our shifting Government NOW deposits to a money market product which does not require us to provide collateral, allowing us to invest these funds in higher yielding assets. The cost of NOW and savings accounts both increased primarily due to an increase in the rate we pay on some of our products to attract additional deposits. These increases were partially offset by a decrease of six basis points in the cost of certificates of deposit, primarily resulting from maturing issuances being replaced at lower rates. The decrease in the cost of borrowed funds was primarily due to maturing and new borrowings being replaced and obtained at lower rates.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

Net Interest Income. For the three months ended September 30, 2016, net interest income was $41.7 million, an increase of $2.4 million, or 6.1%, from $39.3 million for the three months ended September 30, 2015. The increase in net interest income was primarily due to an increase of $533.4 million in the average balance of interest-earning assets to $5,684.4 million for the three months ended September 30, 2016 from $5,151.0 million for the comparable prior year period. The yield earned on interest-earning assets decreased 12 basis points to 3.91% for the quarter ended September 30, 2016 from 4.03% for the comparable prior year period. The cost of interest-bearing liabilities was 1.09% for the three months ended September 30, 2016 and 2015. The effects of the above on both the net interest spread and net interest margin were decreases of 12 basis points to 2.82% and 11 basis points to 2.94%, respectively, for the quarter ended September 30, 2016, compared to the quarter ended September 30, 2015. Included in net interest income was prepayment penalty income from loans and securities for the three months ended September 30, 2016 and 2015 totaling $1.5 million and $2.2 million, respectively, along with recovered interest from non-accrual loans totaling $0.3 million and $0.4 million, respectively. Excluding prepayment penalty income and recovered interest, the net interest margin for the three months ended September 30, 2016 would have been 2.81%, a decrease of four basis points, as compared to 2.85% for the three months ended September 30, 2015.

Benefit for Loan Losses. During the three months ended September 30, 2016, no provision for loan losses was recorded, compared to a benefit of $0.4 million recorded during the comparable prior year period. No provision was recorded during the three months ended September 30, 2016 due to the quarterly analysis of the adequacy of the allowance for loan losses indicating that the reserve was at an appropriate level. During the three months ended September 30, 2016, the Bank recorded net charge-offs totaling $0.4 million and non-accrual loans increased $1.5 million to $21.9 million from $20.4 million at June 30, 2016. The current average loan-to-value ratio for our non-performing loans collateralized by real estate was 40.3% at September 30, 2016. The Bank continues to maintain conservative underwriting standards. We anticipate that we will continue to see low loss content in our loan portfolio. See Note 5 of the Notes to the Consolidated Financial Statements “Loans” and “-ALLOWANCE FOR LOAN LOSSES.”

Non-Interest Income. Non-interest income for the three months ended September 30, 2016 was $1.9 million, an increase of $0.2 million, or 9.2%, from $1.7 million for the three months ended September 30, 2015. The increase in non-interest income was primarily due to a decrease of $0.3 million in net losses from fair value adjustments as compared to the prior year comparable period.

Non-Interest Expense. Non-interest expense was $26.3 million for the three months ended September 30, 2016, an increase of $2.6 million, or 10.8%, from $23.7 million for the three months ended September 30, 2015. The increase in non-interest expense was primarily due to an increase of $2.1 million in salaries and benefits primarily due to annual salary increases and additions in staffing in retail, audit and compliance departments. The three months ended September 30, 2016 also included an $0.8 million write-down on one OREO. The efficiency ratio was 57.4% for the three months ended September 30, 2016 compared to 56.2% for the three months ended September 30, 2015.

Income before Income Taxes. Income before the provision for income taxes decreased $0.4 million, or 2.2%, to $17.3 million for the three months ended September 30, 2016 from $17.7 million for the three months ended September 30, 2015 for the reasons discussed above.

Provision for Income Taxes. The provision for income taxes was $6.7 million for the three months ended September 30, 2016 and 2015. The effective tax rate increased to 38.5% for the three months ended September 30, 2016 from 37.7% in the comparable prior year period due to the reduced impact of preferential tax items.

COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2016 AND 2015

General. Net income for the nine months ended September 30, 2016 was $50.6 million, an increase of $16.1 million, or 46.4%, compared to $34.6 million for the nine months ended September 30, 2015. Diluted earnings per common share were $1.75 for the nine months ended September 30, 2016, an increase of $0.57, or 48.3%, from $1.18 for the nine months ended September 30, 2015.

Return on average equity increased to 13.7% for the nine months ended September 30, 2016 from 10.0% for the nine months ended September 30, 2015. Return on average assets increased to 1.1% for the nine months ended September 30, 2016 from 0.9% for the nine months ended September 30, 2015.

During the nine months ended September 30, 2016, the gain on sale of buildings increased $27.3 million to $33.8 million from $6.5 million for the comparable prior year period. Absent this increase from the gain on sale of buildings, the return on average equity and the return on average assets would have been 9.3% and 0.8%, respectively, for the nine months ended September 30, 2016.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

Interest Income. Total interest and dividend income increased $13.3 million, or 8.8%, to $165.0 million for the nine months ended September 30, 2016 from $151.7 million for the nine months ended September 30, 2015. The increase in interest income was primarily attributable to an increase of $579.8 million in the average balance of interest-earning assets to $5,596.3 million for the nine months ended September 30, 2016 from $5,016.5 million for the comparable prior year period, partially offset by a decrease of 10 basis points in the yield on interest-earning assets to 3.93% for the nine months ended September 30, 2016 from 4.03% in the comparable prior year period. The decline in the yield on interest-earning assets of 10 basis points was primarily due to a 21 basis point reduction in the yield on total loans, net to 4.26% for the nine months ended September 30, 2016 from 4.47% for the nine months ended September 30, 2015. The yield on interest-earning assets was positively impacted by an increase of $580.9 million in the average balance of higher yielding total loans, net to $4,548.2 million for the nine months ended September 30, 2016 from $3,967.2 million for the comparable prior year period. Additionally, the yield on the securities portfolio increased 13 basis points to 2.65% for nine months ended September 30, 2016, from 2.52% for the comparable prior year period. The 21 basis point decrease in the yield on total loans, net was primarily due to the decline in the rates earned on new loan originations and purchases, as compared to the existing portfolio, loans modifying to lower rates, and higher yielding loans prepaying. Excluding prepayment penalty income and recovered interest from loans, the yield on total loans, net, would have decreased 18 basis points to 4.09% for the nine months ended September 30, 2016 from 4.27% for the nine months ended September 30, 2015. The 13 basis point increase in the yield on the securities portfolio was primarily due to the current year including $97.2 million in purchases at an average yield on 2.76%.

