For Farmington Bank Directors, An Eye-Opening Payoff For Converting To Stock Ownership

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.

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