FBR Capital Markets said Flushing Financial Corp.'s (NASDAQ: FFIC) story was well received by investors given that the company is growing loans, generates reasonable profitability, and its performance through the cycle is evidence of its strong credit quality.

The brokerage reiterated its "outperform" rating on shares of Flushing Financial with a price target of $16, equal to a modest 1.25 times of 2011 fourth quarter estimated tangible book following recent travels with management.

"We consider FFIC strongly capitalized for its low-risk model, with a tangible common equity ratio (TCE) of 8.7 percent and a dividend payout ratio of 40 percent. As credit costs recede, FFIC's Return On Assets (ROA) should build from roughly 0.8 percent to 1.20 percent, and its return on total capital employed should improve from 10 percent to 13 percent, yet shares trade at just 1.25 times of tangible book," said Bob Ramsey, an analyst at FBR Capital.

"We recently traveled with Flushing's CEO John Buran and CFO David Fry to visit West Coast clients. Investor questions focused on growth prospects, credit quality, capital, normalized earnings power, and the company's efforts to broaden and improve its funding sources. In our opinion, Flushing's story was well received," said Ramsey.

Ramsey said given 3.86 percent NALs and an allowance equal to 85 basis points of loans, many investors were concerned about the potential loss content in nonaccruals. Flushing's NALs have an average LTV of just 65 percent, as all substandard loans are evaluated and charged down to 90 percent of appraised value, and FFIC's current LTV across its entire portfolio is below 50 percent.

Ramsey said the foreclosure process in New York is slow (both commercial and residential), but many loans are now nearing the end of that process. Flushing is starting to receive bids at or above par for NALs, suggesting that NALs will soon stabilize and begin to trend lower.

Ramsey said low LTVs, conservative debt service coverage ratios, and a focus on rent-regulated multifamily properties give us comfort that the loss content in Flushing's loan portfolios will remain very low.

"Flushing's loans grew 2 percent in 2010 (including 8 percent growth in multifamily), and management is targeting 4 percent to 7 percent loan growth in 2011. Longer term, the company expects that it can return to its historical double-digit pace of loan growth. The company noted increasing activity in the multifamily space and interest from buyers," said Ramsey.

Flushing Financial stock closed Friday's regular trading down 0.94 percent at $14.75 on the NASDAQ Stock Market.

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