Interest Expense. Interest expense increased $3.6 million, or 9.7%, to $40.2 million for the nine months ended September 30, 2016 from $36.7 million for the nine months ended September 30, 2015. The increase in interest expense was primarily due to an increase of $495.7 million in the average balance of interest-bearing liabilities to $5,021.9 million for the nine months ended September 30, 2016, from $4,526.2 million for the comparable prior year period. This increase in interest expense was partially offset by a decrease of six basis points in the cost of borrowed funds to 1.69% for the nine months ended September 30, 2016 from 1.75% for the comparable prior year period. The cost of total deposits was 0.87% for the nine months ended September 30, 2016 and 2015. During the nine months ended September 30, 2016, the cost of certificates of deposit decreased 12 basis points from the comparable prior period, resulting from maturing issuances being replaced at lower rates. This decrease was offset by increases of 21 basis points, six basis points and three basis points in the cost of money market, NOW and savings accounts, respectively, for the nine months ended September 30, 2016 from the comparable prior year period. The cost of money market accounts increased primarily due to our shifting Government NOW deposits to a money market product which does not require us to provide collateral, allowing us to invest these funds in higher yielding assets. The cost of NOW and savings accounts both increased primarily due to an increase in the rate we pay on some of our products to attract additional deposits. The decrease in the cost of borrowed funds was primarily due to maturing and new borrowings being replaced and obtained at lower rates.

Net Interest Income. For the nine months ended September 30, 2016, net interest income was $124.7 million, an increase of $9.7 million, or 8.5%, from $115.0 million for the nine months ended September 30, 2015. The increase in net interest income was primarily due to an increase of $579.8 million in the average balance of interest-earning assets to $5,596.3 million for the nine months ended September 30, 2016 from $5,016.5 million for the comparable prior year period. The yield earned on interest-earning assets decreased 10 basis points to 3.93% for the nine months ended September 30, 2016 from 4.03% for the comparable prior year period. The cost of interest-bearing liabilities decreased one basis point to 1.07% for the nine months ended September 30, 2016 as compared to 1.08% for the nine months ended September 30, 2015. The effects of the above on both the net interest spread and net interest margin were decreases of nine basis points to 2.86% and 2.97%, respectively, for the nine months ended September 30, 2016, compared to the nine months ended September 30, 2015. Included in net interest income was prepayment penalty income from loans and securities for the nine months ended September 30, 2016 and 2015 totaling $5.1 million and $4.9 million, respectively, along with recovered interest from non-accrual loans totaling $0.5 million and $1.2 million, respectively. Excluding the prepayment penalty income and recovered interest, the net interest margin for the nine months ended September 30, 2016 would have been 2.84%, a decrease of five basis points, as compared to 2.89% for the nine months ended September 30, 2015.

Benefit for Loan Losses. During the nine months ended September 30, 2016, no provision for loan losses was recorded, compared to a benefit of $1.6 million recorded during the comparable prior year period. No provision was recorded during the nine months ended September 30, 2016 due to the quarterly analysis of the adequacy of the allowance for loan losses indicating that the reserve was at an appropriate level. During the nine months ended September 30, 2016, the Bank recorded net recoveries totaling $0.3 million and non-accrual loans decreased $0.9 million to $21.9 million from $22.8 million at December 31, 2015. The current average loan-to-value ratio for our non-performing loans collateralized by real estate was 40.3% at September 30, 2016. The Bank continues to maintain conservative underwriting standards. We anticipate that we will continue to see low loss content in our loan portfolio. See Note 5 of the Notes to the Consolidated Financial Statements “Loans” and “-ALLOWANCE FOR LOAN LOSSES.”

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

Non-Interest Income. Non-interest income for the nine months ended September 30, 2016 was $42.1 million, an increase of $28.5 million, or 210.2%, from $13.6 million for the nine months ended September 30, 2015. The increase in non-interest income was primarily due to increases of $27.3 million in net gains on sale of buildings and $2.2 million in net gains on sale of securities, partially offset by an increase of $2.0 million in net losses from fair value adjustments as compared to the prior year comparable period.

Non-Interest Expense. Non-interest expense was $83.2 million for the nine months ended September 30, 2016, an increase of $9.3 million, or 12.6%, from $73.9 million for the nine months ended September 30, 2015. The increase in non-interest expense was primarily due to an increase of $4.6 million in salaries and benefits primarily due to annual salary increases and additions in staffing in retail, audit and compliance departments, as well as increases in production incentives and the cost of split dollar life insurance benefits. The nine months ended September 30, 2016 also included a penalty of $2.1 million on the prepayment of $38.0 million in repurchase agreements and $1.6 million write-down on one OREO. Additionally, the nine months ended September 30, 2016 included increases of $0.9 million in professional services expense from increased legal and consulting expenses, $0.7 million in depreciation and amortization expense, primarily due to the opening of two new branches along with the move to our new corporate headquarters both occurring in 2015 and $0.5 million in other operating expense due to the growth of the Bank. The efficiency ratio was 59.6% for the nine months ended September 30, 2016 compared to 59.5% for the nine months ended September 30, 2015.

