12.

Income Taxes

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

Income tax provisions are summarized as follows:

	For the three months						For the six months
	ended June 30,						ended June 30,
(In thousands)	2017			2016			2017		2016
Federal:
Current	$	6,653		$	16,228		$	9,605	$	19,888
Deferred		(1,077	)		(1,025	)		720		62
Total federal tax provision		5,576			15,203			10,325		19,950
State and Local:
Current		1,618			5,976			1,419		6,361
Deferred		(419	)		(462	)		285		21
Total state and local tax provision		1,199			5,514			1,704		6,382

Total income tax provision	$	6,775		$	20,717		$	12,029	$	26,332

The effective tax rate was

34.7%

and

40.5%

for the

three

months ended

June 30, 2017

and

2016,

respectively, and

32.5%

and

39.7%

for the

six

months ended

June 30, 2017

and

2016,

respectively. The decrease in the effective tax rate reflects the impact of a change in the treatment of deductible stock compensation expense from prior periods. In prior periods the tax impact of deductible stock compensation expense flowed through additional paid-in-capital and did

not

have an impact on the Company’s effective tax rate, in contrast, in

2017

the impact is passed through the provision for income taxes. Additionally, the effective tax rate for

2016

reflects the reduced impact of preferential tax items, because of the gain on sale on

one

of our properties in Flushing, Queens recorded during the

three

months ended

June 30, 2016.

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

	For the three months										For the six months
	ended June 30,										ended June 30,
(dollars in thousands)	2017					2016					2017					2016

Taxes at federal statutory rate	$	6,825		35.0	%	$	17,903		35.0	%	$	12,955		35.0	%	$	23,215		35.0	%
Increase (reduction) in taxes resulting from:
State and local income tax, net of Federal income tax benefit		780		4.0			3,584		7.0			1,108		3.0			4,148		6.3
Other		(830	)	(4.3	)		(770	)	(1.5	)		(2,034	)	(5.5	)		(1,031	)	(1.6	)
Taxes at effective rate	$	6,775		34.7	%	$	20,717		40.5	%	$	12,029		32.5	%	$	26,332		39.7	%

The Company has recorded a deferred tax asset of

$32.4

million at

June 30, 2017,

which is included in “Other Assets” in the Consolidated Statements of Financial Condition. This represents the anticipated net federal, state and local tax benefits expected to be realized in future years upon the utilization of the underlying tax attributes comprising this balance. The Company has reported taxable income for federal, state, and local tax purposes in each of the past

three

fiscal years. In management’s opinion, in view of the Company’s previous, current and projected future earnings trend, the probability that some of the Company’s

$16.9

million deferred tax liability can be used to offset a portion of the deferred tax asset, as well as certain tax planning strategies, it is more likely than

not

that the deferred tax asset will be fully realized. Accordingly,

valuation allowance was deemed necessary for the deferred tax asset at

June 30, 2017.