Flushing Financial Corporation Reports Record Commercial Business Loan Originations; 10.5% Annualized Net Loan Growth

FIRST QUARTER 2018¹

• GAAP diluted EPS was $0.39, up 85.7% QoQ and down 7.1% YoY
• Core diluted EPS was $0.37, up 12.1% QoQ and down 7.5% YoY
• Net interest income was $42.6 million, down 1.0% QoQ and 1.8% YoY
• Net interest margin was 2.79%, down 11bps QoQ and 16bps YoY
  -- Excluding prepayment penalty income from loans and securities, recovered interest from delinquent loans and accelerated accretion of discount upon the call of CLO securities, the net interest margin was 2.72%, down 5bps QoQ and 13bps YoY
• Net recoveries were $38,000 for 1Q18, compared to net charge-offs of $11.5 million in 4Q17 and $18,000 in 1Q17
• GAAP and core ROAE were 8.6% and 8.1%, compared with 4.4% and 7.2%, respectively in 4Q17
• GAAP and core ROAA were both 0.7%, compared with 0.4% and 0.6%, respectively in 4Q17
• Increased quarterly dividend by 11% to $0.20 per share

UNIONDALE, N.Y., April 24, 2018 (GLOBE NEWSWIRE) -- Flushing Financial Corporation (the “Company”) (Nasdaq:FFIC), the parent holding company for Flushing Bank (the “Bank”), today announced its financial results for the first quarter ended March 31, 2018.

John R. Buran, President and Chief Executive Officer, stated, “We experienced superior loan growth during the quarter highlighted by record commercial business originations and purchases totaling $141.0 million, over 40% of total production. Loan originations for the quarter totaled $341.8 million with a yield of 4.27%, 42bps higher than the comparable prior year period and 12bps greater than the linked quarter. Over the last four quarters, our commercial business origination and purchases have averaged approximately 35% of quarterly production, resulting in the commercial business balances growing over 20% during the same period to approximately 15% of gross loans as of March 31, 2018."

“Our strategic focus remains the origination of multi-family, commercial real estate and commercial business loans with a full relationship, which comprised over 85% of the first quarter’s originations and purchases. Loan growth for the period was 2.6% (non-annualized), on pace to meet our annual expectations of high-single to low-double digit growth, while emphasizing rate over volume. For the third consecutive quarter, the yield on new loans exceeded the quarterly average yield of the total portfolio, net of prepayment penalty income and recovered interest from delinquent loans. For the first quarter, the yield on new loans exceeded the quarterly average yield of the total loan portfolio by 15bps, excluding prepayment penalty income and recovered interest from delinquent loans. The increase in the yield of our loan production aided in improving our yield on interest-earning assets to 3.92% for the recent quarter, an increase of 12bps YoY and 2bps QoQ, excluding prepayment penalty income, accelerated accretion of discount upon the call of CLO securities and recovered interest from delinquent loans.”

“On the liability side of the balance sheet, we experienced deposit growth of 6.8% (non-annualized), reducing the loan-to-deposit ratio to 113% from 118% at December 31, 2017. The cost of interest-bearing liabilities increased due to an increase in rates, as we raised the rates we pay on certain deposit products to remain competitive in our market, resulting in the average cost of our interest-bearing liabilities increasing 28bps YoY and 7bps QoQ. To mitigate the impact of future rate increases, we have been actively extending the maturity on our liabilities and, as previously announced, entered into forward interest rate swaps totaling $441.5 million to hedge against rising interest rates.”

“In addition to utilizing forward swaps, we continued our strategy of focusing our origination efforts on higher yielding loans and experienced an increase in the yield of loan originations and purchases during the current quarter compared to the linked quarter and the comparable prior year period. Similar to the improved yield received on new loan originations and purchases, we will see a benefit as our adjustable-rate loan portfolio continues to re-price upward. The combined effect of increases in loan yields and re-pricing of the portfolio continues to partially mitigate net interest margin compression.”

