FLUSHING FINANCIAL CORP - Quarter Report: 2017 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, 2017

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 __

Emerging growth company__

Accelerated filer X

Smaller reporting company __

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

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

The number of shares of the registrant’s Common Stock outstanding as of October 31, 2017 was 28,819,891.

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	48

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk	63

ITEM 4. Controls and Procedures	63

PART II—OTHER INFORMATION

ITEM 1. Legal Proceedings	64

ITEM 1A. Risk Factors	64

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds	64

ITEM 3. Defaults Upon Senior Securities	64

ITEM 4. Mine Safety Disclosures	64

ITEM 5. Other Information	64

ITEM 6. Exhibits	65

SIGNATURES	66

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, 2017			December 31, 2016
ASSETS
Cash and due from banks	$	60,161		$	35,857
Securities held-to-maturity:
Mortgage-backed securities (none pledged) (fair value of $7,839 at September 30, 2017)		7,978			-
Other securities (none pledged) (fair value of $21,542 and $35,408 at September 30, 2017 and December 31, 2016, respectively)		22,952			37,735
Securities available for sale:
Mortgage-backed securities (including assets pledged of $94,414 and $145,860 at September 30, 2017 and December 31, 2016, respectively; $1,696 and $2,016 at fair value pursuant to the fair value option at September 30, 2017 and December 31, 2016, respectively)		519,861			516,476
Other securities (including assets pledged of $45,921 and $82,064 at September 30, 2017 and December 31, 2016, respectively; $19,712 and $28,429 at fair value pursuant to the fair value option at September 30, 2017 and December 31, 2016, respectively)		276,698			344,905
Loans:
Multi-family residential		2,236,173			2,178,504
Commercial real estate		1,352,775			1,246,132
One-to-four family ― mixed-use property		556,723			558,502
One-to-four family ― residential		177,578			185,767
Co-operative apartments		7,035			7,418
Construction		15,811			11,495
Small Business Administration		14,485			15,198
Taxi medallion		18,165			18,996
Commercial business and other		674,706			597,122
Net unamortized premiums and unearned loan fees		16,925			16,559
Allowance for loan losses		(25,269	)		(22,229	)
Net loans		5,045,107			4,813,464
Interest and dividends receivable		21,076			20,228
Bank premises and equipment, net		28,389			26,561
Federal Home Loan Bank of New York stock		55,228			59,173
Bank owned life insurance		131,047			132,508
Goodwill		16,127			16,127
Other assets		76,758			55,453
Total assets	$	6,261,382		$	6,058,487

LIABILITIES
Due to depositors:
Non-interest bearing	$	362,509		$	333,163
Interest-bearing:
Certificate of deposit accounts		1,404,555			1,372,115
Savings accounts		323,186			254,283
Money market accounts		991,706			843,370
NOW accounts		1,308,821			1,362,484
Total interest-bearing deposits		4,028,268			3,832,252
Mortgagors' escrow deposits		53,671			40,216
Borrowed funds
Federal Home Loan Bank advances		1,090,989			1,159,190
Subordinated debentures		73,622			73,414
Junior subordinated debentures, at fair value		36,071			33,959
Total borrowed funds		1,200,682			1,266,563
Other liabilities		76,643			72,440
Total liabilities		5,721,773			5,544,634

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, 2017 and December 31, 2016; 28,819,891 shares and 28,632,904 shares outstanding at September 30, 2017 and December 31, 2016, respectively)		315			315
Additional paid-in capital		216,929			214,462
Treasury stock, at average cost (2,710,704 shares and 2,897,691 shares at September 30, 2017 and December 31, 2016, respectively)		(51,287	)		(53,754	)
Retained earnings		380,316			361,192
Accumulated other comprehensive loss, net of taxes		(6,664	)		(8,362	)
Total stockholders' equity		539,609			513,853

Total liabilities and stockholders' equity	$	6,261,382		$	6,058,487

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						For the nine months
	ended September 30,						ended September 30,
(Dollars in thousands, except per share data)	2017			2016			2017			2016

Interest and dividend income
Interest and fees on loans	$	53,318		$	49,181		$	155,834		$	145,152
Interest and dividends on securities:
Interest		5,850			6,173			18,377			19,275
Dividends		30			121			274			360
Other interest income		121			49			403			191
Total interest and dividend income		59,319			55,524			174,888			164,978

Interest expense
Deposits		10,655			8,520			29,145			24,590
Other interest expense		5,623			5,291			15,696			15,653
Total interest expense		16,278			13,811			44,841			40,243

Net interest income		43,041			41,713			130,047			124,735
Provision for loan losses		3,266			-			3,266			-
Net interest income after provision for loan losses		39,775			41,713			126,781			124,735

Non-interest income
Banking services fee income		885			826			2,773			2,775
Net (loss) gain on sale of securities		(186	)		-			(186	)		2,363
Net gain on sale of loans		152			240			396			584
Net gain on sale of buildings		-			-			-			33,814
Net loss from fair value adjustments		(1,297	)		(823	)		(2,834	)		(2,925	)
Federal Home Loan Bank of New York stock dividends		740			665			2,206			1,870
Gain from life insurance proceeds		238			47			1,405			458
Bank owned life insurance		816			707			2,418			2,096
Other income		313			191			1,120			1,075
Total non-interest income		1,661			1,853			7,298			42,110

Non-interest expense
Salaries and employee benefits		15,310			14,795			47,838			45,024
Occupancy and equipment		2,502			2,576			7,652			7,298
Professional services		1,763			1,730			5,678			5,907
FDIC deposit insurance		499			536			1,328			2,380
Data processing		1,349			939			3,873			3,229
Depreciation and amortization		1,173			1,169			3,493			3,263
Other real estate owned/foreclosure expense		121			273			376			831
Prepayment penalty on borrowings		-			-			-			2,082
Other operating expenses		3,249			4,259			11,357			13,214
Total non-interest expense		25,966			26,277			81,595			83,228

Income before income taxes		15,470			17,289			52,484			83,617

Provision for income taxes
Federal		4,680			5,568			15,005			25,518
State and local		611			1,087			2,315			7,469
Total taxes		5,291			6,655			17,320			32,987

Net income	$	10,179		$	10,634		$	35,164		$	50,630


Basic earnings per common share	$	0.35		$	0.37		$	1.21		$	1.75
Diluted earnings per common share	$	0.35		$	0.37		$	1.21		$	1.75
Dividends per common share	$	0.18		$	0.17		$	0.54		$	0.51

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

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(Unaudited)

	For the three months ended						For the nine months ended
	September 30,						September 30,
(In thousands)	2017			2016			2017			2016

Net income	$	10,179		$	10,634		$	35,164		$	50,630

Other comprehensive income (loss), net of tax:
Amortization of actuarial losses, net of taxes of ($64) and ($82) for the three months ended September 30, 2017 and 2016, respectively and of ($192) and ($247) for the nine months ended September 30, 2017 and 2016, respectively.		88			110			262			329
Amortization of prior service credits, net of taxes of $5 and $4 for the three months ended September 30, 2017 and 2016, respectively and $14 for each of the nine months ended September 30, 2017 and 2016.		(7	)		(7	)		(20	)		(20	)
Reclassification adjustment for net gains included in income, net of taxes of ($78) for the three and nine months ended September 30, 2017 and $1,013 for the nine months ended September 30, 2016.		108			-			108			(1,350	)
Net unrealized (losses) gains on securities, net of taxes of $241 and $2,177 for the three months ended September 30, 2017 and 2016, respectively and of ($1,006) and ($5,103) for the nine months ended September 30, 2017 and 2016, respectively.		(333	)		(2,942	)		1,416			6,852
Net unrealized gain (loss) on cash flow hedges, net of taxes of ($41) and $49 for the three and nine months ended September 30, 2017, respectively.		56			-			(68	)		-


Total other comprehensive income (loss), net of tax		(88	)		(2,839	)		1,698			5,811

Comprehensive income	$	10,091		$	7,795		$	36,862		$	56,441

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,
(In thousands)	2017			2016
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	35,164		$	50,630
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		3,266			-
Depreciation and amortization of bank premises and equipment		3,493			3,263
Amortization of premium, net of accretion of discount		5,716			6,344
Net loss from fair value adjustments		2,834			2,925
Net gain from sale of loans		(396	)		(584	)
Net loss (gain) from sale of securities		186			(2,363	)
Net gain from sale of buildings		-			(33,814	)
Net (gain) loss from sale of OREO		(50	)		1,726
Income from bank owned life insurance		(2,418	)		(2,096	)
Gain from life insurance proceeds		(1,405	)		(458	)
Stock-based compensation expense		5,092			4,169
Deferred compensation		(3,322	)		(3,140	)
Excess tax benefit from stock-based payment arrangements		-			(470	)
Deferred income tax benefit		(1,806	)		(1,228	)
Increase in other liabilities		6,810			7,680
(Increase) decrease in other assets		(68	)		4,823
Net cash provided by operating activities		53,096			37,407

CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of bank premises and equipment		(5,321	)		(4,159	)
Net redemptions (purchases) of Federal Home Loan Bank of New York shares		3,945			(9,119	)
Purchases of securities held-to-maturity		(8,030	)		(35,705	)
Proceeds from maturities of securities held-to-maturity		14,830			8,475
Purchases of securities available for sale		(152,121	)		(59,678	)
Proceeds from sales and calls of securities available for sale		155,999			66,996
Proceeds from maturities and prepayments of securities available for sale		60,573			85,829
Proceeds from bank owned life insurance		4,646			2,236
Proceeds from sale of buildings		-			34,332
Net originations of loans		(234,227	)		(210,506	)
Purchases of loans		(75,832	)		(137,994	)
Proceeds from sale of real estate owned		583			853
Proceeds from sale of loans		54,990			11,499
Net cash used in investing activities		(179,965	)		(246,941	)

CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in non-interest bearing deposits		29,346			50,591
Net increase in interest-bearing deposits		195,552			85,616
Net increase in mortgagors' escrow deposits		13,455			12,432
Net (repayments) proceeds from short-term borrowed funds		(43,500	)		150,000
Proceeds from long-term borrowings		180,000			200,000
Repayment of long-term borrowings		(205,049	)		(260,301	)
Purchases of treasury stock		(2,902	)		(9,102	)
Excess tax benefit from stock-based payment arrangements		-			470
Proceeds from issuance of common stock upon exercise of stock options		-			132
Cash dividends paid		(15,729	)		(14,787	)
Net cash provided by financing activities		151,173			215,051

Net increase in cash and cash equivalents		24,304			5,517
Cash and cash equivalents, beginning of period		35,857			42,363
Cash and cash equivalents, end of period	$	60,161		$	47,880

SUPPLEMENTAL CASHFLOW DISCLOSURE
Interest paid	$	42,543		$	39,792
Income taxes paid		16,906			28,610
Taxes paid if excess tax benefits were not tax deductible		16,906			29,080
Non-cash activities:
Securities purchased not yet settled		-			2,000
Loans transferred to Other Real Estate Owned		-			486
Loans held for investment transferred to loans available for sale		30,565			-

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, 2017 and 2016

(Unaudited)

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

Balance at December 31, 2016	$	513,853		$	315	$	214,462		$	361,192		$	(53,754	)	$	(8,362	)
Net Income		35,164			-		-			35,164			-			-
Award of common shares released from Employee Benefit Trust (114,754 shares)		2,433			-		2,433			-			-			-
Vesting of restricted stock unit awards (284,595 shares)		-			-		(5,052	)		(271	)		5,323			-
Exercise of stock options (4,400 shares)		-			-		(6	)		(40	)		46			-
Stock-based compensation expense		5,092			-		5,092			-			-			-
Purchase of treasury shares (10,000 shares)		(278	)		-		-			-			(278	)		-
Repurchase of shares to satisfy tax obligation (90,779 shares)		(2,624	)		-		-			-			(2,624	)		-
Dividends on common stock ($0.54 per share)		(15,729	)		-		-			(15,729	)		-			-
Other comprehensive income		1,698			-		-			-			-			1,698
Balance at September 30, 2017	$	539,609		$	315	$	216,929		$	380,316		$	(51,287	)	$	(6,664	)

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

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

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

1.	Basis of Presentation

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

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

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

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

The accompanying unaudited consolidated financial statements have been prepared in conformity with the instructions to Quarterly Report on Form 10-Q and Article 10, Rule 10-01 of Regulation S-X for interim financial statements. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The unaudited consolidated interim financial information should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

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

Use of Estimates

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

3.	Earnings Per Share

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

	For the three months ended						For the nine months ended
	September 30,						September 30,
	2017			2016			2017			2016
	(In thousands, except per share data)
Net income, as reported	$	10,179		$	10,634		$	35,164		$	50,630
Divided by:
Weighted average common shares outstanding		29,120			28,861			29,092			28,993
Weighted average common stock equivalents		1			14			2			13
Total weighted average common shares outstanding and common stock equivalents		29,121			28,875			29,094			29,006

Basic earnings per common share	$	0.35		$	0.37		$	1.21		$	1.75
Diluted earnings per common share ⁽¹⁾	$	0.35		$	0.37		$	1.21		$	1.75
Dividend payout ratio		51.4	%		45.9	%		44.6	%		29.1	%

(1)

For the three and nine months ended September 30, 2017 and 2016, there were no stock options that were anti-dilutive.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

