Flushing Financial Corporation Reports Record Quarterly C&I Loan Closings, Loan Pipeline Increased to $424 Million at Quarter End

SECOND QUARTER 2019¹ HIGHLIGHTS

• GAAP diluted EPS was $0.37, up 48.0% QoQ and down 22.9% YoY
• Core diluted EPS was $0.42, up 27.3% QoQ and down 14.3% YoY
• Record C&I closings totaled $158.3 million
• Loan closings increased 50% QoQ
• Loan pipeline totaled $423.9 million, largest since 1Q16
• Net interest margin was 2.45%, down 12bps QoQ and 32bps YoY
• Core net interest margin was 2.40%, down 12bps QoQ and 26bps YoY
• GAAP net interest income of $40.0 million, down 4.3% QoQ and 6.2% YoY
• Core net interest income of $40.8 million, down 3.8% QoQ and 4.3% YoY
• GAAP and core ROAE were 7.5% and 8.6%, respectively, compared with 5.1% and 6.8%, respectively in 1Q19
• GAAP and core ROAA were 0.6% and 0.7%, respectively, compared with 0.4% and 0.6%, respectively in 1Q19
• Provision for loan losses of $1.5 million, or $0.04 after-tax per diluted common share, driven mainly by charge-offs of one commercial business loan relationships and growth in the C&I portfolio

UNIONDALE, N.Y., July 23, 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 second quarter ended June 30, 2019.

John R. Buran, President and Chief Executive Officer, stated, "We are pleased to report quarterly earnings growth as diluted earnings per share rose 48% from 1Q19, while core earnings rose 27%. Both results were down from 2Q18, as net interest margin pressure returned, driven by the inversion of the yield curve, coupled with increased competitive pressure on our deposit business."

"During the quarter, we experienced more robust loan growth as closings increased 50% from 1Q19. Total loan closings for the quarter amounted to $296 million. In addition, the loan pipeline increased over 50% to $424 million during the same period, our largest pipeline since the first quarter of 2016. The mortgage pipeline has an average yield of 4.63%, which is 21bps greater than the 2Q19 core yield of total loans. Due to the size of the pipeline and our strong track record of closing loans in the pipeline, we anticipate loan growth will accelerate in the second half of 2019, resulting in full year loan growth in the mid-single digit range."

"We continued to diversify the loan portfolio during the quarter, as we produced record C&I closings of $158 million, representing 53% of 2Q19 loan closings. These loans are generally floating rate loans and represented 18% of total loans at June 30, 2019, compared to 15% at June 30, 2018. We also recognized improved closing levels for our mortgage loans as they increased $71 million QoQ."

"The net interest margin compressed 12bps QoQ, with both sides of the balance sheet contributing to the compression. We continue to experience pricing pressure due to the inverted yield curve at the pricing point for our loan tenor. In the past, we have articulated our strategy of focusing on rate over volume. During 2Q19, we modified our position and rates due to market conditions. The increase in the cost of funds was primarily driven by pricing pressure on our retail and municipal deposits, as competition from traditional bank and non-bank competitors remains very strong. Although the rates paid on retail and municipal deposits have increased, they remain less expensive than alternative funding sources, including wholesale funding. Given an inverted yield curve, we continue to proactively mitigate the NIM compression through the closing of C&I floating rate loans and our swap strategy. In June 2019, we entered into an additional $100 million of swaps on borrowings bringing total swaps on borrowings to $542 million at the end of 2Q19. Our long-term goal is to move towards being more interest rate neutral which allows us to perform better in all interest rate environments."

Mr. Buran continued, "We remain focused on preserving strong risk management practices, including conservative underwriting standards and improving yields to achieve improved risk-adjusted returns. We continue to focus on increasing the amount of direct loan business, as approximately 63% of 2Q19 loan closings were non-brokered loans."

