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, 2017

Commission file number 001-33013

FLUSHING FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

Delaware

(State or other jurisdiction of incorporation or organization)

11-3209278

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

220 RXR Plaza, Uniondale, New York 11556

(Address of principal executive offices)

(718) 961-5400

(Registrant's telephone number, including area code)

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

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

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

Large accelerated filer __

Non-accelerated filer __

Emerging growth company__

Accelerated filer X

Smaller reporting company __

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

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

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

TABLE OF CONTENTS

	PAGE
PART I — FINANCIAL INFORMATION

ITEM 1. Financial Statements - (Unaudited)

Consolidated Statements of Financial Condition	1

Consolidated Statements of Income	2

Consolidated Statements of Comprehensive Income	3

Consolidated Statements of Cash Flows	4

Consolidated Statements of Changes in Stockholders’ Equity	5

Notes to Consolidated Financial Statements	6

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	48

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk	63

ITEM 4. Controls and Procedures	63

PART II—OTHER INFORMATION

ITEM 1. Legal Proceedings	64

ITEM 1A. Risk Factors	64

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

ITEM 3. Defaults Upon Senior Securities	64

ITEM 4. Mine Safety Disclosures	64

ITEM 5. Other Information	64

ITEM 6. Exhibits	65

SIGNATURES	66

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Consolidated Statements of Financial Condition

(Unaudited)

Item 1. Financial Statements

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

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

STOCKHOLDERS' EQUITY
Preferred stock ($0.01 par value; 5,000,000 shares authorized; none issued)		-			-
Common stock ($0.01 par value; 100,000,000 shares authorized; 31,530,595 shares issued at September 30, 2017 and December 31, 2016; 28,819,891 shares and 28,632,904 shares outstanding at September 30, 2017 and December 31, 2016, respectively)		315			315
Additional paid-in capital		216,929			214,462
Treasury stock, at average cost (2,710,704 shares and 2,897,691 shares at September 30, 2017 and December 31, 2016, respectively)		(51,287	)		(53,754	)
Retained earnings		380,316			361,192
Accumulated other comprehensive loss, net of taxes		(6,664	)		(8,362	)
Total stockholders' equity		539,609			513,853

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

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

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Consolidated Statements of Income

(Unaudited)

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

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

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

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

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

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

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

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

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


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

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

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(Unaudited)

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

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

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


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

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

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

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)

	For the nine months ended
	September 30,
(In thousands)	2017			2016
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	35,164		$	50,630
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		3,266			-
Depreciation and amortization of bank premises and equipment		3,493			3,263
Amortization of premium, net of accretion of discount		5,716			6,344
Net loss from fair value adjustments		2,834			2,925
Net gain from sale of loans		(396	)		(584	)
Net loss (gain) from sale of securities		186			(2,363	)
Net gain from sale of buildings		-			(33,814	)
Net (gain) loss from sale of OREO		(50	)		1,726
Income from bank owned life insurance		(2,418	)		(2,096	)
Gain from life insurance proceeds		(1,405	)		(458	)
Stock-based compensation expense		5,092			4,169
Deferred compensation		(3,322	)		(3,140	)
Excess tax benefit from stock-based payment arrangements		-			(470	)
Deferred income tax benefit		(1,806	)		(1,228	)
Increase in other liabilities		6,810			7,680
(Increase) decrease in other assets		(68	)		4,823
Net cash provided by operating activities		53,096			37,407

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

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

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

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

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

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Consolidated Statements of Changes in Stockholders’ Equity

For the nine months ended September 30, 2017 and 2016

(Unaudited)

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

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

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

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

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

1.	Basis of Presentation

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

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

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

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

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

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

Use of Estimates

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

3.	Earnings Per Share

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

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

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

(1)

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

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

Debt and Equity Securities

The Company did not hold any trading securities at September 30, 2017 and December 31, 2016. Securities available for sale are recorded at fair value. Securities held-to-maturity are recorded at amortized cost.

The following table summarizes the Company’s portfolio of securities held-to-maturity at September 30, 2017:

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

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

FNMA		7,978		7,839		-		139

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

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

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

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

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The following table summarizes the Company’s portfolio of securities available for sale at September 30, 2017:

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

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

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

Mortgage-backed securities shown in the table above include one private issue collateralized mortgage obligation (“CMO”) that is collateralized by commercial real estate mortgages with an amortized cost and market value of $0.1 million and $0.2 million at September 30, 2017 and December 31, 2016.

