One shareholder at the annual meeting of the holding company for Farmington Bank asked about the price of safe deposit boxes. Another wondered why the board of directors is all male. The issue of pay for the directors of this 20-branch bank didn't come up at all this spring and has not, apparently, created any waves.
But the numbers are eye-opening.
In 2012, the six non-employee board members of First Connecticut Bancorp each received $760,332 in stock and options — which they will be able to redeem gradually over the next five years — on top of regular fees that totaled just over $60,000 for most of them.
Those stock and options awards are outsized compared to similar-sized community banks, even ones that are doing very well in the stock market.
There's a simple reason for it. The payouts, made last September, were a one-time grant arising from Farmington Bank's June 2011 conversion from a mutual, owned by its depositors, to a stock company, publicly traded just like Aetna or United Technologies Corp.
Why should non-employee board members pull in paydays in the high six figures just because their bank went public? It's not like a start-up firm, where the insiders amass equity stakes in the lean years and everyone waits for the initial public offering gravy train.
These payoffs are not for ownership at all. Rather, they're a reward for a board that has guided the company, with tenures ranging from 24 years for the most senior to three years for the most recent director at First Connecticut.
The directors are ultimately responsible for the strategy and culture of a company. They attend regular monthly board meetings as well as numerous other committee meetings. And at small banks like Farmington, they also play a deciding role in big loans and credit-risk questions.
First Connecticut Bancorp is hardly alone in handing out these post-conversion payouts, but for several reasons that we'll get to, its totals in 2012 were among the largest ever in the state for a single year.
John J. Patrick Jr., the chairman and CEO, got a pay package totaling $4.4 million, including $3.2 million worth of stock and options paid out under the same post-conversion plan, which he'll be able to cash in over five years, as with the board. He's widely viewed as an effective bank chief, and we'll save the issue of CEO pay for another day.
As for the board payout, is it justified, or an outrage? There are arguments both ways. The company had net income of $3.9 million in 2012, obviously not an amount that would suggest such largesse, but its stock market value has climbed by $60 million in less than two years, a rise of 35 percent.
One thing is clear: Payouts to directors of mutual banks converting to stock companies are poorly understood even by people who try to follow the issue, largely because there are few conversions, each one is different and the information in federal filings is less than crystal clear.
In a mutual conversion, the owners — the depositors — have a right to buy shares. Directors and executives take part in that, and everyone usually wins because the shares rise in value most of the time, sometimes dramatically. Then a funny thing happens: The newly public bank sets aside a cache of shares and options to give to the board and the managers, as a reward for all the work it took to convert the bank.
This isn't sarcasm — it can be tricky, and requires the right timing and strategy, not to mention scrupulous compliance. Under state and federal rules, the directors' and managers' haul can total as much as 4 percent of the stock, plus options to buy 10 percent more at a fixed price. It's all approved by the shareholders, who know what they're sanctioning if they carefully read the 200-page document they get in the mail.
And it can mean big money. First Connecticut Bancorp created 17.9 million shares in its 2011 conversion and sold most of them for $10 apiece, raising $172 million before expenses. A year later, the company set aside 715,208 "recognition and retention" shares, plus 1.8 million options, for board members and managers.
The non-employee directors were allowed to receive up to 30 percent of that 4 percent, in this case a total of 214,560 shares — or 35,760 shares per person. And that is exactly what they received on Sept. 5, 2012, as shares closed at $12.95. The bank also gave each director options to buy 84,931 shares at that price, years in the future.
The shares were worth $463,092 on that day and the options were valued at $297,240 based on a complex formula that's basically an educated guess. The grand total: $760,332, and it's worth even more than that now, with the shares closing at $13.48 Tuesday.
Other Banks, Other Payouts
The team at Farmington Bank is doing a fine job by all accounts, not only doubling the asset size of the bank in recent years but dramatically boosting loans. All that lending is good for the community, at a time when other banks are still sitting on hoards of cash and government bonds.
The bank has also added more than 200 jobs since 2008 and is the state's largest Small Business Administration lender.
Patrick and others say the payouts are exactly what virtually every converting bank offers, as part of a fair practice that lets banks attract top board members and reward them with a stake in the game.
"We have a lot to be proud of," Patrick said. "These guys have given a significant amount of their life to this company. ... They have a passion for their community and show it through their bank."
Critics see the payouts differently.
"I can't even begin to think of a reason for paying directors at that level. I've seen it at S&P 500 companies but never at community banks," said Paul Hodgson, a corporate governance consultant and compensation expert with BHJ Partners in Camden, Maine.
It does happen, though rarely the way it did last year for these six directors. My review of more than a dozen corporate filings shows that the 4 percent to 10 percent formula is commonly approved by shareholders. But in the end, the reported payout amounts vary widely depending on the size of the bank, the value of shares sold, the performance of the shares afterward, the number of directors on the board and the way the bank chooses to make the payouts.