“At March 31, 2018, our total loan portfolio had an average LTV of only 39.1% for loans secured by real estate. During the recent quarter, the pipeline remained strong totaling $325.6 million, supporting our expectation of solid loan growth throughout 2018.”

Mr. Buran continued, “We remain focused on credit quality. Credit quality improved as our non-performing assets decreased by 4.1% in the first quarter and we recognized net recoveries in the period.  Also, total delinquencies have decreased 17% since December 31, 2017. The allowance for loan losses to gross loans has remained constant at 0.39% while the allowance for loan losses to non-performing loans increased to 123% from 112% at the end of 2017. The LTV on our non-performing real estate loans at March 31, 2018 is 36.7%.”

“We continued implementing the strategic objective of improving the expense scalability of our branch network. At the end of the quarter, we have converted 11 branches to the Universal Banker model. The remaining seven branches are scheduled for conversion to the Universal Banker model during 2018 and 2019.  The Universal Banker model, coupled with Video Banker, is a success with our customers as evidenced by the number of transactions handled by our enhanced ATMs and calls to Video Banker. The conversion to the Universal Banker model allows the branch staff to focus on sales resulting in deposit growth. We estimate that the Universal Banker model provides on average a savings of 20% in compensation costs.”

“In addition to the conversion of the branches, we have commenced a marketing campaign entitled “Win Flushing.”  The Flushing, Queens market is a $16 billion market for which our goal is to increase our deposit share by 1%, or $160 million by the first quarter of 2019. Through the first quarter, we have captured $50.7 million in deposit growth in this market place. We continue seeking opportunities for increasing our branch network, focusing on Asian markets. ”

The Company retains its focus on preserving strong risk management practices, including conservative underwriting standards and improving yields to achieve improved risk-adjusted returns.

• In the first quarter, commercial business, multi-family, and commercial real estate loan originations and purchases represented 41%, 24%, and 21%, respectively, of all originations, which were made while maintaining conservative loan-to-values, debt coverage ratios, and increasing yield. 
• The average interest rate obtained for first quarter originations and purchases totaled 4.27%, an increase of 12bps compared to 4.15% for 4Q17 and of 42bps compared to 3.85% for 1Q17.
• The average rate of mortgage loan applications in the pipeline totaled 4.41% at March 31, 2018, as compared to 4.10% at December 31, 2017 and 4.22% at March 31, 2017.
• Multi-family (excluding underlying co-operative mortgages), commercial real estate, and one-to-four family mixed-use property mortgage loans originated during 1Q18 had a yield of 3.97%, an increase of 6bps from 3.91% for 4Q17 and an increase of 25bps from 3.72% for 1Q17. We have maintained our asset quality as these loans had an average loan-to-value ratio of 47.9% and an average debt coverage ratio of 171%.

Mr. Buran concluded, “As previously announced, we have shared a portion of the tax benefits from the Tax Reform Act with our non-executive employees in the form of one-time bonuses totaling $0.5 million and with our shareholders in the form of the 11% increase in our quarterly dividend. We continue to evaluate opportunities to invest additional tax savings into the business to position the Company for future growth. Additionally, the Board of Directors authorized a share repurchase program of 1,000,000 shares with no dollar or time limitations. We remain well capitalized and positioned to deliver profitable growth and long-term value to our shareholders as we continue to execute on our strategic objectives.”

Summary of Strategic Objectives

• Increase core deposits and continue to improve funding mix
• Increase net interest income by leveraging loan pricing opportunities and portfolio mix
• Enhance core earnings power by improving scalability and efficiency
• Manage credit risk
• Maintain well capitalized levels under all stress test scenarios

Earnings Summary:

Net Interest Income

Net interest income for 1Q18 was $42.6 million, a decrease of $0.8 million, or 1.8% YoY (1Q18 compared to 1Q17) and a decrease of $0.5 million, or 1.0% QoQ (1Q18 compared to 4Q17). During 1Q18 the increase in the cost of funds outpaced the increase in the yield of interest-earning assets.