Debt and Equity Securities

The Company did not hold any trading securities at September 30, 2017 and December 31, 2016. 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, 2017:

	Amortized Cost		Fair Value		Gross Unrealized Gains		Gross Unrealized Losses
	(In thousands)
Securities held-to-maturity:
Municipals	$	22,952	$	21,542	$	-	$	1,410

Total other securities		22,952		21,542		-		1,410

FNMA		7,978		7,839		-		139

Total mortgage-backed securities		7,978		7,839		-		139
Total	$	30,930	$	29,381	$	-	$	1,549

The following table summarizes the Company’s portfolio of securities held-to-maturity at December 31, 2016:

	Amortized Cost		Fair Value		Gross Unrealized Gains		Gross Unrealized Losses
	(In thousands)
Securities held-to-maturity:
Municipals	$	37,735	$	35,408	$	-	$	2,327

Total	$	37,735	$	35,408	$	-	$	2,327

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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, 2017:

	Amortized Cost		Fair Value		Gross Unrealized Gains		Gross Unrealized Losses
	(In thousands)
Corporate	$	110,000	$	103,126	$	-	$	6,874
Municipals		102,226		104,979		2,753		-
Mutual funds		18,629		18,629		-		-
Collateralized loan obligations		48,398		48,881		483		-
Other		1,083		1,083		-		-
Total other securities		280,336		276,698		3,236		6,874
REMIC and CMO		330,593		330,459		1,953		2,087
GNMA		1,096		1,184		88		-
FNMA		138,995		138,781		547		761
FHLMC		49,557		49,437		23		143
Total mortgage-backed securities		520,241		519,861		2,611		2,991
Total securities available for sale	$	800,577	$	796,559	$	5,847	$	9,865

The following table summarizes the Company’s portfolio of securities available for sale at December 31, 2016:

	Amortized Cost		Fair Value		Gross Unrealized Gains		Gross Unrealized Losses
	(In thousands)
Corporate	$	110,000	$	102,910	$	-	$	7,090
Municipals		124,984		126,903		1,983		64
Mutual funds		21,366		21,366		-		-
Collateralized loan obligations		85,470		86,365		895		-
Other		7,363		7,361		-		2
Total other securities		349,183		344,905		2,878		7,156
REMIC and CMO		402,636		401,370		1,607		2,873
GNMA		1,319		1,427		108		-
FNMA		109,493		108,351		463		1,605
FHLMC		5,378		5,328		35		85
Total mortgage-backed securities		518,826		516,476		2,213		4,563
Total securities available for sale	$	868,009	$	861,381	$	5,091	$	11,719

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 $0.1 million and $0.2 million at September 30, 2017 and December 31, 2016.

The corporate securities held by the Company at September 30, 2017 and December 31, 2016 are issued by U.S. banking institutions.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The following tables detail the amortized cost and fair value of the Company’s securities classified as held-to-maturity and available for sale at September 30, 2017, by contractual maturity. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Amortized
Securities held-to-maturity:	Cost		Fair Value
	(In thousands)

Due in one year or less	$	1,085	$	1,085
Due after ten years		21,867		20,457

Total other securities		22,952		21,542
Mortgage-backed securities		7,978		7,839

Total	$	30,930	$	29,381

Securities available for sale:	Amortized Cost		Fair Value
	(In thousands)

Due in one year or less	$	-	$	-
Due after one year through five years		4,335		4,443
Due after five years through ten years		159,666		153,369
Due after ten years		97,706		100,257
Mutual funds		18,629		18,629

Total other securities		280,336		276,698
Mortgage-backed securities		520,241		519,861

Total	$	800,577	$	796,559

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

	At September 30, 2017
			Total				Less than 12 months				12 months or more
					Unrealized				Unrealized				Unrealized
	Count		Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
			(Dollars in thousands)

Held-to-maturity securities
Municipals		1	$	20,457	$	1,410	$	20,457	$	1,410	$	-	$	-
Total other securities		1		20,457		1,410		20,457		1,410		-		-

FNMA		1		7,839		139		7,839		139		-		-
Total mortgage-backed securities		1		7,839		139		7,839		139		-		-
Total		2	$	28,296	$	1,549	$	28,296	$	1,549	$	-	$	-


Available for sale securities
Corporate		14	$	103,126	$	6,874	$	19,154	$	846	$	83,972	$	6,028
Total other securities		14		103,126		6,874		19,154		846		83,972		6,028

REMIC and CMO		23		149,238		2,087		133,091		1,449		16,147		638
FNMA		11		90,337		761		81,621		595		8,716		166
FHLMC		2		48,400		143		48,400		143		-		-
Total mortgage-backed securities		36		287,975		2,991		263,112		2,187		24,863		804
Total		50	$	391,101	$	9,865	$	282,266	$	3,033	$	108,835	$	6,832

	At December 31, 2016
			Total				Less than 12 months				12 months or more
					Unrealized				Unrealized				Unrealized
	Count		Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
			(Dollars in thousands)
Held-to-maturity securities

Municipals		1	$	19,538	$	2,327	$	19,538	$	2,327	$	-	$	-
Total		1	$	19,538	$	2,327	$	19,538	$	2,327	$	-	$	-

Available for sale securities
Corporate		14	$	102,910	$	7,090	$	28,476	$	1,524	$	74,434	$	5,566
Collateralized loan obligations		4		16,047		64		16,047		64		-		-
Other		1		298		2		-		-		298		2
Total		19		119,255		7,156		44,523		1,588		74,732		5,568

REMIC and CMO		35		222,807		2,873		208,827		2,268		13,980		605
FNMA		18		80,924		1,605		74,972		1,250		5,952		355
FHLMC		1		3,993		85		3,993		85		-		-
Total mortgage-backed securities		54		307,724		4,563		287,792		3,603		19,932		960
Total		73	$	426,979	$	11,719	$	332,315	$	5,191	$	94,664	$	6,528

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

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The Company reviewed each investment that had an unrealized loss at September 30, 2017 and December 31, 2016. The unrealized losses in municipal securities held-to-maturity at September 30, 2017 and December 31, 2016 were caused by illiquidity in the market and movements in interest rates. The unrealized losses in FNMA securities held-to-maturity at September 30, 2017 were caused by movements in interest rates. The unrealized losses in securities available for sale at September 30, 2017 and December 31, 2016 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, 2017 and December 31, 2016.

Realized gains and losses on the sales of securities are determined using the specific identification method. The Company sold available for sale securities totaling $112.4 million during the three months ended September 30, 2017. 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 totaling $112.4 million and $64.6 million during the nine months ended September 30, 2017 and 2016, respectively.

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

	For the three months ended September 30,					For the nine months ended September 30,
	2017			2016		2017			2016
	(In thousands)
Gross gains from the sale of securities	$	401		$	-	$	401		$	2,370
Gross losses from the sale of securities		(587	)		-		(587	)		(7	)

Net (losses) gains from the sale of securities	$	(186	)	$	-	$	(186	)	$	2,363

5. Loans

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

Interest on loans is recognized on the accrual basis. 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.

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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.

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.

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

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

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

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 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. Taxi medallion loans with a loan-to-value greater than 100% are allocated a portion of the allowance for loan losses in the amount of the excess of the loan-to-value over the loan’s principal balance. The fair value of the underlying collateral of taxi medallion loans is the value of the underlying medallion based upon the most recently reported arm’s length transaction. When there is no recent sale activity, the fair value is calculated using capitalization rates. All taxi medallion loans are classified as impaired and allocated a portion of the allowance in the amount of the excess of the loan-to-value over the loan’s principal balance.

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 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, 2017, we utilized recent third party appraisals of the collateral to measure impairment for $39.2 million, or 82.9%, of collateral dependent impaired loans, and used internal evaluations of the property’s value for $8.1 million, or 17.1%, 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-accrual performing TDR loans until they have made timely payments for six consecutive months.

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, 2017, 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 tables shows loans modified and classified as TDR during the periods indicated:

	For the three months ended September 30, 2017
(Dollars in thousands)	Number		Balance		Modification description


Taxi medallion		4	$	1,306	Loan amortization extension
Total		4	$	1,306

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

	For the nine months ended
	September 30, 2017					September 30, 2016
(Dollars in thousands)	Number		Balance		Modification description	Number		Balance		Modification description

One-to-four family - residential		-	$	-			2	$	263	Received below market interest rates and the 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
Taxi medallion		9		5,595	All loans amortizations were extended, with three loans also receiving a below market interest rate		-		-
Total		9	$	5,595			4	$	1,002

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

The recorded investment of the loans modified and classified as TDR presented in the tables above, were unchanged as there was no principal forgiven in these modifications.

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, 2017				December 31, 2016
(Dollars in thousands)	Number of contracts		Recorded investment		Number of contracts		Recorded investment

Multi-family residential		9	$	2,533		9	$	2,572
Commercial real estate		2		2,031		2		2,062
One-to-four family - mixed-use property		5		1,765		5		1,800
One-to-four family - residential		3		577		3		591
Taxi medallion		21		15,074		12		9,735
Commercial business and other		2		517		2		675
Total performing troubled debt restructured		42	$	22,497		33	$	17,435

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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, 2017				December 31, 2016
(Dollars in thousands)	Number of contracts		Recorded investment		Number of contracts		Recorded investment

Multi-family residential		1	$	377		1	$	396

Total troubled debt restructurings that subsequently defaulted		1	$	377		1	$	396

During the three and nine months ended September 30, 2017 and 2016 there were no TDR loans transferred to non-performing status.

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

(In thousands)	September 30, 2017		December 31, 2016

Loans ninety days or more past due and still accruing:
Multi-family residential	$	415	$	-
Commercial real estate		38		-
One-to-four family - mixed-use property		129		386
Taxi medallion		1,147		-
Total		1,729		386

Non-accrual mortgage loans:
Multi-family residential		1,309		1,837
Commercial real estate		1,147		1,148
One-to-four family - mixed-use property		2,217		4,025
One-to-four family - residential		7,434		8,241
Total		12,107		15,251

Non-accrual non-mortgage loans:
Small Business Administration		50		1,886
Taxi medallion		-		3,825
Commercial business and other		4		68
Total		54		5,779

Total non-accrual loans		12,161		21,030

Total non-performing loans	$	13,890	$	21,416

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

During the three and nine months ended September 30, 2017, we did not foreclose on any consumer mortgages through in-substance repossession. We did not hold any foreclosed residential real estate properties at September 30, 2017. At December 31, 2016, we held one foreclosed residential real estate property for $0.5 million. Included within net loans as of September 30, 2017 and December 31, 2016 was a recorded investment of $8.7 million and $11.4 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.

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,
	2017		2016		2017		2016
	(In thousands)
Interest income that would have been recognized had the loans performed in accordance with their original terms	$	401	$	468	$	1,249	$	1,405
Less: Interest income included in the results of operations		166		99		434		391
Total foregone interest	$	235	$	369	$	815	$	1,014

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

	September 30, 2017
(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	$	6,115	$	155	$	1,724	$	7,994	$	2,228,179	$	2,236,173
Commercial real estate		3,455		481		1,185		5,121		1,347,654		1,352,775
One-to-four family - mixed-use property		3,577		112		2,346		6,035		550,688		556,723
One-to-four family - residential		3,646		43		7,246		10,935		166,643		177,578
Co-operative apartments		-		-		-		-		7,035		7,035
Construction loans		-		-		-		-		15,811		15,811
Small Business Administration		-		245		-		245		14,240		14,485
Taxi medallion		-		-		1,147		1,147		17,018		18,165
Commercial business and other		-		-		4		4		674,702		674,706
Total	$	16,793	$	1,036	$	13,652	$	31,481	$	5,021,970	$	5,053,451

	December 31, 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	$	2,575	$	287	$	1,837	$	4,699	$	2,173,805	$	2,178,504
Commercial real estate		3,363		22		1,148		4,533		1,241,599		1,246,132
One-to-four family - mixed-use property		4,671		762		4,411		9,844		548,658		558,502
One-to-four family - residential		3,831		194		8,047		12,072		173,695		185,767
Co-operative apartments		-		-		-		-		7,418		7,418
Construction loans		-		-		-		-		11,495		11,495
Small Business Administration		13		-		1,814		1,827		13,371		15,198
Taxi medallion		-		-		3,825		3,825		15,171		18,996
Commercial business and other		22		1		-		23		597,099		597,122
Total	$	14,475	$	1,266	$	21,082	$	36,823	$	4,782,311	$	4,819,134

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

September 30, 2017
(In thousands)	Multi-family residential			Commercial real estate			One-to-four family - mixed-use property			One-to-four family - residential			Construction loans			Small Business Administration		Taxi medallion		Commercial business and other			Unallocated			Total

Allowance for credit losses:
Beginning balance	$	5,917		$	4,688		$	2,568		$	990		$	130		$	306	$	2,330	$	4,668		$	560		$	22,157
Charge-off's		(290	)		-			(1	)		-			-			-		-		(33	)		-			(324	)
Recoveries		66			25			-			58			-			17		-		4			-			170
Provision (Benefit)		43			(86	)		(49	)		(90	)		(13	)		70		3,661		290			(560	)		3,266
Ending balance	$	5,736		$	4,627		$	2,518		$	958		$	117		$	393	$	5,991	$	4,929		$	-		$	25,269

