KBRA Affirms Ratings for Flushing Financial Corporation

KBRA affirms the senior unsecured debt rating of BBB, the subordinated debt rating of BBB-, and the short-term debt rating of K3 for Uniondale, New York-based Flushing Financial Corporation (NASDAQ: FFIC) (“Flushing” or “the company”). In addition, KBRA affirms the deposit and senior unsecured debt ratings of BBB+, the subordinated debt rating of BBB, and the short-term deposit and debt ratings of K2 for its subsidiary, Flushing Bank. The Outlook for all long-term ratings is Negative.

Key Credit Considerations

Flushing's spread reliant, liability sensitive balance sheet weakened the company’s earnings power during the Fed tightening cycle and intensely competitive deposit market environment such that the company's core ROA has recently tracked at ~30 bps. Given FFIC’s higher component of CDs and utilization of wholesale funding sources, paired with the more conservative and lower yielding loan portfolio, funding costs have repriced higher at a meaningfully faster rate than earning asset yields resulting in ~120 bps of NIM compression since 4Q21. The company has historically relied on a higher level of noncore funding to support loan growth, with core deposits to total funding averaging 70% from 2019-2023. Moreover, time deposits comprise 38% of the total base, contributing to comparatively elevated deposit costs (3.55% for 3Q24). FFIC's ability to enhance the core deposit franchise over the medium term will likely be challenging given the highly competitive deposit market. That said, we note that 3Q24 was highlighted by some NIM expansion supported by favorable loan repricing, contributing to a slight improvement in core ROA to 34 bps. While we recognize that earnings power remains constrained, NIM should benefit from further rate cuts with a large amount of CDs repricing downward over the next year, combined with the anticipated repricing of loans. Accordingly, earnings should benefit with modestly expanding NIM as long as credit costs remain low.

Flushing has historically maintained somewhat below peer capital levels (10.2% CET1 at 3Q24), though not necessarily inconsistent with a comparatively conservative loan book; however, with weakened earnings power, internal capital rebuild has been limited. Should a more challenging credit environment arise, the company’s weaker earnings power with somewhat lower aggregate loss absorbing capacity – loan loss reserves plus core capital – would provide less of a buffer against potentially rising credit costs. That said, we note that FFIC has maintained conservative underwriting standards, highlighted by low LTVs and strong DSCRs for its largest lending segments, combined with low historical loss rates for NYC rent-regulated multifamily lending, have resulted in negligible loss content over contemporary operating history with NCOs averaging 6 bps over the last 5 years. While investor CRE concentration is elevated compared to peers at 476% of RBC, multifamily loans (39% of the total loan portfolio) represent the largest relative exposure, which has reflected an impressive credit performance record, including, but not limited to, during the GFC. Additionally, despite an above average exposure to rent-regulated multifamily in NYC (properties with >50% of rent regulated units at ~20% of loans), the company maintains conservative underwriting with average LTV and DSCR of 48% and 1.8x, respectively.

Rating Sensitivities

A return to Stable Outlook could occur from continued asset quality outperformance, maintenance of capital metrics, and an improved earnings profile. Given the Negative Outlook, a rating downgrade is possible, which would transpire from unexpected deterioration in asset quality, continued pressure on the funding profile, or more aggressive capital management.

To access ratings and relevant documents, click here.

Methodologies