Nasdaq Stock Market Inc. once again warned Tennessee Commerce Bancorp Inc. in Franklin that its stock is in danger of being delisted because of possible violations of a rule prohibiting top executives from voting on their own pay raises.
The most recent notification came in a letter dated Oct. 10, a little more than four months after Tennessee Commerce’s compensation committee voted to raise the salaries of four top executives, including Arthur F. Helf, its chairman and chief executive officer, and to make the raises retroactive to Jan. 1.
At issue is the committee’s makeup at the time of the June 1 vote. Nasdaq rules require a company’s compensation committee either to be made up entirely of independent directors or to have all its decisions approved by a majority of the independent directors. Mr. Helf and two of the other executives who received raises were on the committee at the time, though they recused themselves from the vote on their own pay.
The Nasdaq’s listing qualifications panel first contacted the $800 million-asset Tennessee Commerce on the day of the vote warning of a possible violation, but the matter appeared to be put to rest after the committee was reconfigured to be made up entirely of independent directors. The Nasdaq formally closed its review of the issue July 24 by issuing a letter of reprimand.
A Nasdaq spokesman would not comment on why it is reexamining the issue, and Tennessee Commerce officials did not return repeated phone calls. Also, the spokesman would not say what Tennessee Commerce, which went public in December 2005, would need to do to avoid a delisting.
But analysts who follow the company said that the size of the pay increases, coupled with the July resignations of three independent directors, could be inviting more scrutiny.
Michael R. Sapp, Tennessee Commerce’s president and chief lending officer, and H. Lamar Cox, its chief administrative officer, sat on the committee along with Mr. Helf at the time of the vote. Mr. Helf’s and Mr. Sapp’s salaries rose from $190,000 to $400,000, and Mr. Cox’s rose from $180,000 to $350,000, according to Securities and Exchange Commission documents.
George W. Fort, the company’s chief financial officer, did not sit on either the board or the compensation committee, but his salary rose from $130,000 to $335,000.
The compensation committee has 13 members. Analysts said that they did not know what the vote tally was, though Barry McCarver, an analyst with Stephens Inc., said in an interview that it was not unanimous.
The vote appeared to cause friction among the committee members. Three independent directors who sat on the committee — Winston C. Hickman, Fowler H. Low, and Regg E. Swanson — tendered their resignations in mid-July, citing the outcome of the compensation vote.
“My decision is a direct result of my disagreement with the board’s action and policy regarding executive compensation and the manner in which the vote was taken to approve this policy,” Mr. Swanson wrote in his July 11 resignation letter. “Their desire to attain compensation that I feel is excessive, based on information that I have obtained independent of the board, and the subsequent vote process which granted the compensation has violated my trust in the management of the bank.”
Mr. McCarver said that Nasdaq likely is weighing in now because of “the amount of the compensation increase” and the resignation of the three directors.
“I think it has totally to do with perception,” he said. “The perception was that this took place at an inappropriate time frame. They were notified by the Nasdaq that they were going to have to make changes to their compensation committee. Did that trigger the management team and the board to therefore alter compensation before they were forced to alter the committee by the rules?”
Mr. McCarver said he does not believe Tennessee Commerce did anything improper, and that it was already redeveloping the compensation policy before it was contacted by the Nasdaq. In his opinion, “the management team was pretty significantly underpaid prior to the change.” Once the change was instituted, the salaries were “on the high end, but it’s not out of the range; it’s not absurd.”
He doubts the stock will be delisted. In this case, an “unseasoned management team” with little public experience was not familiar with all the rules and not savvy in the ways of perception, he said.
Jeff K. Davis, an analyst with First Horizon National Corp.’s FTN Midwest Research, agreed with that assessment. Sometimes “these protocol type issues of transitioning from a private company to a public company” come up with small-cap companies, he said.
Tennessee Commerce said last week that it has filed an appeal with the Nasdaq over the latest notice and plans to address the issue with the listings qualifications panel in the near future.
According to Mr. McCarver, the best-case scenario for the company would be for the Nasdaq to express its satisfaction with the compensation board’s current composition and to uphold the vote. That process would take about six to eight weeks, he said.
“The worst case is that the Nasdaq committee says, ‘We don’t like how this was handled. Your compensation committee, which is now made up of independent directors, needs to reformulate a plan, vote on it, and approve it, and the one you have now is null and void,’ ” he said. That scenario would take longer, “which means this is an issue overhanging the stock for greater than six to eight weeks.”
Tennessee Commerce’s shares fell sharply in mid-June, shortly after the company informed shareholders in an SEC filing that the Nasdaq had warned its shares could be delisted. They have yet to recover. As of midday Monday they were down 16% since June 7.
Second-quarter earnings at Tennessee Commerce rose 73% from a year earlier, to a record $1.6 million. The company is scheduled to report third-quarter earnings Wednesday.
