"What can a community bank do to improve the price of its stock?" was the latest contest question for the presidency of Schmidlap National Bank.

Stock in many small banks is closely held, with few purchases and sales during the year. And the largest holders at those banks plan to take their stock to the grave with them.

Still, respondents agreed, everything possible must be done to promote the bank to dealers. Otherwise, they probably won't be likely to make the investment required to become market makers.

Respondents also agreed that anything that can be done to provide more liquidity, through stock splits and stock dividends, can make shares more attractive.

A response from Thomas Gillen and Donald Jennings of RGC Kingston in New York City offers a lot of value.

These two general partners of the Kingston Fund, which invests in community bank stocks, said investors want banks to concentrate on performance rather than liquidity, but said accumulation of excess capital does not add to shareholder value.

They recommend the reduction of excess capital any way possible, even if it means a special dividend.

They further suggest the radical step of tying management compensation to the performance of the stock.

Personally, I wonder if such a policy would lead to bad banking practices.

My fear is that the bank might take steps that help stock performance now but hurt it later-such as realizing the profits on bonds selling above par and reinvesting the proceeds in lower-coupon securities.

I would love to hear from banks that have tied compensation to stock price to see how it has worked out.

Whoever sends the response that is judged to be bestwill be named president for a day of Old Schmidlap.

The winner of our current contest is Michael Guirlinger, resident and CEO of the Banc Stock Exchange of America in Columbus, Ohio. Mr. Guirlinger's response concentrates on the role of directors in promoting the stock of their banks.

He writes:

"We have a program called Stock Navigation. It is designed to chart a course for management and the board to increase visibility, marketability, and liquidity for their stock. The presumption, of course, is that the price will rise because of this concerted and consistent effort.

"The essential issue is consistent visibility of the stock. So we offer some simple but effective everyday suggestions:

Every business card of everyone at the bank should have the bank's trading symbol on the back, in gold, with black ink. This card should be handed to everyone with the symbol side up-to cause notice that the stock is traded. Can you think of a cheaper billboard?

Every board member should have a business card, as noted in the preceding point

Every board members should have a highly visible plaque or other appropriate icon at his place of business, showing that he is a member of a board and a shareholder.

The bank lobby should have a sign conspicuously displayed that identifies the bank's trading symbol and the name of the market maker(s) and their "800" numbers. This is practically nonexistent in most banks. It is highly likely that many bank customers do not know they can be owners, too.

The bank's letterhead should bear the trading symbol. Counter statements and quarterly mailings should prominently display the trading symbol and list whom to contact to buy the stock.

Require every board member to arrange a breakfast, lunch, or dinner with the CEO or president at least once a quarter with a bona fide prospective bank customer who also could buy the bank's stock. Any board member who refuses to do this or is too lazy should be booted off the board.

Purchase inexpensive space on the back of all local church/synagogue papers-principal county and surrounding adjacent counties-and display the name of the bank, trading symbol, and the market makers' names and phone numbers."

He adds:

"If we win, do we get options in Schmidlap National?"

No, but you do get a certificate suitable for framing.

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