Edgar Filing: FLUSHING FINANCIAL CORP

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2016

Commission file number 001-33013

FLUSHING FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

Delaware

(State or other jurisdiction of incorporation or organization)

11-3209278

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

220 RXR Plaza, Uniondale, New York 11556

(Address of principal executive offices)

(718) 961-5400

(Registrant's telephone number, including area code)

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

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

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

Large accelerated filer __

Non-accelerated filer _

Accelerated filer X

Smaller reporting company __

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

The number of shares of the registrant’s Common Stock outstanding as of July 29, 2016 was 28,631,468.

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	66
ITEM 4. Controls and Procedures	66
PART II — OTHER INFORMATION
ITEM 1. Legal Proceedings	67
ITEM 1A. Risk Factors	67
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds	67
ITEM 3. Defaults Upon Senior Securities	67
ITEM 4. Mine Safety Disclosures	67
ITEM 5. Other Information	67
ITEM 6. Exhibits	68
SIGNATURES	69

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Consolidated Statements of Financial Condition

(Unaudited)

Item 1. Financial Statements

(Dollars in thousands, except per share data)	June 30, 2016			December 31, 2015
ASSETS
Cash and due from banks	$	50,165		$	42,363
Securities held-to-maturity:
Other securities (none pledged) (fair value of $28,410 and $6,180 at June 30, 2016 and December 31, 2015, respectively)		28,410			6,180
Securities available for sale:
Mortgage-backed securities (including assets pledged of $399,599 and $496,121 at June 30, 2016 and December 31, 2015, respectively; $2,292 and $2,527 at fair value pursuant to the fair value option at June 30, 2016 and December 31, 2015, respectively)		580,500			668,740
Other securities (including assets pledged of $65,660 and none at June 30, 2016 and December 31, 2015, respectively; $28,514 and $28,205 at fair value pursuant to the fair value option at June 30, 2016 and December 31, 2015, respectively)		368,611			324,657
Loans:
Multi-family residential		2,159,138			2,055,228
Commercial real estate		1,146,400			1,001,236
One-to-four family ― mixed-use property		566,702			573,043
One-to-four family ― residential		190,251			187,838
Co-operative apartments		7,571			8,285
Construction		9,899			7,284
Small Business Administration		14,718			12,194
Taxi medallion		20,641			20,881
Commercial business and other		564,084			506,622
Net unamortized premiums and unearned loan fees		16,875			15,368
Allowance for loan losses		(22,198	)		(21,535	)
Net loans		4,674,081			4,366,444
Interest and dividends receivable		20,390			18,937
Bank premises and equipment, net		24,470			25,622
Federal Home Loan Bank of New York stock		67,195			56,066
Bank owned life insurance		115,100			115,536
Goodwill		16,127			16,127
Other assets		41,678			63,962
Total assets	$	5,986,727		$	5,704,634

LIABILITIES
Due to depositors:
Non-interest bearing	$	317,112		$	269,469
Interest-bearing:
Certificate of deposit accounts		1,411,550			1,403,302
Savings accounts		260,528			261,748
Money market accounts		452,589			472,489
NOW accounts		1,453,540			1,448,695
Total interest-bearing deposits		3,578,207			3,586,234
Mortgagors' escrow deposits		45,905			36,844
Borrowed funds ($27,485 and $29,018 at fair value pursuant to the fair value option at June 30, 2016 and December 31, 2015, respectively)		1,384,751			1,155,676
Securities sold under agreements to repurchase		60,000			116,000
Other liabilities		91,869			67,344
Total liabilities		5,477,844			5,231,567

Commitments and contingencies

STOCKHOLDERS' EQUITY
Preferred stock ($0.01 par value; 5,000,000 shares authorized; None issued)		-			-
Common stock ($0.01 par value; 100,000,000 shares authorized; 31,530,595 shares issued at June 30, 2016 and December 31, 2015; 28,631,243 shares and 28,830,558 shares outstanding at June 30, 2016 and December 31, 2015, respectively)		315			315
Additional paid-in capital		212,613			210,652
Treasury stock, at average cost (2,899,352 shares and 2,700,037 shares at
June 30, 2016 and December 31, 2015, respectively)		(53,351	)		(48,868	)
Retained earnings		346,218			316,530
Accumulated other comprehensive income (loss), net of taxes		3,088			(5,562	)
Total stockholders' equity		508,883			473,067

Total liabilities and stockholders' equity	$	5,986,727		$	5,704,634

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

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Consolidated Statements of Income

(Unaudited)

	For the three months ended June 30,						For the six months ended June 30,
(Dollars in thousands, except per share data)	2016			2015			2016			2015

Interest and dividend income
Interest and fees on loans	$	48,413		$	44,084		$	95,971		$	87,618
Interest and dividends on securities:
Interest		6,510			5,988			13,102			11,858
Dividends		120			118			239			236
Other interest income		48			32			142			53
Total interest and dividend income		55,091			50,222			109,454			99,765

Interest expense
Deposits		8,097			7,437			16,070			14,895
Other interest expense		5,105			4,645			10,362			9,176
Total interest expense		13,202			12,082			26,432			24,071

Net interest income		41,889			38,140			83,022			75,694
Benefit for loan losses		-			(516	)		-			(1,250	)
Net interest income after benefit for loan losses		41,889			38,656			83,022			76,944

Non-interest income
Banking services fee income		973			898			1,949			1,782
Net gain on sale of securities		2,363			64			2,363			64
Net gain on sale of loans		3			47			344			49
Net gain on sale of buildings		33,814			6,537			33,814			6,537
Net gain (loss) from fair value adjustments		(1,115	)		768			(2,102	)		173
Federal Home Loan Bank of New York stock dividends		582			457			1,205			975
Gain from life insurance proceeds		-			-			411			-
Bank owned life insurance		694			715			1,389			1,432
Other income		403			461			884			865
Total non-interest income		37,717			9,947			40,257			11,877

