Community banks are experiencing a fundamental change to its core business model that will forever change the landscape of the industry. Consumerism in the United States is paralyzed, real estate speculation is non-existent, and many community bank’s revenue mix are out of balance with poor risk orientation.

Capital markets move briskly with the continuous onslaught of data released on the economy, industry, companies and executives. As 2010 approached, bank executives expressed optimism for a stronger economy, firming real estate values, and wider access to capital markets. The year started strong as private capital sources concluded that credit troubles would ease and valuations were at – or near – a trough. As 2010 progressed, it was clear that asset quality holes on bank balance sheets were deeper and wider than most had anticipated, creating skepticism among investors that bank values had bottomed, or that a number of smaller banks were even solvent.

As we approach 2011, capital sources are much more discerning about credit quality; managements and boards are fatigued; and, capital sources are looking for transformational events to drive potential returns. Banks continue to experience franchise threats given poor asset quality, a rigorous regulatory environment, and deteriorating capital ratios. For banks to successfully recapitalize, investors are looking for three initiatives:

A thorough independent analysis of asset quality on a majority of credits held in a bank’s portfolio with a verified pricing matrix for an asset disposition strategy.
New executive management with a record for strategic execution, organizational leadership, and driving shareholder returns.

A strategic plan that includes an event that will transform the fundamental profile of the bank; revenue growth opportunities; and, risk wighted returns for investors that are clear and meaningful.

Banks will continue to struggle with poor asset quality challenges for the foreseeable future given an economic backdrop of anemic growth. Capital ratios will continue to deteriorate and the regulatory environment will remain stiff. Management teams and board of directors of struggling banks will need to seek bold and creative solutions unimaginable 12 months ago to preserve franchise values.