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

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

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

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

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

Total	$	30,930	$	29,381

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

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

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

Total	$	800,577	$	796,559

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

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

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

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


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

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

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

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

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

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

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

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

It is not anticipated that these securities would be settled at a price that is less than the amortized cost of the Company’s investment. Each of these securities is performing according to its terms and, in the opinion of management, will continue to perform according to its terms. The Company does not have the intent to sell these securities and it is more likely than not the Company will not be required to sell the securities before recovery of the securities’ amortized cost basis. This conclusion is based upon considering the Company’s cash and working capital requirements and contractual and regulatory obligations, none of which the Company believes would cause the sale of the securities. Therefore, the Company did not consider these investments to be other-than-temporarily impaired at September 30, 2017 and December 31, 2016.

Realized gains and losses on the sales of securities are determined using the specific identification method. The Company sold available for sale securities totaling $112.4 million during the three months ended September 30, 2017. The Company did not sell any available for sale securities during the three months ended September 30, 2016. The Company sold available for sale securities totaling $112.4 million and $64.6 million during the nine months ended September 30, 2017 and 2016, respectively.

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

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

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

5. Loans

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

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

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The Company recognizes a loan as non-performing when the borrower has demonstrated the inability to bring the loan current, or due to other circumstances which, in management’s opinion, indicate the borrower will be unable to bring the loan current within a reasonable time. All loans classified as non-performing, which includes all loans past due 90 days or more, are classified as non-accrual unless there is, in our opinion, compelling evidence the borrower will bring the loan current in the immediate future. Prior to a loan becoming 90 days delinquent, an updated appraisal is ordered and/or an internal evaluation is prepared.

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

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

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

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

The loan balances of collateral dependent impaired loans are compared to the property’s updated fair value. The Company considers fair value of collateral dependent loans to be 85% of the appraised or internally estimated value of the property. The balance which exceeds fair value is generally charged-off, except for taxi medallion loans. The 85% is based on the actual net proceeds the Bank has received from the sale of other real estate owned (“OREO”) as a percentage of OREO’s appraised value. Taxi medallion loans with a loan-to-value greater than 100% are allocated a portion of the allowance for loan losses in the amount of the excess of the loan-to-value over the loan’s principal balance. The fair value of the underlying collateral of taxi medallion loans is the value of the underlying medallion based upon the most recently reported arm’s length transaction. When there is no recent sale activity, the fair value is calculated using capitalization rates. All taxi medallion loans are classified as impaired and allocated a portion of the allowance in the amount of the excess of the loan-to-value over the loan’s principal balance.

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

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

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

As of September 30, 2017, we utilized recent third party appraisals of the collateral to measure impairment for $39.2 million, or 82.9%, of collateral dependent impaired loans, and used internal evaluations of the property’s value for $8.1 million, or 17.1%, of collateral dependent impaired loans.

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

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

The allocation of a portion of the allowance for loan losses for a performing TDR loan is based upon the present value of the future expected cash flows discounted at the loan’s original effective rate, or for a non-performing TDR which is collateral dependent, the fair value of the collateral. At September 30, 2017, there were no commitments to lend additional funds to borrowers whose loans were modified to a TDR. The modification of loans to a TDR did not have a significant effect on our operating results, nor did it require a significant allocation of the allowance for loan losses.

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

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


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

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

One-to-four family - residential		-	$	-			2	$	263	Received below market interest rates and the amortizations were extended
Commercial business and other		-		-			2		739	One received an amortization extension and one received a below market interest rate and an amortization extension
Taxi medallion		9		5,595	All loans amortizations were extended, with three loans also receiving a below market interest rate		-		-
Total		9	$	5,595			4	$	1,002

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

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

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

	September 30, 2017				December 31, 2016
(Dollars in thousands)	Number of contracts		Recorded investment		Number of contracts		Recorded investment

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

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

	September 30, 2017				December 31, 2016
(Dollars in thousands)	Number of contracts		Recorded investment		Number of contracts		Recorded investment

Multi-family residential		1	$	377		1	$	396

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

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

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

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

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

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

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

Total non-accrual loans		12,161		21,030

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

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

During the three and nine months ended September 30, 2017, we did not foreclose on any consumer mortgages through in-substance repossession. We did not hold any foreclosed residential real estate properties at September 30, 2017. At December 31, 2016, we held one foreclosed residential real estate property for $0.5 million. Included within net loans as of September 30, 2017 and December 31, 2016 was a recorded investment of $8.7 million and $11.4 million, respectively, of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings were in process according to local requirements of the applicable jurisdiction.