Non-interest expense
Salaries and employee benefits		13,968			13,157			30,229			27,823
Occupancy and equipment		2,352			2,635			4,722			5,348
Professional services		2,027			1,350			4,177			3,129
FDIC deposit insurance		940			811			1,844			1,560
Data processing		1,199			1,172			2,290			2,247
Depreciation and amortization		1,062			867			2,094			1,535
Other real estate owned/foreclosure expense		405			87			558			607
Prepayment penalty on borrowings		2,082			-			2,082			-
Other operating expenses		4,419			4,169			8,955			7,938
Total non-interest expense		28,454			24,248			56,951			50,187

Income before income taxes		51,152			24,355			66,328			38,634

Provision for income taxes
Federal		15,203			7,155			19,950			11,407
State and local		5,514			2,366			6,382			3,660
Total taxes		20,717			9,521			26,332			15,067

Net income	$	30,435		$	14,834		$	39,996		$	23,567


Basic earnings per common share	$	1.05		$	0.51		$	1.38		$	0.80
Diluted earnings per common share	$	1.05		$	0.51		$	1.38		$	0.80
Dividends per common share	$	0.17		$	0.16		$	0.34		$	0.32

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 June 30,						For the six months ended June 30,
(In thousands)	2016			2015			2016			2015

Net income	$	30,435		$	14,834		$	39,996		$	23,567

Other comprehensive income, net of tax:
Amortization of actuarial losses, net of taxes of ($82) and ($135) for the three months ended June 30, 2016 and 2015, respectively and of ($165) and ($268) for the six months ended June 30, 2016 and 2015, respectively.		110			171			219			345
Amortization of prior service credits, net of taxes of $5 for each of the three months ended June 30, 2016 and 2015, respectively and of $10 for each of the six months ended June 30, 2016 and 2015, respectively.		(7	)		(7	)		(13	)		(13	)
Reclassification adjustment for net gains included in income, net of taxes of $1,013 and $28 for the three and six months ended June 30, 2016 and 2015, respectively.		(1,350	)		(36	)		(1,350	)		(36	)
Net unrealized gains on securities, net of taxes of ($2,252) and $4,126 for the three months ended June 30, 2016 and 2015, respectively and of ($7,280) and $833 for the six months ended June 30, 2016 and 2015, respectively.		3,024			(5,477	)		9,794			(1,145	)


Total other comprehensive income (loss), net of tax		1,777			(5,349	)		8,650			(849	)

Comprehensive income	$	32,212		$	9,485		$	48,646		$	22,718

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

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)

	For the six months ended June 30,
(Dollars in thousands)	2016			2015
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	39,996		$	23,567
Adjustments to reconcile net income to net cash provided by operating activities:
Benefit for loan losses		-			(1,250	)
Depreciation and amortization of bank premises and equipment		2,094			1,535
Amortization of premium, net of accretion of discount		4,099			4,447
Net (gain) loss from fair value adjustments		2,102			(173	)
Net gain from sale of loans		(344	)		(49	)
Net gain from sale of securities		(2,363	)		(64	)
Net gain from sale of buildings		(33,814	)		(6,537	)
Income from bank owned life insurance		(1,389	)		(1,432	)
Gain from life insurance proceeds		(411	)		-
Stock-based compensation expense		3,564			3,643
Deferred compensation		(2,629	)		(2,004	)
Excess tax benefit from stock-based payment arrangements		(421	)		(380	)
Deferred income tax (benefit) provision		83			(3,855	)
Increase in other liabilities		16,211			706
Decrease in other assets		4,754			5,374
Net cash provided by operating activities		31,532			23,528

CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of bank premises and equipment		(1,460	)		(7,841	)
Net purchases of Federal Home Loan Bank of New York shares		(11,129	)		(3,002	)
Purchases of securities held-to-maturity		(27,705	)		(3,100	)
Proceeds from maturities of securities held-to-maturity		5,475			390
Purchases of securities available for sale		(61,615	)		(138,095	)
Proceeds from sales and calls of securities		66,996			25,039
Proceeds from maturities and prepayments of securities		53,856			61,868
Proceeds from bank owned life insurance		2,236			-
Proceeds from sale of buildings		34,332			20,209
Net originations of loans		(160,139	)		(82,544	)
Purchases of loans		(137,994	)		(126,070	)
Proceeds from sale of real estate owned		853			2,070
Proceeds from sale of loans		8,360			5,028
Net cash used in investing activities		(227,934	)		(246,048	)

CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in non-interest bearing deposits		47,643			1,741
Net increase (decrease) in interest-bearing deposits		(8,448	)		179,213
Net increase in mortgagors' escrow deposits		9,061			8,251
Net proceeds from short-term borrowed funds		215,000			35,000
Proceeds from long-term borrowings		150,000			72,996
Repayment of long-term borrowings		(190,637	)		(50,000	)
Purchases of treasury stock		(9,085	)		(13,490	)
Excess tax benefit from stock-based payment arrangements		421			380
Proceeds from issuance of common stock upon exercise of stock options		127			142
Cash dividends paid		(9,878	)		(9,379	)
Net cash provided by financing activities		204,204			224,854

Net increase in cash and cash equivalents		7,802			2,334
Cash and cash equivalents, beginning of period		42,363			34,265
Cash and cash equivalents, end of period	$	50,165		$	36,599

SUPPLEMENTAL CASHFLOW DISCLOSURE
Interest paid	$	28,250		$	23,585
Income taxes paid		9,270			16,221
Taxes paid if excess tax benefits were not tax deductible		9,691			16,601
Non-cash activities:
Securities purchased not yet settled		-			22,037
Securities transferred from available for sale to held-to-maturity		-			4,510
Loans transferred to Other Real Estate Owned		486			772
Loans provided for the sale of Other Real Estate Owned		-			175
Loans held for investment transferred to loans held for sale		-			300