Income before Income Taxes. Income before the provision for income taxes increased $27.3 million, or 48.5%, to $83.6 million for the nine months ended September 30, 2016 from $56.3 million for the nine months ended September 30, 2015 for the reasons discussed above.

Provision for Income Taxes. The provision for income taxes for the nine months ended September 30, 2016 was $33.0 million, an increase of $11.3 million, or 51.8%, from $21.7 million for the comparable prior year period. The increase was primarily due to an increase of $27.3 million in income before income taxes, and an increase in the effective tax rate to 39.5% for the nine months ended September 30, 2016 from 38.6% in the comparable prior year period. The increase in the effective tax rate reflects the reduced impact of preferential tax items as a result of the increase in the gain on sale of buildings.

FINANCIAL CONDITION

Assets. Total assets at September 30, 2016 were $5,999.3 million, an increase of $294.6 million, or 5.2%, from $5,704.6 million at December 31, 2015. Total loans, net increased $353.0 million, or 8.1%, during the nine months ended September 30, 2016 to $4,719.5 million from $4,366.4 million at December 31, 2015. Loan originations and purchases were $850.3 million for the nine months ended September 30, 2016, an increase of $12.5 million, or 1.5%, from $837.9 million for the nine months ended September 30, 2015. During the nine months ended September 30, 2016, we continued to focus on the origination of multi-family residential, commercial real estate and commercial business loans with a full relationship. The loan pipeline totaled $289.3 million at September 30, 2016 compared to $330.5 million at December 31, 2015.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

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

	For the three months				For the nine months
	ended September 30,				ended September 30,
(In thousands)	2016		2015		2016		2015
Multi-family residential ⁽¹⁾	$	61,378	$	91,306	$	293,385	$	268,481
Commercial real estate ⁽²⁾		68,970		151,358		245,114		295,084
One-to-four family – mixed-use property		12,618		20,008		42,493		44,905
One-to-four family – residential		3,362		12,618		17,050		34,696
Co-operative apartments		-		1,915		470		2,365
Construction		1,920		1,999		6,034		3,386
Small Business Administration		470		2,232		6,785		8,713
Commercial business and other ⁽³⁾		84,525		53,028		239,015		180,239
Total	$	233,243	$	334,464	$	850,346	$	837,869

(1)

Includes purchases of $98.4 million and $119.9 million for the nine months ended September 30, 2016 and 2015, respectively. There were no purchases during the three months ended September 30, 2016. Includes purchases of $20.0 million for the three months ended September 30, 2015.

(2)

Includes purchases of $25.9 million and $76.1 million for the nine months ended September 30, 2016 and 2015, respectively. There were no purchases during the three months ended September 30, 2016. Includes purchases of $65.1 million for the three months ended September 30, 2015.

(3)

Includes purchases of $13.7 million and $20.4 million for the nine months ended September 30, 2016 and 2015, respectively. There were no purchases during the three months ended September 30, 2016. Includes purchases of $5.2 million for the three months ended September 30, 2015.

The Bank maintains its conservative underwriting standards that include, among other things, a loan-to-value ratio of 75% or less and a debt coverage ratio of at least 125%. Multi-family residential (excluding underlying co-operative mortgages), commercial real estate and one-to-four family mixed-use property mortgage loans originated during the third quarter of 2016 had an average loan-to-value ratio of 41.9% and an average debt coverage ratio of 204%.

The Bank’s non-performing assets totaled $26.4 million at September 30, 2016, a decrease of $4.6 million, or 14.9%, from $31.0 million at December 31, 2015. Total non-performing assets as a percentage of total assets were 0.44% at September 30, 2016 compared to 0.54% at December 31, 2015. The ratio of allowance for loan losses to total non-performing loans was 92.6% at September 30, 2016 and 82.6% at December 31, 2015. Performing troubled debt restructured loans totaled $8.2 million at September 30, 2016, a decrease of $1.3 million, or 13.7%, from $9.5 million at December 31, 2015.

During the nine months ended September 30, 2016, mortgage-backed securities decreased $123.7 million, or 18.5%, to $545.1 million from $668.7 million at December 31, 2015. The decrease in mortgage-backed securities during the nine months ended September 30, 2016 was primarily due to sales of $64.6 million at an average yield on 3.03% and principal repayments of $79.8 million, which were partially offset by purchases of $13.1 million at an average yield on 2.65% and an increase of $9.2 million in the fair value of mortgage-backed securities.

During the nine months ended September 30, 2016, other securities held-to-maturity, increased $27.1 million, or 438.4%, to $33.3 million from $6.2 million at December 31, 2015. The increase in other securities held-to-maturity during the nine months ended September 30, 2016 was primarily due to purchases of $35.7 million at an average yield on 2.37%, which was partially offset by maturities totaling $8.5 million. Other securities held-to-maturity primarily consist of municipal bonds.

During the nine months ended September 30, 2016, other securities available for sale, increased $41.2 million, or 12.7%, to $365.8 million from $324.7 million at December 31, 2015. The increase in other securities during the nine months ended September 30, 2016 was primarily due to purchases of $48.4 million at an average yield on 3.07% and an increase of $0.5 million in the fair value of other securities, which was partially offset by maturities totaling $6.0 million. Other securities available for sale primarily consist of securities issued by mutual or bond funds that invest in government and government agency securities, municipal bonds, collateralized loan obligations and corporate bonds.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

Liabilities. Total liabilities were $5,486.6 million at September 30, 2016, an increase of $255.1 million, or 4.9%, from $5,231.6 million at December 31, 2015. During the nine months ended September 30, 2016, due to depositors increased $136.8 million, or 3.5%, to $3,992.5 million, due to increases of $155.6 million in core deposits, partially offset by a decrease of $18.8 million in certificates of deposit. The increase in core deposits was due to increases of $260.9 million and $50.6 million in money market and demand accounts, respectively, partially offset by decreases of $152.2 million and $3.7 million in NOW and savings accounts, respectively. Borrowed funds increased $88.8 million during the nine months ended September 30, 2016. The increase in borrowed funds was primarily due to a net increase in short-term borrowings to replace the seasonal outflow of Government deposits which are expected to return during the quarter ended December 31, 2016.

