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 revised to Negative from Stable.

Key Credit Considerations

The change to Negative Outlook is primarily related to the slippage in the company’s earnings and returns over the past year, principally due to a spread-reliant, liability sensitive balance sheet. An above average cost of funds, together with a preponderance of lower risk but also lower-yielding loan classes, have constrained the company’s reported NIM, which has declined by 118 bps from its peak of 3.40% for 1Q22 (to 2.22% during 3Q23). While the company has reduced liability sensitivity by utilizing interest rate hedges, management currently expects some further modest NIM contraction until the Fed pauses rate increases. FFIC has historically relied on a higher level of noncore funding to support loan growth, with core deposits to total funding averaging 70% from 2018-2022. Moreover, the company’s ability to enhance the core deposit franchise over the medium term will be challenging given the highly competitive deposit market.

The company has historically maintained somewhat below peer capital levels (10.2% CET1 at 3Q23), not necessarily inadequate given a comparatively conservative loan book; however, with FFIC's earnings expected to remain challenged over the near term (at a minimum), internal capital generation will likely be comparatively limited. Should a more challenging credit environment arise, the company’s weaker earnings power, together with somewhat lower aggregate loss absorbing capacity – loan loss reserves plus core capital – would provide less of buffer against potentially rising credit costs. With that said, we acknowledge that FFIC has maintained conservative underwriting standards, highlighted by low weighted average LTVs and strong debt service coverage ratios for its largest lending segments. The company’s longstanding NYC rent-regulated multifamily lending vertical (~25% of the total loan portfolio) has reflected an impressive credit performance record, including, but not limited to, during the GFC. FFIC’s total NPAs have tracked at below-peer levels for an extended period (average related ratio of <40 bps from 2016-2021), with the recent modest increase due to an idiosyncratic event. While investor CRE concentration is elevated compared to peers at 478% of RBC, as noted, multifamily loans represent the largest relative exposure. Finally, with respect to intercompany capital management, FFIC’s double leverage of 124% at 3Q23 remains among the highest in the rating category, and any further increase in the measure would be viewed unfavorably.

Rating Sensitivities

A return to Stable Outlook could occur from an improved funding profile resulting in stronger profitability metrics and internal generation of core capital which builds related measures to be more in line with peers. Credit outperformance, should a more challenging environment arise, would also be viewed favorably. Given the Negative Outlook, a rating downgrade is possible, which could result from unexpected deterioration in asset quality or continued pressure on the funding profile, negatively impacting the company’s ability to generate capital.

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