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

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Consolidated Statements of Changes in Stockholders’ Equity

For the six months ended June 30, 2016 and 2015

(Unaudited)

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

Balance at December 31, 2015	$	473,067		$	315	$	210,652		$	316,530		$	(48,868	)	$	(5,562	)
Net Income		39,996			-		-			39,996			-			-
Award of common shares released from Employee Benefit Trust (134,005 shares)		1,912			-		1,912			-			-			-
Vesting of restricted stock unit awards (245,111 shares)		-			-		(4,047	)		(396	)		4,443			-
Exercise of stock options (27,945 shares)		127			-		2			(34	)		159			-
Stock-based compensation expense		3,673			-		3,673			-			-			-
Stock-based income tax benefit		421			-		421			-			-			-
Purchase of treasury shares (378,695 shares)		(7,492	)		-		-			-			(7,492	)		-
Repurchase of shares to satisfy tax obligation (77,212 shares)		(1,593	)		-		-			-			(1,593	)		-
Dividends on common stock ($0.34 per share)		(9,878	)		-		-			(9,878	)		-			-
Other comprehensive income		8,650			-		-			-			-			8,650
Balance at June 30, 2016	$	508,883		$	315	$	212,613		$	346,218		$	(53,351	)	$	3,088

Balance at December 31, 2014	$	456,247		$	315	$	206,437		$	289,623		$	(37,221	)	$	(2,907	)
Net Income		23,567			-		-			23,567			-			-
Award of common shares released from Employee Benefit Trust (139,607 shares)		1,969			-		1,969			-			-			-
Vesting of restricted stock unit awards (204,110 shares)		-			-		(3,074	)		(503	)		3,577			-
Exercise of stock options (9,725 shares)		142			-		(4	)		(8	)		154			-
Stock-based compensation expense		3,549			-		3,549			-			-			-
Stock-based income tax benefit		380			-		380			-			-			-
Purchase of treasury shares (635,199 shares)		(12,380	)		-		-			-			(12,380	)		-
Repurchase of shares to satisfy tax obligation (58,461 shares)		(1,110	)		-		-			-			(1,110	)		-
Dividends on common stock ($0.32 per share)		(9,379	)		-		-			(9,379	)		-			-
Other comprehensive income		(849	)		-		-			-			-			(849	)
Balance at June 30, 2015	$	462,136		$	315	$	209,257		$	303,300		$	(46,980	)	$	(3,756	)

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

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

Basis of Presentation

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

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

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

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

The accompanying unaudited consolidated financial statements have been prepared in conformity with the instructions to Quarterly Report on Form 10-Q and Article 10, Rule 10-01 of Regulation S-X for interim financial statements. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The unaudited consolidated interim financial information should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.

Use of Estimates

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

Earnings Per Share

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

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

	For the three months ended June 30,						For the six months ended June 30,
	2016			2015			2016			2015
	(In thousands, except per share data)
Net income, as reported	$	30,435		$	14,834		$	39,996		$	23,567
Divided by:
Weighted average common shares outstanding		29,022			29,246			29,059			29,321
Weighted average common stock equivalents		12			22			14			22
Total weighted average common shares outstanding and common stock equivalents		29,034			29,268			29,073			29,343
Basic earnings per common share	$	1.05		$	0.51		$	1.38		$	0.80
Diluted earnings per common share ⁽¹⁾	$	1.05		$	0.51		$	1.38		$	0.80
Dividend payout ratio		16.2	%		31.4	%		24.6	%		40.0	%

(1)

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

Debt and Equity Securities

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

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

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

	Amortized Cost		Fair Value		Gross Unrealized Gains		Gross Unrealized Losses
	(In thousands)
Securities held-to-maturity:
Municipals	$	28,410	$	28,410	$	-	$	-

Total	$	28,410	$	28,410	$	-	$	-

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

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

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

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The following table summarizes the Company’s portfolio of securities available for sale at June 30, 2016:

	Amortized Cost		Fair Value		Gross Unrealized Gains		Gross Unrealized Losses
	(In thousands)
Corporate	$	110,000	$	106,263	$	981	$	4,718
Municipals		126,347		131,716		5,369		-
Mutual funds		21,645		21,645		-		-
Collateralized loan obligations		101,650		101,820		340		170
Other		7,169		7,167		-		2
Total other securities		366,811		368,611		6,690		4,890
REMIC and CMO		412,117		420,227		8,562		452
GNMA		7,952		8,120		168		-
FNMA		132,981		136,393		3,449		37
FHLMC		15,453		15,760		307		-
Total mortgage-backed securities		568,503		580,500		12,486		489
Total securities available for sale	$	935,314	$	949,111	$	19,176	$	5,379

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 amortized cost and market value of $5.3 million at June 30, 2016.