Equity. Total stockholders’ equity increased $39.6 million, or 8.4%, to $512.6 million at September 30, 2016 from $473.1 million at December 31, 2015. Stockholders’ equity increased primarily due to net income of $50.6 million, an increase in other comprehensive income totaling $5.8 million, primarily due to an increase in the fair value of the securities portfolio and the net impact of $5.4 million from the vesting and exercising of shares of employee and director stock plans. These increases were partially offset by the declaration and payment of dividends on the Company’s common stock of $0.51 per common share totaling $14.8 million and the purchase of 378,695 treasury shares, at an average price of $19.78 per share, for a total cost of $7.5 million. Book value per common share was $17.90 at September 30, 2016 compared to $16.41 at December 31, 2015.

Cash flow. During the nine months ended September 30, 2016, funds provided by the Company's operating activities amounted to $37.4 million. These funds combined with $215.1 million provided from financing activities were utilized to fund net investing activities of $246.9 million. The Company's primary business objective is the origination and purchase of multi-family residential loans, commercial business loans and commercial real estate mortgage loans and to a lesser extent one-to-four family (including mixed-use properties) and SBA loans. During the nine months ended September 30, 2016, the net total of loan originations and purchases less loan repayments and sales was $348.5 million. During the nine months ended September 30, 2016, the Company also funded purchases of $59.7 million in securities available for sale and $35.7 million in securities held-to-maturity. During the nine months ended September 30, 2016, funds were provided by net increases in short-term borrowing of $150.0 million and total deposits of $148.6 million. Additionally, funds were provided by $152.8 million in proceeds from maturities, sales, calls and prepayments of securities available for sale and the sale of buildings totaling $34.3 million. In addition to funding loan growth, these funds were used to repay $60.3 million in long-term borrowings. The Company also used funds of $14.8 million and $9.1 million for dividend payments and purchases of treasury stock, respectively, during the nine months ended September 30, 2016.

INTEREST RATE RISK

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

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

The Company manages the mix of interest-earning assets and interest-bearing liabilities on a continuous basis to maximize return and adjust its exposure to interest rate risk. On a quarterly basis, management prepares the “Earnings and Economic Exposure to Changes in Interest Rate” report for review by the Asset Liability Committee of the Board of Directors, as summarized below. This report quantifies the potential changes in net interest income and net portfolio value should interest rates go up or down (shocked) 200 basis points, assuming the yield curves of the rate shocks will be parallel to each other. The Company’s regulators currently place focus on the net portfolio value, focusing on a rate shock up or down of 200 basis points. Net portfolio value is defined as the market value of assets net of the market value of liabilities. The market value of assets and liabilities is determined using a discounted cash flow calculation. The net portfolio value ratio is the ratio of the net portfolio value to the market value of assets. All changes in income and value are measured as percentage changes from the projected net interest income and net portfolio value at the base interest rate scenario. The base interest rate scenario assumes interest rates at September 30, 2016. Various estimates regarding prepayment assumptions are made at each level of rate shock. However, prepayment penalty income is excluded from this analysis. Actual results could differ significantly from these estimates. At September 30, 2016, the Company was within the guidelines set forth by the Board of Directors for each interest rate level.

The following table presents the Company’s interest rate shock as of September 30, 2016:

	Projected Percentage Change In
	Net Interest			Net Portfolio			Net Portfolio
Change in Interest Rate	Income			Value			Value Ratio
-200 Basis points		-1.45	%		11.69	%		10.87	%
-100 Basis points		0.30			7.25			10.62
Base interest rate		0.00			0.00			10.19
+100 Basis points		-3.56			-9.14			9.53
+200 Basis points		-7.66			-20.60			8.60

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

AVERAGE BALANCES

Net interest income represents the difference between income on interest-earning assets and expense on interest-bearing liabilities. Net interest income depends upon the relative amount of interest-earning assets and interest-bearing liabilities and the interest rate earned or paid on them. The following table sets forth certain information relating to the Company’s Consolidated Statements of Financial Condition and Consolidated Statements of Income for the three months ended September 30, 2016 and 2015, 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,
	2016							2015
	Average				Yield/			Average				Yield/
	Balance		Interest		Cost			Balance		Interest		Cost
Assets	(Dollars in thousands)
Interest-earning assets:
Mortgage loans, net	$	4,093,240	$	43,777		4.28	%	$	3,561,262	$	40,754		4.58	%
Other loans, net		593,353		5,402		3.64			508,388		4,489		3.53
Total loans, net ⁽¹⁾		4,686,593		49,179		4.20			4,069,650		45,243		4.45
Taxable securities:
Mortgage-backed securities		554,515		3,350		2.42			692,777		4,307		2.49
Other securities		245,477		2,162		3.52			176,072		1,290		2.93
Total taxable securities		799,992		5,512		2.76			868,849		5,597		2.58
Tax-exempt securities: ⁽²⁾⁽³⁾
Other securities		148,004		784		2.12			136,043		1,030		3.03
Total tax-exempt securities		148,004		784		2.12			136,043		1,030		3.03
Interest-earning deposits and federal funds sold		49,824		49		0.39			76,473		43		0.22
Total interest-earning assets		5,684,413		55,524		3.91			5,151,015		51,913		4.03
Other assets		292,312							276,604
Total assets	$	5,976,725						$	5,427,619