• Multi-family (excluding underlying co-operative mortgages), commercial real estate, and one-to-four family mixed-use property mortgage loans originated during 2Q19 had a yield of 4.60%, which is above our core yield of total loans for the same period, a decrease of 41bps from 5.01% for 1Q19 and an increase of 33bps from 4.27% for 2Q18. As noted, the decrease in the yield of 2Q19 originations was due to the inverted yield curve. We maintained our asset quality as these loans had an average loan-to-value ratio of 38% and an average debt coverage ratio of 192%.
• We remain committed to our strategy of focusing on C&I loans, commercial real estate loans and multi-family. In the 2Q19, these loan closings represented 53%, 14%, and 19%, respectively, of all originations, which were made while maintaining conservative loan-to-value and debt coverage ratios.

Mr. Buran concluded, "Overall, we remain well capitalized and well positioned to deliver profitable growth and long-term value to our shareholders as we continue to execute 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 2Q19 was $40.0 million, a decrease of $2.6 million, or 6.1% YoY (2Q19 compared to 2Q18) and $1.8 million, or 4.3% QoQ (2Q19 compared to 1Q19).

• Net interest margin of 2.45%, decreased 32bps YoY and 12bps QoQ
• Net interest spread of 2.23%, decreased 38bps YoY and 13bps QoQ
• Yield on average interest-earning assets of 4.26%, increased 15bps YoY but decreased 3bps QoQ
• Cost of average interest-bearing liabilities of 2.03%, increased 53bps YoY and 10bps QoQ
• Cost of funds of 1.90%, increased 50bps YoY and 10bps 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 $6,540.1 million, increased $358.9 million, or 5.8%, YoY and $19.0 million, or 0.3%, QoQ
• Net interest income includes prepayment penalty income from loans and securities totaling $1.1 million in 2Q19, $0.8 million in 1Q19 and $1.6 million in 2Q18; recovered interest from delinquent loans of $0.5 million in 2Q19, $0.7 million in 1Q19 and $0.2 million in 2Q18; and losses from fair value adjustments on qualifying hedges totaling $0.8 million in 2Q19, $0.6 million in 1Q19 and none in 2Q18
• Absent all above items noted in the preceding bullet, the yield on interest-earning assets was 4.21% in 2Q19, a decrease of 3bps from 1Q19 and 22bps from 2Q18 and the net interest margin was 2.40% in 2Q19, which decreased 12bps from 1Q19 and 26bps from 2Q18

Provision for loan losses

The Company recorded a provision of $1.5 million compared to $1.0 million in 1Q19 and none in 2Q18.

• 2Q19 includes charge-offs from one commercial business loan relationship, after charge-off the remaining book balance for this relationship was $0.2 million, equaling the value of the underlying collateral
• Recorded net charge-offs of $1.0 million in 2Q19, $0.9 million in 1Q19, and $0.3 million in 2Q18

Non-interest Income

Non-interest income for 2Q19 was $2.5 million, a decrease of $0.7 million YoY, but an increase of $1.5 million QoQ

• Non-interest income included net gain on sale of assets of $0.8 million in 2Q19, net gain on sale of loans of $0.1 million in each of 2Q19 and 1Q19 and $0.4 million in 2Q18
• Additionally, non-interest income included net losses from fair value adjustments of $2.0 million in 2Q19, $2.1 million in 1Q19, and $0.3 million in 2Q18
• Absent all above items, non-interest income was $3.5 million, an increase of $0.5 million, or 16.9%, YoY, and $0.6 million, or 19.0%, QoQ, resulting primarily from a capital gain of $0.5 million recorded in 2Q19 from the redemption of $1.2 million in assets held in a rabbi trust

Non-interest Expense

Non-interest expense for 2Q19 was $27.2 million, a decrease of $0.2 million, or 0.9% YoY, and $5.3 million, or 16.2% QoQ.