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

	For the three months ended September 30,				For the nine months ended September 30,
	2017		2016		2017		2016
	(In thousands)
Interest income that would have been recognized had the loans performed in accordance with their original terms	$	401	$	468	$	1,249	$	1,405
Less: Interest income included in the results of operations		166		99		434		391
Total foregone interest	$	235	$	369	$	815	$	1,014

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

	September 30, 2017
(In thousands)	30 - 59 Days Past Due		60 - 89 Days Past Due		Greater than 90 Days		Total Past Due		Current		Total Loans

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

	December 31, 2016
(In thousands)	30 - 59 Days Past Due		60 - 89 Days Past Due		Greater than 90 Days		Total Past Due		Current		Total Loans

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

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

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

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

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

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

- 17 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

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

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

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

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

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

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

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

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

	December 31, 2016
(In thousands)	Multi-family residential		Commercial real estate		One-to-four family - mixed-use property		One-to-four family- residential		Co-operative apartments		Construction loans		Small Business Administration		Taxi medallion		Commercial business and other		Unallocated		Total

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

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

- 19 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

	September 30, 2017						December 31, 2016
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
	(In thousands)
With no related allowance recorded:
Mortgage loans:
Multi-family residential	$	2,489	$	2,935	$	-	$	3,660	$	3,796	$	-
Commercial real estate		4,767		4,767		-		4,489		4,516		-
One-to-four family mixed-use property		5,079		5,454		-		6,435		6,872		-
One-to-four family residential		9,661		10,696		-		9,560		11,117		-
Co-operative apartments		-		-		-		-		-		-
Construction		1,178		1,178		-		-		-		-
Non-mortgage loans:
Small Business Administration		370		386		-		416		509		-
Taxi medallion		2,608		2,608		-		2,334		2,476		-
Commercial business and other		380		749		-		2,072		2,443		-

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

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

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

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

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

- 20 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The following table shows our average recorded investment and interest income recognized for impaired loans for the three months ended September 30, 2017 and 2016:

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

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

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

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

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

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

- 21 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

The following table shows our average recorded investment and interest income recognized for impaired loans for the nine months ended September 30, 2017 and 2016:

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

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

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

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

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

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

- 22 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

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

	September 30, 2017
(In thousands)	Special Mention		Substandard		Doubtful		Loss		Total

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

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

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

Commitments to extend credit (principally real estate mortgage loans) and lines of credit (principally home equity lines of credit and business lines of credit) amounted to $94.7 million and $229.0 million, respectively, at September 30, 2017.

- 23 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

6. Loans held for sale

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

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

The following table shows loans sold during the period indicated:

	For the three months ended September 30, 2017

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

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

	For the three months ended September 30, 2016

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

	For the nine months ended September 30, 2017

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

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

- 24 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

	For the nine months ended September 30, 2016

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

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

7. Stock-Based Compensation

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

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

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

- 25 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

	Shares			Weighted-Average Grant-Date Fair Value

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

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

As of September 30, 2017, there was $8.7 million of total unrecognized compensation cost related to RSU awards granted. That cost is expected to be recognized over a weighted-average period of 3.1 years. The total fair value of awards vested for the three months ended September 30, 2017 and 2016 was $14,000 and $4,000, respectively. The total fair value of awards vested for the nine months ended September 30, 2017 and 2016 was $7.0 million and $4.8 million, respectively. The vested but unissued RSU awards consist of awards made to employees and directors who are eligible for retirement. According to the terms of these awards, which provide for vesting upon retirement, these employees and directors have no risk of forfeiture. These shares will be issued at the original contractual vesting and settlement dates.