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

- 17 -

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

Allowance for credit losses:
Beginning balance	$	5,923		$	4,487		$	2,903		$	1,015		$	92	$	481		$	2,243		$	4,492		$	593		$	22,229
Charge-off's		(452	)		(4	)		(36	)		(170	)		-		(89	)		(54	)		(48	)		-			(853	)
Recoveries		297			93			68			58			-		66			-			45			-			627
Provision (Benefit)		(32	)		51			(417	)		55			25		(65	)		3,802			440			(593	)		3,266
Ending balance	$	5,736		$	4,627		$	2,518		$	958		$	117	$	393		$	5,991		$	4,929		$	-		$	25,269

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

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

Financing Receivables:
Ending Balance	$	2,236,173	$	1,352,775	$	556,723	$	177,578	$	7,035	$	15,811	$	14,485	$	18,165	$	674,706	$	5,053,451
Ending balance: individually evaluated for impairment	$	4,721	$	6,798	$	6,317	$	10,079	$	-	$	1,178	$	370	$	18,165	$	748	$	48,376
Ending balance: collectively evaluated for impairment	$	2,231,452	$	1,345,977	$	550,406	$	167,499	$	7,035	$	14,633	$	14,115	$	-	$	673,958	$	5,005,075

Allowance for credit losses:
Ending balance: individually evaluated for impairment	$	217	$	154	$	206	$	56	$	-	$	-	$	-	$	5,991	$	8	$	6,632
Ending balance: collectively evaluated for impairment	$	5,519	$	4,473	$	2,312	$	902	$	-	$	117	$	393	$	-	$	4,921	$	18,637

	December 31, 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	$	2,178,504	$	1,246,132	$	558,502	$	185,767	$	7,418	$	11,495	$	15,198	$	18,996	$	597,122	$	-	$	4,819,134
Ending balance: individually evaluated for impairment	$	5,923	$	6,551	$	8,809	$	9,989	$	-	$	-	$	1,937	$	16,282	$	2,492	$	-	$	51,983
Ending balance: collectively evaluated for impairment	$	2,172,581	$	1,239,581	$	549,693	$	175,778	$	7,418	$	11,495	$	13,261	$	2,714	$	594,630	$	-	$	4,767,151

Allowance for credit losses:
Ending balance: individually evaluated for impairment	$	232	$	179	$	417	$	60	$	-	$	-	$	90	$	2,236	$	12	$	-	$	3,226
Ending balance: collectively evaluated for impairment	$	5,691	$	4,308	$	2,486	$	955	$	-	$	92	$	391	$	7	$	4,480	$	593	$	19,003

- 19 -

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, 2017						December 31, 2016
	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	$	2,489	$	2,935	$	-	$	3,660	$	3,796	$	-
Commercial real estate		4,767		4,767		-		4,489		4,516		-
One-to-four family mixed-use property		5,079		5,454		-		6,435		6,872		-
One-to-four family residential		9,661		10,696		-		9,560		11,117		-
Co-operative apartments		-		-		-		-		-		-
Construction		1,178		1,178		-		-		-		-
Non-mortgage loans:
Small Business Administration		370		386		-		416		509		-
Taxi medallion		2,608		2,608		-		2,334		2,476		-
Commercial business and other		380		749		-		2,072		2,443		-

Total loans with no related allowance recorded		26,532		28,773		-		28,966		31,729		-

With an allowance recorded:
Mortgage loans:
Multi-family residential		2,232		2,232		217		2,263		2,263		232
Commercial real estate		2,031		2,031		154		2,062		2,062		179
One-to-four family mixed-use property		1,238		1,238		206		2,374		2,376		417
One-to-four family residential		418		418		56		429		429		60
Co-operative apartments		-		-		-		-		-		-
Construction		-		-		-		-		-		-
Non-mortgage loans:
Small Business Administration		-		-		-		1,521		1,909		90
Taxi medallion		15,557		15,557		5,991		13,948		13,948		2,236
Commercial business and other		368		368		8		420		420		12

Total loans with an allowance recorded		21,844		21,844		6,632		23,017		23,407		3,226

Total Impaired Loans:
Total mortgage loans	$	29,093	$	30,949	$	633	$	31,272	$	33,431	$	888

Total non-mortgage loans	$	19,283	$	19,668	$	5,999	$	20,711	$	21,705	$	2,338

- 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 three months ended September 30, 2017 and 2016:

	September 30, 2017				September 30, 2016
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(In thousands)
With no related allowance recorded:
Mortgage loans:
Multi-family residential	$	2,451	$	12	$	4,639	$	23
Commercial real estate		5,142		60		4,661		55
One-to-four family mixed-use property		5,269		45		8,234		37
One-to-four family residential		10,023		29		10,204		19
Co-operative apartments		-		-		-		-
Construction		890		15		285		-
Non-mortgage loans:
Small Business Administration		260		5		404		13
Taxi medallion		3,177		19		5,053		52
Commercial business and other		1,254		6		2,211		45

Total loans with no related allowance recorded		28,466		191		35,691		244

With an allowance recorded:
Mortgage loans:
Multi-family residential		2,242		28		2,279		29
Commercial real estate		2,040		24		2,080		24
One-to-four family mixed-use property		1,445		16		2,567		35
One-to-four family residential		422		4		435		4
Co-operative apartments		-		-		-		-
Construction		-		-		-		-
Non-mortgage loans:
Small Business Administration		-		-		397		1
Taxi medallion		14,716		73		6,459		17
Commercial business and other		385		5		448		7

Total loans with an allowance recorded		21,250		150		14,665		117

Total Impaired Loans:
Total mortgage loans	$	29,924	$	233	$	35,384	$	226

Total non-mortgage loans	$	19,792	$	108	$	14,972	$	135

- 21 -

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, 2017 and 2016:

	September 30, 2017				September 30, 2016
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(In thousands)
With no related allowance recorded:
Mortgage loans:
Multi-family residential	$	2,650	$	57	$	5,129	$	69
Commercial real estate		5,881		214		4,841		162
One-to-four family mixed-use property		5,399		123		8,407		119
One-to-four family residential		10,062		85		10,457		69
Co-operative apartments		-		-		-		-
Construction		794		22		380		-
Non-mortgage loans:
Small Business Administration		230		9		353		38
Taxi medallion		3,771		74		3,369		155
Commercial business and other		1,584		93		2,265		136

Total loans with no related allowance recorded		30,371		677		35,201		748

With an allowance recorded:
Mortgage loans:
Multi-family residential		2,391		107		2,284		87
Commercial real estate		2,039		72		2,173		73
One-to-four family mixed-use property		1,379		50		2,622		107
One-to-four family residential		422		12		403		10
Co-operative apartments		-		-		-		-
Construction		-		-		-		-
Non-mortgage loans:
Small Business Administration		-		-		315		4
Taxi medallion		14,663		166		5,009		91
Commercial business and other		383		17		962		20

Total loans with an allowance recorded		21,277		424		13,768		392

Total Impaired Loans:
Total mortgage loans	$	31,017	$	742	$	36,696	$	696

Total non-mortgage loans	$	20,631	$	359	$	12,273	$	444

- 22 -

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

Multi-family residential	$	9,333	$	2,188	$	-	$	-	$	11,521
Commercial real estate		1,015		4,767		-		-		5,782
One-to-four family - mixed-use property		1,700		4,551		-		-		6,251
One-to-four family - residential		915		9,503		-		-		10,418
Co-operative apartments		-		-		-		-		-
Construction loans		-		1,178		-		-		1,178
Small Business Administration		585		215		-		-		800
Taxi medallion		-		18,165		-		-		18,165
Commercial business and other		17,694		748		-		-		18,442
Total loans	$	31,242	$	41,315	$	-	$	-	$	72,557

	December 31, 2016
(In thousands)	Special Mention		Substandard		Doubtful		Loss		Total

Multi-family residential	$	7,133	$	3,351	$	-	$	-	$	10,484
Commercial real estate		2,941		4,489		-		-		7,430
One-to-four family - mixed-use property		4,197		7,009		-		-		11,206
One-to-four family - residential		1,205		9,399		-		-		10,604
Co-operative apartments		-		-		-		-		-
Construction loans		-		-		-		-		-
Small Business Administration		540		436		-		-		976
Taxi medallion		2,715		16,228		54		-		18,997
Commercial business and other		9,924		2,493		-		-		12,417
Total loans	$	28,655	$	43,405	$	54	$	-	$	72,114

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 $94.7 million and $229.0 million, respectively, at September 30, 2017.

- 23 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

6. Loans held for sale

Loans held for sale are carried at the lower of cost or estimated fair value. At September 30, 2017 and December 31, 2016, the Bank did not have any loans held for sale.

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

The following table shows loans sold during the period indicated:

	For the three months ended September 30, 2017

(Dollars in thousands)	Loans sold		Proceeds		Net gain (loss)
Delinquent and non-performing loans
Multi-family residential		2	$	707	$	30
Commercial real estate		3		1,118		34
One-to-four family - mixed-use property		3		913		115
Total		8	$	2,738	$	179

Performing loans
Multi-family residential		10	$	12,704	$	(22	)
Commercial real estate		2		17,832		(7	)
Small Business Administration		1		142		2
Total		13	$	30,678	$	(27	)

	For the three months ended September 30, 2016

(Dollars in thousands)	Loans sold		Proceeds		Net gain
Delinquent and non-performing loans
Multi-family residential		3	$	632	$	1
One-to-four family - mixed-use property		8		2,507		239
Total		11	$	3,139	$	240

	For the nine months ended September 30, 2017

(Dollars in thousands)	Loans sold		Proceeds		Net charge-offs			Net gain (loss)
Delinquent and non-performing loans
Multi-family residential		2	$	707	$	-		$	30
Commercial real estate		4		1,453		(4	)		35
One-to-four family - mixed-use property		8		2,703		(33	)		143
Total		14	$	4,863	$	(37	)	$	208

Performing loans
Multi-family residential		12	$	18,784	$	-		$	(36	)
Commercial real estate		7		26,283		-			(28	)
Small Business Administration		8		5,061		-			252
Total		27	$	50,128	$	-		$	188

- 24 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

	For the nine months ended September 30, 2016

(Dollars in thousands)	Loans sold		Proceeds		Net charge-offs			Net gain
Delinquent and non-performing loans
Multi-family residential		9	$	2,680	$	(8	)	$	3
Commercial real estate		2		192		-			-
One-to-four family - mixed use		15		5,093		-			262
Total		26	$	7,965	$	(8	)	$	265

Performing loans
Small Business Administration		6		3,534		-			319
Total		6	$	3,534	$	-		$	319

7. Stock-Based Compensation

For the three months ended September 30, 2017 and 2016, the Company’s net income, as reported, includes $1.1 million of stock-based compensation costs and $0.4 of income tax benefits related to the stock-based compensation plans in each of the periods. For the nine months ended September 30, 2017 and 2016, the Company’s net income, as reported, includes $5.2 million and $4.7 million, respectively, of stock-based compensation costs and $1.7 million and $1.8 million, respectively, 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, 2017 and 2016. During the nine months ended September 30, 2017 and 2016, the Company granted 276,900 and 337,175 restricted stock units, respectively. The Company has not granted stock options since 2009. At September 30, 2017, the Company had 1,200 stock options, all 100% vested, outstanding.

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

The 2014 Omnibus Incentive Plan (“2014 Omnibus Plan”) became effective on May 20, 2014 after adoption by the Board of Directors and approval by the stockholders. The 2014 Omnibus Plan authorizes the Compensation Committee of the Company’s Board of Directors to grant a variety of equity compensation awards as well as long-term and annual cash incentive awards, all of which can, but need not, be structured so as to comply with Section 162(m) of the Internal Revenue Code of 1986, as amended. On May 31, 2017, stockholders approved an amendment to the 2014 Omnibus Plan (the “Amendment”) authorizing an additional 672,000 shares available for future issuance. In addition, to increasing the number of shares for future grants, the Amendment eliminates, in the case of stock options and SARs, the ability to recycle shares used to satisfy the exercise price or taxes for such awards. No other amendments to the 2014 Omnibus Plan were made. Including the additional shares authorized from the Amendment, 953,268 shares are available for future issuance under the 2014 Omnibus Plan at September 30, 2017.

- 25 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The following table summarizes the Company’s restricted stock unit (“RSU”) awards at or for the nine months ended September 30, 2017:

	Shares			Weighted-Average Grant-Date Fair Value

Non-vested at December 31, 2016		488,779		$	18.99
Granted		276,900			28.21
Vested		(244,762	)		21.93
Forfeited		(22,860	)		23.61
Non-vested at September 30, 2017		498,057		$	22.46

Vested but unissued at September 30, 2017		244,077		$	22.67

As of September 30, 2017, there was $8.7 million of total unrecognized compensation cost related to RSU awards granted. That cost is expected to be recognized over a weighted-average period of 3.1 years. The total fair value of awards vested for the three months ended September 30, 2017 and 2016 was $14,000 and $4,000, respectively. The total fair value of awards vested for the nine months ended September 30, 2017 and 2016 was $7.0 million and $4.8 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.

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, 2017 and 2016 are provided in the following table:

	For the three months ended September 30,					For the nine months ended September 30,
(In thousands)	2017		2016			2017		2016
Proceeds from stock options exercised	$	-	$	5		$	-	$	132
Fair value of shares received upon exercise of stock options		-		262			37		612
Tax benefit (expense) related to stock options exercised		-		(10	)		39		(12	)
Intrinsic value of stock options exercised		-		44			96		156

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.

