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Steven Syre | Boston Capital

Insiders big winners when mutual banks go public

One of the more clever ways to get rich is to sell something you don’t own.

This is a well-established fact in the community banking world, of all places. It is the key concept that drives the conversion of many smaller mutual banks into public stock ownership, a process that commonly leads to the sale of that institution a few years later.

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Technically, mutual banks are owned by their depositors. In a sense, everyone owns them and no one owns them. This is the kind of gray area that makes an investment banker’s pulse race.

Sure, some converted banks remain independent for years and become bigger themselves through the purchase of even smaller institutions. But they are the exceptions.

Here’s why: Executives who run these banks and drive the entire conversion process are the big winners — paying themselves much more during their years at the helm of public companies and cashing out millions more in stock at the eventual sale. Usually, those banks are sold by executives who happen to be ready to retire.

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One community bank in Boston is going through this process right now. Think of it as a textbook case.

Peoples Federal Savings Bank, based in Brighton, went public four years ago in a stock conversion. The bank, which has about $585 million in assets, agreed just last month to be sold to the parent company of Rockland Trust.

Like many other community banks, Peoples Federal has been in business a long time. It opened its doors in 1888, the year George Eastman patented the Kodak Box Camera. Boxer John L. Sullivan reigned as heavyweight champion at the time. It’s fair to say the bank survived its share of economic upheaval over all those years.

Peoples Federal converted to public stock ownership in 2010, about a year after the market began to recover from the global financial crisis. The bank’s holding company was run then, as it is now, by Maurice H. Sullivan Jr., who is 68 years old. But Thomas J. Leach Jr., 64, was and remains the chief executive of the bank itself.

The next four years were very good times for the managers and directors running Peoples Federal. You can see that in documents covering the bank’s three full fiscal years as a publicly owned company.

Sullivan earned about $3.6 million over those three years, and Leach did even better, making nearly $4.2 million. Those figures include salaries, stock awards and options, plus other kinds of compensation. Their average annual total pay was well over double what they had earned in their last year of running a mutual bank.

Two other senior executives made about $4.4 million between them over the same three public-company years — again in a combination of cash, stock, and other rewards.

One final group to consider: Peoples Federal’s 10 directors, a variety of individuals that includes a developer, an accountant, the owner of a restaurant, and an undertaker.

The board also includes Sullivan’s son, lawyer Maurice H. Sullivan III.

The year before they went public, directors were paid about $20,000 to oversee Peoples Federal. But each member of the board of the publicly traded bank received about $350,000 over three years. The vast bulk of the new compensation came in the form of stock and options — all of which will be quite valuable by the time the sale closes.

Add up all of this compensation for top executives and directors and you will come to a grand total of $15.6 million for three years of work.

Here’s one way to put that in context: Peoples Federal Savings Bank earned a grand total of $13 million — before taxes — over those same three years. Yes, compensation for top executives and directors exceeded the profits of the entire business those years.

As you can imagine, I wanted to ask people at the bank how that worked out. But Sullivan and Leach did not respond to my messages, left over the course of more than a week.

Once the sale of Peoples Federal is closed, top executives gain full access to stock awards that had been scheduled to vest over several years. Sullivan and Leach will leave, but they get a severance payment worth a combined $4.2 million. Both executives get the use of a car for the next three years.

Most community banks that convert to public companies will disappear in a matter of a few years. It’s not hard to see why.

Steven Syre is a Globe columnist. He can be reached
at syre@globe.com.
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