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

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

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

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The following table details the amortized cost and fair value of the Company’s securities classified as held-to-maturity at June 30, 2016, by contractual maturity. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Amortized Cost		Fair Value
	(In thousands)

Due in one year or less	$	6,370	$	6,370
Due after one year through five years		40		40
Due after ten years		22,000		22,000

Total securities held-to-maturity	$	28,410	$	28,410

The amortized cost and fair value of the Company’s securities, classified as available for sale at June 30, 2016, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Amortized Cost		Fair Value
	(In thousands)

Due in one year or less	$	-	$	-
Due after one year through five years		1,810		1,843
Due after five years through ten years		91,683		91,795
Due after ten years		251,673		253,328

Total other securities		345,166		346,966
Mutual funds		21,645		21,645
Mortgage-backed securities		568,503		580,500

Total securities available for sale	$	935,314	$	949,111

The following table shows the Company’s available for sale securities with gross unrealized losses and their fair value, aggregated by category and length of time that individual securities have been in a continuous unrealized loss position, at June 30, 2016:

			Total				Less than 12 months				12 months or more
	Count		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
			(Dollars in thousands)
Corporate		12	$	85,282	$	4,718	$	52,559	$	2,441	$	32,723	$	2,277
Collateralized loan obligations		6		45,861		170		45,861		170		-		-
Other		1		298		2		-		-		298		2
Total other securities		19		131,441		4,890		98,420		2,611		33,021		2,279

REMIC and CMO		8		45,906		452		11,004		61		34,902		391
FNMA		1		7,084		37		-		-		7,084		37
Total mortgage-backed securities		9		52,990		489		11,004		61		41,986		428
Total securities available for sale		28	$	184,431	$	5,379	$	109,424	$	2,672	$	75,007	$	2,707

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

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

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

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

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

The Company sold available for sale securities with book values at the time of sale totaling $64.6 million and $25.0 million during the three and six months ended June 30, 2016 and 2015, respectively.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

	For the three months ended June 30,						For the six months ended June 30,
	2016			2015			2016			2015
	(In thousands)
Gross gains from the sale of securities	$	2,370		$	233		$	2,370		$	233
Gross losses from the sale of securities		(7	)		(169	)		(7	)		(169	)

Net gains from the sale of securities	$	2,363		$	64		$	2,363		$	64

Loans

Loans are reported at their outstanding principal balance net of any unearned income, charge-offs, deferred loan fees and costs on originated loans and unamortized premiums or discounts on purchased loans. Interest on loans is recognized on the accrual basis. The accrual of income on loans is generally discontinued when certain factors, such as contractual delinquency of 90 days or more, indicate reasonable doubt as to the timely collectability of such income. Uncollected interest previously recognized on non-accrual loans is reversed from interest income at the time the loan is placed on non-accrual status. A non-accrual loan can be returned to accrual status when contractual delinquency returns to less than 90 days delinquent. Subsequent cash payments received on non-accrual loans that do not bring the loan to less than 90 days delinquent are recorded on a cash basis. Subsequent cash payments can also be applied first as a reduction of principal until all principal is recovered and then subsequently to interest, if in management’s opinion, it is evident that recovery of all principal due is likely to occur. Loan fees and certain loan origination costs are deferred. Net loan origination costs and premiums or discounts on loans purchased are amortized into interest income over the contractual life of the loans using the level-yield method. Prepayment penalties received on loans which pay in full prior to their scheduled maturity are included in interest income in the period they are collected.

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

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

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

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

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

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

As of June 30, 2016, we utilized recent third party appraisals of the collateral to measure impairment for $33.0 million, or 71.3%, of collateral dependent impaired loans, and used internal evaluations of the property’s value for $13.3 million, or 28.7%, of collateral dependent impaired loans.

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

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

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 June 30, 2016, there were no commitments to lend additional funds to borrowers whose loans were modified to a TDR. The modification of loans to a TDR did not have a significant effect on our operating results, nor did it require a significant allocation of the allowance for loan losses.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

	For the three and six months ended June 30, 2016
(Dollars in thousands)	Number		Balance		Modification description

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

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

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

	For the six months ended June 30, 2015
(Dollars in thousands)	Number		Balance		Modification description


Small business administration		1		41	Received a below market interest rate and the loan amortization was extended.

Total		1	$	41

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

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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 performing according to their restructured terms at the periods indicated:

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

Multi-family residential		9	$	2,599		9	$	2,626
Commercial real estate		2		2,086		3		2,371
One-to-four family - mixed-use property		5		1,819		6		2,052
One-to-four family - residential		3		600		1		343
Small business administration		-		-		1		34
Commercial business and other		3		1,197		4		2,083

Total performing troubled debt restructured		22	$	8,301		24	$	9,509

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

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:

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

Multi-family residential		1	$	397		1	$	391

Total troubled debt restructurings that subsequently defaulted		1	$	397		1	$	391

- 14 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

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

Loans ninety days or more past due and still accruing:
Multi-family residential	$	574	$	233
Commercial real estate		320		1,183
One-to-four family - mixed-use property		635		611
One-to-four family - residential		13		13
Construction		-		1,000
Commercial Business and other		-		220
Total		1,542		3,260

Non-accrual mortgage loans:
Multi-family residential		3,162		3,561
Commercial real estate		2,299		2,398
One-to-four family - mixed-use property		6,005		5,952
One-to-four family - residential		8,406		10,120
Total		19,872		22,031

Non-accrual non-mortgage loans:
Small business administration		185		218
Taxi medallion		196		-
Commercial business and other		128		568
Total		509		786

Total non-accrual loans		20,381		22,817


Total non-accrual loans and loans ninety days or more past due and still accruing	$	21,923	$	26,077

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 June 30,				For the six months ended June 30,
	2016		2015		2016		2015
	(In thousands)
Interest income that would have been recognized had the loans performed in accordance with their original terms	$	476	$	662	$	948	$	1,313
Less: Interest income included in the results of operations		101		143		213		301
Total foregone interest	$	375	$	519	$	735	$	1,012

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

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

Multi-family residential	$	4,706	$	363	$	3,737	$	8,806	$	2,150,332	$	2,159,138
Commercial real estate		2,405		987		2,619		6,011		1,140,389		1,146,400
One-to-four family - mixed-use property		4,417		1,025		6,640		12,082		554,620		566,702
One-to-four family - residential		1,518		527		8,221		10,266		179,985		190,251
Co-operative apartments		-		-		-		-		7,571		7,571
Construction loans		-		576		-		576		9,323		9,899
Small Business Administration		2,435		119		80		2,634		12,084		14,718
Taxi medallion		3,767		-		196		3,963		16,678		20,641
Commercial business and other		3,012		12		-		3,024		561,060		564,084
Total	$	22,260	$	3,609	$	21,493	$	47,362	$	4,632,042	$	4,679,404

