Massachusetts has lost many of its community banks in recent years, in part because some converted from private to publicly held companies, opening the door to acquisitions by bigger banks — and to big paydays for executives.
But last month, in a development that industry officials consider unprecedented, depositors at tiny Beverly Bank blocked a plan by its executives to convert to public ownership, meaning that the company would sell shares on a stock exchange. The vote of 238 to 205 in favor of the proposal fell short of the two-thirds majority needed for approval.
“It was a little bit of a surprise,” said Michael Wheeler, chief executive of the 126-year-old bank, which has four branches and $332 million in assets.
Analysts, however, called it a startling rebuke to a community banking industry that, they say, has grown accustomed to having depositors rubber-stamp private-to-public conversions.
Cornelius Hurley, director of the Center for Finance, Law and Policy at Boston University, said the Beverly Bank vote shows that bank executives can no longer take the support of depositors for granted.
“There just seems to be people saying, ‘Enough is enough,’ ” Hurley said.
The fate of community banks, many with roots that have been in place in their towns since the 1800s, is of particular interest to consumers, small businesses, and nonprofit groups — many of whom have grown to rely on the banks’ local lending and charitable giving programs.
Since 2000, Massachusetts has lost a quarter of its banks — many of them community institutions like Beverly Bank — to the waves of consolidation that have swept the industry.
Most community banks in the state are mutually owned by depositors. Until recently, conversions to public ownership happened infrequently, with just nine community banks converting in the previous decade, according to the state Division of Banks.
But this year, five small, local banks have moved to become publicly traded companies, and that has raised concerns among critics, who worry that conversions often harm communities while enriching top executives.
Once the banks become publicly traded, critics say, it increases the incentives for executives to sell — leaving them with significant stock holdings that can be cashed in at a premium, but leaving the community without a locally owned bank.
One of the most controversial bank conversions in recent years involved Danversbank, of Danvers, which became a publicly traded banking company in 2008. Three years later, it sold itself to People’s United Financial Inc. in Connecticut.
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 regulatory filings.
Bottomley, through a spokesman, declined to comment.
Beverly Bank’s Wheeler acknowledged the Danversbank deal may have influenced the vote on Aug. 14. “I understand the emotions and get it,” Wheeler said. But he stressed his management team pushed for a conversion that would have raised about $47 million, so that the bank could expand local lending.
Community bankers say conversions are often necessary to raise capital to compete against larger banks, as well as to meet post-financial crisis rules that require banks to maintain larger capital cushions. Small banks, they add, are grappling with low interest rates and increased regulatory costs that cut into profits and available capital.
In Beverly, Wheeler said the next steps for the bank are unclear. Options include asking for a new vote, staying the course as a cooperative bank controlled by its depositors, or possibly merging with another community bank.
Depositors who blocked the conversion were concerned that the community would lose another locally owned bank, the Salem News reported. John Somes, executive director of the Greater Beverly Chamber of Commerce, noted that recent banking history is a touchy issue in Beverly.
The city once had three local banks. But Beverly Savings Bank merged with another community bank in 1988.
Beverly National Bank was taken over by Danversbank in 2010 and then became part of People’s United Financial the next year, when the Connecticut company bought Danversbank.
Beverly Bank, which changed its name last year from Beverly Cooperative Bank, is the last of those three local banks.
“Some people are a little nervous about losing a community bank,” said Somes, who is not a Beverly Bank depositor. “But other people recognize smaller banks have to be able to compete against larger banks.”
The spate of private-to-public conversions in Massachusetts and the history of big payouts to executives recently led Reading Co-operative Bank’s board of directors to approve a plan to make it harder for that small bank to convert to a publicly traded company.
The proposal, which goes before depositors for a vote later this month, would require a “supermajority” vote of eight of 10 board members to approve any conversion, in addition to a two-thirds vote by depositors.
The plan would also forbid any board member, manager, or employee from owning equity interests in the bank for five years after any conversion.
Julieann Thurlow, the chief executive at 128-year-old Reading Co-operative, said she proposed the restrictions because she is “passionate about the role of community banks” in the economy and throughout Massachusetts.
“Maybe I’ve watched the Jimmy Stewart movie about a community banker too many times, but I feel strongly about this,” Thurlow said, referring to the film “It’s A Wonderful Life.”
“This walking away with millions of dollars after a conversion is just ridiculous.”
Jay Fitzgerald can be reached at firstname.lastname@example.org.