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Option Play
By Francis X. Gilpin
Associate Editor
Stockholders of First State Financial Corp. had to be happy when they assembled last month at the Longboat Key Club to review 2004 results.
First State, parent of Sarasota's First State Bank, returned 14.55% on average equity last year, a measurement of what the holding company did to increase shareholder value. That was first among seven banks with headquarters in the Sarasota and Tampa metropolitan areas that trade their stock publicly.
But Corey J. Coughlin, president and chief executive at First State, may have asked himself why his W-2 form failed to reflect the bank's showing. Coughlin's total 2004 cash compensation of $186,167 was only fifth-best among the seven local public bank companies.
When the Gulf Coast Business Review asked about the seeming gap between the bank's returns and Coughlin's pay, First State Chairman Thomas W. Wright responded with a wisecrack. "He put you up to this, didn't he?" Wright jokes of Coughlin.
What the typical community bank CEO makes in a year wouldn't cover the cost of fuel for the jet that flies a Wall Street investment banker around the globe in a week. For that, community bank shareholders should be grateful.
But that doesn't mean community bank CEO pay always lines up perfectly with performance. The Review found that last year's compensation of the seven local community bank CEOs who operate under U.S. Securities and Exchange Commission oversight generally corresponded with the profitability of their institutions.
In one case, however, shareholders got dinged a bit because a holding company has piled stock options on top of what was already a generous CEO paycheck.
Kenneth P. Cherven, president and CEO of First Community Bank Corp. of America, received total cash compensation of $286,946 last year. That was tops among the group of seven.
But the 9.15% that the Pinellas Park parent of First Community Bank of America returned on average equity lagged behind First State's return as well as that of two Bradenton holding companies, First National Bancshares Inc. and Horizon Bancorporation Inc.
That isn't to say Cherven, who is also CEO of the holding company's bank subsidiary, has been a slacker.
Since arriving at First Community Bank in 2000, Cherven has improved return on equity every year. In fact, over his four full years on the job, ROE has averaged 8.11% at First Community Bank. Only Coughlin and First National Bancshares Chairman and CEO Francis I. "Rip" duPont III have done better during their respective tenures.
Cherven just doesn't get cheated at the pay window.
Besides the distinction of being the best-paid CEO of the group, Cherven holds options to acquire First Community Bank stock that have been valued at more than $3.4 million. By far, that is the biggest collection of options held by any of the seven CEOs.
Cherven referred compensation questions to First Community Bank's board of directors. Company Chairman Robert M. Menke didn't return a call for comment.
But Cherven says stock options are an important recruitment tool when he scouts the executive ranks of rival regional institutions for new talent. After success in Pinellas and Charlotte counties, First Community Bank is moving into Hillsborough County, where Cherven will hire a third entirely separate management team and area board.
"In most cases, they have options at the big banks," Cherven says of his recruiting targets. "We have to have options to get them to come to work for us."
Nevertheless, there are consequences for a shareholder when stock options are doled out, even if they aren't reflected on the company's financial statements.
At First Community Bank, for example, the holding company reported 2004 earnings of 93 cents per share. That was second only to First National Bancshares, parent of 1st National Bank & Trust, with 98 cents a share.
Yet the picture dims a bit when share dilution - from warrants, convertible debt and the eventual exercising of options - is considered. That calculation shaves 14 cents off First Community Bank's reported 2004 earnings per share, the biggest dip among the seven local banks. Even with the decline, First Community Bank, with adjusted earnings of 79 cents a share, maintains second place when net income at all seven banks is similarly recast.
Accounting rule-makers and the SEC require public companies to disclose such math in a footnote to their audited statements. Technology companies, which have relied heavily on stock grants to reward executives, are among the critics that have resisted the accounting profession's push to expense options in the financial statements themselves.
Jacqueline Reck, associate professor of accounting at the University of South Florida, says public companies will soon have to expense options on the income statement.
The consolation for critics is that the new accounting rules allow companies to choose pricing models for their options that tend to cushion the hit to the bottom line, Reck says.