- 26 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The following table summarizes the Phantom Stock Plan at or for the nine months ended September 30, 2017:

Phantom Stock Plan	Shares			Fair Value

Outstanding at December 31, 2016		89,339		$	29.39
Granted		7,889			27.42
Forfeited		(10	)		28.95
Distributions		(8,471	)		28.69
Outstanding at September 30, 2017		88,747		$	29.72
Vested at September 30, 2017		88,431		$	29.72

The Company recorded stock-based compensation expense for the Phantom Stock Plan of $0.2 million and $0.4 million for the three months ended September 30, 2017 and 2016, respectively. The total fair value of the distributions from the Phantom Stock Plan was $0.2 million for the three months ended September 30, 2017. There were no distributions for the three months ended September 30, 2016.

For the nine months ended September 30, 2017 and 2016, the Company recorded stock-based compensation expense for the Phantom Stock Plan of $0.1 million and $0.2 million, respectively. The total fair value of the distributions from the Phantom Stock Plan during the nine months ended September 30, 2017 and 2016 was $0.2 million and $28,000, respectively.

8. 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)	2017			2016			2017			2016

Employee Pension Plan:
Interest cost	$	216		$	226		$	648		$	678
Amortization of unrecognized loss		174			201			523			604
Expected return on plan assets		(348	)		(348	)		(1,044	)		(1,044	)
Net employee pension expense	$	42		$	79		$	127		$	238

Outside Director Pension Plan:
Service cost	$	10		$	11		$	30		$	33
Interest cost		23			24			69			72
Amortization of unrecognized gain		(23	)		(21	)		(69	)		(65	)
Amortization of past service liability		10			9			30			30
Net outside director pension expense	$	20		$	23		$	60		$	70

Other Postretirement Benefit Plans:
Service cost	$	79		$	90		$	237		$	270
Interest cost		76			80			228			240
Amortization of unrecognized loss		-			12			-			36
Amortization of past service credit		(21	)		(22	)		(64	)		(64	)
Net other postretirement expense	$	134		$	160		$	401		$	482

The Company previously disclosed in its Consolidated Financial Statements for the year ended December 31, 2016 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, 2017. The Company does not expect to make a contribution to the Employee Pension Plan (the “Employee Pension Plan”). As of September 30, 2017, the Company has contributed $108,000 to the Outside Director Pension Plan and $60,000 in contributions were made to the Other Postretirement Benefit Plans. As of September 30, 2017, the Company has not revised its expected contributions for the year ending December 31, 2017.

- 27 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

9. 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, 2017, the Company carried financial assets and financial liabilities under the fair value option with fair values of $21.4 million and $36.1 million, respectively. At December 31, 2016, the Company carried financial assets and financial liabilities under the fair value option with fair values of $30.4 million and $34.0 million, respectively. The Company did not elect to carry any additional financial assets or financial liabilities under the fair value option during the nine months ended September 30, 2017.

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)	2017		2016		September 30, 2017			September 30, 2016			September 30, 2017			September 30, 2016

Mortgage-backed securities	$	1,696	$	2,016	$	(5	)	$	(6	)	$	(15	)	$	(4	)
Other securities		19,712		28,429		40			(30	)		184			156
Borrowed funds		36,071		33,959		(925	)		(296	)		(2,090	)		1,250
Net gain (loss) from fair value adjustments ^{(1) (2)}					$	(890	)	$	(332	)	$	(1,921	)	$	1,402

(1)

The net gain (loss) from fair value adjustments presented in the above table does not include net losses of $0.4 million and $0.5 million for the three months ended September 30, 2017 and 2016, 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 $0.9 million and $4.3 million for the nine months ended September 30, 2017 and 2016, 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, 2017 and December 31, 2016. The fair value of borrowed funds includes accrued interest payable of $0.2 million and $0.1 million at September 30, 2017 and December 31, 2016, respectively.

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

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

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

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

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

Level 1 – where quoted market prices are available in an active market. At September 30, 2017, Level 1 included one mutual fund. At December 31, 2016, the Company did not value any of its assets or liabilities that are carried at fair value on a recurring basis as Level 1.

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, 2017 and December 31, 2016, 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, 2017, Level 3 included trust preferred securities owned and junior subordinated debentures issued by the Company. At December 31, 2016, 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, 2017 and December 31, 2016:

	Quoted Prices
	in Active Markets				Significant Other				Significant Other
	for Identical Assets				Observable Inputs				Unobservable Inputs				Total carried at fair value
	(Level 1)				(Level 2)				(Level 3)				on a recurring basis
	2017		2016		2017		2016		2017		2016		2017		2016
	(In thousands)

Assets:
Mortgage-backed Securities	$	-	$	-	$	519,861	$	516,476	$	-	$	-	$	519,861	$	516,476
Other securities		11,589		-		264,026		337,544		1,083		7,361		276,698		344,905
Interest rate swaps		-		-		5,410		6,350		-		-		5,410		6,350

Total assets	$	11,589	$	-	$	789,297	$	860,370	$	1,083	$	7,361	$	801,969	$	867,731

Liabilities:
Borrowings	$	-	$	-	$	-	$	-	$	36,071	$	33,959	$	36,071	$	33,959
Interest rate swaps		-		-		4,645		3,386		-		-		4,645		3,386

Total liabilities	$	-	$	-	$	4,645	$	3,386	$	36,071	$	33,959	$	40,716	$	37,345

- 29 -

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, 2017					September 30, 2016
	Trust preferred securities			Junior subordinated debentures		Trust preferred securities		Junior subordinated debentures
	(In thousands)

Beginning balance	$	7,444		$	35,137	$	7,167	$	27,485
Security call		(6,300	)		-		-		-
Net gain from fair value adjustment of financial assets ⁽¹⁾		28			-		23		-
Net loss from fair value adjustment of financial liabilities ⁽¹⁾		-			925		-		296
Decrease in accrued interest receivable		(89	)		-		-		-
Increase in accrued interest payable		-			9		-		10
Change in unrealized gains included in other comprehensive income		-			-		1		-
Ending balance	$	1,083		$	36,071	$	7,191	$	27,791

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

(1)

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

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, 2017					September 30, 2016
	Trust preferred securities			Junior subordinated debentures		Trust preferred securities			Junior subordinated debentures
	(In thousands)

Beginning balance	$	7,361		$	33,959	$	7,212		$	29,018
Security call		(6,300	)		-		-			-
Net gain (loss) from fair value adjustment of financial assets ⁽¹⁾		108			-		(23	)		-
Net loss (gain) from fair value adjustment of financial liabilities ⁽¹⁾		-			2,090		-			(1,250	)
Decrease in accrued interest receivable		(88	)		-		-			-
Increase in accrued interest payable		-			22		1			23
Change in unrealized gains included in other comprehensive income		2			-		1			-
Ending balance	$	1,083		$	36,071	$	7,191		$	27,791

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

(1)

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

During the three and nine months ended September 30, 2017, one mutual fund security for $11.6 million was transferred from Level 2 into Level 1. There were no transfers between Levels 1, 2 and 3 during the three and nine months ended September 30, 2016.

- 30 -

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, 2017

Fair Value

Valuation Technique

Unobservable Input

Range

Weighted Average

(Dollars in thousands)

Assets:

Trust preferred securities

1,083

Discounted cash flows

Discount rate

n/a

5.9

Liabilities:

Junior subordinated debentures

36,071

Discounted cash flows

Discount rate

n/a

5.9

	December 31, 2016

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

Trust preferred securities	$	7,191	Discounted cash flows	Discount rate		6.3%	-	7.1%		7.0	%

Liabilities:

Junior subordinated debentures	$	33,959	Discounted cash flows	Discount rate			n/a			6.3	%

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, 2017 and December 31, 2016, 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, 2017 and December 31, 2016:

	Quoted Prices
	in Active Markets				Significant Other				Significant Other
	for Identical Assets				Observable Inputs				Unobservable Inputs				Total carried at fair value
	(Level 1)				(Level 2)				(Level 3)				on a recurring basis
	2017		2016		2017		2016		2017		2016		2017		2016
	(In thousands)
Assets:
Impaired loans	$	-	$	-	$	-	$	-	$	20,159	$	14,968	$	20,159	$	14,968
Other real estate owned		-		-		-		-		-		533		-		533

Total assets	$	-	$	-	$	-	$	-	$	20,159	$	15,501	$	20,159	$	15,501

- 31 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

	September 30, 2017

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

Impaired loans	$	1,566	Income approach	Capitalization rate		6.5%	to	7.5%		7.0	%

				Reduction for planned expedited disposal			15.0%			15.0	%

Impaired loans	$	13,852	Sales approach	Adjustment to sales comparison value to reconcile differences between comparable sales		-50.0%	to	16.2%		-0.6	%

				Reduction for planned expedited disposal		0.0%	to	15.0%		3.7	%

Impaired loans	$	4,741	Blended income and sales approach	Adjustment to sales comparison value to reconcile differences between comparable sales		-30.0%	to	25.0%		-0.8	%

				Capitalization rate		5.0%	to	9.8%		7.5	%

				Reduction for planned expedited disposal		14.5%	to	15.0%		15.0	%

	December 31, 2016

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

Impaired loans	$	2,007	Income approach	Capitalization rate		6.0%	to	7.5%		7.0	%

				Reduction planned for expedited disposal			15.0%			15.0	%

Impaired loans	$	8,703	Sales approach	Adjustment to sales comparison value to reconcile differences between comparable sales		-40.0%	to	16.2%		-1.5	%

				Reduction planned for expedited disposal		0%	to	15.0%		7.7	%

Impaired loans	$	4,258	Blended income and sales approach	Adjustment to sales comparison value to reconcile differences between comparable sales		-50.0%	to	25.0%		-0.6	%

				Capitalization rate		5.3%	to	9.5%		7.2	%

				Reduction planned for expedited disposal			15.0%			15.0	%

Other real estate owned	$	533	Sales approach	Adjustment to sales comparison value to reconcile differences between comparable sales		3.3%	to	18.6%		11.0	%

The Company did not have any liabilities that were carried at fair value on a non-recurring basis at September 30, 2017 and December 31, 2016.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The methods and assumptions used to estimate fair value at September 30, 2017 and December 31, 2016 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 held for sale:

The fair value of non-performing loans held for sale is estimated through a negotiated sales price.

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.

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 and is valued at the input level for its underlying financial asset.

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

- 33 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

Accrued Interest Payable:

The carrying amount is a reasonable estimate of fair value due to its short-term nature and is valued at the input level for its underlying financial liability.

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, 2017 and December 31, 2016, the fair values of the above financial instruments approximate the recorded amounts of the related fees and were not considered to be material.

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

Cash and due from banks	$	60,161	$	60,161	$	60,161	$	-	$	-
Securities held-to-maturity
Mortgage-backed securities		7,978		7,839		-		7,839		-
Other securities		22,952		21,542		-		-		21,542
Securities available for sale
Mortgage-backed securities		519,861		519,861		-		519,861		-
Other securities		276,698		276,698		11,589		264,026		1,083
Loans		5,070,376		5,058,558		-		-		5,058,558
FHLB-NY stock		55,228		55,228		-		55,228		-
Accrued interest receivable		21,076		21,076		-		21,076		-
Interest rate swaps		5,410		5,410		-		5,410		-

Total assets	$	6,039,740	$	6,026,373	$	71,750	$	873,440	$	5,081,183


Liabilities:
Deposits	$	4,444,448	$	4,445,811	$	3,039,893	$	1,405,918	$	-
Borrowings		1,200,682		1,196,962		-		1,160,891		36,071
Accrued interest payable		3,512		3,512		-		3,512		-
Interest rate swaps		4,645		4,645		-		4,645		-

Total liabilities	$	5,653,287	$	5,650,930	$	3,039,893	$	2,574,966	$	36,071

- 34 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

	December 31, 2016
	Carrying		Fair
	Amount		Value		Level 1		Level 2		Level 3
	(In thousands)
Assets:

Cash and due from banks	$	35,857	$	35,857	$	35,857	$	-	$	-
Securities held-to-maturity
Other securities		37,735		35,408		-		-		35,408
Securities available for sale
Mortgage-backed securities		516,476		516,476		-		516,476		-
Other securities		344,905		344,905		-		337,544		7,361
Loans		4,835,693		4,814,840		-		-		4,814,840
FHLB-NY stock		59,173		59,173		-		59,173		-
Interest rate swaps		6,350		6,350		-		6,350		-

Total assets	$	5,836,189	$	5,813,009	$	35,857	$	919,543	$	4,857,609

Liabilities:
Deposits	$	4,205,631	$	4,213,714	$	2,833,516	$	1,380,198	$	-
Borrowings		1,266,563		1,255,283		-		1,221,324		33,959
Interest rate swaps		3,386		3,386		-		3,386		-

Total liabilities	$	5,475,580	$	5,472,383	$	2,833,516	$	2,604,908	$	33,959

10. Derivative Financial Instruments

At September 30, 2017 and December 31, 2016, the Company’s derivative financial instruments consist of interest rate swaps. The Company’s interest rate swaps are used for three purposes: 1) to mitigate the Company’s exposure to rising interest rates on a portion ($18.0 million) of its floating rate junior subordinated debentures that have a contractual value of $61.9 million, at September 30, 2017 and December 31, 2016; 2) mitigate the Company’s exposure to rising interest rates on certain fixed rate loans totaling $279.5 million and $235.4 million at September 30, 2017 and December 31, 2016, respectively; and 3) to mitigate exposure to rising interest rates on certain short-term advances totaling $50.0 million at September 30, 2017.