Directors of the old Savings Bank of Manchester hit an even bigger payday after they converted to a full stock company in 2000. SBM's holding company, Connecticut Bancshares, gave each director at least 11,231 shares and options to buy at least 22,803 more, over the next four years.
By early 2004, Connecticut Bancshares merged with another converting mutual, New Haven Savings Bank, for $52 a share — more than five times the issue price. Most of the 12 non-executive directors cashed out $1.2 million from their unvested shares and options, and the shares that they had earned before then, which previously vested, were worth at least $200,000 per person by the time of the merger, which created a new bank — NewAlliance.
After People's United went public in 2007 with a huge, $3.4 billion conversion, its non-employee directors each received more than $400,000 in stock and options, plus an annual allotment targeted at $95,000 worth of shares, on top of their regular fees — even though the stock fell sharply, and remains far below its original issue price.
If they had received the full amount permitted under the shareholder-approved plan, each People's United director would have pulled in $4.9 million worth of stock, even after it dropped by 15 percent from the issue price. Imagine the riot at that shareholder meeting.
Rockville Bank is similar to Farmington Bank in some ways. Its holding company, Rockville Financial, also converted to a stock company in 2011, with a similar-sized offer. Rockville also approved the same payout plan, and its shares also rose nicely. But in 2012, the Rockville directors each received only $121,000 in stock and options, on top of their regular fees.
The difference? Maybe not much. Rockville Financial might well make similar payouts in future years, under the plan — as some converted bank companies do. First Connecticut, by contrast, elected to take the expense in one year, and report the payouts as a single amount. First Connecticut also has only six directors, giving each a larger piece of the pie.
Looking at banks across the spectrum, First Connecticut's stock issue, while smaller than that of People's United and NewAlliance, was among the larger conversions. A list of 14 recent mutual conversions in First Connecticut's 2011 stock offering document shows just two larger than $50 million, and the average was $28 million, compared with First Connecticut's $172 million.
One company, Territorial Bancorp Inc. of Honolulu, Hawaii, has a $126 million conversion in 2009 and later gave each of five directors a package worth $903,000. But that bank's shares climbed much faster than First Connecticut's, and regardless, such examples are rare.
'Committed to Being There'
Patrick calls the payout to his directors fully justified. He's a CEO with a long record of success at four central Connecticut banks, and argues forcefully that the directors, who serve staggered, three-year terms, are the backbone, the leaders.
Five of the directors were already on the board when they hired Patrick in 2008 from his job as president and CEO of TD Bank Connecticut. They are, in order of seniority, Robert F. Edmunds, chairman of Edmunds Gages, a manufacturing firm, and a Farmington Bank director since 1989; David M. Drew, owner and president of the Briarwood Printing Co.; Kevin S. Ray, president of Deming Insurance Agency Inc. and secretary/treasurer of Deming Financial Services Inc.; Ronald A. Bucchi, a self-employed certified public accountant and management consultant; and Michael A. Ziebka, managing partner of Budwitz & Meyerjack, P.C., an accounting firm.
Patrick recruited John J. Carson, an economist, University of Hartford vice president and former state economic development commissioner, who was on Patrick's board at TD Bank.
It's not a cushy gig, being a bank director on a John Patrick board. In 2012, according to public records, the board members each attended more than 50 meetings. On my visit to Patrick's office, he held up a stack of three briefing books totaling hundreds of pages that the directors had to study for last Friday's meeting alone.
The board of a public company also takes on personal liability if anything goes wrong. Insurance covers much of that risk but not all of it.
Critics say that some converting banks are just positioning themselves for a takeover three or four years later — and many banks have done exactly that. First Connecticut, however, sought a longer protection period, and is ineligible to be bought for seven years after the conversion.
"They are committed to being there, and they are committed to serving their market, and they wanted the market to know that they weren't going to just do a short-term flip," said Howard Pitkin, the state banking commissioner. "We didn't view that as a bad thing for anybody."
All six First Connecticut directors have full resumes of civic volunteer positions. I know Carson and Edmunds, They're both terrific, extremely public spirited.
It comes down to this: I always thought shepherding a community bank was part of the civic duty of prominent and prosperous citizens, not just a business proposition, like any other job.
"I think it used to be a civic role," Patrick said, but the demands are too great, the stakes too high and the legal requirements too heavy.
That evolution is too bad and it calls for more disclosure to shareholders. We've seen a lot of improvement in that area, but not enough. Right now the offering document for a bank conversion includes a paragraph that states the number of shares in a recognition and retention plan with little breakdown and little detail. Banks can't offer much more information than that under strict reporting rules, even if they want to.
Regulators ought to require a big, clear section with a chart: "Here is the number of shares and options that each director, and the CEO, would receive if this conversion goes through. And here is the amount those shares and options would be worth if the shares fall by 15 percent, if they stay flat or if they rise by 15 percent."
Then shareholders would see exactly what they're buying, and their vote would mean true approval.