As the Review's analysis of SEC filings by local banks shows, tech stockholders wouldn't be the only investors to feel a pinch from options expensing.
A dime per share disappears from the reported 2004 earnings of Sarasota-based Suncoast Bancorp Inc. when dilution from stock options and other factors are figured in. Earnings at First National Bancshares and Bradenton-based Coast Financial Holdings Inc. each get clipped by nine cents a share.
DuPont says First National Bancshares plans to jettison most of its executive stock-option plan, in view of the pending accounting rule change and the stepped-up corporate governance requirements of the Sarbanes-Oxley Act of 2002.
"That's unfortunate because I always think that executives who, as I call it, have skin in the game are going to perform better," says duPont. "If you lose a sense of ownership in your management team, that can affect your processes over time."
DuPont acknowledges the accounting rule change isn't intended to outlaw stock options, merely to make their impact on profitability clearer to investors. "We just felt by that running it through the income statement, it causes too much pain and suffering," says duPont.
Speaking of suffering, Horizon's Charles S. Conoley says he is probably the least compensated president of any local bank around. Indeed, Conoley is near the bottom of GCBR's pay ranking. He holds comparatively few stock options.
Still, Conoley is a bigger shareholder, on a percentage basis, at his company than any of the other six CEOs are at theirs. Conoley owns about 9.2% of Horizon shares, which he says he acquired as the bank was starting up in the late 1990s.
Eight cents a share vanishes when the Bradenton bank's 2004 earnings are recomputed. But Conoley attributes some of that dip to an expected conversion of Horizon warrants into common stock later this year.
First State's Coughlin insists he was the lowest-paid CEO at a Sarasota community bank when he came to work three years ago for Wright, the company's biggest shareholder.
"At the time I came in, the bank couldn't afford me or somebody like me," says Coughlin, a veteran banker. "That's OK for a short period of time. But that's not something that I'm going to put up with for long."
In 2004, First State shareholders felt the slightest sting of any investors in the seven local banks when it came to dilution, including the currently only theoretical expensing of options in the financial footnotes. On a pro forma basis, the company's earnings were reduced by just a penny a share.
That may be changing. Wright agrees that Coughlin likely has been underpaid for his peer group. "We're a performance-driven company," says Wright. "If we do well, he does well."
Coughlin has been awarded rights to 35,000 shares of First State, according to Wright, supplementing options for 30,000 shares that he already holds. Coughlin says he also recently cashed a $90,000 bonus check, which will be reported in First State's 2006 proxy statement.
"They've taken good care of me and they'll continue to take care of me," Coughlin says.
What took so long? "All of those other guys must be better negotiators," quips Coughlin.
2004 COMPANY PERFORMANCE VS. CEO PAY
Return on Total non-stock
Holding company (banking unit) Headquarters average equity Chief Executive Salary Bonus Other cash compensation
First State Financial Corp. (First State Bank) Sarasota 14.55% Corey J. Coughlin $160,167 $25,000 $1,000 $186,167
First National Bancshares Inc. (1st National Bank & Trust) Bradenton 12.80% Francis I. duPont III $182,000 $70,000 $11,581 $263,581
Horizon Bancorporation Inc. (Horizon Bank) Bradenton 12.15% Charles S. Conoley $116,000 $20,000 $6,000 $142,000
First Community Bank Corp. of America (First Community Bank of America) Pinellas Park 9.15% Kenneth P. Cherven $170,140 $95,000 $21,806 $286,946
Suncoast Bancorp Inc. (Suncoast Bank) Sarasota 5.56% John T. Stafford $96,075 $0 $13,700 $109,775
Florida Business BancGroup Inc. (Bay Cities Bank) Tampa 5.12% Gregory W. Bryant $150,000 $45,000 $13,911 $208,911
Coast Financial Holdings Inc. (Coast Bank of Florida) Bradenton 2.44% Brian P. Peters $160,000 $75,000 $7,200 $242,200
Source: Gulf Coast Business Review analysis of regulatory filings
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