Bank Chief to Shareholders: Time Will Make Us a Better Target

We agree to disagree.

That was the message Frank Burke, chairman, president and chief executive of Flagship Community Bank, delivered to shareholders in a recent letter addressing calls from Flagship's biggest investor to sell the Clearwater, Fla., bank.

Service Equity Partners, a Dallas private equity fund that shares 7.7% ownership of the $105 million-asset bank's stock with another fund, sent a letter to Flagship shareholders in April making a case for the privately held bank to sell itself for cash or stock in a publicly traded buyer.

Absent those outcomes, shareholders "will continue to receive a significantly below-par risk-adjusted return on their investment for many years to come," Mark Ruh and Thomas Lykos Jr., managing directors at Commerce Street Investment Management, which manages Service Equity Partners, warned in their letter.

Burke conceded in his May 6 letter that Flagship would be "a desirable target for other small or medium sized banks that want … to make the combined entities more attractive to a larger and hopefully a more liquid suitor." But he argued that Flagship would be a better target, and thus fetch a better price, if management was given time to focus on profitability.

"Prospective suitors are looking for earnings and we need to generate a more consistent earnings stream," Burke wrote. "Our capital ratios remain strong and will allow us to grow responsibly for another two — three years before additional capital is needed."

Flagship earned $56,000 in the first quarter after reporting a $272,000 profit last year. Its Tier 1 leverage ratio was 11.4% at March 31.

Service Equity Partners, which bought its shares before the financial crisis, pointed to other metrics to back up its claims that Flagship is "too small to succeed" in an environment beset with challenges for "microbanks." The managing directors expressed concern that the bank would be unable to produce a return on assets above 0.25% or a return on equity above 2.5%.

"For the investment risk being taken by micro-bank Flagship's shareholders, we should be rewarded with a [ROE] in the 14-18% range," Ruh and Lykos said.

Flagship isn't the only Florida bank under pressure to consider selling. CapGen Capital Group, the biggest investor in Seacoast Banking Corp. of Florida in Stuart, wants Seacoast to generate better returns or sell to a larger institution.

Burke, meanwhile, is asking Flagship's shareholders to give his team more time, echoing a sentiment expressed by the management team at Comerica in Dallas, which is also facing growing calls to sell itself.

"Equity multiples are growing and still have room for further growth," Burke wrote. "An immediate deal may not result in the best return for shareholders."

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