Why These Fundamentals Make Flushing Financial Corporation’s (NASDAQ:FFIC) More Attractive
Flushing Financial Corporation’s (NASDAQ:FFIC) profitability and risk are largely affected by the underlying economic growth for the region it operates in US given it is a small-cap stock with a market capitalisation of US$782.46M. A bank’s cash flow is directly impacted by economic growth as it is the main driver of deposit levels and demand for loans which it profits from. Following the Financial Crisis in 2008, a set of reforms termed Basel III was enforced to bolster risk management, regulation, and supervision in the financial services industry. Basel III target banking regulations to improve the sector’s ability to absorb shocks resulting from economic stress which may expose financial institutions like Flushing Financial to vulnerabilities. Unpredictable macro events such as political instability could weaken its financial position which is why it is important to understand how well the bank manages its risk levels. High liquidity and low leverage could position Flushing Financial favourably at the face of macro headwinds. A way to measure this risk is to look at three leverage and liquidity metrics which I will take you through today. Check out our latest analysis for Flushing Financial
Is FFIC’s Leverage Level Appropriate?
Banks with low leverage are better positioned to weather adverse headwinds as they have less debt to pay off. A bank’s leverage may be thought of as the level of assets it owns compared to its own shareholders’ equity. While financial companies will always have some leverage for a sufficient capital buffer, Flushing Financial’s leverage ratio of less than the suitable maximum level of 20x, at 12x, is considered to be very cautious and prudent. This means the bank exhibits very strong leverage management and is well-positioned to repay its debtors in the case of any adverse events since it has an appropriately high level of equity relative to the debt it has taken on to remain in business. If the bank needs to increase its debt levels to firm up its capital cushion, there is plenty of headroom to do so without deteriorating its financial position.
How Should We Measure FFIC’s Liquidity?
As abovementioned, loans are quite illiquid so it is important to understand how much of these loans make up Flushing Financial’s total assets. Generally, they should make up less than 70% of total assets, but its current level of 81.86% means the bank has obviously lent out 12% above the sensible upper limit. This indicates that revenue is dependent on this particular asset but also the bank is more exposed to defaulting relative to banks with less loans.
What is FFIC’s Liquidity Discrepancy?
Banks operate by lending out its customers’ deposits as loans and charge a higher interest rate. These loans may be fixed term and often cannot be readily realized, conversely, on the liability side, customer deposits must be paid in very short notice and on-demand. This mismatch between illiquid loans and liquid deposits poses a risk for the bank if unusual events occur and requires it to immediately repay its depositors. Relative to the prudent industry loan to deposit level of 90%, Flushing Financial’s ratio of over 118.80% is higher, which positions the bank in a risky spot given the adverse liquidity disparity between loan and deposit levels. Basically, for $1 of deposits with the bank, it lends out over $1 which is imprudent.
Next Steps:
We’ve only touched on operational risks for FFIC in this article. But as a stock investment, there are other fundamentals you need to understand. I’ve put together three key factors you should further examine:
Future Outlook: What are well-informed industry analysts predicting for FFIC’s future growth? Take a look at our free research report of analyst consensus for FFIC’s outlook.
Valuation: What is FFIC worth today? Has the future growth potential already been factored into the price? The intrinsic value infographic in our free research report helps visualize whether FFIC is currently mispriced by the market.
Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.