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

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

- 16 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

June 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	$	6,298		$	4,201	$	3,507		$	1,042		$	55	$	269		$	335	$	4,591		$	1,695		$	21,993
Charge-off's		(23	)		-		(54	)		(8	)		-		(1	)		-		(15	)		-			(101	)
Recoveries		206			-		18			1			-		43			-		38			-			306
Provision (Benefit)		(304	)		244		(145	)		9			20		263			707		55			(849	)		-
Ending balance	$	6,177		$	4,445	$	3,326		$	1,044		$	75	$	574		$	1,042	$	4,669		$	846		$	22,198

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

Allowance for credit losses:
Beginning balance	$	8,629		$	3,902		$	5,429		$	1,465		$	23	$	266	$	11	$	4,366		$	24,091
Charge-off's		(303	)		(14	)		(394	)		(91	)		-		-		-		(1	)		(803	)
Recoveries		191			(4	)		44			74			-		7		-		-			312
Provision (Benefit)		(217	)		(158	)		101			(15	)		6		18		-		(251	)		(516	)
Ending balance	$	8,300		$	3,726		$	5,180		$	1,433		$	29	$	291	$	11	$	4,114		$	23,084

- 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 six month periods indicated:

June 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		(65	)		-		(68	)		(74	)		-		(1	)		-		(40	)		-		(248	)
Recoveries		219			-		205			366			-		74			-		47			-		911
Provision (Benefit)		(695	)		206		(1,038	)		(475	)		25		239			699		193			846		-
Ending balance	$	6,177		$	4,445	$	3,326		$	1,044		$	75	$	574		$	1,042	$	4,669		$	846	$	22,198

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

Allowance for credit losses:
Beginning balance	$	8,827		$	4,202		$	5,840		$	1,690		$	42		$	279		$	11	$	4,205		$	25,096
Charge-off's		(400	)		(32	)		(472	)		(244	)		-			-			-		(52	)		(1,200	)
Recoveries		214			68			47			74			-			27			-		8			438
Provision (Benefit)		(341	)		(512	)		(235	)		(87	)		(13	)		(15	)		-		(47	)		(1,250	)
Ending balance	$	8,300		$	3,726		$	5,180		$	1,433		$	29		$	291		$	11	$	4,114		$	23,084

- 18 -

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:

June 30, 2016
(In thousands)	Multi-family residential		Commercial real estate		One-to-four family - mixed-use property		One-to-four family- residential		Co-operative apartments		Construction loans		Small Business Administration		Taxi Medallion		Commercial business and other		Unallocated		Total
Financing Receivables:
Ending Balance	$	2,159,138	$	1,146,400	$	566,702	$	190,251	$	7,571	$	9,899	$	14,718	$	20,641	$	564,084	$	-	$	4,679,404
Ending balance: individually evaluated for impairment	$	8,015	$	7,038	$	11,605	$	10,769	$	-	$	570	$	938	$	6,364	$	2,709	$	-	$	48,008
Ending balance: collectively evaluated for impairment	$	2,151,123	$	1,139,362	$	555,097	$	179,482	$	7,571	$	9,329	$	13,780	$	14,277	$	561,375	$	-	$	4,631,396

Allowance for credit losses:
Ending balance: individually evaluated for impairment	$	242	$	201	$	480	$	50	$	-	$	-	$	412	$	1,035	$	1	$	-	$	2,421
Ending balance: collectively evaluated for impairment	$	5,935	$	4,244	$	2,846	$	994	$	-	$	75	$	162	$	7	$	4,668	$	846	$	19,777

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

Allowance for credit losses:
Ending balance: individually evaluated for impairment	$	252	$	180	$	502	$	51	$	-	$	-	$	-	$	333	$	112	$	-	$	1,430
Ending balance: collectively evaluated for impairment	$	6,466	$	4,059	$	3,725	$	1,176	$	-	$	50	$	262	$	10	$	4,357	$	-	$	20,105

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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, unpaid principal balance and allocated allowance for loan losses for impaired loans at the periods indicated:

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

	(In thousands)
With no related allowance recorded:
Mortgage loans:
Multi-family residential	$	5,732	$	6,209	$	-	$	5,742	$	6,410	$	-
Commercial real estate		4,952		4,980		-		3,812		3,869		-
One-to-four family mixed-use property		9,102		10,082		-		10,082		11,335		-
One-to-four family residential		10,333		11,934		-		12,255		14,345		-
Co-operative apartments		-		-		-		-		-		-
Construction		570		570		-		1,000		1,000		-
Non-mortgage loans:
Small Business Administration		262		262		-		276		276		-
Taxi Medallion		-		-		-		-		-		-
Commercial Business and other		2,252		2,622		-		2,682		5,347		-

Total loans with no related allowance recorded		33,203		36,659		-		35,849		42,582		-

With an allowance recorded:
Mortgage loans:
Multi-family residential		2,283		2,283		242		2,305		2,305		252
Commercial real estate		2,086		2,086		201		2,371		2,371		180
One-to-four family mixed-use property		2,503		2,503		480		2,746		2,746		502
One-to-four family residential		436		436		50		343		343		51
Co-operative apartments		-		-		-		-		-		-
Construction		-		-		-		-		-		-
Non-mortgage loans:
Small Business Administration		676		676		412		34		34		-
Taxi Medallion		6,364		6,364		1,035		2,118		2,118		333
Commercial Business and other		457		457		1		2,034		2,034		112

