Flushing Financial's Capital Raise: Unloading Underwater Bonds

Flushing Financial Corporation (FFIC) has announced plans to raise $70 million in capital, aiming to shore up its balance sheet and reduce exposure to underwater bonds. This strategic move comes as the bank seeks to mitigate losses and maintain competitive deposit rates in the face of rising interest rates and plummeting bond values.

The decision to raise capital and unload underwater bonds reflects a shift in Flushing Financial's risk management strategy. The bank's pivot from cash to securities in 2018, influenced by Basel rules, led to a significant portfolio of government bonds and mortgage-backed securities (MBS). However, rising interest rates have caused the values of these bonds to plummet by a total of $250 billion, forcing banks to sit on them to avoid recording losses. This reduced yields earned on bonds, impacting the amount banks can pay to depositors.



Flushing Financial's plan to raise $70 million will help it reduce exposure to underwater bonds and strengthen its balance sheet. As of Q1 2024, the bank held $1.2 billion in underwater bonds, contributing to a $60 million loss. By selling these bonds, Flushing Financial can reduce its unrealized losses and improve its net interest margin. The raised capital will also enhance Flushing Financial's capital adequacy ratio, boosting investor confidence and potentially leading to an increase in its stock price.



The capital raise could have significant implications for Flushing Financial's dividend policy and shareholder returns. With the capital raise, Flushing Financial may be able to reinvest in higher-yielding assets, potentially improving its net interest margin and earnings. This could lead to an increase in dividends, benefiting shareholders. However, if the capital raise is used primarily to cover losses from underwater bonds, it may not directly translate to higher dividends. Instead, it could help stabilize the bank's financial position, reducing the risk of dividend cuts. Additionally, the capital raise could dilute existing shareholders' ownership, potentially impacting their returns.

In conclusion, Flushing Financial's planned $70 million capital raise is a strategic move to reduce exposure to underwater bonds and improve its balance sheet. This decision reflects a shift in risk management strategy, aiming to mitigate losses and maintain competitive deposit rates. The capital raise could have significant implications for Flushing Financial's dividend policy and shareholder returns, as the bank seeks to stabilize its financial position and reinvest in higher-yielding assets.