Flushing Financial Corporation Reports Full Year 2018 GAAP EPS up 36% and Record Full Year Core EPS up 24%; Quarterly Yields on Loan Closings Increased 75bps from 4Q17

FOURTH QUARTER 2018¹ HIGHLIGHTS

• GAAP diluted EPS was $0.44, up 109.5% from 4Q17 and down 27.9% QoQ
• Core diluted EPS was $0.54, up 63.6% from 4Q17 and unchanged QoQ
• Net interest income of $40.6 million, down 2.1% QoQ, and 5.6% from 4Q17
• Net interest margin was 2.55%, down 16bps QoQ and 35bps from 4Q17
• Non-interest expense decreased 5.4% QoQ and 0.5% from 4Q17
• GAAP and core ROAE were 9.2% and 11.4%, compared with 12.9% and 11.4%, respectively in 3Q18
• GAAP and core ROAA were 0.7% and 0.9%, respectively, compared with 1.1% and 1.0% , respectively in 3Q18
• Sold $120.3 million in lower yielding investment securities, resulting in a loss on sale of $1.9 million and purchased $113.4 million in higher yielding investment securities; transaction expected to aid 2019 EPS and NIM
• Tax benefit of $0.06 per diluted share due to release of previously accrued tax liability

FULL YEAR 2018¹ HIGHLIGHTS

• GAAP diluted EPS was $1.92, up 36.2% YoY
• Record core diluted EPS of $1.94, up 23.6% YoY
• Record loan closings of $1,250.8 million, up 20.3% YoY  
• GAAP ROAE was 10.3%, compared with 7.8% and core ROAE was 10.4%, compared with 8.6% for 2017
• GAAP ROAA was 0.9%, compared with 0.7% and core ROAA was 0.9%, compared with 0.7% for 2017
• Net interest income was $167.4 million, down 3.3%, and net interest margin was 2.70%, down 23bps YoY
• Non-interest expense increased 3.9% YoY
• Tax benefit of $0.12 per diluted share due to release of previously accrued tax liability

UNIONDALE, N.Y., Jan. 31, 2019 (GLOBE NEWSWIRE) — Flushing Financial Corporation (the “Company”) (Nasdaq-GS: FFIC), the parent holding company for Flushing Bank (the “Bank”), today announced its financial results for the fourth quarter and fiscal year ended December 31, 2018.

John R. Buran, President and Chief Executive Officer, stated, “We are pleased to report another quarter of strong loan closings totaling $345 million, our highest quarterly production in 2018, bringing total annual loan closings to a record level of $1.3 billion, resulting in net loan growth of 3.2% (non-annualized) QoQ and 7.3% for the full year. These milestones were achieved while continuing to adhere to our strategy of emphasizing rate over volume, resulting in a 75bps increase in average loan yields on loan closings in 4Q18 compared to those booked in 4Q17. The increase in new loan volume and yields combined with repricings of adjustable rate loans resulted in a 9bps increase in the yield of total loans to 4.38% in 4Q18 from 4.29% in 3Q18, excluding prepayment penalty income and recovered interest from nonaccrual loans.”

“We continued to experience margin pressure during 4Q18 driven by higher cost of funds. The cost of funds increased 12bps QoQ and 58bps YoY, as the Federal Reserve increased benchmark rates by 100bps since the fourth quarter of 2017. We expect continued competition for deposits and additional compression on the NIM through 2019.”

“Overall our net interest margin decreased 16bps from 3Q18 to 2.55% for 4Q18. The decline in the net interest margin was primarily driven by a decrease of approximately $2 million in prepayment penalties and recovered interest from non-accrual loans in 4Q18 from 3Q18. The decrease in our net interest margin shrinks to 3bps QoQ using core NIM which excludes the adjustments noted above for prepayment penalties and recovered interest from non-accrual loans.”

“Our strategy of focusing on our net interest margin spurred our decision to sell lower yielding investment securities, from which we recognized a loss on sale totaling $1.9 million, and reinvested the proceeds into higher yielding investment securities. We anticipate this transaction to aid our future net interest margin and earnings per share and to break even in approximately two years.”

