Democratizing Money: The Natural Life Cycle of Community Banks

 How the Early Death of Community Banks Can Be Avoided

Summarized By Kevin Zeese

This is a summary of a presentation given by Bill Thorington at the Economic Track of the Democracy Convention held in Madison Wisconsin on August 25, 2011.  Thorington’s biography and contact information are at the bottom of the summary.

The topic I am supposed to discuss is problems of community banking.  This is an interesting way to look at community banks because I see community banking as a positive, solution to banking issues.  But they can have problems and one of their challenges is that community banks are often victims of their own success.  There is a life cycle of community banks.  People get excited, invest in them, bank with them and they grow but 10 to 12 years later how many of those banks are still there? Through mergers and acquisitions they tend to disappear.  They become victims of their own success.

Community banks are generally smaller than the large commercial banks. They are locally and regionally focused, able to listen to people and do things for your community.  They are locally managed, more receptive to you.  You can talk to the bank president.  They are locally owned, especially in the earlier part of their life cycle.  Banks form by bringing in investors. When I started my community bank we did presentations and sought investors.  They became the bank owners, the shareholders and was locally owned.  Friends and neighbors are the owners.  If you are able to invest in a community bank, go to the shareholder meetings and tell them what you want, otherwise management will do what it wants to do and be driven by profits, but profits may not be what you want. Profits are the beginning of the end of a community bank – growth leads to their end.

Community banks are generally run by people who are good stewards of your community.  They are members of civic groups, go to fundraising events and community meetings. This gets them to grow as the community hears about them.  People in the community come to the bank to borrow money for local projects and the banks grow.  A bank only has so much money to loan so it has to grow and find new sources of capital.  This starts the life cycle.  You will see a second branch opening up.  This brings in more deposits, infrastructure, staff and the need to recapitalize itself and bring in more investors.  Good to have broader representatives in the community but the original founders and investors lose influence. People make more money but ownership share drops.  Growth is good for the investors and ownership as far as more money and resources but their share of ownership continues to drop.

Success makes the community bank a target for a bigger bank.  The same type of thing happens in neighboring communities where community banks develop.  This makes growth harder, the bank can’t make as many loans.  The result the bank starts merger and acquisition discussions with neighboring community banks. If you get absorbed, shareholders get paid or own part of new bank.  Now the bank may have 10 to 15 branches in multiple counties.  The bank loses touch with the community, owner-shareholders lose interest.  The bank is no longer a local community bank, but a regional bank.  Regional banks form all over the state and the same merger process develops.  Now you have a very large bank, no longer community located.  What happens next – a local community bank develops where you started as people want to invest in their community.

When bank comes in and wants to buy you and you say no, they increase their offer and bring it directly to the board.  If the board says no, the buyers go directly to the shareholders with a larger offer.  Then if the shareholders say no the buyers start a hostile takeover.  They go to individual shareholders offer more than the stock is worth.  At some point the money becomes too big and individual shareholders sell their stock.  As this process continues they seek to buy a majority of shares.  There was a time when I had a board meeting for our community bank. There was a knock on the door and managers of the neighboring bank walk in and they say – we now have 51% of ownership of the bank, announce a board meeting and fired the existing board. That completes the hostile takeover.

When a community bank is set up there are steps you can take to make a takeover more difficult.  For example, there are poison pills you can put in Articles of Incorporation that would make the raider pay a lot in a hostile takeover that might make a takeover of less interest. The Articles can require that executive management be put under contract and paid a lot if there is a hostile takeover.  You can add a variety of costs to a hostile takeover that will make it expensive for the raider and make acquisition less attractive. This has been upheld in some court cases, not others, so need to learn from those decisions.

Community banks are good, I would do it again if I had the opportunity, but the life cycle of growth and profit is something that needs to be faced.  If there is a community bank in your neighborhood, get involved.  Let them know profit and growth are not your primary objectives, resist take-over, resist growth and stop the natural life cycle that growth leads to.  There are ways to expand funding of community that do not require this kind of growth. State banks, community owned banks, are a way to avoid the need for growth.

Bill Thorington, from Humboldt County CA, is more than just a political and social activist. He is a retired community banker with a legal, scientific and business background. As an entrepreneur and founder of many businesses, he has personally experienced the real world of localization vs. corporatization. His email is

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