In a year when Massachusetts community banks have been in a frenzy to scrap private ownership and set themselves up for a potentially lucrative sale to a larger rival, Reading Co-operative Bank is charting an alternative path.
Depositors of the small bank north of Boston will vote Tuesday on whether to make it harder for the 128-year-old institution to convert to a publicly held bank. The proposed rule changes would also restrict the ability of future bank leaders to profit from such a move.
Julieann Thurlow, president of Reading Co-operative, said community banks serve a vital role in continuing to provide local loans when the national economy stumbles, and in sponsoring local charities. But their ranks have been thinning in Massachusetts as more of them convert and are sold after a mandatory three-year state waiting period. Just this year, an unprecedented six community banks announced their intention to sell stock to the public.
Reading Co-operative, with eight branches in six communities, is trying to hold on to its roots as a bank established in the late 1880s to help middle-income residents and workers buy homes and build up assets, she said.
"Instead of running from it, taking cooperative out of the name, et cetera, we're going to celebrate it," she said.
The bank proposed changing its rules so that a two-thirds majority of Reading Co-operative's board members and depositors would have to approve a public stock offering.
In addition, no officer, director, or employee of the bank would be able to hold stock in Reading Co-operative for five years after a conversion.
Some banks sell stock to raise money to pay for the increased costs of regulation and technology or to expand. But Thurlow said the potential for large payouts to those in charge during a conversion is also playing an outsized role in the decision.
Thurlow declined to provide her annual compensation, but said her salary fell in the median of Massachusetts banks with $400 million to $600 million in assets.
Unlike publicly held banks, which must report executive compensation to shareholders and in regulatory filings, mutuals and cooperatives do not face similar requirements.
"We have seen a spate of bank conversions under the guise of raising capital to grow," Thurlow wrote recently to her 21,000 depositors. "These transactions ultimately result in the sale of the local bank and local asset to a regional bank while significantly enriching the senior leadership that took the bank public. The community loses its local bank, jobs are lost and the community philanthropy ceases."
Earlier this fall, Peoples Federal Savings Bank of Brighton, which went public four years ago, announced that it would be sold to the parent company of Rockland Trust. In the three years since it went public, the bank's executives and directors have made $15.6 million in compensation, earning $2.6 million more than the bank itself did during that time period.
When Danversbank in Danvers became a publicly traded banking company in 2008 and then sold itself to People's United Financial Inc. in Connecticut, several employees lost their jobs in the transition. However, in the year of the sale, Kevin Bottomley, then Danversbank's chief executive, earned $12.4 million in compensation, in addition to receiving $3.6 million for canceling unexercised stock options and shares of People's United, according to documents filed with regulators.
Some Massachusetts bank depositors, who usually rubber-stamp a board's decision to go public, are putting up resistance.
This past summer, Beverly Bank failed to get the necessary two-thirds of its depositors to vote in favor of selling shares on a stock exchange.
Reading Co-operative's rule change would not prohibit the bank from converting, but it would make it harder to do so, said Stanley Ragalevsky, a lawyer with K&L Gates LLP who helped the bank draft its new rules.
In 2011, Salem Five Bank made a similar change in its bylaws, deterring a conversion and barring any directors, trustees or employees from profiting in a conversion.
Ragalevsky, who has studied bank conversions, found that only 15 percent of Massachusetts banks that changed from private to public ownership between 1982 and 2004 remained independent.
Most were acquired by bigger regional and national banks, and some failed.
"It's not that things have to stay the way they were in 1885," Ragalevsky said. "But I don't think anybody can feel happy about what's happened and who's profited."