Total loans with an allowance recorded		14,805		14,805		2,421		11,951		11,951		1,430

Total Impaired Loans:
Total mortgage loans	$	37,997	$	41,083	$	973	$	40,656	$	44,724	$	985

Total non-mortgage loans	$	10,011	$	10,381	$	1,448	$	7,144	$	9,809	$	445

- 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:

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

	(In thousands)
With no related allowance recorded:
Mortgage loans:
Multi-family residential	$	5,920	$	33	$	10,281	$	36
Commercial real estate		5,077		45		5,598		36
One-to-four family mixed-use property		8,928		41		10,816		51
One-to-four family residential		10,649		25		13,458		18
Co-operative apartments		-		-		307		5
Construction		570		7		-		-
Non-mortgage loans:
Small Business Administration		257		3		314		3
Taxi Medallion		-		-		-		-
Commercial Business and other		2,313		46		4,607		49

Total loans with no related allowance recorded		33,714		200		45,381		198

With an allowance recorded:
Mortgage loans:
Multi-family residential		2,289		29		2,372		30
Commercial real estate		2,222		24		541		7
One-to-four family mixed-use property		2,617		34		3,069		42
One-to-four family residential		389		4		350		3
Co-operative apartments		-		-		-		-
Construction		-		-		-		-
Non-mortgage loans:
Small Business Administration		413		10		40		1
Taxi Medallion		4,237		44		-		-
Commercial Business and other		1,225		7		2,584		35

Total loans with an allowance recorded		13,392		152		8,956		118

Total Impaired Loans:
Total mortgage loans	$	38,661	$	242	$	46,792	$	228

Total non-mortgage loans	$	8,445	$	110	$	7,545	$	88

- 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 six months ended:

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

	(In thousands)
With no related allowance recorded:
Mortgage loans:
Multi-family residential	$	5,861	$	67	$	10,347	$	77
Commercial real estate		4,655		90		6,099		71
One-to-four family mixed-use property		9,313		88		11,219		103
One-to-four family residential		11,184		52		13,244		42
Co-operative apartments		-		-		204		10
Construction		713		14		-		-
Non-mortgage loans:
Small Business Administration		263		6		209		6
Taxi Medallion		-		-		-		-
Commercial Business and other		2,436		93		3,997		100

Total loans with no related allowance recorded		34,425		410		45,319		409

With an allowance recorded:
Mortgage loans:
Multi-family residential		2,294		58		2,508		61
Commercial real estate		2,272		49		1,151		15
One-to-four family mixed-use property		2,660		68		3,077		84
One-to-four family residential		373		7		351		7
Co-operative apartments		-		-		-		-
Construction		-		-		-		-
Non-mortgage loans:
Small Business Administration		287		19		27		1
Taxi Medallion		3,531		88		-		-
Commercial Business and other		1,494		14		2,627		69

Total loans with an allowance recorded		12,911		303		9,741		237

Total Impaired Loans:
Total mortgage loans	$	39,325	$	493	$	48,200	$	470

Total non-mortgage loans	$	8,011	$	220	$	6,860	$	176

- 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:

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

Multi-family residential	$	7,678	$	5,416	$	-	$	-	$	13,094
Commercial real estate		1,552		4,952		-		-		6,504
One-to-four family - mixed-use property		3,797		9,785		-		-		13,582
One-to-four family - residential		1,346		10,431		-		-		11,777
Co-operative apartments		-		-		-		-		-
Construction loans		576		570		-		-		1,146
Small Business Administration		554		870		-		-		1,424
Taxi Medallion		-		6,364		-		-		6,364
Commercial business and other		730		2,710		-		-		3,440
Total loans	$	16,233	$	41,098	$	-	$	-	$	57,331

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

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

Commitments to extend credit (principally real estate mortgage loans) and lines of credit (principally home equity lines of credit and business lines of credit) amounted to $58.9 million and $217.2 million, respectively, at June 30, 2016.

- 23 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

Loans held for sale

Loans held for sale are carried at the lower of cost or estimated fair value. At June 30, 2016 and December 31, 2015, the Bank did not have any loans held for sale.

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

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

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

Multi-family residential		3	$	1,174	$	(8	)	$	-
One-to-four family - mixed-use property		3		1,271		-			3

Total		6	$	2,445	$	(8	)	$	3

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

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

Multi-family residential		2	$	1,045	$	137	$	-
Commercial real estate		1		1,311		-		-
One-to-four family - mixed-use property		4		1,150		-		47

Total		7	$	3,506	$	137	$	47

- 24 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

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

Multi-family residential		6	$	2,049	$	(8	)	$	2
Commercial real estate		2		192		-			-
One-to-four family - mixed-use property		7		2,585		-			23

Total⁽¹⁾		15	$	4,826	$	(8	)	$	25

(1)

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

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

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

Multi-family residential		4	$	1,881	$	137	$	(2	)
Commercial real estate		1		1,311		-		-
One-to-four family - mixed-use property		7		1,836		-		51

Total		12	$	5,028	$	137	$	49

Other Real Estate Owned

The following are changes in OREO during the periods indicated:

	For the three months ended June 30,						For the six months ended June 30,
	2016			2015			2016			2015
	(In thousands)

Balance at beginning of period	$	4,602		$	5,252		$	4,932		$	6,326
Acquisitions		-			289			486			772
Write-down of carrying value		(934	)		(896	)		(934	)		(896	)
Sales		-			(390	)		(816	)		(1,947	)

Balance at end of period ⁽¹⁾	$	3,668		$	4,255		$	3,668		$	4,255

(1)

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

- 25 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

	For the three months ended June 30,						For the six months ended June 30,
	2016			2015			2016			2015
	(In thousands)

Gross gains	$	-		$	86		$	37		$	302
Gross losses		-			-			-			(6	)
Write-down of carrying value		(934	)		(896	)		(934	)		(896	)

Total net loss	$	(934	)	$	(810	)	$	(897	)	$	(600	)

We may obtain physical possession of residential real estate collateralizing a consumer mortgage loan via foreclosure or an in-substance repossession. During the three and six months ended June 30, 2016, we did not foreclose on any consumer mortgages through in-substance repossession. At June 30, 2016, we held two foreclosed residential real estate properties totaling $0.6 million and at December 31, 2015, we held one foreclosed residential real estate property for $0.l million. Included within net loans as of June 30, 2016 and December 31, 2015 was a recorded investment of $13.1 million and $15.2 million, respectively, of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings were in process according to local requirements of the applicable jurisdiction.