Liabilities and Equity
Interest-bearing liabilities:
Deposits:
Savings accounts	$	258,884		306		0.47		$	262,535		297		0.45
NOW accounts		1,384,368		1,979		0.57			1,398,358		1,646		0.47
Money market accounts		601,709		990		0.66			420,860		455		0.43
Certificate of deposit accounts		1,428,770		5,213		1.46			1,391,511		5,276		1.52
Total due to depositors		3,673,731		8,488		0.92			3,473,264		7,674		0.88
Mortgagors' escrow accounts		48,840		32		0.26			44,606		27		0.24
Total deposits		3,722,571		8,520		0.92			3,517,870		7,701		0.88
Borrowed funds		1,337,049		5,291		1.58			1,125,291		4,902		1.74
Total interest-bearing liabilities		5,059,620		13,811		1.09			4,643,161		12,603		1.09
Non interest-bearing deposits		318,188							254,435
Other liabilities		89,943							65,843
Total liabilities		5,467,751							4,963,439
Equity		508,974							464,180
Total liabilities and equity	$	5,976,725						$	5,427,619

Net interest income /net interest rate spread			$	41,713		2.82	%			$	39,310		2.94	%

Net interest-earning assets /net interest margin	$	624,793				2.94	%	$	507,854				3.05	%

Ratio of interest-earning assets to interest-bearing liabilities						1.12	X						1.11	X

(1)

Loan interest income includes loan fee income (which includes net amortization of deferred fees and costs, late charges, and prepayment penalties) of approximately $0.9 million and $1.4 million for the three months ended September 30, 2016 and 2015, respectively.

(2)

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

(3)

Includes prepayment penalty income of approximately $26,000 and $0.2 million for the three months ended September 30, 2016 and 2015, respectively.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

The following table sets forth certain information relating to the Company’s Consolidated Statements of Financial Condition and Consolidated Statements of Income for the nine months ended September 30, 2016 and 2015, 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 nine months ended September 30,
	2016							2015
	Average				Yield/			Average				Yield/
	Balance		Interest		Cost			Balance		Interest		Cost
Assets		(Dollars in thousands)
Interest-earning assets:
Mortgage loans, net	$	3,972,502	$	129,200		4.34	%	$	3,466,085	$	119,931		4.61	%
Other loans, net		575,652		15,950		3.69			501,154		12,930		3.44
Total loans, net ⁽¹⁾		4,548,154		145,150		4.26			3,967,239		132,861		4.47
Taxable securities:
Mortgage-backed securities		603,994		11,231		2.48			700,563		13,028		2.48
Other securities		241,821		6,040		3.33			151,589		2,897		2.55
Total taxable securities		845,815		17,271		2.72			852,152		15,925		2.49
Tax-exempt securities: ⁽²⁾⁽³⁾
Other securities		140,889		2,366		2.24			137,093		2,796		2.72
Total tax-exempt securities		140,889		2,366		2.24			137,093		2,796		2.72
Interest-earning deposits and federal funds sold		61,484		191		0.41			60,028		96		0.21
Total interest-earning assets		5,596,342		164,978		3.93			5,016,512		151,678		4.03
Other assets		287,111							274,581
Total assets	$	5,883,453						$	5,291,093

Liabilities and Equity
Interest-bearing liabilities:
Deposits:
Savings accounts	$	262,382		910		0.46		$	265,831		852		0.43
NOW accounts		1,539,050		5,863		0.51			1,441,598		4,847		0.45
Money market accounts		514,626		2,277		0.59			352,639		1,015		0.38
Certificate of deposit accounts		1,416,811		15,455		1.45			1,343,588		15,809		1.57
Total due to depositors		3,732,869		24,505		0.88			3,403,656		22,523		0.88
Mortgagors' escrow accounts		55,481		85		0.20			51,772		73		0.19
Total deposits		3,788,350		24,590		0.87			3,455,428		22,596		0.87
Borrowed funds		1,233,571		15,653		1.69			1,070,801		14,078		1.75
Total interest-bearing liabilities		5,021,921		40,243		1.07			4,526,229		36,674		1.08
Non interest-bearing deposits		296,321							243,693
Other liabilities		73,594							57,855
Total liabilities		5,391,836							4,827,777
Equity		491,617							463,316
Total liabilities and equity	$	5,883,453						$	5,291,093

Net interest income / net interest rate spread			$	124,735		2.86	%			$	115,004		2.95	%

Net interest-earning assets / net interest margin	$	574,421				2.97	%	$	490,283				3.06	%

Ratio of interest-earning assets to interest-bearing liabilities						1.11	X						1.11	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 $3.2 million for the nine months ended September 30, 2016 and 2015, respectively.

(2)

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

(3)

Includes prepayment penalty income of approximately $26,000 and $0.2 million for the nine months ended September 30, 2016 and 2015, respectively.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

LOANS

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

	For the nine months ended September 30,
(In thousands)	2016		2015

Mortgage Loans

At beginning of period	$	3,832,914	$	3,321,501

Mortgage loans originated:
Multi-family residential		195,028		148,592
Commercial real estate		219,183		219,031
One-to-four family – mixed-use property		42,493		44,905
One-to-four family – residential		17,050		34,696
Co-operative apartments		470		2,365
Construction		6,034		3,386
Total mortgage loans originated		480,258		452,975

Mortgage loans purchased:
Multi-family residential		98,357		119,889
Commercial real estate		25,931		76,053
Total mortgage loans purchased		124,288		195,942

Less:
Principal and other reductions		305,218		283,885
Loans transferred to Available for Sale		-		300
Sales		7,259		10,063

At end of period	$	4,124,983	$	3,676,170

Non-Mortgage Loans

At beginning of period	$	539,697	$	477,153

Other loans originated:
Small Business Administration		6,785		8,713
Commercial business		223,938		157,711
Other		1,371		2,137
Total other loans originated		232,094		168,561

