Activist shareholder Lawrence Seidman urged Flushing Financial Corp. to sell to a larger financial institution after the company reported weak second-quarter earnings and said it would pivot its lending away from commercial real estate.
The company reported earnings per share of 18 cents in the quarter, compared to 29 cents a year earlier. As of the close of trading Aug. 7, Flushing Financial's share price was down more than 20% year to date.
Company executives said on a second-quarter earnings conference call that they plan to shift attention to commercial and industrial lending in light of Flushing Financial's heavy exposure to commercial real estate (CRE) loans. The bank's ratio of nonowner-occupied CRE loans to total risk-based capital was 530.2% as of March 31, according to S&P Global Market Intelligence data, far above the regulatory guideline of 300%.
"They have to be a part of something bigger, they're too concentrated in multifamily, and that would be a great business for a much larger institution that has more diversity," Seidman said in an interview. "They keep telling me they're doing better. ... Well, the proof is in the pudding. They're not doing better."
Seidman has owned Flushing Financial shares for almost two years and owns a 2.5% stake in the company, which puts him among its top shareholders. He said he sent the company a letter outlining his concerns and advocating for a sale. Flushing Financial said it does not comment on shareholder activity when asked about the letter.
In 2021, Malvern Bancorp hired Seidman as a consultant after it charged off a $2.9 million New York City CRE loan and booked a $3.1 million impairment. Flushing Financial has better underwriting in its office loan portfolio, but some have concerns about whether the regulated multifamily market in New York will provide shareholders with an adequate return even if credit quality is good, Seidman said.
"Now they are trying to hire all these new people and do [commercial and industrial] lending, they want to change the entire bank," Seidman said. "The way you change the entire bank is sell it."
Room for improvement
Flushing Financial has a good, regulated multifamily asset base in New York and handles CRE loans well, but investors are skeptical of the asset class in the current environment, Seidman said.
Piper Sandler modeled Flushing Financial's core profitability through 2024-end and into 2025 and determined that the company is unlikely to produce return on equity above 5%, which is low compared to the company's peers, analyst Mark Fitzgibbon said.
The firm downgraded Flushing Financial's stock to "neutral" after its latest earnings report, calling its profitability "anemic." While the risk of losses for the company is low because it is run conservatively, spreads are narrow, Fitzgibbon said, adding that either a sale or internal fixes could right the company's current performance.
Either way, shareholders will have to be patient, and change will not happen overnight if the bank is determined not to sell, Fitzgibbon said, adding that Flushing Financial executives have said they want to stay independent. A takeover is unlikely in the short term but could happen later if an activist investor pushed a sale, he said.
Activist advice
Seidman said the letter to Flushing Financial is not a proxy contest but gives the company formal notice of his feelings as a major stakeholder. Earnings in the next couple of quarters will decide his next steps, he said.
The letter followed several conversations between Seidman and company officials starting in early 2023, in which they laid out four areas of focus for the future. The key areas, outlined in the company's third-quarter 2023 earnings call, are interest rate risk, credit quality, liquidity and customer experience. But Seidman said the company has not defined long-term success.
In the letter, Seidman suggested the bank sell to an ethnically focused banking institution. Flushing Financial has a substantial Asian-American client base and an ethnically focused bank embedded in the company, with $746 million in loans and $1.3 billion in deposits from members of the Asian community, Fitzgibbon said.
With that part of the bank growing rapidly, "there's always been some speculation that their franchise might be attractive to one of the larger ethnic Asian banks out there, predominantly on the West Coast," Fitzgibbon said.