Repurchase Agreements

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

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

	At June 30, 2016
	Remaining Contractual Maturity of Agreements
	Less than 1 year		1 year to 3 years		Over 3 years		Total
	(In thousands)
Repurchase agreements:
Mortgage-backed securities	$	20,000	$	-	$	40,000	$	60,000

Total repurchase agreements	$	20,000	$	-	$	40,000	$	60,000

- 26 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

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

The fair value of the collateral pledged for the repurchase agreements above was $67.9 million and $131.4 million at June 30, 2016 and December 31, 2015, respectively.

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

Stock-Based Compensation

For the three months ended June 30, 2016 and 2015, the Company’s net income, as reported, includes $0.6 million and $0.9 million, respectively, of stock-based compensation costs and $0.2 and $0.3 million, respectively, of income tax benefits related to the stock-based compensation plans in each of the periods. For the six months ended June 30, 2016 and 2015, the Company’s net income, as reported, includes $3.6 million of stock-based compensation costs and $1.4 million of income tax benefits related to the stock-based compensation plans. During the three months ended June 30, 2015, the Company granted 3,600 restricted stock units. The Company did not issue any restricted stock units during the three months ended June 30, 2016. During the six months ended June 30, 2016 and 2015, the Company granted 337,175 and 318,120 restricted stock units, respectively. The Company has not granted any stock options since 2009.

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

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

	Shares			Weighted-Average Grant-Date Fair Value

Non-vested at December 31, 2015		415,909		$	18.10
Granted		337,175			19.85
Vested		(235,335	)		18.71
Forfeited		(14,660	)		18.49
Non-vested at June 30, 2016		503,089		$	18.98

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

As of June 30, 2016, there was $8.2 million of total unrecognized compensation cost related to non-vested full value awards granted under the Omnibus Plan. That cost is expected to be recognized over a weighted-average period of 3.5 years. The total fair value of awards vested for the three months ended June 30, 2015 were $0.8 million. No awards vested during the three months ended June 30, 2016. The total fair value of awards vested for the six months ended June 30, 2016 and 2015 was $4.8 million and $4.9 million, respectively. The vested but unissued RSU awards consist of awards made to employees and directors who are eligible for retirement. According to the terms of these awards, which provide for vesting upon retirement, these employees and directors have no risk of forfeiture. These shares will be issued at the original contractual vesting and settlement dates.

- 27 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

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

Outstanding at December 31, 2015		109,130		$	16.14
Granted		-			-
Exercised		(27,945	)		17.08
Forfeited		-			-
Outstanding at June 30, 2016		81,185		$	15.81		1.9	$	330

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

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 six months ended June 30, 2016 and 2015 are provided in the following table:

	For the three months ended June 30,				For the six months ended June 30,
(In thousands)	2016		2015		2016			2015
Proceeds from stock options exercised	$	109	$	142	$	127		$	142
Fair value of shares received upon exercise of stock options		22		-		350			20
Tax benefit (expense) related to stock options exercised		14		8		(2	)		9
Intrinsic value of stock options exercised		69		31		112			33

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

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

Phantom Stock Plan	Shares			Fair Value

Outstanding at December 31, 2015		79,440		$	21.64
Granted		10,905			19.88
Forfeited		-			-
Distributions		(1,363	)		20.28
Outstanding at June 30, 2016		88,982		$	19.88
Vested at June 30, 2016		88,667		$	19.88

The Company recorded stock-based compensation expense (benefit) for the Phantom Stock Plan of ($139,000) and $85,000 for the three months ended June 30, 2016 and 2015, respectively. The total fair value of the distributions from the Phantom Stock Plan was $1,000 for the three months ended June 30, 2015. There were no distributions for the three months ended June 30, 2016.

- 28 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

For the six months ended June 30, 2016 and 2015, the Company recorded stock-based compensation expense (benefit) for the Phantom Stock Plan of ($109,000) and $94,000, respectively. The total fair value of the distributions from the Phantom Stock Plan during the six months ended June 30, 2016 and 2015 was $28,000 and $9,000, respectively.

10.

Pension and Other Postretirement Benefit Plans

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

	Three months ended June 30,						Six months ended June 30,
(In thousands)	2016			2015			2016			2015

Employee Pension Plan:
Interest cost	$	226		$	221		$	452		$	442
Amortization of unrecognized loss		201			290			402			581
Expected return on plan assets		(348	)		(350	)		(696	)		(700	)
Net employee pension expense	$	79		$	161		$	158		$	323

Outside Director Pension Plan:
Service cost	$	11		$	11		$	22		$	22
Interest cost		24			24			48			48
Amortization of unrecognized gain		(21	)		(14	)		(42	)		(28	)
Amortization of past service liability		10			10			20			20
Net outside director pension expense	$	24		$	31		$	48		$	62

Other Postretirement Benefit Plans:
Service cost	$	90		$	95		$	180		$	190
Interest cost		80			75			160			150
Amortization of unrecognized loss		12			30			24			60
Amortization of past service credit		(22	)		(22	)		(43	)		(43	)
Net other postretirement expense	$	160		$	178		$	321		$	357

The Company previously disclosed in its Consolidated Financial Statements for the year ended December 31, 2015 that it expects to contribute $0.3 million and $0.2 million to the Outside Director Pension Plan (the “Outside Director Pension Plan”) and the other postretirement benefit plans (the “Other Postretirement Benefit Plans”), respectively, during the year ending December 31, 2016. The Company does not expect to make a contribution to the Employee Pension Plan (the “Employee Pension Plan”). As of June 30, 2016, the Company has contributed $72,000 to the Outside Director Pension Plan and $33,000 to the Other Postretirement Benefit Plans. As of June 30, 2016, the Company has not revised its expected contributions for the year ending December 31, 2016.