At September 30, 2017, we held derivatives designated as cash flow hedges, fair value hedges and certain derivatives not designated as hedges. At December 31, 2016, we held fair value hedges and certain derivatives not designated as hedges.

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

At September 30, 2017 and December 31, 2016, derivatives with a combined notional amount of $36.3 million were not designated as hedges. At September 30, 2017 and December 31, 2016, derivatives with a combined notional amount of $261.2 million and $217.1 million were designated as fair value hedges. At September 30, 2017, derivatives with a combined notional amount of $50.0 million were designated as cash flow hedges. At December 31, 2016, the Company did not have any cash flow hedges.

For cash flow hedges, the effective portion of changes in the fair value of the derivative is reported in AOCL, net of tax, but the ineffective portion of changes in the fair value of the derivative is recognized directly in earnings. 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.

- 35 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

	September 30, 2017					December 31, 2016
	Notional		Net Carrying			Notional		Net Carrying
	Amount		Value ⁽¹⁾			Amount		Value ⁽¹⁾

Interest rate swaps (fair value hedge)	$	176,408	$	5,410		$	182,177	$	6,350
Interest rate swaps (fair value hedge)		84,774		(1,482	)		34,916		(658	)
Interest rate swaps (non-hedge)		36,321		(3,045	)		36,321		(2,728	)
Interest rate swaps (cash flow hedge)		50,000		(118	)		-		-
Total derivatives	$	347,503	$	765		$	253,414	$	2,964

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

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

	For the three months ended						For the nine months ended
	September 30,						September 30,
(In thousands)	2017			2016			2017			2016

Financial Derivatives:
Interest rate swaps (non-hedge)	$	(56	)	$	(111	)	$	(316	)	$	(3,532	)
Interest rate swaps (fair value hedge)		(351	)		(380	)		(597	)		(795	)
Net loss ⁽¹⁾	$	(407	)	$	(491	)	$	(913	)	$	(4,327	)

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

During the three months and nine months ended September 30, 2017 and 2016, the Company did not record any hedge ineffectiveness.

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

- 36 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

	September 30, 2017
							Gross Amounts Not Offset in the Consolidated Statement of Condition
(In thousands)	Gross Amount of Recognized Assets		Gross Amount Offset in the Statement of Condition		Net Amount of Assets Presented in the Statement of Condition		Financial Instruments		Cash Collateral Received		Net Amount

Interest rate swaps	$	5,410	$	-	$	5,410	$	-	$	670	$	4,740

							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	$	4,645	$	-	$	4,645	$	1,105	$	-	$	3,540

	December 31, 2016
							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	$	6,350	$	-	$	6,350	$	-	$	2,964	$	3,386

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

Interest rate swaps	$	3,386	$	-	$	3,386	$	-	$	-	$	3,386

- 37 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

11. 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)	2017			2016			2017			2016
Federal:
Current	$	6,703		$	6,474		$	16,308		$	26,362
Deferred		(2,023	)		(906	)		(1,303	)		(844	)
Total federal tax provision		4,680			5,568			15,005			25,518
State and Local:
Current		1,398			1,492			2,817			7,853
Deferred		(787	)		(405	)		(502	)		(384	)
Total state and local tax provision		611			1,087			2,315			7,469

Total income tax provision	$	5,291		$	6,655		$	17,320		$	32,987

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

12. Accumulated Other Comprehensive Income (Loss):

The following table sets forth the changes in accumulated other comprehensive loss by component for the three months ended September 30, 2017:

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

Beginning balance, net of tax	$	(2,110	)	$	(124	)	$	(4,342	)	$	(6,576	)
Other comprehensive income before reclassifications, net of tax		(333	)		56			-			(277	)

Amounts reclassified from accumulated other comprehensive income, net of tax		108			-			81			189

Net current period other comprehensive income, net of tax		(225	)		56			81			(88	)

Ending balance, net of tax	$	(2,335	)	$	(68	)	$	(4,261	)	$	(6,664	)

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

	Unrealized Gains (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 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, 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 loss by component for the nine months ended September 30, 2017:

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

Beginning balance, net of tax	$	(3,859	)	$	-		$	(4,503	)	$	(8,362	)
Other comprehensive income before reclassifications, net of tax		1,416			(68	)		-			1,348

Amounts reclassified from accumulated other comprehensive income, net of tax		108			-			242			350

Net current period other comprehensive income, net of tax		1,524			(68	)		242			1,698

Ending balance, net of tax	$	(2,335	)	$	(68	)	$	(4,261	)	$	(6,664	)

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

	Unrealized Gains (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

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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 loss by component for the periods indicated:

For the three months ended September 30, 2017

	Amounts Reclassified from
Details about Accumulated Other	Accumulated Other				Affected Line Item in the Statement
Comprehensive Loss Components	Comprehensive Loss				Where Net Income is Presented
	(In thousands)
Unrealized losses on available for sale securities:	$	(186	)		Net loss on sale of securities
		78			Tax benefit
	$	(108	)		Net of tax

Amortization of defined benefit pension items:
Actuarial losses	$	(152	)	(1)	Other operating expense
Prior service credits		12		(1)	Other operating expense
		(140	)		Total before tax
		59			Tax benefit
	$	(81	)		Net of tax

For the three months ended September 30, 2016

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

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

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

For the nine months ended September 30, 2017

	Amounts Reclassified from
Details about Accumulated Other	Accumulated Other				Affected Line Item in the Statement
Comprehensive Loss Components	Comprehensive Loss				Where Net Income is Presented
	(In thousands)
Unrealized losses on available for sale securities:	$	(186	)		Net loss on sale of securities
		78			Tax benefit
	$	(108	)		Net of tax

Amortization of defined benefit pension items:
Actuarial losses	$	(454	)	(1)	Other operating expense
Prior service credits		34		(1)	Other operating expense
		(420	)		Total before tax
		178			Tax benefit
	$	(242	)		Net of tax

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

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

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

(1)

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

13. Regulatory Capital

Under current capital regulations, the Bank is required to comply with four separate capital adequacy standards. As of September 30, 2017, 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 2017 is 1.25% and increases 0.625% annually through 2019 to 2.5%. The CCB for the Bank at September 30, 2017 was 6.60%.

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

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

	September 30, 2017					December 31, 2016
			Percent of					Percent of
	Amount		Assets			Amount		Assets
	(Dollars in thousands)

Tier I (leverage) capital:
Capital level	$	629,748		10.10	%	$	607,033		10.12	%
Requirement to be well capitalized		311,625		5.00			299,848		5.00
Excess		318,123		5.10			307,185		5.12

Common Equity Tier I risk-based capital:
Capital level	$	629,748		14.04	%	$	607,033		14.12	%
Requirement to be well capitalized		291,614		6.50			279,443		6.50
Excess		338,134		7.54			327,590		7.62

Tier 1 risk-based capital:
Capital level	$	629,748		14.04	%	$	607,033		14.12	%
Requirement to be well capitalized		358,910		8.00			343,930		8.00
Excess		270,838		6.04			263,103		6.12

Total risk-based capital:
Capital level	$	655,017		14.60	%	$	629,262		14.64	%
Requirement to be well capitalized		448,637		10.00			429,913		10.00
Excess		206,380		4.60			199,349		4.64

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The Holding Company is subject to the same regulatory capital requirements as the Bank. As of September 30, 2017, 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, 2017 was 6.61%.

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

	September 30, 2017					December 31, 2016
			Percent of					Percent of
	Amount		Assets			Amount		Assets
	(Dollars in thousands)

Tier I (leverage) capital:
Capital level	$	565,265		9.07	%	$	539,228		9.00	%
Requirement to be well capitalized		311,475		5.00			299,654		5.00
Excess		253,790		4.07			239,574		4.00

Common Equity Tier I risk-based capital:
Capital level	$	530,442		11.84	%	$	506,432		11.79	%
Requirement to be well capitalized		291,325		6.50			279,121		6.50
Excess		239,117		5.34			227,311		5.29

Tier 1 risk-based capital:
Capital level	$	565,265		12.61	%	$	539,228		12.56	%
Requirement to be well capitalized		358,554		8.00			343,534		8.00
Excess		206,711		4.61			195,694		4.56

Total risk-based capital:
Capital level	$	665,534		14.85	%	$	636,457		14.82	%
Requirement to be well capitalized		448,193		10.00			429,417		10.00
Excess		217,341		4.85			207,040		4.82

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

14. New Authoritative Accounting Pronouncements

In August 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017-12, “Derivatives and Hedging (Topic 815)” providing targeted improvements to the accounting for hedging activities, which is effective January 1, 2019, with early adoption permitted in any interim period or fiscal year before the effective date. The guidance introduces a number of amendments, several of which are optional, that are designed to simplify the application of hedge accounting, improve financial statement transparency and more closely align hedge accounting with an entity’s risk management strategies. We are currently evaluating the impact of adopting this new guidance on our consolidated results of operations, financial condition and cash flows.

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

In March 2017, the FASB issued ASU No. 2017-07, “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost”, which requires that an employer disaggregate the service cost component from the other components of net benefit cost, as follows:

Service cost must be presented in the same line item(s) as other employee compensation costs. These costs are generally included within income from continuing operations, but in some cases may be eligible for capitalization, if certain criteria are met.

All other components of net benefit cost must be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. These generally include interest cost, actual return on plan assets, amortization of prior service cost included in accumulated other comprehensive income, and gains or losses from changes in the value of the projected benefit obligation or plan assets. If a separate line item is used to present the other components of net benefit cost, it must be appropriately described. If a separate line item is not used, an entity must disclose the line item(s) in the income statement that includes the other components of net benefit cost. The ASU clarifies that these costs are not eligible for capitalization.

The amendments are effective for fiscal years beginning after December 15, 2017, including interim periods within those years. Early adoption is permitted as of the beginning of an annual period. The guidance is not expected to have a significant impact on the Company's financial positions, results of operations or disclosures.

In January 2017, the FASB issued ASU No. 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment”. The ASU simplifies the subsequent measurement of goodwill and eliminates Step 2 from the goodwill impairment test. The Company should perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit's fair value. The impairment charge is limited to the amount of goodwill allocated to that reporting unit. The amendments in this update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for goodwill impairment tests performed on testing dates after January 1, 2017. The guidance is not expected to have a significant impact on the Company's financial positions, results of operations or disclosures.

In August 2016, the FASB issued ASU No. 2016-15 “Classification of Certain Cash Receipts and Cash Payments”, to clarify how certain cash receipts and cash payments are presented and classified in the statements of cash flows. The amendments are intended to reduce diversity in practice by clarifying whether the following items should be categorized as operating, investing or financing in the statement of cash flows: (i) debt prepayments and extinguishment costs, (ii) settlement of zero-coupon debt, (iii) settlement of contingent consideration, (iv) insurance proceeds, (v) settlement of corporate-owned life insurance (COLI) and bank-owned life insurance (BOLI) policies, (vi) distributions from equity method investees, (vii) beneficial interests in securitization transactions, and (viii) receipts and payments with aspects of more than one class of cash flows. The ASU will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. The Company does not expect adoption of this ASU will have a material effect 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 has begun collecting and evaluating data and system requirements to implement this standard. The adoption of this update could have a material impact on the Company’s consolidated results of operations and financial condition. The extent of the impact is still unknown and will depend on many factors, such as the composition of the Company’s loan portfolio and expected loss history at adoption. Management has developed committees to evaluate and implement CECL.

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

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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. We do not believe the adoption of this standard will have a material impact on the Company’s consolidated results of operations, financial condition or cash flows.

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers”. This ASU establishes a comprehensive revenue recognition standard for virtually all industries under U.S. GAAP, including those that previously followed industry-specific guidance such as real estate, construction and software industries. The revenue standard’s core principle is built on the contract between a vendor and a customer for the provision of goods and services. It attempts to depict the exchange of rights and obligations between the parties in the pattern of revenue recognition based on the consideration to which the vendor is entitled. The guidance in this ASU for public companies is effective for the annual periods beginning after December 15, 2016, including interim periods therein. ASU 2014-09 does not apply to the majority of our revenue streams. In August 2015, the FASB approved a one-year delay of the effective date of this standard. The deferral would require public entities to apply the standard for annual reporting periods beginning after December 15, 2017. Public companies would be permitted to elect to early adopt for annual reporting periods beginning after December 15, 2016. The Company has completed a review of its income streams determining that a significant portion of its income is derived from sources scoped out of this guidance, therefore, we do not believe the adoption of this standard will have a material impact on the Company’s consolidated results of operations, financial condition or cash flows.