• Non-interest expense improved QoQ, primarily due to 1Q19 including seasonal and one-time expenses
• The ratio of non-interest expense to average assets improved to 1.58% in 2Q19 compared to 1.89% in 1Q19 and 1.69% in 2Q18
• The efficiency ratio was 61.1% in 2Q19 compared to 70.4% in 1Q19 and 59.6% in 2Q18

Provision for Income Taxes

The provision for income taxes in 2Q19 was $3.3 million, a decrease of $1.2 million, or 27.1% YoY but an increase of $1.0 million, or 43.1% QoQ.

• Pre-tax income decreased by $4.6 million, or 24.9% YoY but increased by $4.5 million, or 47.8% QoQ
• The effective tax rates were 23.7% in 2Q19, 24.5% in 1Q19 and 24.4% in 2Q18

Financial Condition Summary:

Loans:

• Net loans held for investment were $5,616.9 million reflecting an increase of 0.9% QoQ (not annualized) and 5.7% from June 30, 2018, as we continue to focus on the origination of multi-family, commercial real estate and commercial business loans with a full relationship
• Loan closings of multi-family, commercial real estate and commercial business loans totaled $254.4 million for 2Q19, or 85.8% of loan production
• Loan pipeline was $423.9 million at June 30, 2019, compared to $274.8 million at March 31, 2019 and $322.9 million at June 30, 2018
• The loan-to-value ratio on our portfolio of real estate dependent loans as of June 30, 2019 totaled 38.4%

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

Credit Quality:

• Non-performing loans totaled $15.7 million, a decrease of $0.6 million, or 3.4%, from $16.3 million at December 31, 2018
• Non-performing assets totaled $16.0 million, a decrease of $0.3 million, or 1.9%, from $16.3 million at December 31, 2018
• Classified assets totaled $31.9 million, a decrease of $14.6 million, or 31.4%, from $46.5 million at December 31, 2018
• Loans classified as troubled debt restructured (TDR) totaled $6.3 million, a decrease of $2.1 million, or 24.8%, from $8.4 million at December 31, 2018
• 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 35.4% average loan-to-value for non-performing loans collateralized by real estate
• Net charge-offs totaled $1.9 million during the six months ended June 30, 2019

Capital Management:

• The Company and Bank, at June 30, 2019, were both well capitalized under all applicable regulatory requirements
• Through 2Q19, stockholders' equity increased $15.9 million, or 2.9%, to $565.4 million due to net income of $17.6 million and an improvement in the fair value of the securities portfolio, partially offset by the declaration and payment of dividends on the Company's common stock
• During 2Q19, the Company did not repurchase any shares; as of June 30, 2019, 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 $20.06 at June 30, 2019, from $19.64 at December 31, 2018 and tangible book value per common share, a non-GAAP measure, increased to $19.50 at June 30, 2019, from $19.07 at December 31, 2018

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 Wednesday, July 24, 2019 at 9:30 AM (ET) to discuss the Company's strategy and results for the second quarter
• Dial-in for Live Call: 1-877-509-5836
• Webcast: https://services.choruscall.com/links/ffic190724.html
• Dial-in for Replay: 1-877-344-7529
• Replay Access Code: 10129655
• The conference call will be simultaneously webcast and archived through 5:00 PM (ET) on July 24, 2020

About Flushing Financial Corporation

Flushing Financial Corporation 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 on 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^®, an 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, 2018 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 tables entitled "Reconciliation of GAAP Earnings and Core Earnings" and "Reconciliation of GAAP Net Interest Income and Net Interest Margin to Core Net Interest Income and Net Interest Margin."

- 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)

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

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

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

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)

Net Charge-Offs (Recoveries)

Core Diluted EPS, Core ROAE, Core ROAA, Core Net Interest Income, Core Yield on Total Loans, Core Net Interest Margin and tangible book value per common share are each non-GAAP measures used in this release. A reconciliation to the most directly comparable GAAP financial measures appears below in tabular form. The Company believes that these measures are useful for both investors and management to understand the effects of certain interest and 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)