• Net interest margin of 2.79%, decreased 16bps YoY and 11bps QoQ
• Net interest spread of 2.65%, decreased 19bps YoY and 10bps QoQ
• Net interest income includes prepayment penalty income from loans of $0.9 million in 1Q18 compared with $1.1 million in 1Q17 and $1.4 million in 4Q17, and recovered interest from delinquent loans of $0.2 million in 1Q18, compared to $0.5 million in 1Q17 and $0.1 million in 4Q17
• Excluding prepayment penalty income, accelerated accretion of discount and recovered interest from nonaccrual loans, the yield on interest-earning assets was 3.92% in 1Q18, an improvement from 3.80% in 1Q17 and 3.90% in 4Q17, and the net interest margin was 2.72% in 1Q18, which decreased from 2.85% in 1Q17 and from 2.77% in 4Q17
• Average balance of total interest-earning assets of $6,098.7 million, increased $224.9 million, or 3.8%, YoY and $164.2 million, or 2.8%, QoQ
• Yield on interest-earning assets of 3.99%, increased 9bps YoY and decreased 3bps QoQ
• Cost of interest-bearing liabilities of 1.34%, increased 28bps YoY and 7bps QoQ
• Cost of funds of 1.27%, increased 26bps YoY and 10bps QoQ, driven by increases in rates paid on certificates of deposit, government deposits and short-term borrowings resulting from increases in the Fed Funds rate during 2018  

Provision for loan losses

Provision recorded for loan losses for 1Q18 was $0.2 million compared to $6.6 million in 4Q17 and no provision in 1Q17.

• Provision in 1Q18 was primarily driven by the growth in the loan portfolio

Non-interest Income

Non-interest income for 1Q18 was $3.2 million, a decrease of $0.5 million, or 13.3%, YoY and an increase of $0.1 million, or 4.4% QoQ.

• Non-interest income included net losses from the sale of loans of $0.3 million in 1Q18 and net gains from the sale of loans of $0.2 million in both 4Q17 and 1Q17
• Additionally, non-interest income included net losses from fair value adjustments of $0.1 million in 1Q18, $0.6 million in 4Q17 and $0.4 million in 1Q17 and gains from life insurance proceeds of $0.8 million in 1Q18 and $1.2 million in 1Q17
• Absent all above items, non-interest income was $2.8 million, an increase of $0.1 million YoY, but a decrease of $0.7 million QoQ

Non-interest Expense

Non-interest expense for 1Q18 was $31.3 million, an increase of $1.7 million, or 5.9%, YoY and $5.4 million, or 20.9% QoQ.

• Salaries and benefits increased $1.4 million YoY primarily due to annual salary increases and the previously announced one-time bonuses paid to non-executive employees in 1Q18 totaling $0.5 million and increased $4.2 million QoQ due to those items compounded with annual restricted stock unit awards to employees and increased payroll taxes
• The first quarter of each year includes the impact of annual grants of employee and director restricted stock unit awards; restricted stock expense totaled $3.5 million in 1Q18 compared to $3.3 million in 1Q17 and $0.9 million in 4Q17  
• Non-interest expense (excluding: salaries and benefits expense, director restricted stock unit awards and net gain/losses on sale of OREO) totaled $11.6 million in 1Q18, an increase of $0.3 million, or 2.7% YoY and $0.1 million, or 0.7% QoQ
• The efficiency ratio was 69.3% in 1Q18 compared to 64.0% in 1Q17 and 55.4% in 4Q17

Provision for Income Taxes

The provision for income taxes in 1Q18 was $3.0 million, a decrease of $2.3 million, or 43.9%, YoY and $4.7 million, or 61.7%, QoQ.