11.

Fair Value of Financial Instruments

The Company carries certain financial assets and financial liabilities at fair value in accordance with GAAP which defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, establishes a framework for measuring fair value and expands disclosures about fair value measurements. GAAP permits entities to choose to measure many financial instruments and certain other items at fair value. At June 30, 2016, the Company carried financial assets and financial liabilities under the fair value option with fair values of $30.8 million and $27.5 million, respectively. At December 31, 2015, the Company carried financial assets and financial liabilities under the fair value option with fair values of $30.7 million and $29.0 million, respectively. The Company did not elect to carry any additional financial assets or financial liabilities under the fair value option during the three and six months ended June 30, 2016.

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

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

Mortgage-backed securities	$	2,292	$	2,527	$	(3	)	$	(28	)	$	2	$	(36	)
Other securities		28,514		28,205		90			(108	)		186		89
Borrowed funds		27,485		29,018		492			(1,229	)		1,546		(705	)
Net gain (loss) from fair value adjustments^{(1) (2)}					$	579		$	(1,365	)	$	1,734	$	(652	)

(1)

The net gain from fair value adjustments presented in the above table does not include net gains (losses) of ($1.7) million and $2.1 million for the three months ended June 30, 2016 and 2015, respectively, from the change in the fair value of interest rate swaps.

(2)

The net gain (loss) from fair value adjustments presented in the above table does not include net gains (losses) of ($3.8) million and $0.8 million for the six months ended June 30, 2016 and 2015, respectively, from the change in the fair value of interest rate swaps.

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

The borrowed funds had a contractual principal amount of $61.9 million at both June 30, 2016 and December 31, 2015. The fair value of borrowed funds includes accrued interest payable of $0.1 million at June 30, 2016 and December 31, 2015.

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

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

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

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

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

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

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

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

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

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

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

Assets:
Mortgage-backed Securities	$	-	$	-	$	580,500	$	668,740	$	-	$	-	$	580,500	$	668,740
Other securities		-		-		361,444		317,445		7,167		7,212		368,611		324,657
Interest rate swaps		-		-		-		48		-		-		-		48

Total assets	$	-	$	-	$	941,944	$	986,233	$	7,167	$	7,212	$	949,111	$	993,445

Liabilities:
Borrowings	$	-	$	-	$	-	$	-	$	27,485	$	29,018	$	27,485	$	29,018
Interest rate swaps		-		-		16,201		4,314		-		-		16,201		4,314

Total liabilities	$	-	$	-	$	16,201	$	4,314	$	27,485	$	29,018	$	43,686	$	33,332

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

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

Beginning balance	$	7,150	$	27,977
Net gain from fair value adjustment of financial assets⁽¹⁾		15		-
Net gain from fair value adjustment of financial liabilities ⁽¹⁾		-		(491	)
Decrease in accrued interest payable		-		(1	)
Change in unrealized gains included in other comprehensive income		2		-
Ending balance	$	7,167	$	27,485

Changes in unrealized gains held at period end	$	2	$	-

(1)

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

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

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

Beginning balance	$	14,464		$	7,189	$	28,245
Transfer to held-to-maturity		(4,510	)		-		-
Principal repayments		(55	)		-		-
Maturities		(2,000	)		-		-
Net gain from fair value adjustment of financial assets included in earnings ⁽¹⁾		-			37		-
Net loss from fair value adjustment of financial liabilities included in earnings ⁽¹⁾		-			-		1,229
Increase in accrued interest payable		-			-		2
Change in unrealized gains included in other comprehensive income		-			-		-
Ending balance	$	7,899		$	7,226	$	29,476

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

(1)

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

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

	For the six months ended June 30, 2016
	Trust preferred securities			Junior subordinated debentures

Beginning balance	$	7,212		$	29,018
Net loss from fair value adjustment of financial assets included in earnings ⁽¹⁾		(45	)		-
Net gain from fair value adjustment of financial liabilities included in earnings⁽¹⁾		-			(1,547	)
Increase in accrued interest payable		-			14
Change in unrealized gains (losses) included in other comprehensive income		-			-
Ending balance	$	7,167		$	27,485

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

(1)

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

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

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

Beginning balance	$	15,519		$	7,090	$	28,771
Transfer to held-to-maturity		(4,510	)		-		-
Purchases		1,000			-		-
Principal repayments		(110	)		-		-
Maturities		(4,000	)		-		-
Net gain from fair value adjustment of financial assets included in earnings ⁽¹⁾		-			131		-
Net loss from fair value adjustment of financial liabilities included in earnings ⁽¹⁾		-			-		705
Decrease in accrued interest payable		-			-		-
Change in unrealized gains (losses) included in other comprehensive income		-			5		-
Ending balance	$	7,899		$	7,226	$	29,476

Changes in unrealized gains held at period end	$	-		$	5	$	-

(1)

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

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

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

June 30, 2016

Fair Value

Valuation Technique

Unobservable Input

Range

Weighted Average

(Dollars in thousands)

Assets:

Trust preferred securities

7,167