Cash proceeds, fair value received, tax benefits, and intrinsic value related to stock options exercised, and the weighted average grant date fair value for options granted, during the three and nine months ended September 30, 2017 and 2016 are provided in the following table:

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

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

- 26 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

Phantom Stock Plan	Shares			Fair Value

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

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

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

8. Pension and Other Postretirement Benefit Plans

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

	Three months ended September 30,						Nine months ended September 30,
(In thousands)	2017			2016			2017			2016

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

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

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

The Company previously disclosed in its Consolidated Financial Statements for the year ended December 31, 2016 that it expects to contribute $0.3 million and $0.2 million to the Outside Director Pension Plan (the “Outside Director Pension Plan”) and the other postretirement benefit plans (the “Other Postretirement Benefit Plans”), respectively, during the year ending December 31, 2017. The Company does not expect to make a contribution to the Employee Pension Plan (the “Employee Pension Plan”). As of September 30, 2017, the Company has contributed $108,000 to the Outside Director Pension Plan and $60,000 in contributions were made to the Other Postretirement Benefit Plans. As of September 30, 2017, the Company has not revised its expected contributions for the year ending December 31, 2017.

- 27 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

9. Fair Value of Financial Instruments

The Company carries certain financial assets and financial liabilities at fair value in accordance with GAAP which defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, establishes a framework for measuring fair value and expands disclosures about fair value measurements. GAAP permits entities to choose to measure many financial instruments and certain other items at fair value. At September 30, 2017, the Company carried financial assets and financial liabilities under the fair value option with fair values of $21.4 million and $36.1 million, respectively. At December 31, 2016, the Company carried financial assets and financial liabilities under the fair value option with fair values of $30.4 million and $34.0 million, respectively. The Company did not elect to carry any additional financial assets or financial liabilities under the fair value option during the nine months ended September 30, 2017.

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

	Fair Value		Fair Value		Changes in Fair Values For Items Measured at Fair Value
	Measurements		Measurements		Pursuant to Election of the Fair Value Option
	at September 30,		at December 31,		Three Months Ended						Nine Months Ended
(Dollars in thousands)	2017		2016		September 30, 2017			September 30, 2016			September 30, 2017			September 30, 2016

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

(1)

The net gain (loss) from fair value adjustments presented in the above table does not include net losses of $0.4 million and $0.5 million for the three months ended September 30, 2017 and 2016, respectively, from the change in the fair value of interest rate swaps.

(2)

The net gain (loss) from fair value adjustments presented in the above table does not include net losses of $0.9 million and $4.3 million for the nine months ended September 30, 2017 and 2016, respectively, from the change in the fair value of interest rate swaps.

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

The borrowed funds had a contractual principal amount of $61.9 million at both September 30, 2017 and December 31, 2016. The fair value of borrowed funds includes accrued interest payable of $0.2 million and $0.1 million at September 30, 2017 and December 31, 2016, respectively.

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

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

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PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

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

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

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

Level 2 – when quoted market prices are not available, fair value is estimated using quoted market prices for similar financial instruments and adjusted for differences between the quoted instrument and the instrument being valued. Fair value can also be estimated by using pricing models, or discounted cash flows. Pricing models primarily use market-based or independently sourced market parameters as inputs, including, but not limited to, yield curves, interest rates, equity or debt prices and credit spreads. In addition to observable market information, models also incorporate maturity and cash flow assumptions. At September 30, 2017 and December 31, 2016, Level 2 included mortgage related securities, corporate debt, municipals and interest rate swaps.

Level 3 – when there is limited activity or less transparency around inputs to the valuation, financial instruments are classified as Level 3. At September 30, 2017, Level 3 included trust preferred securities owned and junior subordinated debentures issued by the Company. At December 31, 2016, Level 3 included trust preferred securities owned and junior subordinated debentures issued by the Company and a single issuer trust preferred security.

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

The following table sets forth the assets and liabilities that are carried at fair value on a recurring basis and the method that was used to determine their fair value, at September 30, 2017 and December 31, 2016:

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

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

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

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

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

- 29 -

PART I – FINANCIAL INFORMATION

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

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

	For the three months ended
	September 30, 2017					September 30, 2016
	Trust preferred securities			Junior subordinated debentures		Trust preferred securities		Junior subordinated debentures
	(In thousands)

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

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

(1)

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

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

	For the nine months ended
	September 30, 2017					September 30, 2016
	Trust preferred securities			Junior subordinated debentures		Trust preferred securities			Junior subordinated debentures
	(In thousands)

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

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