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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, 2016. 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, 2016. 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 and became 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. The Bank’s primary regulator is the New York State Department of Financial Services, and its primary federal regulator is the Federal Deposit Insurance Corporation (“FDIC”). Deposits are insured to the maximum allowable amount by the FDIC. Additionally, the Bank is a member of the Federal Home Loan Bank system. The primary business of Flushing Financial Corporation has been the operation of the Bank. The Bank owns three subsidiaries: Flushing Preferred Funding Corporation, Flushing Service Corporation, and FSB Properties Inc. The Bank also operates an internet branch, which operates under the brands of iGObanking.com^®and BankPurely®. The 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 our interest-earning assets and the cost of our interest-bearing liabilities. Net interest income is the result of our interest rate margin, which is the difference between the average yield earned on interest-earning assets and the average cost of interest-bearing liabilities, adjusted for the difference in the average balance of interest-earning assets as compared to the average balance of interest-bearing liabilities. We also generate non-interest income primarily from loan fees, service charges on deposit accounts, mortgage servicing fees, and other fees, income earned on Bank Owned Life Insurance (“BOLI”), dividends on Federal Home Loan Bank of New York stock and net gains and losses on sales of securities and loans. Our operating expenses consist principally of employee compensation and benefits, occupancy and equipment costs, other general and administrative expenses and income tax expense. Our results of operations also can be significantly affected by changes in the fair value of financial assets and financial liabilities for which changes in value are recorded through earnings, our periodic provision for loan losses and specific provision for losses on real estate owned.

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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:

increase core deposits and continue to improve funding mix to manage funding costs;

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

enhance earnings by improving scalability and efficiency;

manage credit risk;

maintain well capitalized levels under all stress test scenarios;

increase our commitment to the multi-cultural marketplace, with a particular focus on the Asian community in Queens; 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 9 of the Notes to the Consolidated Financial Statements.

During the third quarter of 2017, we continued our strategy of focusing our origination efforts on higher yielding loans. Loan originations and purchases for the nine months ended September 30, 2017 totaled $710.7 million, with multi-family real estate, commercial real estate and commercial business loans accounting for 89.3% of originations and purchases. Our total loan portfolio grew 5% during the nine months ended September 30, 2017 while holding our strong underwriting standards. Loan applications in process strengthened to $417.0 million at September 30, 2017, compared to $279.1 million at June 30, 2017 and $289.3 million at September 30, 2016.

The yield on loan production increased 21 basis points to 4.25% for the three months ended September 30, 2017, from 4.04% for the three months ended June 30, 2017 and 51 basis points from 3.74% for the comparable quarter of 2016. This marks the first quarter since the quarter ended December 31, 2008 that our yield from new loan originations and purchases exceeded the yield of our total loan portfolio, after excluding prepayment penalty income and recovered interest from delinquent loans.

Our net interest margin for the three months ended September 30, 2017 was 2.90%, a decrease of five basis points from the trailing quarter and four basis points from the comparable prior year period. At the end of the second quarter of 2017, in order to remain competitive in our market, we increased the rates paid on our government deposits by a weighted average of 33 basis points. At the same time, we expanded BankPurely®, our eco-friendly, socially conscious, healthier lifestyle community internet brand, by offering a premium savings account. The full impact of these initiatives was experienced in the most recent quarter, as the cost of total deposits increased 14 basis points from the second quarter of 2017. Additionally, this quarter’s net-interest margin was negatively impacted by seasonal government deposit outflows, which were replaced with short-term borrowings costing an additional 30 basis points to 65 basis points.

We continued our discipline regarding non-interest expense and credit quality continued to improve, as our non-performing assets have decreased by 37% since the end of 2016 and net charge-offs remain minimal. However, during the recent quarter, we recorded a provision for loan losses for the first time since the fourth quarter of 2015, of $3.3 million. The provision was the result of a reduction in the estimated fair value of the collateral underlying our performing taxi medallion portfolio. At September 30, 2017, we have allocated $6.0 million of our allowance for taxi medallion loans which equals 33.0% of the outstanding principal.

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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. See Note 13 of the Notes to the Consolidated Financial Statements “Regulatory Capital”.

COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016

General. Net income for the three months ended September 30, 2017 was $10.2 million, a decrease of $0.5 million, or 4.3%, compared to $10.6 million for the three months ended September 30, 2016. Diluted earnings per common share were $0.35 for the three months ended September 30, 2017, a decrease of $0.02, or 5.4%, from $0.37 for the three months ended September 30, 2016.

Return on average equity decreased to 7.6% for the three months ended September 30, 2017 from 8.4% for the three months ended September 30, 2016. Return on average assets was 0.7% for the three months ended September 30, 2017 and 2016.

Interest Income. Interest and dividend income increased $3.8 million, or 6.8%, to $59.3 million for the three months ended September 30, 2017 from $55.5 million for the three months ended September 30, 2016. The increase in interest income was primarily attributable to an increase of $251.7 million in the average balance of interest-earning assets to $5,936.1 million for the three months ended September 30, 2017 from $5,684.4 million for the comparable prior year period, combined with an increase of nine basis points in the yield of interest-earning assets to 4.00% for the three months ended September 30, 2017 from 3.91% in the comparable prior year period. The increase in the yield on interest-earning assets of nine basis points was primarily due to an increase of $347.1 million in the average balance of total loans, net, which have a higher yield than the yield of total interest-earning assets, combined with a decrease of $94.3 million in the average balance of total securities, which have a lower yield than the yield of total interest-earning assets. The yield of interest-earning assets also improved due to increases of four basis points and 12 basis points, respectively, in the yields of total loans, net and taxable securities for the three months ended September 30, 2017 from the comparable prior year period. Additionally, the yield of interest-earning deposits and federal funds sold increased 60 basis points for the three months ended September 30, 2017 from the comparable prior year period due to increases in the Federal Funds rate. The increases of four basis points in the yield on the total loans, net and 12 basis points in the yield of taxable securities were primarily due to the loans being originated and loans and securities being purchased at higher yields than the existing portfolio yield. Excluding prepayment penalty income and recovered interest from loans, the yield on total loans, net, would have increased four basis points to 4.09% for the three months ended September 30, 2017 from 4.05% for the three months ended September 30, 2016.

Interest Expense. Interest expense increased $2.5 million, or 17.9%, to $16.3 million for the three months ended September 30, 2017 from $13.8 million for the three months ended September 30, 2016. The increase in interest expense was primarily due to an increase of 14 basis points in the average cost of interest-bearing liabilities to 1.23% for the three months ended September 30, 2017 from 1.09% for the three months ended September 30, 2016, combined with an increase of $216.3 million in the average balance of interest-bearing liabilities to $5,275.9 million for the three months ended September 30, 2017, from $5,059.6 million for the comparable prior year period. The 14 basis point increase in the cost of interest-bearing liabilities was primarily due to the Bank raising the rates we pay on some of our deposit products to stay competitive within our market. This increase in rates was partially offset by an improvement in our funding mix, as the combined average balance of lower costing savings, NOW and money market deposits increased $352.7 million to $2,597.6 million for the three months ended September 30, 2017 from $2,245.0 million for the comparable prior year period, while the combined average balance of higher costing certificates of deposit and borrowed funds decreased $141.7 million to $2,624.1 million for the three months ended September 30, 2017 from $2,765.8 million for the comparable prior year period.

Net Interest Income. For the three months ended September 30, 2017, net interest income was $43.0 million, an increase of $1.3 million, or 3.2%, from $41.7 million for the three months ended September 30, 2016. The increase in net interest income was primarily due to an increase of $251.7 million in the average balance of interest-earning assets to $5,936.1 million for the three months ended September 30, 2017 from $5,684.4 million for the comparable prior year period. The yield earned on interest-earning assets increased nine basis points to 4.00% for the three months ended September 30, 2017 from 3.91% for the comparable prior year period. The cost of interest-bearing liabilities increased 14 basis points to 1.23% for the three months ended September 30, 2017 as compared to 1.09% for the three months ended September 30, 2016. The effects of the above on both the net interest spread and net interest margin were decreases of five basis points to 2.77% and four basis points to 2.90%, respectively, for the quarter ended September 30, 2017, compared to the quarter ended September 30, 2016. Included in net interest income was prepayment penalty income from loans for the three months ended September 30, 2017 and 2016 totaling $1.6 million and $1.5 million, respectively, and recovered interest from non-accrual loans totaling $0.3 million for each of the three months ended September 30, 2017 and 2016. Without the prepayment penalty income and recovered interest, the net interest margin for the three months ended September 30, 2017 would have been 2.77%, a decrease of four basis points, as compared to 2.81% for the three 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

Provision for Loan Losses. During the three months ended September 30, 2017, a provision for loan losses was recorded for $3.3 million, compared to none for the comparable prior year period. The provision was the result of a reduction in the estimated fair value of the collateral underlying our performing taxi medallion portfolio. During the three months ended September 30, 2017, the Bank recorded net charge-offs totaling $0.2 million and non-accrual loans decreased $2.0 million to $12.2 million from $14.1 million at June 30, 2017. The current average loan-to-value ratio for our non-performing loans collateralized by real estate was 34.9% at September 30, 2017. 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, 2017 was $1.7 million, a decrease of $0.2 million, or 10.4%, from $1.9 million for the three months ended September 30, 2016. The decrease in non-interest income was primarily due to an increase of $0.5 million in net losses from fair value adjustments, partially offset by an increase of $0.3 million in income from bank owned life insurance as compared to the prior year comparable period.

Non-Interest Expense. Non-interest expense was $26.0 million for the three months ended September 30, 2017, a decrease of $0.3 million, or 1.2%, from $26.3 million for the three months ended September 30, 2016. The decrease in non-interest expense was primarily due to the prior year period including a write-down of $0.8 million on one OREO partially offset by an increase in salaries and benefits expense, primarily due to annual salary increases and additions in staffing to support the growth of the Bank.

Income before Income Taxes. Income before the provision for income taxes decreased $1.8 million, or 10.5%, to $15.5 million for the three months ended September 30, 2017 from $17.3 million for the three months ended September 30, 2016 for the reasons discussed above.

Provision for Income Taxes. The provision for income taxes was $5.3 million for the three months ended September 30, 2017, a decrease of $1.4 million, or 20.5%, from $6.7 million for the three months ended September 30, 2016. The effective tax rate decreased to 34.2% for the three months ended September 30, 2017 from 38.5% in the comparable prior year period due to the impact of preferential tax items.

COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016

General. Net income for the nine months ended September 30, 2017 was $35.2 million, a decrease of $15.5 million, or 30.5%, compared to $50.6 million for the nine months ended September 30, 2016. Diluted earnings per common share were $1.21 for the nine months ended September 30, 2017, a decrease of $0.54, or 30.9%, from $1.75 for the nine months ended September 30, 2016.

The nine months ended September 30, 2016, included a net after-tax gain on the sale of buildings of $19.6 million, or $0.67 per diluted common share. The nine months ended September 30, 2017 did not include any net gains on sale of buildings.

Return on average equity decreased to 8.9% for the nine months ended September 30, 2017 from 13.7% for the nine months ended September 30, 2016. Return on average assets decreased to 0.8% for the nine months ended September 30, 2017 from 1.2% 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 $9.9 million, or 6.0%, to $174.9 million for the nine months ended September 30, 2017 from $165.0 million for the nine months ended September 30, 2016. The increase in interest income was primarily attributable to an increase of $313.5 million in the average balance of interest-earning assets to $5,909.9 million for the nine months ended September 30, 2017 from $5,596.3 million for the comparable prior year period. The yield on interest-earning assets increased two basis points to 3.95% for the nine months ended September 30, 2017 from 3.93% in the comparable prior year period. The increase in the yield on interest-earning assets of two basis points was primarily due to the yield on interest-earning assets being positively impacted by an increase of $407.3 million in the average balance of higher yielding total loans, net to $4,955.4 million for the nine months ended September 30, 2017 from $4,548.2 million for the comparable prior year period. Additionally, the yield on the securities portfolio increased 15 basis points to 2.80% for nine months ended September 30, 2017, from 2.65% for the comparable prior year period and the yield on interest-earning deposits increased 40 basis points to 0.81% for the nine months ended September 30, 2017 from 0.41% for the nine months ended September 30, 2016. The seven 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 two basis points to 4.07% for the nine months ended September 30, 2017 from 4.09% for the nine months ended September 30, 2016. The 15 basis point increase in the yield on the securities portfolio was primarily due to the net impact in the current year from $160.0 million in purchases at an average yield on 2.94% with $112.4 million in sales at an average yield of 2.21%.

Interest Expense. Interest expense increased $4.6 million, or 11.4%, to $44.8 million for the nine months ended September 30, 2017 from $40.2 million for the nine months ended September 30, 2016. The increase in interest expense was primarily due to an increase of $250.9 million in the average balance of interest-bearing liabilities to $5,272.8 million for the nine months ended September 30, 2017, from $5,021.9 million for the comparable prior year period. Additionally, the increase was due to an increase of six basis points in the cost of total interest-bearing liabilities to 1.13% for the nine months ended September 30, 2017 from 1.07% for the comparable prior year period. The six basis point increase in the cost of interest-bearing liabilities was primarily due to the Bank raising the rates we pay on some of our deposit products to stay competitive within our market. This increase in rates was partially offset by an improvement in our funding mix, as the combined average balance of lower costing savings, NOW and money market deposits increased $329.1 million to $2,645.2 million for the nine months ended September 30, 2017 from $2,316.1 million for the comparable prior year period, while the combined average balance of higher costing certificates of deposit and borrowed funds decreased $83.6 million to $2,566.8 million for the nine months ended September 30, 2017 from $2,650.4 million for the comparable prior year period.