“Similar to the prior quarter, we allowed $15 million of participations with another financial institution to repay, as the rates offered during the refinancing process did not meet our rate criteria. Year-to-date, we have allowed approximately $154 million of participations to repay rather than refinance at a rate below our criteria. We continue to focus on the origination and purchase of adjustable rate loans, as approximately 78% of our new loans and 46% of our new investment securities were adjustable rate products allowing us to manage future compression on net interest margin as spreads are fixed. Additionally, approximately $450 million of forward swaps entered into in late 2017 provided a benefit of a basis point to the quarter’s net interest margin. We expect these swaps to continue to benefit our net interest margin as interest rates rise.”  

“Over the past year, C&I loans represented 38% of new loan closings, which are primarily adjustable rate loans.  For the first time business loan closings exceeded multi-family closings for the year. We have over $2 billion of loans repricing through 2021. During the fourth quarter $152 million of mortgage loans have repriced up an average of 57bps. In addition, the pipeline totals $197 million with an average yield of 5.12% compared to $355 million at 4.68% in the linked quarter.”  

“Total deposits increased $258 million, or 5.5% (non-annualized) QoQ. The majority of this increase was transaction deposits which increased 8.3% (non-annualized) QoQ. Retail deposits increased $105 million QoQ. A prominent feature in the growth of retail deposits is the “Win Flushing” program, which focuses on increasing our deposit market share in the Asian Community of Flushing, Queens. Through the fourth quarter of 2018, we substantially achieved our goal, as we captured over $143 million of the $160 million in deposit growth targeted to be obtained by the end of 1Q19. Central to the “Win Flushing” program was the conversion of Flushing branches to the Universal Banker model, permitting staff to spend more time with customers. As of year-end we had 15 branches operating under the Universal Banker model. In the branches that have been converted we experienced an increase of over 120% in transactions processed at ATMs, to almost 60% of all branch transactions, reducing our customer’s reliance on tellers, resulting in an increase of over 30% in total branch sales, as sales per employee increased approximately 50% due to our branch staff focusing more time on sales opportunities. As previously discussed, we expect to have the remaining branches converted to the Universal Banker model by the end of 2019.”   

Mr. Buran continued, “We continue to see strong improvements in our delinquency trends, as non-performing assets decreased by 10% and, total delinquencies decreased 20% since December 31, 2017. The loan-to-value ratio on our non-performing real estate loans at December 31, 2018 remained conservative at 35%. The net recoveries of $214,000 for the quarter reflect the Company’s conservative underwriting and diligence in the collection process.”

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

• Multi-family (excluding underlying co-operative mortgages), commercial real estate, and one-to-four family mixed-use property mortgage loans originated during 4Q18 had a yield of 4.73%, an increase of 35bps from 4.38% for 3Q18 and an increase of 82bps from 3.91% for 4Q17. We maintained our asset quality as these loans had an average loan-to-value ratio of 46% and an average debt coverage ratio of 164%.
• We remain committed to our strategy of focusing on C&I loans, commercial real estate loans and multi-family. In the fourth quarter, loan closings represented 34%, 28%, and 25%, respectively, of all originations, which were made while maintaining conservative loan-to-value and debt coverage ratios, and increasing yield.

Mr. Buran concluded, “Overall, 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

• Manage cost of funds and continue to improve funding mix
• Increase 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 4Q18 was $40.6 million, a decrease of $2.4 million, or 5.6% YoY (4Q18 compared to 4Q17) and $0.9 million, or 2.1% QoQ (4Q18 compared to 3Q18).

• Net interest margin of 2.55%, decreased 35bps YoY and 16bps QoQ
• Net interest spread of 2.34%, decreased 41bps YoY and 17bps QoQ
• Yield on average interest-earning assets of 4.24%, increased 22bps YoY but decrease 3bps QoQ
• Cost of average interest-bearing liabilities of 1.90%, increased 63bps YoY and 14bps QoQ
• Cost of funds of 1.75%, increased 58bps YoY and 12bps QoQ, driven by increases in rates paid on deposits and short-term borrowings resulting from increases in the Fed Funds rate 
• Average balance of total interest-earning assets of $6,364.5 million, increased $430.0 million, or 7.2%, YoY and $234.0 million, or 3.8%, QoQ
• Net interest income includes prepayment penalty income from loans totaling $0.9 million in 4Q18 compared with $1.4 million in 4Q17 and $1.9 million in 3Q18, accretion of discount upon call of CLO securities of none in 4Q18 and 3Q18 and $0.4 million in 4Q17 and recovered interest from delinquent loans of $0.3 million in 4Q18, compared to $0.1 million in 4Q17 and $1.1 million in 3Q18
• Absent all above items, the yield on interest-earning assets was 4.16% in 4Q18, an improvement of 26bps from 4Q17 and 8bps from 3Q18 and the net interest margin was 2.48% in 4Q18, which decreased 29bps from 4Q17 and 3bps from 3Q18