Other loans purchased:
Commercial business		13,706		20,391
Total other loans purchased		13,706		20,391

Less:
Principal and other reductions		182,439		151,690
Sales		3,211		3,765

At end of period	$	599,847	$	510,650

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

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

Management continues to adhere to the Company’s conservative underwriting standards. At times, the Company may restructure a loan to enable a borrower to continue making payments when it is deemed to be in the best long-term interest of the Company. This restructure may include making concessions to the borrower that the Company would not make in the normal course of business, such as reducing the interest rate until the next reset date, extending the amortization period thereby lowering the monthly payments, or changing the loan to interest only payments for a limited time period. At times, certain problem loans have been restructured by combining more than one of these options. The Company believes that restructuring these loans in this manner will allow certain borrowers to become and remain current on their loans. The Company classifies these loans as TDR. Loans which have been current for six consecutive months at the time they are restructured as TDR remain on accrual status. Loans which were delinquent at the time they are restructured as a TDR are placed on non-accrual status until they have made timely payments for six consecutive months. Loans that are restructured as TDR but are not performing in accordance with the restructured terms are excluded from the TDR table below, as they are placed on non-accrual status and reported as non-performing loans.

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

	September 30,		June 30,		December 31,
(In thousands)	2016		2016		2015
Accrual Status:
Multi-family residential	$	2,584	$	2,599	$	2,626
Commercial real estate		2,074		2,086		2,371
One-to-four family - mixed-use property		1,809		1,819		2,052
One-to-four family - residential		335		338		343
Small business administration		-		-		34
Commercial business and other		849		872		2,083
Total		7,651		7,714		9,509


Non-Accrual Status:
One-to-four family - residential		261		262		-
Commercial business and other		290		325		-

Total		551		587		-

Total performing troubled debt restructured	$	8,202	$	8,301	$	9,509

Subsequent to September 30, 2016, one taxi medallion relationship totaling $6.8 million was approved to be restuructured as a TDR. The TDR was approved to receive a below market interest rate.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

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

		September 30,			June 30,			December 31,
(In thousands)		2016			2016			2015
Loans 90 days or more past due and still accruing:
Multi-family residential	$	-		$	574		$	233
Commercial real estate		1,183			320			1,183
One-to-four family - mixed-use property		470			635			611
One-to-four family - residential		-			13			13
Construction		-			-			1,000
Commercial business and other		-			-			220
Total		1,653			1,542			3,260

Non-accrual loans:
Multi-family residential		1,649			3,162			3,561
Commercial real estate		1,157			2,299			2,398
One-to-four family - mixed-use property		4,534			6,005			5,952
One-to-four family - residential		8,340			8,406			10,120
Small business administration		2,132			185			218
Taxi Medallion		3,971			196			-
Commercial business and other		99			128			568
Total		21,882			20,381			22,817

Total non-performing loans		23,535			21,923			26,077

Other non-performing assets:
Real estate acquired through foreclosure		2,839			3,668			4,932
Total		2,839			3,668			4,932

Total non-performing assets	$	26,374		$	25,591		$	31,009

Non-performing assets to total assets		0.44	%		0.43	%		0.54	%
Allowance for loan losses to non-performing loans		92.61	%		101.25	%		82.58	%

Included in loans over 90 days past due and still accruing were four loans totaling $1.7 million, seven loans totaling $1.5 million and ten loans totaling $3.3 million at September 30, 2016, June 30, 2016 and December 31, 2015, respectively, which are past their respective maturity dates and are still remitting payments. The Bank is actively working with these borrowers to extend the loans maturity or repay these loans.

Included in non-performing loans was one loan totaling $0.4 million at September 30, 2016, June 30, 2016 and December 31, 2015 which was restructured as TDR and not performing in accordance with its restructured terms.

- 62 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

The following table shows our delinquent loans that are less than 90 days past due and still accruing interest and considered performing at the periods indicated:

	September 30, 2016				December 31, 2015
	60 - 89		30 - 59		60 - 89		30 - 59
	days		days		days		days
	(In thousands)

Multi-family residential	$	917	$	5,441	$	804	$	9,422
Commercial real estate		377		3,051		153		2,820
One-to-four family - mixed-use property		746		4,396		1,257		8,630
One-to-four family - residential		427		887		154		4,261
Construction		-		-		-		-
Small Business Administration		-		28		-		42
Taxi medallion		-		-		-		-
Commercial business and other		4		247		2		-
Total delinquent loans	$	2,471	$	14,050	$	2,370	$	25,175

CRITICIZED AND CLASSIFIED ASSETS

Our policy is to review our assets, focusing primarily on the loan portfolio, OREO and the investment portfolios, to ensure that the credit quality is maintained at the highest levels. When weaknesses are identified, immediate action is taken to correct the problem through direct contact with the borrower or issuer. We then monitor these assets, and, in accordance with our policy and current regulatory guidelines, we designate them as “Special Mention,” which is considered a “Criticized Asset,” and “Substandard,” “Doubtful,” or “Loss” which are considered “Classified Assets,” as deemed necessary. These loan designations are updated quarterly. We designate an asset as Substandard when a well-defined weakness is identified that jeopardizes the orderly liquidation of the debt. We designate an asset as Doubtful when it displays the inherent weakness of a Substandard asset with the added provision that collection of the debt in full, on the basis of existing facts, is highly improbable. We designate an asset as Loss if it is deemed the debtor is incapable of repayment. We do not hold any loans designated as loss, as loans that are designated as Loss are charged to the Allowance for Loan Losses. Assets that are non-accrual are designated as Substandard or Doubtful. We designate an asset as Special Mention if the asset does not warrant designation within one of the other categories, but does contain a potential weakness that deserves closer attention. Our total Criticized and Classified assets were $66.3 million at September 30, 2016, an increase of $11.5 million from $54.8 million at December 31, 2015.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

