Flushing Financial Corporation Announces Second Quarter GAAP Diluted EPS of $0.44 and Record Core Diluted EPS of $0.46, Driven by Record Net Interest Income, Strong Credit Quality and Solid Loan Growth

SECOND QUARTER 2017¹

• GAAP diluted EPS was $0.44, up 4.8% QoQ but down 58.1% YoY, largely due to net gain on sale of buildings in 2Q16
• Record core diluted EPS was $0.46, up 17.9% YoY and 15.0% QoQ
• Record net interest income of $43.6 million, an improvement of 4.1% YoY and 0.5% QoQ
• Net interest margin was 2.95%, unchanged QoQ
• GAAP and core ROAE improved to 9.6% and 10.2%, compared with 9.5% and 9.1% in 1Q17
• GAAP and core ROAA was 0.8% and 0.9%, compared with 0.8% for both in 1Q17

UNIONDALE, N.Y., July 25, 2017 -- Flushing Financial Corporation (the “Company”) (Nasdaq:FFIC), the parent holding company for Flushing Bank (the “Bank”), today announced its financial results for the three and six months ended June 30, 2017.

John R. Buran, President and Chief Executive Officer, stated, “We are pleased to report record core earnings for the second quarter of 2017 driven by record net interest income and our continued discipline regarding non-interest expense. Credit quality continued to improve, as our non-performing assets have decreased by over 29% since the end of 2016 and net charge-offs remain minimal. We saw tangible results from our strategy change announced in mid-2016 to focus origination efforts on higher yielding loans.  The yield on recent quarter loan production increased 19 basis points over the prior quarter and 33 basis points from the comparable quarter of 2016. For the first time since 2010, quarterly new loan yields exceed that quarter’s average yield on total interest-earning assets. Our total loan portfolio, including loans held for sale, grew 2% during the recent quarter and 5% for the first six months of 2017 while meeting our strong underwriting standards.”

“We continue to implement our strategy of enhancing operational scalability and efficiency by converting our branch network to the more cost effective Universal Banker model.  We expect to convert half of our 19 branches by the end of 2017. Although total deposits increased 8% year-over-year, deposits declined 3% quarter-over-quarter primarily caused by seasonal government deposit outflows, which we anticipate returning in the fourth quarter.”

“As a result of recent rate increases by the Federal Reserve, we have started to experience some rate pressure on liabilities. During the recent quarter, our cost of funds increased 4 basis points due to a combination of an increase in the rates we pay on some of our deposit products to stay competitive within our market and the funding mix, as seasonal government deposit outflows were replaced by slightly more expensive borrowed funds.”

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 second quarter, multi-family, commercial real estate, and commercial business loan originations and purchases represented 24%, 47%, and 19%, respectively, of all originations while maintaining conservative loan-to-values, debt coverage ratios, and increasing yield. 
• The average interest rate obtained for second quarter originations and purchases improved to 4.04% compared to 3.85% for 1Q17 and 3.71% for 2Q16.
• The average rate of mortgage loan applications in the pipeline totaled 4.17% at June 30, 2017, as compared to 4.20% at December 31, 2016 and 3.94% at June 30, 2016.
• Multi-family (excluding underlying co-operative mortgages), commercial real estate, and one-to-four family mixed-use property mortgage loans originated during the second quarter of 2017 had an increased yield of 4.19% compared to 4.01% for the previous quarter and 3.81% for the same quarter in 2016.  While the yields have been increasing, we have kept our asset quality as these loans had a low average loan-to-value ratio of 46.2% and an average debt coverage ratio of 198%.

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.”

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

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:

Quarter ended June 30, 2017 (2Q17) compared to the quarters ended June 30, 2016 (2Q16) and March 31, 2017 (1Q17).

June 30, 2017 compared to March 31, 2017 (“QoQ”); June 30, 2017 compared to June 30, 2016 (“YoY”).

Net Interest Income

Net interest income for 2Q17 was $43.6 million, an increase of 4.1% YoY and 0.5% QoQ.

• Net interest margin of 2.95%, decreased 4bps YoY but remains unchanged QoQ
• Net interest spread of 2.83%, decreased 5bps YoY and 1bp QoQ
• Net interest income includes prepayment penalty income from loans of $1.0 million in 2Q17 compared with $1.4 million in 2Q16 and $1.1 million in 1Q17, and recovered interest from nonaccrual loans of $0.3 million in 2Q17 compared with $0.2 million in 2Q16 and $0.5 million in 1Q17
• Net interest income includes $0.4 million in accelerated accretion of discount upon the call of CLO securities totaling $27.5 million
• Excluding prepayment penalty income, accelerated accretion of discount and recovered interest from nonaccrual loans, the yield on interest-earning assets would have improved to 3.82% in 2Q17, compared with 3.81% in 2Q16 and 3.80% in 1Q17, and the net interest margin would have decreased to 2.83% in 2Q17, compared with 2.87% in 2Q16 and 2.85% in 1Q17
• Average balance of total interest-earning assets of $5,919.0 million, increased $306.0 million, or 5.5% YoY and increased $45.2 million, or 0.8% QoQ
• Yield on interest-earning assets of 3.94%, increased 1bp YoY and 4bps QoQ
• Cost of interest-bearing liabilities of 1.11%, increased 6bps YoY and 5bps QoQ
• Cost of funds of 1.05%, increased 6bps YoY and 4bps QoQ, driven by an increase in rates paid on our core deposits and short-term borrowings  

Non-interest Income

Non-interest income for 2Q17 was $1.9 million, a decrease of $35.8 million YoY and $1.7 million QoQ.