• Pre-tax income decreased by $3.2 million, or 18.0% YoY but increased $0.7 million, or 5.2% QoQ
• The effective tax rates were 20.5% in 1Q18, 28.7% in 4Q17 (excluding $3.8 million from the revaluation of net deferred tax assets), and 30.0% in 1Q17
• Both 1Q18 and 1Q17 effective tax rates reflect the vesting of restricted stock awards, which are treated as discrete items for tax purposes, our stock awards generally vest in the first quarter, therefore we anticipate the Company’s effective tax rate to increase to approximately 24.5% in the second quarter of 2018 and approximately 23.5% for the full year

Financial Condition Summary:

Loans:

• Net loans held for investment were $5,292.3 million reflecting an increase of 2.6% QoQ (not annualized) and 6.9% YoY as we continue to focus on the origination of multi-family, commercial real estate and commercial business loans with a full relationship while emphasizing rate over volume
• Loan originations and purchases of multi-family, commercial real estate and commercial business loans totaled $292.1 million for 1Q18, or 85.5% of loan production
• Loan pipeline was $325.6 million at March 31, 2018, compared to $359.8 million at December 31, 2017 and $303.1 million at March 31, 2017
• The loan-to-value ratio on our portfolio of real estate dependent loans as of March 31, 2018 totaled 39.1%

The following table shows the average rate received from loan originations and purchases for the periods indicated:

Credit Quality:

• Non-performing loans totaled $16.6 million, a decrease of $1.5 million, or 8.2%, from $18.1 million at December 31, 2017
• Non-performing assets totaled $17.4 million, a decrease of $0.8 million, or 4.1%, from $18.1 million at December 31, 2017
• Classified assets totaled $30.9 million, a decrease of $3.1 million, or 9.0%, from $34.0 million at December 31, 2017, primarily due to reductions in non-performing loans
• Loans classified as troubled debt restructured (TDR) totaled $10.9 million, a decrease of $2.3 million, or 17.2%, from $13.2 million at December 31, 2017, primarily due to the sale of one commercial TDR
• We anticipate continued low loss content in the portfolio, as our strong underwriting standards coupled with our practice of obtaining updated appraisals and recording charge-offs early in the delinquency process has resulted in a 36.7% average loan-to-value for non-performing loans collateralized by real estate at March 31, 2018
• Provision for loan losses of $0.2 million was recorded during the first quarter of 2018, as the result of the growth in the loan portfolio; net recoveries totaled $38,000 during the first quarter of 2018, compared to net charge-offs of $11.5 million for the fourth quarter of 2017, of which $11.2 million was related to taxi medallion loans

Capital Management:

• The Company and Bank, at March 31, 2018, were both well capitalized under all applicable regulatory requirements
• During 1Q18, stockholders’ equity increased $2.7 million, or 0.5%, to $535.3 million due to net income of $11.4 million, partially offset by the declaration and payment of dividends on the Company’s common stock and repurchases of the Company’s common stock
• During 1Q18, the Company repurchased 217,863 treasury shares at an average cost of $27.14 per share; as of March 31, 2018, up to 36,417 shares may be repurchased under the previous authorized stock repurchase program, which has no expiration or maximum dollar limit.
• In 1Q18, the Company authorized the purchase of up to 1,000,000 shares of its common stock under a new authorized stock repurchase program; the Company will complete its previous purchase authorization prior to purchasing shares under this authorization
• Book value per common share increased to $18.75 at March 31, 2018, from $18.63 at December 31, 2017 and tangible book value per common share, a non-GAAP measure, increased to $18.20 at March 31, 2018, from $18.08 at December 31, 2017

Conference Call Information:

About Flushing Financial Corporation

Flushing Financial Corporation (Nasdaq: FFIC) is the holding company for Flushing Bank^®, a New York State-chartered commercial bank insured by the Federal Deposit Insurance Corporation. The Bank serves consumers, businesses, professionals, corporate clients, and public entities by offering a full complement of deposit, loan, equipment finance, and cash management services through its banking offices located in Queens, Brooklyn, Manhattan, and Nassau County. As a leader in real estate lending, the Bank’s experienced lending team creates mortgage solutions for real estate owners and property managers both within and outside the New York City metropolitan area. Flushing Bank is an Equal Housing Lender. The Bank also operates an online banking division consisting of iGObanking.com^®, which offers competitively priced deposit products to consumers nationwide, and BankPurely^®, our eco-friendly, healthier lifestyle community brand.

