FYR

Tracking Community Bank Stocks Just Got Easier

America’s Community Bankers, the national trade association for community banks, and The NASDAQ Stock Market, the world’s largest electronic stock market, have launched the nation’s most broadly diversified stock index for community banks, the America’s Community Bankers NASDAQ Index. The index creates a new tool for tracking the performance of the community-based banking sector.

“It will bring greater visibility to community banking, which should yield greater liquidity and fairer valuations to our banks, thrifts, and holding companies. It will measure where the nation’s economic action is taking place-in local communities across this country, said ACB Chairman William W. Zuppe, who is also president and chief operating officer of Sterling Financial Corp., Spokane, Washington. “Main Street has known about us for a long time. Now it’s time Wall Street did, too,” pronounced Zuppe at the December announcement ceremony.

ACB and NASDAQ developed the index as a yardstick for the capital markets to use in measuring the performance of community bank stocks. The index includes 545 NASDAQ-listed community banks, with a market capitalization of about $175 billion. Based on FDIC data, the index excludes any of the 50 largest banks based on asset size, banks classified as having an “international specialization,” and banks classified as having a “credit card specialization.”

The index will be calculated once a day using NASDAQ official closing prices. It can be accessed on the America’s Community Bankers’ website (www.AmericasCommunity Bankers.com) or on NASDAQ’s website (www.nasdaq.com).

Unlike other NASDAQ indexes, the index will be a total return index, which means that companies’ dividends will be reinvested and included in the index value as of the ex-dividend date. The index will be adjusted for splits and spin-offs. When a company is no longer listed, it will be removed from the index. Newly listed companies will be added periodically.

S Corps on the Rise

According to the annual study conducted by global accounting firm Grant Thornton, the number of banks and thrifts that have converted from C Corporation to S Corporation status has again increased-in 2003 there was a net increase of 160 banks and thrifts that made the conversion.

“The S Corporation conversion has universal appeal to financial institutions, across both geographies and asset sizes,” says Dick Soukup, co-author of the study and a financial services industry assurance partner with Grant Thornton’s Chicago office. “Banks and thrifts that are able to convert start saving immediately.”

Recent legislation, however, has affected this benefit. Banks and thrifts that make the S Corporation conversion typically make distributions to their shareholders to satisfy the individual tax obligations that result from the bank’s earnings. Under the old law, the top federal dividend income tax rate of 38.6% exceeded the top federal corporate income tax rate of 35.0% by 3.6%.

“For some financial institutions, the adverse effect on capital of having to make distributions to cover this additional tax of 3.6% of pre-tax earnings was one of the deciding factors in not electing S Corporation status,” says John Ziegelbauer, partner in charge of Grant Thornton’s financial institutions practice and co-author of the study.

The 2003 tax act equalized the top federal tax rates for corporations and individuals, and thus, eliminated this obstacle.

“The top federal individual rate of 35% under the new law for individuals remains significantly lower than the total combined top corporate and individual federal tax rate of 44.75% that faces shareholders of C Corporation thrifts and banks,” says Ziegelbauer. Under the new law, S Corporation shareholders will enjoy a 9.75% of pre-tax earnings advantage.

The new law that lowered and equalized the top federal tax rates applied to capital gains and dividends is of great benefit to banks and thrifts that want to remain independent.

“In the past, because dividends were taxed at a much higher rate than capital gains, investors often found they could maximize their return by selling their stock instead of holding the stock and receiving dividends,” Ziegelbauer says.

Additional findings of Grant Thornton’s 2003 S Corporation analysis include:

• A total of 2,009-21.6% of the 9,314 Federal Deposit Insurance Corp.-insured banks and thrifts as of March 31, 2003-are currently S Corporations.
• The Southwest region has the highest percentage of financial institution S Corporations-35.9% of banks and 18.6% of stock-thrifts. Following closely behind are banks in the Midwest with 31.0%, and stock-thrifts in the Southeast with 14.3%.
• Eight banks and seven stock-thrifts with more than $1 billion in total assets have successfully made the S Corporation conversion.
• The largest financial institution S Corporation is a $9.1 billion thrift in Oklahoma.
• The total assets of banks and thrifts electing S Corporation status only represents 3.0 % of all FDIC-insured assets.

Directors’ Perspectives on Compensation

Bank Director‘s sister publication, Corporate Board Member, conducted a research study late in 2003 in conjunction with the executive compensation business of Towers Perrin, a global professional services firm, to focus on the issues of director and executive compensation. The study was designed to measure the impact of recent public, regulatory, and shareholder scrutiny on recruiting and compensating executives and directors, the usage of compensation consultants and the board compensation committee. A total of 1,018 responses comprised the survey results.

Directors were asked how compensation practices are being used within a company’s recruiting efforts. In terms of recruiting an outside candidate for the position of CEO, 35.5% indicated they would pay “whatever it takes to attract the right person for the job,” while 56% more conservatively intend to pay either an amount similar to the current CEO’s package or a modest premium. Breaking the respondents into categories by their company’s revenue size, the willingness to “pay what ever it takes…” increased as the respondent’s company’s revenue size increased. The majority of respondents said their CEO’s annual bonus and long-term incentives are directly linked to the company’s overall performance (62.3%), while just under 1/3 (32.5%) said it was somewhat linked. Only .9% said their CEO’s annual bonus and long-term incentives were not linked at all to the company’s overall performance.

In filling the next, open senior management position, 50.1% of respondents intend to pursue internal and outside candidates based on private referrals from peers as well as the services of an executive recruiter. When asked if compensation issues were involved in recent candidates’ decisions to turn down offers for senior positions, 30.4% said it was either the primary reason or one among many.

When asked their overall opinion of the executive compensation practices at their company/companies and then of those at U.S. corporations in general, 79.1% of respondents indicated that the compensation practices of their company were either very good or good, but still could use some changes. Only 16.1% responded that their company’s compensation practices were excellent and needed no changes. As for their opinion of corporate executive compensation nationwide, 30.6% rated the practices as fair, indicating they require significant change to become excellent. Only 1.4% believe practices are currently excellent with no changes needed. With the increased level of outside scrutiny, only 6.3% of respondents believed such scrutiny would have significant impact on their executive compensation policies, while 45.2% expect some impact and 33.7% expect no impact on these policies.

With more attention focused on executive compensation policies over the past few years, a number of policies, requirements and laws have gone into effect. Respondents were asked their opinion of what impact the following will have on their compensation policies and practices:

Sarbanes-Oxley legislation-The majority, 46.4%, expect Sarbanes-Oxley to have some impact on their executive compensation policies, 11.0% expect significant impact, and 34.4% indicated they anticipate no impact.

FAS 123 stock option accounting-Again, the majority, 46.6%, expect FAS 123 to have some impact on their executive compensation policies, 19.9% expect significant impact and 23.2% expect no impact.

Increased disclosure of executive compensation policies-62.0% believe increased disclosure to have no impact on executive compensation policies, 31.6% anticipate some impact and 3.3% anticipate the impact to be significant.

Mandatory shareholder approval for all stock option plans-50.8% anticipate mandatory shareholder approval for all stock option plans will have no impact on their executive compensation policies while 10.2% anticipate significant impact while 32.5% expect some impact.

NYSE and NASDAQ listing requirements-Once more, the majority of respondents, 61.7%, believe there will be no impact from the new listing requirements on their executive compensation policies. However, 3.6% anticipate significant impact and 27.8% anticipate some impact on these policies.

Of the policies listed above, directors believe FAS 123 stock option accounting will have the most effect on their company’s executive compensation practices, with a combined percentage of 66.5% believing it will cause significant or some impact.