• Non-interest income included net losses from fair value adjustments of $1.2 million in 2Q17, $1.1 million in 2Q16 and $0.4 million in 1Q17
• 2Q16 included a gain of $33.8 million recorded from the sale of one of our properties in Flushing, Queens and a gain on the sale of securities of $2.4 million and 1Q17 included a gain from life insurance proceeds of $1.2 million
• Absent the above items non-interest income was $3.1 million, an increase of $0.5 million YoY and $0.2 million QoQ

Non-interest Expense

Non-interest expense for 2Q17 was $26.1 million, a decrease of $2.4 million, or 8.4%, YoY and $3.5 million, or 11.8% QoQ.

• 2Q16 included a non-recurring penalty of $2.1 million on the prepayment of $38.0 million in repurchase agreements and a write-down of $0.8 million on one OREO property. Absent these two items, non-interest expense increased $0.5 million, or 1.9% YoY, driven by increased salaries and benefits from annual salary increases and additions in staffing, partially offset by reductions in FDIC insurance expense, due to lower assessment rates, and decreased foreclosure expense due to continued improvement in asset quality
• Lower costs associated with FDIC insurance and foreclosure expense should be sustainable
• 1Q17 included the impact of annual grants of employee and director restricted stock unit awards totaling $3.3 million. Absent this item in 1Q17, non-interest expense decreased $0.2 million or 0.8%, primarily driven by decreased foreclosure expense
• The efficiency ratio improved to 55.8% from 57.1% in 2Q16 and 64.0% in 1Q17

Provision for Income Taxes

The provision for income taxes in 2Q17 was $6.8 million, a decrease of $13.9 million YoY but an increase of $1.5 million QoQ.

• Pre-tax income decreased by $31.7 million, or 61.9% YoY but increased $2.0 million, or 11.3% QoQ
• The effective tax rates were 34.7% in 2Q17, 40.5% in 2Q16 and 30.0% in 1Q17
• The improvement in the Company’s effective tax rate compared to 2Q16 was primarily due to a change in the accounting treatment of deductible stock compensation expense from prior years; in prior years, 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
• The increase in the Company’s effective tax rate compared to 1Q17 was primarily due to the requirement that stock compensation be treated, for tax purposes, as a discrete tax item in the period the shares vest; our stock awards generally vest in the first quarter, therefore reducing 1Q17 effective tax rate
• We anticipate the effective tax rate to approximate the 2Q17 rate for the remainder of the year

Financial Condition Summary:

Loans:

• Net loans held for investment were $5,023.5 million reflecting an increase of 1.4% QoQ (not annualized) and 4.4% year-to-date as we continue to focus on the origination of multi-family, commercial real estate and commercial business loans with a full relationship
• Loan originations and purchases of multi-family, commercial real estate and commercial business loans totaled $236.3 million for 2Q17, or 90.5% of loan production
• Loan pipeline was $279.1 million at June 30, 2017, compared to $303.1 million at March 31, 2017 and $329.8 million at June 30, 2016
• The loan-to-value ratio on our portfolio of real estate dependent loans as of June 30, 2017 totaled 39.8%

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

Credit Quality:

• Non-performing loans totaled $15.5 million, a decrease of $6.0 million, or 27.8%, from $21.4 million at December 31, 2016
• Classified assets totaled $44.7 million, an increase of $0.7 million, or 1.7%, from $44.0 million at December 31, 2016, primarily due to an increase in substandard taxi medallion loans, partially offset by reductions in non-performing assets
• Loans classified as troubled debt restructured (TDR) totaled $21.4 million, an increase of $3.9 million, or 22.6%, from $17.4 million at December 31, 2016, attributable to the addition of five taxi medallion TDRs
• 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 38.5% average loan-to-value for non-performing loans collateralized by real estate at June 30, 2017
• No provision for loan losses was recorded in the six months ended June 30, 2017 or all of 2016 due to continued strong credit quality, with net charge-offs totaling $0.1 million for the six months ended June 30, 2017 and net recoveries of $0.7 million for all of 2016

Capital Management:

• The Company and Bank are subject to the same regulatory requirements and at June 30, 2017, both were well capitalized under all applicable regulatory requirements
• During six months ended June 30, 2017, stockholders’ equity increased $20.2 million, or 3.9%, to $534.1 million due to net income of $25.0 million and $1.8 million of other comprehensive income, partially offset by the declaration and payment of dividends on the Company’s common stock
• During the six months ended June 30, 2017, the Company repurchased 10,000 treasury shares at an average cost of $27.80 per share; as of June 30, 2017, up to 485,905 shares may be repurchased under the current authorized stock repurchase program, which has no expiration or maximum dollar limit
• Book value per common share increased to $18.54 at June 30, 2017, from $17.95 at December 31, 2016 and $17.77 at June 30, 2016
• Tangible book value per common share, a non-GAAP measure, increased to $18.00 at June 30, 2017, from $17.40 at December 31, 2016 and $17.22 at June 30, 2016

Inaugural 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 26, 2017 at 9:30 AM (ET) to discuss the Company’s strategy and results for the second quarter of 2017
• Dial-in for Live Call: 1-888-317-6016
• Webcast: https://services.choruscall.com/links/ffic170726.html 
• Dial-in for Replay: 1-877-344-7529
• The conference call will be simultaneously webcast and archived through 5:00 PM (ET) on September 30, 2017

About Flushing Financial Corporation

Flushing Financial Corporation 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, and public entities by offering a full complement of deposit, loan, and cash management services through its 19 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. The Bank also operates an online banking division, iGObanking.com®, which offers competitively priced deposit products to consumers nationwide.

Additional information on 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, 2016 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”, “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 -

Core Diluted EPS, Core ROAE, Core ROAA, 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 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