Additional information on Flushing Bank and Flushing Financial Corporation may be obtained by visiting the Company’s website at http://www.flushingbank.com.

 “Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995: Statements in this Press Release relating to plans, strategies, economic performance and trends, projections of results of specific activities or investments and other statements that are not descriptions of historical facts may be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking information is inherently subject to risks and uncertainties, and actual results could differ materially from those currently anticipated due to a number of factors, which include, but are not limited to, risk factors discussed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017 and in other documents filed by the Company with the Securities and Exchange Commission from time to time. Forward-looking statements may be identified by terms such as “may”, “will”, “should”, “could”, “expects”, “plans”, “intends”, “anticipates”, “believes”, “estimates”, “predicts”, “forecasts”, “goals”, “potential” or “continue” or similar terms or the negative of these terms. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. The Company has no obligation to update these forward-looking statements.

¹ See the table entitled “Reconciliation of Non-GAAP Financial Measures.”

- Statistical Tables Follow -

(1) Calculated by dividing stockholders’ equity by shares outstanding.

(2) Calculated by dividing tangible stockholders’ common equity, a non-GAAP measure by shares outstanding. Tangible stockholders’ common equity is stockholders’ equity less intangible assets (goodwill, net of deferred taxes). See “Calculation of Tangible Stockholders’ Common Equity to Tangible Assets”.

(3) Ratios are presented on an annualized basis, where appropriate.

(4) Efficiency ratio, a non-GAAP measure, was calculated by dividing non-interest expense (excluding OREO expense and the net gain/loss from the sale of OREO) by the total of net interest income and non-interest income (excluding net gains and losses from fair value adjustments and life insurance proceeds).

(1) See “Calculation of Tangible Stockholders’ Common Equity to Tangible Assets”.
(2) Excludes performing non-accrual TDR loans.

(1) Loan interest income includes loan fee income (which includes net amortization of deferred fees and costs, late charges, and prepayment penalties) of approximately $0.1 million, $0.5 million and $0.6 million for the three months ended March 31, 2018, December 31, 2017 and March 31, 2107, respectively.
(2) Interest income on tax-exempt securities does not include the tax benefit of the tax-exempt securities.

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
LOANS
(Unaudited)

Loan Originations and Purchases

Loan Composition

Net Loans Activity

⁽¹⁾  Not included in the above analysis are troubled debt restructured taxi medallion loans totaling $5.7 million at March 31, 2018.

Net Charge-Offs (Recoveries)

Core Diluted EPS, Core ROAE, Core ROAA, tangible book value per common share and core earnings before provision and income taxes are each non-GAAP measures used in this release. A reconciliation to the most directly comparable GAAP financial measures appears in tabular form at the end of this release. The Company believes that these measures are useful for both investors and management to understand the effects of certain non-interest items and provide an alternative view of the Company's performance over time and in comparison to the Company's competitors. These measures should not be viewed as a substitute for net income. The Company believes that tangible book value per common share is useful for both investors and management as these are measures commonly used by financial institutions, regulators and investors to measure the capital adequacy of financial institutions. The Company believes these measures facilitate comparison of the quality and composition of the Company's capital over time and in comparison to its competitors. These measures should not be viewed as a substitute for total shareholders' equity.

These non-GAAP measures have inherent limitations, are not required to be uniformly applied and are not audited. They should not be considered in isolation or as a substitute for analysis of results reported under GAAP. These non-GAAP measures may not be comparable to similarly titled measures reported by other companies.

Susan K. Cullen
Senior Executive Vice President, Treasurer and Chief Financial Officer
Flushing Financial Corporation
(718) 961-5400