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 September 30, 2016

Commission file number 001-33013

FLUSHING FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

Delaware

(State or other jurisdiction of incorporation or organization)

11-3209278

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

220 RXR Plaza, Uniondale, New York 11556

(Address of principal executive offices)

(718) 961-5400

(Registrant's telephone number, including area code)

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

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

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

Large accelerated filer __

Non-accelerated filer __

Accelerated filer X

Smaller reporting company __

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

The number of shares of the registrant’s Common Stock outstanding as of October 31, 2016 was 28,618,493.

TABLE OF CONTENTS

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

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Consolidated Statements of Financial Condition

(Unaudited)

Item 1. Financial Statements

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

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

Commitments and contingencies

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

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

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

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Consolidated Statements of Income

(Unaudited)

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

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

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

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

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

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

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

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

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


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

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

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(Unaudited)

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

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

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

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

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

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

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)

	For the nine months ended September 30,
(Dollars in thousands)	2016			2015
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	50,630		$	34,575
Adjustments to reconcile net income to net cash provided by operating activities:
Benefit for loan losses		-			(1,620	)
Depreciation and amortization of bank premises and equipment		3,263			2,528
Amortization of premium, net of accretion of discount		6,344			6,804
Net (gain) loss from fair value adjustments		2,925			921
Net gain from sale of loans		(584	)		(355	)
Net gain from sale of securities		(2,363	)		(167	)
Net gain from sale of buildings		(33,814	)		(6,537	)
Income from bank owned life insurance		(2,096	)		(2,157	)
Gain from life insurance proceeds		(458	)		-
Stock-based compensation expense		4,169			4,222
Deferred compensation		(3,140	)		(2,768	)
Excess tax benefit from stock-based payment arrangements		(470	)		(467	)
Deferred income tax benefit		(1,228	)		(5,024	)
Increase in other liabilities		7,680			2,432
Decrease in other assets		6,549			2,065
Net cash provided by operating activities		37,407			34,452

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

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

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

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

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

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Consolidated Statements of Changes in Stockholders’ Equity

For the nine months ended September 30, 2016 and 2015

(Unaudited)

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

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


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

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

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

Basis of Presentation

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

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

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

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

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

Use of Estimates

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

Earnings Per Share

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

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

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

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

(1)

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

Debt and Equity Securities

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

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

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

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

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

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

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

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

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

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

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

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

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

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

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

	Amortized Cost		Fair Value
	(In thousands)

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

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

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

	Amortized Cost		Fair Value
	(In thousands)

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

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

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

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

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

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

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

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

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

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

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

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

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

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

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

Loans

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

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

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

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

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

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

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

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

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

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

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

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

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

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

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


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

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

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

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

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

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

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

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

- 13 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

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

Multi-family residential		1	$	392		1	$	391

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

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

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

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

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

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

Total non-accrual loans		21,882		22,817

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

- 14 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

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

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

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

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

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

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

- 15 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

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

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

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

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

- 16 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

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

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

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

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

- 17 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

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

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

- 18 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

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

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

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

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

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

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

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

- 19 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

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

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

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

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

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

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

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

- 20 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

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

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

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

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

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

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

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

- 21 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

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

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

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

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

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

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

- 22 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

Loans held for sale

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

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

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

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

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

Total		11	$	3,139	$	-	$	240

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

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

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

Total ⁽¹⁾		6	$	2,280	$	(3	)	$	14

(1)

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

- 23 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

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

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

Total ⁽¹⁾		26	$	7,965	$	(8	)	$	265

(1)

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

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

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

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

Total ⁽¹⁾		18	$	7,307	$	134	$	63

(1)

- 24 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

Other Real Estate Owned

The following are changes in OREO during the periods indicated:

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

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

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

(1)

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

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

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

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

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

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

- 25 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

Repurchase Agreements

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

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

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

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

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

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

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

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

Stock-Based Compensation

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

- 26 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

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

	Shares			Weighted-Average Grant-Date Fair Value

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

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

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

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

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

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

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

- 27 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

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

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

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

Phantom Stock Plan	Shares			Fair Value

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

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

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

- 28 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

10.

Pension and Other Postretirement Benefit Plans

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

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

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

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

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

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

11.

Fair Value of Financial Instruments

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

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

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

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

(1)

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

(2)

The net gain (loss) from fair value adjustments presented in the above table does not include net losses of $4.3 million and $1.3 million for the nine months ended September 30, 2016 and 2015, respectively, from the change in the fair value of interest rate swaps.

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

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

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

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

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

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

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

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

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

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

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

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

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

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

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

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

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

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

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

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

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

(1)

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

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

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

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

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

(1)

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

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

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


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

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

(1)

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

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

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

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

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

(1)

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

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

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

September 30, 2016