The following table sets forth the Bank’s assets designated as Criticized and Classified at September 30, 2016:

(In thousands)	Special Mention		Substandard		Doubtful		Loss		Total

Loans:
Multi-family residential	$	7,700	$	3,234	$	-	$	-	$	10,934
Commercial real estate		3,332		4,369		-		-		7,701
One-to-four family - mixed-use property		3,732		8,188		-		-		11,920
One-to-four family - residential		1,109		10,171		-		-		11,280
Construction loans		-		-		-		-		-
Small Business Administration		702		607		-		-		1,309
Taxi Medallion		-		16,659		-		-		16,659
Commercial business and other		1,030		2,607		-		-		3,637
Total loans		17,605		45,835		-		-		63,440

Other Real Estate Owned		-		2,839		-		-		2,839
Total	$	17,605	$	48,674	$	-	$	-	$	66,279

The following table sets forth the Bank's Criticized and Classified assets at December 31, 2015:

(In thousands)	Special Mention		Substandard		Doubtful		Loss		Total

Loans:
Multi-family residential	$	4,361	$	5,421	$	-	$	-	$	9,782
Commercial real estate		1,821		3,812		-		-		5,633
One-to-four family - mixed-use property		3,087		10,990		-		-		14,077
One-to-four family - residential		1,437		12,255		-		-		13,692
Construction loans		-		1,000		-		-		1,000
Small Business Administration		229		224		-		-		453
Taxi Medallion		-		2,118		-		-		2,118
Commercial business and other		-		3,123		-		-		3,123
Total loans		10,935		38,943		-		-		49,878

Other Real Estate Owned		-		4,932		-		-		4,932
Total	$	10,935	$	43,875	$	-	$	-	$	54,810

On a quarterly basis all collateral dependent loans that are classified as Substandard or Doubtful are internally reviewed for impairment, based on updated cash flows for income producing properties, or updated independent appraisals. The loan balances of collateral dependent loans reviewed for impairment are then compared to the loans updated fair value. We consider fair value of collateral dependent loans to be 85% of the appraised or internally estimated value of the property, except for taxi medallion loans. The balance which exceeds fair value is generally charged-off, except for taxi medallion loans. The fair value of the underlying collateral of taxi medallion loans is the value of the underlying medallion based upon the most recently reported arm’s length transaction. When there is no recent sale activity, the fair value is calculated using capitalization rates. Taxi medallion loans with a loan-to-value greater than 100% are classified as impaired and allocated a portion of the allowance for loan losses (“ALL”) in the amount of the excess of the loan-to-value over the loan’s principal balance. At September 30, 2016, the current average loan-to-value ratio on our collateral dependent loans reviewed for impairment was 54.5%.

- 64 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

ALLOWANCE FOR LOAN LOSSES

The ALL represents the expense charged to earnings based upon management’s quarterly analysis of credit risk. The amount of the ALL is based upon multiple factors which reflects management’s assessment of the credit quality of the loan portfolio. The factors are both quantitative and qualitative in nature including, but not limited to, historical losses, economic conditions, trends in delinquencies, value and adequacy of underlying collateral, volume and portfolio mix, and internal loan processes.

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

During the nine months ended September 30, 2106, the portion of the ALL related to the loss history declined. Charge-offs recorded in the past twelve quarters have decreased as credit conditions have improved. The percentage of loans originated prior to 2009, compared to the total loan portfolio, is decreasing as scheduled amortization and repayments have occurred. As disclosed in Note 5 of the Notes to the Consolidated Financial Statements “Loans”, the loans originated prior to 2009 have a higher delinquency and loss rate. These reductions in the ALL were partially offset by an additional allocation to our taxi medallion portfolio coupled with an increase in the outstanding loan balances. The impact from the above and the recorded net recoveries during the nine months ended September 30, 2016 resulted in the ALL totaling $21.8 million, an increase of $0.3 million, from December 31, 2015. Based upon management consistently applying the ALL methodology and review of the loan portfolio, management concluded a charge to earnings to increase the ALL was not warranted. The ALL at September 30, 2016, represented 0.46% of gross loans outstanding as compared to 0.49% of gross loans outstanding at December 31, 2015. The ALL represented 92.6% of non-performing loans at September 30, 2016 compared to 82.6% at December 31, 2015. The ratio of net charge-offs to average total loans was a benefit of 0.01% for the nine months ended September 30, 2016 compared to net charge offs of 0.02% for the comparable 2015 period.

As a component of the credit risk assessment, the Bank has established an Asset Classification Committee which carefully evaluates loans which are past due 90 days and/or are classified. The Asset Classification Committee thoroughly assesses the condition and circumstances surrounding each loan meeting the criteria. The Bank also has a Delinquency Committee which evaluates loans meeting specific criteria. The Bank’s loan policy requires loans to be placed into non-accrual status once the loan becomes 90 days delinquent unless they are well secured and in the process of collection or they are past maturity but continue making payments and are in the process of renegotiation. The Portfolio Management department reviews all loans greater than $650,000 annually.

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

- 65 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

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

	For the nine months ended September 30,
(Dollars in thousands)	2016			2015

Balance at beginning of period	$	21,535		$	25,096

Benefit for loan losses		-			(1,620	)

Loans charged-off:
Multi-family residential		(155	)		(458	)
Commercial real estate		-			(32	)
One-to-four family – mixed-use property		(139	)		(571	)
One-to-four family – residential		(74	)		(244	)
Small Business Administration		(362	)		(9	)
Commercial business and other		(59	)		(62	)
Total loans charged-off		(789	)		(1,376	)

Recoveries:
Multi-family residential		230			218
Commercial real estate		11			168
One-to-four family – mixed-use property		252			73
One-to-four family – residential		366			374
Small Business Administration		118			32
Commercial business and other		72			8
Total recoveries		1,049			873

Net recoveries (charge-offs)		260			(503	)

Balance at end of period	$	21,795		$	22,973

Ratio of net charge-offs (recoveries) during the period to average loans outstanding during the period		(0.01	)%		0.02	%
Ratio of allowance for loan losses to gross loans at end of period		0.46	%		0.55	%
Ratio of allowance for loan losses to non-performing assets at end of period		82.64	%		68.67	%
Ratio of allowance for loan losses to non-performing loans at end of period		92.61	%		80.32	%

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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, 2016, 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, 2015.

