Flushing Financial (NASDAQ: FFIC) reported Q3 EPS of $0.54, $0.06 better than the analyst estimate of $0.48.

• GAAP diluted EPS was $0.61, up 27.1% QoQ and 74.3% YoY
• Core diluted EPS was $0.54, up 10.2% QoQ and 45.9% YoY
• Net interest income of $41.5 million, down 2.6% QoQ, and 3.5% YoY
• Net interest margin was 2.71%, down 5bps QoQ and 19bps YoY
• GAAP and core ROAE were 12.9% and 11.4%, compared with 10.5% and 10.6%, respectively in 2Q18
• GAAP and core ROAA were 1.1% and 1.0%, respectively, compared with 0.9% for each in 2Q18
• Tax benefit of $0.06 per diluted share due to release of previously accrued tax liability

John R. Buran, President and Chief Executive Officer, stated, “We are pleased to report earnings per diluted common share of $0.61 for the third quarter of 2018, an increase of 27% and 74% from 2Q18 and 3Q17, respectively, driven by continued strong execution of our strategic objectives and the release of previously accrued tax liability.”

“Our strategic focus of increasing net interest income through emphasizing rate over volume and reducing our liability sensitive position has resulted in net loans growth of 0.9% (non-annualized) for the third quarter. Similar to the prior quarter, we allowed $62 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 $139 million of participations to repay rather than refinance at a rate below our criteria. During the quarter, approximately 70% of our new loans and 40% of our new investment securities were adjustable rate products allowing us to reduce future compression on the net interest margin as spreads are fixed. Additionally, approximately $450 million of forward swaps entered in late 2017 have provided a benefit of 1bp to the quarter’s net interest margin. We expect these swaps to continue to benefit our net interest margin as interest rates rise. These swaps coupled with the extension of the maturity of liabilities has mitigated our liability sensitive position.”

“The yield on the loan portfolio increased 21bps from the linked quarter and 28bps from the same quarter in 2017 representing successful execution of our strategic objectives. The yield on mortgage loan originations increased 8bps from the linked quarter and 35bps from the same quarter in 2017. The yield on new loan originations decreased 8bps during the quarter primarily due to the initial rate recorded on certain adjustable rate C&I loans, which have an average rate reset of 3 months. Over the past five quarters, C&I loans represent 39% of new loan originations, which are primarily adjustable rate loans. As we have previously disclosed, we have approximately $2 billion of loans repricing through 2020, of which $127 million mortgage loans have repriced up an average of 68bps during the third quarter, further enhancing loan yields. In addition, the pipeline remains strong at $355 million with an average yield of 4.68% compared to $323 million at 4.67% in the linked quarter.”

“Despite this good news on yields, margin pressure continued to be driven by higher cost of funds. The cost of funds increased 22bps QoQ and 48bps YoY, as the Federal Reserve increased benchmark rates by 100bps since the third quarter of 2017. The competition for deposits this quarter was most acute in the municipal government sector as the cost of NOW and money market accounts increased 39bps and 32bps, respectively. We expect continued competition for deposits and additional compression on the NIM through 2019.”

“Retail deposits increased $106 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 third quarter of 2018, we have captured over $100 million in deposit growth through this program and remain on pace to add $160 million in deposits by the end of 1Q19. Central to the “Win Flushing” program was the conversion of the Flushing branches to the Universal Banker model permitting staff to spend more time with customers. In the 11 branches that have been converted we have 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, allowing our branch staff to focus 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 and a branch in Chinatown opening in 4Q18.”

Mr. Buran continued, “As we’ve continued to improve loan yields we have retained our focus on credit quality. Non-performing assets decreased by 30% and, total delinquencies have decreased 17% since December 31, 2017. The allowance for loan losses to gross loans was 0.38% while the allowance for loan losses to non-performing loans improved to 161% from 137% in the linked quarter. The loan-to-value ratio on our non-performing real estate loans at September 30, 2018 remains conservative at 35%. The net recoveries of $89,000 for the quarter reflect the Company’s conservative underwriting and diligence in the collection process.”

For earnings history and earnings-related data on Flushing Financial (FFIC) click here.