Net Interest Income. For the nine months ended September 30, 2017, net interest income was $130.0 million, an increase of $5.3 million, or 4.3%, from $124.7 million for the nine months ended September 30, 2016. The increase in net interest income was primarily due to an increase of $313.5 million in the average balance of interest-earning assets to $5,909.9 million for the nine months ended September 30, 2017 from the comparable prior year period. The yield earned on interest-earning assets increased two basis points to 3.95% for the nine months ended September 30, 2017. The cost of interest-bearing liabilities increased six basis points to 1.13% for the nine months ended September 30, 2017 as compared to 1.07% for the nine months ended September 30, 2016. The effects of the above on both the net interest spread and net interest margin were decreases of four basis points to 2.82% and 2.93%, respectively, for the nine months ended September 30, 2017, compared to the nine months ended September 30, 2016. Included in net interest income was prepayment penalty income from loans for the nine months ended September 30, 2017 and 2016 totaling $3.6 million and $5.0 million, respectively, recovered interest from non-accrual loans totaling $1.1 million and $0.5 million, respectively, and accelerated accretion of discount upon the call of CLO securities totaling $0.4 million and $26,000, respectively. Without the prepayment penalty income, recovered interest and accelerated discount upon call, the net interest margin for the nine months ended September 30, 2017 would have been 2.82%, a decrease of two basis points, as compared to 2.84% for the nine months ended September 30, 2016.

Provision for Loan Losses. During the nine months ended September 30, 2017, a provision for loan losses was recorded for $3.3 million, compared to none for the comparable prior year period. The provision was the result of a reduction in the estimated fair value of the collateral underlying our performing taxi medallion portfolio. During the nine months ended September 30, 2017, the Bank recorded net charge-offs totaling $0.2 million and non-accrual loans decreased $8.9 million to $12.2 million from $21.0 million at December 31, 2016. The current average loan-to-value ratio for our non-performing loans collateralized by real estate was 34.9% at September 30, 2017. 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, 2017 was $7.3 million, a decrease of $34.8 million, or 82.7%, from $42.1 million for the nine months ended September 30, 2016. The decrease in non-interest income was primarily due to the prior year period including $33.8 million in net gains on sale of buildings and $2.4 million in net gains on sale of securities compared to no building sales and a net loss of $0.2 million in sales of securities recorded during the nine months ended September 30, 2017. These decreases were partially offset by an increase in the gain from life insurance proceeds of $0.9 million for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016.

Non-Interest Expense. Non-interest expense was $81.6 million for the nine months ended September 30, 2017, a decrease of $1.6 million, or 2.0%, from $83.2 million for the nine months ended September 30, 2016. The decrease in non-interest expense was primarily due to the nine months ended September 30, 2016 including a penalty of $2.1 million on the prepayment of $38.0 million in repurchase agreements and $1.7 million in net losses from the sale of OREO compared to no prepayment penalties on borrowings and a net gain on the sale of OREO totaling $50,000 recorded during the nine months ended September 30, 2017. In addition, the nine months ended September 30, 2017 had decreases of $1.1 million in FDIC insurance expense due to lower assessment rates and $0.4 million in foreclosure expense due to improved credit conditions. These reductions in non-interest expense were partially offset by an increase of $2.8 million in salaries and benefits primarily due to annual salary increases and additions in staffing to support the growth of the Bank.

Income before Income Taxes. Income before the provision for income taxes decreased $31.1 million, or 37.2%, to $52.5 million for the nine months ended September 30, 2017 from $83.6 million for the nine months ended September 30, 2016 for the reasons discussed above.

Provision for Income Taxes. The provision for income taxes for the nine months ended September 30, 2017 was $17.3 million, a decrease of $15.7 million, or 47.5%, from $33.0 million for the comparable prior year period. The decrease was primarily due to a decrease of $31.1 million in income before income taxes and a decrease in the effective tax rate to 33.0% for the nine months ended September 30, 2017 from 39.5% in the comparable prior year period. The decrease in the effective tax rate reflects the impact of a change in the accounting treatment of deductible stock compensation expense from prior years. Additionally, the nine months ended September 30, 2016, effective tax rate reflected the impact of preferential tax items because of that period including the gain on sale buildings.

FINANCIAL CONDITION

Assets. Total assets at September 30, 2017 were $6,261.4 million, an increase of $202.9 million, or 3.3%, from $6,058.5 million at December 31, 2016. Total loans, net increased $231.6 million, or 4.8%, during the nine months ended September 30, 2017 to $5,045.1 million from $4,813.5 million at December 31, 2016. Loan originations and purchases were $710.7 million for the nine months ended September 30, 2017, a decrease of $139.7 million, or 16.4%, from $850.3 million for the nine months ended September 30, 2016. During the nine months ended September 30, 2017, 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 $417.0 million at September 30, 2017 compared to $310.9 million at December 31, 2016.

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

	For the three months ended September 30,				For the nine months ended September 30,
(In thousands)	2017		2016		2017		2016
Multi-family residential ⁽¹⁾	$	64,551	$	61,378	$	254,728	$	293,385
Commercial real estate ⁽²⁾		25,385		68,970		184,676		245,114
One-to-four family – mixed-use property		13,136		12,618		45,334		42,493
One-to-four family – residential		5,843		3,362		16,623		17,050
Co-operative apartments		232		-		232		470
Construction		148		1,920		7,121		6,034
Small Business Administration		4,276		470		6,787		6,785
Commercial business and other ⁽³⁾		69,354		84,525		195,150		239,015
Total	$	182,925	$	233,243	$	710,651	$	850,346

(1)

Includes purchases of $31.0 million and $98.4 million for the nine months ended September 30, 2017 and 2016, respectively. There were purchases of $8.4 million during the three months ended September 30, 2017. There were no purchases during the three months ended September 30, 2016.

(2)

Includes purchases of $25.9 million and $25.9 million for the nine months ended September 30, 2017 and 2016, respectively. There were no purchases during the three months ended September 30, 2017. There were no purchases during the three months ended September 30, 2016.

(3)

Includes purchases of $18.9 million and $13.7 million for the nine months ended September 30, 2017 and 2016, respectively. There were purchases of $9.0 million during the three months ended September 30, 2017. There were no purchases during the three 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

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 2017 had an average loan-to-value ratio of 41.2% and an average debt coverage ratio of 187%.

The Bank’s non-performing assets totaled $13.9 million at September 30, 2017, a decrease of $8.1 million, or 36.7%, from $21.9 million at December 31, 2016. Total non-performing assets as a percentage of total assets were 0.22% at September 30, 2017 compared to 0.36% at December 31, 2016. The ratio of allowance for loan losses to total non-performing loans was 181.9% at September 30, 2017 and 103.8% at December 31, 2016.

During the nine months ended September 30, 2017, mortgage-backed securities including held-to-maturity increased $11.4 million, or 2.2%, to $527.8 million from $516.5 million at December 31, 2016. The increase in mortgage-backed securities during the nine months ended September 30, 2017 was primarily due to purchases of $149.9 million at an average yield of 2.88%, partially offset by sales of $78.7 million at an average yield on 2.09% and principal repayments of $60.6 million.

During the nine months ended September 30, 2017, other securities including held-to-maturity, decreased $83.0 million, or 21.7%, to $299.7 million from $382.6 million at December 31, 2016. The decrease in other securities during the nine months ended September 30, 2017 was primarily due to $43.1 million in calls of CLO securities and one private issue trust preferred security, sales totaling $33.7 million at an average yield of 2.49% and $14.8 million in maturities of municipal securities, partially offset by a purchase of $10.0 million corporate bond at an average yield on 3.86%. Other securities 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.

Liabilities. Total liabilities were $5,721.8 million at September 30, 2017, an increase of $177.1 million, or 3.2%, from $5,544.6 million at December 31, 2016. During the nine months ended September 30, 2017, due to depositors increased $225.4 million, or 5.4%, to $4,390.8 million, due to increases of $192.9 million in core deposits and $32.4 million in certificates of deposit. The increase in core deposits was due to increases of $148.3 million, $68.9 million and $29.3 million in money market, savings and demand accounts, respectively, partially offset by a decrease of $53.7 million in NOW accounts. Borrowed funds decreased $65.9 million during the nine months ended September 30, 2017. The decrease in borrowed funds was primarily due to a decrease in FHLB short-term borrowings as funding needs were provided by increased deposits.

Equity. Total stockholders’ equity increased $25.8 million, or 5.0%, to $539.6 million at September 30, 2017 from $513.9 million at December 31, 2016. Stockholders’ equity increased primarily due to net income of $35.2 million, the net impact totaling $4.9 million from the vesting and exercising of shares of employee and director stock plans and other comprehensive income totaling $1.7 million, primarily due to an increase in the fair value of the securities portfolio. These increases were partially offset by the declaration and payment of dividends on the Company’s common stock of $0.54 per common share totaling $15.7 million and the purchase of 10,000 treasury shares, at an average cost of $27.80 per share, totaling $0.3 million. Book value per common share was $18.72 at September 30, 2017 compared to $17.95 at December 31, 2016.

Cash flow. During the nine months ended September 30, 2017, funds provided by the Company's operating activities amounted to $53.1 million. These funds, combined with $151.2 million provided from financing activities, were utilized to fund net investing activities of $180.0 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, 2017, the net total of loan originations and purchases less loan repayments and sales was $255.1 million. During the nine months ended September 30, 2017, the Company also funded $152.1 million in purchases of securities available for sale and $8.0 million of securities held-to-maturity. During the nine months ended September 30, 2017, funds were provided by long-term borrowed funds totaling $180.0 million and a net increase in total deposits of $238.4 million. Additionally, $216.6 million in proceeds from maturities, sales, calls and prepayments of securities available for sale and $14.8 million in maturities of securities held-to-maturity provided funds. In addition to funding loan growth, these funds were used to repay $205.0 million in long-term borrowings and $43.5 million in net short-term borrowings. The Company also used funds of $15.7 million and $2.9 million for dividend payments and purchases of treasury stock, respectively, during the nine months ended September 30, 2017.

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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 RATE RISK

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

The Company manages the mix of interest-earning assets and interest-bearing liabilities on a continuous basis to maximize return and adjust its exposure to interest rate risk. On a quarterly basis, management prepares the “Earnings and Economic Exposure to Changes in Interest Rate” report for review by the Asset Liability Committee of the Board of Directors, as summarized below. This report quantifies the potential changes in net interest income and net portfolio value should interest rates go up or down (shocked) 200 basis points, assuming the yield curves of the rate shocks will be parallel to each other. The Company’s regulators currently place focus on the net portfolio value, focusing on a rate shock up or down of 200 basis points. Net portfolio value is defined as the market value of assets net of the market value of liabilities. The market value of assets and liabilities is determined using a discounted cash flow calculation. The net portfolio value ratio is the ratio of the net portfolio value to the market value of assets. All changes in income and value are measured as percentage changes from the projected net interest income and net portfolio value at the base interest rate scenario. The base interest rate scenario assumes interest rates at September 30, 2017. 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, 2017, 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, 2017:

	Projected Percentage Change In
	Net Interest	Net Portfolio	Net Portfolio
Change in Interest Rate	Income	Value	Value Ratio
-200 Basis points	5.03%	11.57%	12.52%
-100 Basis points	4.63	3.84	12.04
Base interest rate	0.00	0.00	11.89
+100 Basis points	-6.05	-8.76	11.18
+200 Basis points	-12.18	-15.24	10.66

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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, 2017 and 2016, 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,
	2017							2016
	Average				Yield/			Average				Yield/
	Balance		Interest		Cost			Balance		Interest		Cost
Assets	(Dollars in thousands)
Interest-earning assets:
Mortgage loans, net	$	4,350,338	$	46,121		4.24	%	$	4,093,240	$	43,777		4.28	%
Other loans, net		683,328		7,197		4.21			593,353		5,404		3.64
Total loans, net ⁽¹⁾		5,033,666		53,318		4.24			4,686,593		49,181		4.20
Taxable securities:
Mortgage-backed securities		520,889		3,335		2.56			554,515		3,350		2.42
Other securities		189,957		1,787		3.76			245,477		2,160		3.52
Total taxable securities		710,846		5,122		2.88			799,992		5,510		2.76
Tax-exempt securities: ⁽²⁾
Other securities		142,899		758		2.12			148,004		784		2.12
Total tax-exempt securities		142,899		758		2.12			148,004		784		2.12
Interest-earning deposits and federal funds sold		48,718		121		0.99			49,824		49		0.39
Total interest-earning assets		5,936,129		59,319		4.00			5,684,413		55,524		3.91
Other assets		303,192							292,312
Total assets	$	6,239,321						$	5,976,725

Liabilities and Equity
Interest-bearing liabilities:
Deposits:
Savings accounts	$	330,316		583		0.71		$	258,884		306		0.47
NOW accounts		1,340,228		2,468		0.74			1,384,368		1,979		0.57
Money market accounts		927,067		2,337		1.01			601,709		990		0.66
Certificate of deposit accounts		1,375,052		5,218		1.52			1,428,770		5,213		1.46
Total due to depositors		3,972,663		10,606		1.07			3,673,731		8,488		0.92
Mortgagors' escrow accounts		54,236		49		0.36			48,840		32		0.26
Total deposits		4,026,899		10,655		1.06			3,722,571		8,520		0.92
Borrowed funds		1,249,038		5,623		1.80			1,337,049		5,291		1.58
Total interest-bearing liabilities		5,275,937		16,278		1.23			5,059,620		13,811		1.09
Non interest-bearing deposits		354,149							318,188
Other liabilities		72,767							89,943
Total liabilities		5,702,853							5,467,751
Equity		536,468							508,974
Total liabilities and equity	$	6,239,321						$	5,976,725

Net interest income / net interest rate spread			$	43,041		2.77	%			$	41,713		2.82	%

Net interest-earning assets / net interest margin	$	660,192				2.90	%	$	624,793				2.94	%

Ratio of interest-earning assets to interest-bearing liabilities						1.13	X						1.12	X

(1)

Loan interest income includes loan fee income (which includes net amortization of deferred fees and costs, late charges, and prepayment penalties) of approximately $0.9 million and $0.9 million for the three months ended September 30, 2017 and 2016, respectively.

