By Tad Gage – It’s no secret the next few years are going to hold a lot of changes in the community banking sector. As we at Capital Insight Partners produce reports and updates on various regions in the U.S., one thing is clear: there are too many community banks. Capital issues, challenging loan portfolios and painful accounting-related revaluations of assets and goodwill have certainly had a powerful impact, even on long-established community banks.

But the real pain seems to be in store for the crop of banks that sprang up in the ‘90s through 2006. Without a doubt, there are a large number of successful de novos holding their own and even growing. The upside for many of these businesses is they started conservatively and didn’t have the capital or inclination to dive into the overheated real estate market. So they have been able to emerge in 2010 with minimal loan problems, good core deposits, minimally leveraged balance sheets and adequate capital.

Many of the banks we talk with, whether de novo or established, realize they’ll need a capital infusion at some point if they want to grow and take advantage of the many market opportunities that exist for the community bank model. The expansion opportunity for these healthy banks lies primarily with friendly mergers of relative equals, selective organic or acquisitive branch or location expansion, and acquiring smaller banks.

A large number of these very small community banks aren’t necessarily in trouble, but they don’t have the resources or access to capital to effectively do more than tread water. Realistically, these banks need to prepare to be acquired. And potential consolidators can also prepare to be effective and attractive acquirers.

Putting your financial house in order is the best way to prepare. For acquisition candidates, making it easy for potential acquirers to analyze the bank (under appropriate non-disclosure agreements, of course) can highlight the bank’s value and help potential acquirers identify the opportunities. For potential acquirers, having clear and transparent financials and a compelling game plan will make it easier to demonstrate to investors in a capital raise that you’re the horse to back.

Some key areas to analyze include:

·         Asset quality

·         Fair value of owned assets

·         Book value

·         Nonperforming assets and loan-loss reserves

·         Underwriting practices

·         Real estate loan participations

·         Net-interest margin

·         Capital adequacy

·         Management and board

You can find a detailed discussion of and rationale of these key issues in the Capital Insight-authored article in Bank Accounting and Finance. Just click on the logo link listed on the left side of this page for more detailed information.