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, 2016:

							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, 2016		-	$	-		-		520,905
August 1 to August 31, 2016		-		-		-		520,905
September 1 to September 30, 2016		-		-		-		520,905
Total		-	$	-		-

During the quarter ended September 30, 2016, the Company did not repurchase any shares of the Company’s common stock. At September 30, 2016, 520,905 shares may still be repurchased under the currently authorized stock repurchase program. Stock will be purchased under the current stock repurchase program 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 this authorization.

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	Certificate of Incorporation of Flushing Financial Corporation (1)
	3.2	Certificate of Amendment to Certificate of Incorporation of Flushing Financial Corporation (3)
	3.3	Certificate of Amendment to Certificate of Incorporation of Flushing Financial Corporation (5)
	3.4	Certificate of Designations of Series A Junior Participating Preferred Stock of Flushing Financial Corporation (4)
	3.5	Certificate of Increase of Shares Designated as Series A Junior Participating Preferred Stock of Flushing Financial Corporation (2)
	3.6	Amended and Restated By-Laws of Flushing Financial Corporation (6)
	4.1	Flushing Financial Corporation has outstanding certain long-term debt. None of such debt exceeds ten percent of Flushing Financial Corporation's total assets; therefore, copies of constituent instruments defining the rights of the holders of such debt are not included as exhibits. Copies of instruments with respect to such long-term debt will be furnished to the Securities and Exchange Commission upon request.
	31.1	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Chief Executive Officer (filed herewith)
	31.2	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Chief Financial Officer (filed herewith)
	32.1	Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002 by the Chief Executive Officer (furnished herewith)
	32.2	Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002 by the Chief Financial Officer (furnished herewith)
	101.INS	XBRL Instance Document (filed herewith)
	101.SCH	XBRL Taxonomy Extension Schema Document (filed herewith)
	101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document (filed herewith)
	101.DEF	XBRL Taxonomy Extension Definition Linkbase Document (filed herewith)
	101.LAB	XBRL Taxonomy Extension Label Linkbase Document (filed herewith)
	101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document (filed herewith)

(1)	Incorporated by reference to Exhibits filed with the Registration Statement on Form S-1 filed September 1, 1995, Registration No. 33-96488.
(2)	Incorporated by reference to Exhibit filed with Form 8-K filed September 27, 2006.
(3)	Incorporated by reference to Exhibits filed with Form S-8 filed May 31, 2002.
(4)	Incorporated by reference to Exhibits filed with Form 10-Q for the quarter ended September 30, 2002.
(5)	Incorporated by reference to Exhibit filed with Form 10-K for the year ended December 31, 2011.
(6)	Incorporated by reference to Exhibit filed with Form 10-Q for the quarter ended June 30, 2014.

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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 4, 2016	By: /s/John R. Buran
	John R. Buran
	President and Chief Executive Officer




Dated: November 4, 2016	By: /s/Susan K. Cullen
	Susan K. Cullen
	Senior Executive Vice President, Treasurer and
	Chief Financial Officer

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FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

EXHIBIT INDEX

Exhibit No.		Description

	3.1	Certificate of Incorporation of Flushing Financial Corporation (1)
	3.2	Certificate of Amendment to Certificate of Incorporation of Flushing Financial Corporation (3)
	3.3	Certificate of Amendment to Certificate of Incorporation of Flushing Financial Corporation (5)
	3.4	Certificate of Designations of Series A Junior Participating Preferred Stock of Flushing Financial Corporation (4)
	3.5	Certificate of Increase of Shares Designated as Series A Junior Participating Preferred Stock of Flushing Financial Corporation (2)
	3.6	Amended and Restated By-Laws of Flushing Financial Corporation (6)
	4.1	Flushing Financial Corporation has outstanding certain long-term debt. None of such debt exceeds ten percent of Flushing Financial Corporation's total assets; therefore, copies of constituent instruments defining the rights of the holders of such debt are not included as exhibits. Copies of instruments with respect to such long-term debt will be furnished to the Securities and Exchange Commission upon request.
	31.1	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Chief Executive Officer (filed herewith)
	31.2	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Chief Financial Officer (filed herewith)
	32.1	Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002 by the Chief Executive Officer (furnished herewith)
	32.2	Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002 by the Chief Financial Officer (furnished herewith)
	101.INS	XBRL Instance Document (filed herewith)
	101.SCH	XBRL Taxonomy Extension Schema Document (filed herewith)
	101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document (filed herewith)
	101.DEF	XBRL Taxonomy Extension Definition Linkbase Document (filed herewith)
	101.LAB	XBRL Taxonomy Extension Label Linkbase Document (filed herewith)
	101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document (filed herewith)

(1)	Incorporated by reference to Exhibits filed with the Registration Statement on Form S-1 filed September 1, 1995, Registration No. 33-96488.
(2)	Incorporated by reference to Exhibit filed with Form 8-K filed September 27, 2006.
(3)	Incorporated by reference to Exhibits filed with Form S-8 filed May 31, 2002.
(4)	Incorporated by reference to Exhibits filed with Form 10-Q for the quarter ended September 30, 2002.
(5)	Incorporated by reference to Exhibit filed with Form 10-K for the year ended December 31, 2011.
(6)	Incorporated by reference to Exhibit filed with Form 10-Q for the quarter ended June 30, 2014.

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