(2)

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

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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, 2017 and 2016, 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,
	2017							2016
	Average				Yield/			Average				Yield/
	Balance		Interest		Cost			Balance		Interest		Cost
Assets	(Dollars in thousands)
Interest-earning assets:
Mortgage loans, net	$	4,287,674	$	135,429		4.21	%	$	3,972,502	$	129,200		4.34	%
Other loans, net		667,749		20,405		4.07			575,652		15,952		3.69
Total loans, net ⁽¹⁾		4,955,423		155,834		4.19			4,548,154		145,152		4.26
Taxable securities:
Mortgage-backed securities		527,890		10,122		2.56			603,994		11,231		2.48
Other securities		215,453		6,220		3.85			241,821		6,038		3.33
Total taxable securities		743,343		16,342		2.93			845,815		17,269		2.72
Tax-exempt securities: ⁽²⁾
Other securities		145,058		2,309		2.12			140,889		2,366		2.24
Total tax-exempt securities		145,058		2,309		2.12			140,889		2,366		2.24
Interest-earning deposits and federal funds sold		66,042		403		0.81			61,484		191		0.41
Total interest-earning assets		5,909,866		174,888		3.95			5,596,342		164,978		3.93
Other assets		299,139							287,111
Total assets	$	6,209,005						$	5,883,453

Liabilities and Equity
Interest-bearing liabilities:
Deposits:
Savings accounts	$	288,376		1,289		0.60		$	262,382		910		0.46
NOW accounts		1,474,572		7,006		0.63			1,539,050		5,863		0.51
Money market accounts		882,213		5,487		0.83			514,626		2,277		0.59
Certificate of deposit accounts		1,396,583		15,257		1.46			1,416,811		15,455		1.45
Total due to depositors		4,041,744		29,039		0.96			3,732,869		24,505		0.88
Mortgagors' escrow accounts		60,895		106		0.23			55,481		85		0.20
Total deposits		4,102,639		29,145		0.95			3,788,350		24,590		0.87
Borrowed funds		1,170,203		15,696		1.79			1,233,571		15,653		1.69
Total interest-bearing liabilities		5,272,842		44,841		1.13			5,021,921		40,243		1.07
Non interest-bearing deposits		340,221							296,321
Other liabilities		67,967							73,594
Total liabilities		5,681,030							5,391,836
Equity		527,975							491,617
Total liabilities and equity	$	6,209,005						$	5,883,453

Net interest income / net interest rate spread			$	130,047		2.82	%			$	124,735		2.86	%

Net interest-earning assets / net interest margin	$	637,024				2.93	%	$	574,421				2.97	%

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 $1.9 million and $3.4 million for the nine months ended September 30, 2017 and 2016, respectively.

(2)

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

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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)	2017		2016

Mortgage Loans

At beginning of period	$	4,187,818	$	3,832,914

Mortgage loans originated:
Multi-family residential		223,766		195,028
Commercial real estate		158,749		219,183
One-to-four family – mixed-use property		45,334		42,493
One-to-four family – residential		16,623		17,050
Co-operative apartments		232		470
Construction		7,121		6,034
Total mortgage loans originated		451,825		480,258

Mortgage loans purchased:
Multi-family residential		30,962		98,357
Commercial real estate		25,927		25,931
Total mortgage loans purchased		56,889		124,288

Less:
Principal and other reductions		300,897		305,218
Loans transferred to Available for Sale		30,565		-
Sales		18,975		7,259

At end of period	$	4,346,095	$	4,124,983

Non-Mortgage Loans

At beginning of period	$	631,316	$	539,697

Other loans originated:
Small Business Administration		6,787		6,785
Commercial business		174,541		223,938
Other		1,666		1,371
Total other loans originated		182,994		232,094

Other loans purchased:
Commercial business		18,943		13,706
Total other loans purchased		18,943		13,706

Less:
Principal and other reductions		119,519		182,439
Sales		4,842		3,211
Other		1,536
At end of period	$	707,356	$	599,847

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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. See Note 5 of the Notes to the Consolidated Financial Statements “Loans”.

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

(In thousands)	September 30, 2017		June 30, 2017		December 31, 2016
Accrual Status:
Multi-family residential	$	2,531	$	2,546	$	2,572
Commercial real estate		2,031		2,037		2,062
One-to-four family - mixed-use property		1,765		1,778		1,800
One-to-four family - residential		577		581		591
Taxi medallion		10,965		10,486		9,735
Commercial business and other		368		381		420
Total		18,237		17,809		17,180


Non-Accrual Status:
Taxi medallion		4,109		3,384		-
Commercial business and other		150		185		255
Total		4,259		3,569		255

Total performing troubled debt restructured	$	22,496	$	21,378	$	17,435

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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:

(In thousands)	September 30, 2017			June 30, 2017			December 31, 2016
Loans 90 days or more past due and still accruing:
Multi-family residential	$	415		$	-		$	-
Commercial real estate		38			-			-
One-to-four family - mixed-use property		129			-			386
Construction		-			602			-
Taxi medallion		1,147			727			-
Total		1,729			1,329			386

Non-accrual loans:
Multi-family residential		1,309			1,537			1,837
Commercial real estate		1,147			1,948			1,148
One-to-four family - mixed-use property		2,217			2,971			4,025
One-to-four family - residential		7,434			7,616			8,241
Small business administration		50			53			1,886
Taxi medallion		-			-			3,825
Commercial business and other		4			5			68
Total		12,161			14,130			21,030

Total non-performing loans		13,890			15,459			21,416

Other non-performing assets:
Real estate acquired through foreclosure		-			-			533
Total		-			-			533

Total non-performing assets	$	13,890		$	15,459		$	21,949

Non-performing assets to total assets		0.22	%		0.25	%		0.36	%
Allowance for loan losses to non-performing loans		181.92	%		143.33	%		103.80	%

Included in loans over 90 days past due and still accruing were four loans totaling $1.7 million, four loans totaling $1.3 million and two loans totaling $0.4 million at September 30, 2017, June 30, 2017 and December 31, 2016, 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, 2017, June 30, 2017 and December 31, 2016 which was restructured as TDR and not performing in accordance with its restructured terms.

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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

CRITICIZED AND CLASSIFIED ASSETS

Our policy is to review our assets, focusing primarily on the loan portfolio, OREO and the investment portfolios, to ensure that the credit quality is maintained at the highest levels. See Note 5 of the Notes to the Consolidated Financial Statements “Loans” for a description of how loans are determined to be criticized or classified and a table displaying criticized and classified loans at September 30, 2017 and December 31, 2016. The Company had no criticized or classified OREO at September 30, 2017 and had $0.5 million classified OREO at December 31, 2016. The Company did not hold any criticized or classified investment securities at September 30, 2017 and December 31, 2016. Our total Criticized and Classified assets were $72.6 million at September 30, 2017, a decrease $0.1 million from December 31, 2016.

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. All taxi medallion loans are classified impaired. Taxi medallion loans with a loan-to-value greater than 100% are 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, 2017, the current average loan-to-value ratio on our collateral dependent loans reviewed for impairment was 52.9%.

ALLOWANCE FOR LOAN LOSSES

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

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

During the nine months ended September 30, 2107, the portion of the ALL related to the loss history declined. Charge-offs recorded in the past twelve quarters were minimal, as credit conditions remained stable. The percentage of loans originated prior to 2009, compared to the total loan portfolio, decreased as scheduled amortization and repayments occurred. As disclosed in Note 5 of the Notes to the Consolidated Financial Statements “Loans”, the loans originated prior to 2009 have a higher delinquency and loss rate. These reductions in the ALL were more than offset by an additional allocation to our taxi medallion portfolio due to a reduction in the estimated fair value of the collateral underlying our performing taxi medallion portfolio. At September 30, 2017, we have allocated $6.0 million of the allowance to the taxi medallion portfolio which equals 33.0% of the outstanding principal. The impact from the above and the minimal charge-offs recorded during the nine months ended September 30, 2017 resulted in the ALL totaling $25.3 million, an increase of $3.0 million, or 13.7% from December 31, 2016. Based upon management consistently applying the ALL methodology and review of the loan portfolio, management concluded a charge to earnings to increase the ALL was warranted. The ALL at September 30, 2017, represented 0.50% of gross loans outstanding as compared to 0.46% of gross loans outstanding at December 31, 2016. The ALL represented 181.9% of non-performing loans at September 30, 2017 compared to 103.8% at December 31, 2016.

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

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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

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

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)	2017			2016

Balance at beginning of period	$	22,229		$	21,535

Provision for loan losses		3,266			-

Loans charged-off:
Multi-family residential		(452	)		(155	)
Commercial real estate		(4	)		-
One-to-four family – mixed-use property		(36	)		(139	)
One-to-four family – residential		(170	)		(74	)
Small Business Administration		(89	)		(362	)
Taxi medallion		(54	)		-
Commercial business and other		(48	)		(59	)
Total loans charged-off		(853	)		(789	)

Recoveries:
Multi-family residential		297			230
Commercial real estate		93			11
One-to-four family – mixed-use property		68			252
One-to-four family – residential		58			366
Small Business Administration		66			118
Commercial business and other		45			72
Total recoveries		627			1,049

Net (charge-offs) recoveries		(226	)		260

Balance at end of period	$	25,269		$	21,795

Ratio of net charge-offs (recoveries) during the period to average loans outstanding during the period		0.01	%		(0.01	)%
Ratio of allowance for loan losses to gross loans at end of period		0.50	%		0.46	%
Ratio of allowance for loan losses to non-performing assets at end of period		181.92	%		82.64	%
Ratio of allowance for loan losses to non-performing loans at end of period		181.92	%		92.61	%

- 62 -

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, 2017, 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.

- 63 -

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, 2016.

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, 2017:

							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, 2017		-	$	-		-		485,905
August 1 to August 31, 2017		-		-		-		485,905
September 1 to September 30, 2017		-		-		-		485,905
Total		-	$	-		-

During the quarter ended September 30, 2017, the Company did not repurchase any shares of the Company’s common stock. At September 30, 2017, 485,905 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 6, 2017	By: /s/John R. Buran
	John R. Buran
	President and Chief Executive Officer

Dated: November 6, 2017	By: /s/Susan K. Cullen
	Susan K. Cullen
	Senior Executive Vice President, Treasurer and
	Chief Financial Officer

- 66 -

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

EXHIBIT INDEX

Exhibit No.		Description

	3.1 P	Certificate of Incorporation of Flushing Financial Corporation (1)
	3.2	Certificate of Amendment to Certificate of Incorporation of Flushing Financial Corporation (3)
	3.3	Certificate of Amendment to Certificate of Incorporation of Flushing Financial Corporation (5)
	3.4	Certificate of Designations of Series A Junior Participating Preferred Stock of Flushing Financial Corporation (4)
	3.5	Certificate of Increase of Shares Designated as Series A Junior Participating Preferred Stock of Flushing Financial Corporation (2)
	3.6	Amended and Restated By-Laws of Flushing Financial Corporation (6)
	4.1	Flushing Financial Corporation has outstanding certain long-term debt. None of such debt exceeds ten percent of Flushing Financial Corporation's total assets; therefore, copies of constituent instruments defining the rights of the holders of such debt are not included as exhibits. Copies of instruments with respect to such long-term debt will be furnished to the Securities and Exchange Commission upon request.
	31.1	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Chief Executive Officer (filed herewith)
	31.2	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Chief Financial Officer (filed herewith)
	32.1	Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002 by the Chief Executive Officer (furnished herewith)
	32.2	Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002 by the Chief Financial Officer (furnished herewith)
	101.INS	XBRL Instance Document (filed herewith)
	101.SCH	XBRL Taxonomy Extension Schema Document (filed herewith)
	101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document (filed herewith)
	101.DEF	XBRL Taxonomy Extension Definition Linkbase Document (filed herewith)
	101.LAB	XBRL Taxonomy Extension Label Linkbase Document (filed herewith)
	101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document (filed herewith)
(1)	Incorporated by reference to Exhibits filed with the Registration Statement on Form S-1 filed September 1, 1995, Registration No. 33-96488. (P: Indicates a filing submitted in paper)
(2)	Incorporated by reference to Exhibit filed with Form 8-K filed September 27, 2006.
(3)	Incorporated by reference to Exhibits filed with Form S-8 filed May 31, 2002.
(4)	Incorporated by reference to Exhibits filed with Form 10-Q for the quarter ended September 30, 2002.
(5)	Incorporated by reference to Exhibit filed with Form 10-K for the year ended December 31, 2011.
(6)	Incorporated by reference to Exhibit filed with Form 10-Q for the quarter ended June 30, 2014.

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