Provision for loan losses

As a result of the quarterly review of the allowance for loan losses, the Company recorded a provision of $0.4 million compared to $6.6 million in 4Q17 and none in 3Q18.

• Recorded net charge-offs (recoveries) of ($0.2) million in 4Q18, $11.5 million in 4Q17 and ($89,000) in 3Q18

Non-interest Income (Loss)

Non-interest income (loss) for 4Q18 was a loss $1.0 million, a decrease of $4.1 million YoY, and $5.9 million QoQ.

• During 4Q18 securities totaling $120.3 million at an average yield of 2.41% were sold, recording a loss on sale of $1.9 million, and the proceeds were used to purchase $113.4 million in securities at an average yield of 3.70%  
• Additionally, non-interest income included net losses from fair value adjustments of $3.6 million in 4Q18, $0.6 million in 4Q17 and $0.2 million in 3Q18, gains from sale of assets of $1.1 million in 4Q18 and gains from life insurance of $2.2 million in 3Q18
• Absent all above items, non-interest income was $3.4 million, a decrease of $0.3 million, or 8.6% YoY, but an increase of $0.5 million, 16.4% QoQ

Non-interest Expense

Non-interest expense for 4Q18 was $25.8 million, a decrease of $0.1 million, or 0.5% YoY, and $1.5 million, or 5.4% QoQ.

• During 4Q18 BOLI split dollar insurance expense was reduced due to an increase in the discount rate used to calculate the cumulative split dollar liability; BOLI split dollar expense (income) was ($0.6) million in 4Q18, $0.6 million in 4Q17 and $0.1 million in 3Q18
• Absent the above items, non-interest expense was $26.4 million, an increase of $1.1 million, or 4.4% YoY, but a decrease of $0.7 million, or 2.5% QoQ
• The efficiency ratio was 58.5% in 4Q18 compared to 55.4% in 4Q17 and 61.3% in 3Q18

Provision for Income Taxes

The provision for income taxes in 4Q18 was $1.0 million, a decrease of $6.6 million, or 86.4% YoY and a decrease of $0.9 million, or 45.2% QoQ.

• Pre-tax income decreased by $0.2 million, or 1.3% YoY and by $5.8 million, or 30.0% QoQ
• The effective tax rates were 7.8% in 4Q18, 56.4% in 4Q17 and 9.9% in 3Q18
• 4Q18 and 3Q18 each reflect the release of a previously accrued tax liability of $1.8 million; 4Q17 reflects additional tax expense totaling $3.8 million from 2017 tax reform
• Absent the above items, the effective tax rates were 20.9% in 4Q18, 28.7% in 4Q17 and 19.1% in 3Q18

Financial Condition Summary:

Loans:

• Net loans held for investment were $5,530.5 million reflecting an increase of 3.2% QoQ (not annualized) and 7.3% from December 31, 2017, 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 closings of multi-family, commercial real estate and commercial business loans totaled $297.2 million for 4Q18, or 86.6% of loan production
• Loan pipeline was $196.6 million at December 31, 2018, compared to $359.8 million at December 31, 2017 and $355.2 million at September 30, 2018
• The loan-to-value ratio on our portfolio of real estate dependent loans as of December 31, 2018 totaled 38.8%

The following table shows the weighted average rate received from loan closings for the periods indicated:

Credit Quality:

• Non-performing loans totaled $16.3 million, a decrease of $1.9 million, or 10.4%, from $18.1 million at December 31, 2017
• Non-performing assets totaled $16.3 million, a decrease of $1.8 million, or 10.2%, from $18.1 million at December 31, 2017
• Classified assets totaled $46.5 million, an increase of $12.5 million, or 36.8%, from $34.0 million at December 31, 2017, primarily due to seven business loan relationships totaling $24.6 million being downgraded as they did not meet certain loan covenants; five of the relationships totaling $21.1 million are still accruing and continue to remit payments on time
• Loans classified as troubled debt restructured (TDR) totaled $8.4 million, a decrease of $4.8 million, or 36.6%, from $13.2 million at December 31, 2017, primarily due to the repayment of four taxi medallion TDRs, resulting in a recovery of $0.1 million and 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 34.9% average loan-to-value for non-performing loans collateralized by real estate at December 31, 2018
• Net recoveries totaled $19,000 during the twelve months ended December 31, 2018

Capital Management:

• The Company and Bank, at December 31, 2018, were both well capitalized under all applicable regulatory requirements
• During 4Q18, stockholders’ equity increased $7.7 million, or 1.4%, to $549.5 million due to net income of $12.4 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 4Q18, the Company repurchased 42,116 treasury shares at an average cost of $22.27 per share; as of December 31, 2018, up to 467,211 shares remained subject to repurchase under the authorized stock repurchase program, which has no expiration or maximum dollar limit
• Book value per common share increased to $19.64 at December 31, 2018, from $18.63 at December 31, 2017 and tangible book value per common share, a non-GAAP measure, increased to $19.07 at December 31, 2018, from $18.08 at December 31, 2017

Conference Call Information:

• John R. Buran, President and Chief Executive Officer, and Susan K. Cullen, Senior Executive Vice President and Chief Financial Officer, will host a conference call on Friday, February 1, 2019 at 9:30 AM (ET) to discuss the Company’s strategy and results for the fourth quarter and full year of 2018
• Dial-in for Live Call: 1-877-509-5836
• Webcast: https://services.choruscall.com/links/ffic190201.html
• Dial-in for Replay: 1-877-344-7529
• Replay Access Code: 10123652
• The conference call will be simultaneously webcast and archived through 5:00 PM (ET) on February 1, 2020

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 Long Island. 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.

– Statistical Tables Follow –

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
(Unaudited)

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands, except per share data)
(Unaudited) 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA
(Dollars in thousands, except per share data)
(Unaudited)

(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 the sale of securities, fair value adjustments and life insurance proceeds).

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA
(Dollars in thousands)
(Unaudited)

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

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
NET INTEREST MARGIN
(Dollars in thousands)
(Unaudited)

1. Loan interest income includes loan fee income (which includes net amortization of deferred fees and costs, late charges, and prepayment penalties) of approximately $0.5 million, $1.2 million and $0.5 million for the three months ended December 31, 2018, September 30, 2018 and December 31, 2017, respectively.
2. Interest income on tax-exempt securities does not include the tax benefit of the tax-exempt securities.

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
NET INTEREST MARGIN
(Dollars in thousands)
(Unaudited)

1. Loan interest income includes loan fee income (which includes net amortization of deferred fees and costs, late charges, and prepayment penalties) of approximately $2.1 million and $2.4 million for the year ended December 31, 2018 and 2017, respectively.
2. Interest income on tax-exempt securities does not include the tax benefit of the tax-exempt securities.

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
DEPOSIT COMPOSITION
(Unaudited)

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
LOANS
(Unaudited)

Loan Closings

Loan Composition

Net Loans Activity 

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
NON-PERFORMING ASSETS and NET CHARGE-OFFS
(Unaudited)

⁽¹⁾  Not included in the above analysis are TDR taxi medallion loans totaling $3.9 million in 4Q18, $5.4 million in 3Q18, $5.5 million in 2Q18, $5.7 million in 1Q18 and $5.9 million in 4Q17.

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.

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
RECONCILIATION OF GAAP EARNINGS and CORE EARNINGS
(Dollars in thousands, except per share data)
(Unaudited)

FLUSHING FINANCIAL CORPORATION and SUBSIDIARIES
CALCULATION OF TANGIBLE STOCKHOLDERS’
COMMON EQUITY to TANGIBLE ASSETS
(Unaudited)

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

Contact:

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