Painful consolidation is coming to community banks, and the biggest determinant of which companies will survive is the quality of senior management, particularly the chief executive.

So what separates the average leader from the exceptional? There is no one thing, but those offering prescriptions touched on a common theme — change. Hoping to muddle through until business returns to "normal" is not a sound strategy.

"Even though we are four years into this, some CEOs still feel they can run their banks the way they always did," said Bob Goldstein, a principal at CapGen Financial Group and a veteran banker. "The industry is riddled with them, and they are doomed to failure."

CapGen, the private-equity firm founded by former Comptroller of the Currency Gene Ludwig, has reviewed 200 community banks and invested in just six.

What does Goldstein look for in a CEO?

"What's important to us is someone with very varied skills," he said. "It really takes a special collection of abilities. You can't just be a very good salesperson with average risk skills."

One of those bankers is Sam Erwin, the chief executive of Palmetto Bank in Greenville, S.C.

"The model has to change," Erwin said. "Our revenues are declining, our costs are going up, our regulations are greater and greater, so we have to learn how to live in a world that may never give us the margins that we enjoyed for many years."

The $1.4 billion-asset bank is sorting through a load of problems, but it raised $110 million last fall from investors, including CapGen and Patriot Financial Partners, because it has a valuable franchise with a strategy for the future.

Goldstein, Erwin, other CEOs and industry consultants interviewed for this story said bankers must take a tough look at their operations — and their people — and face the ugly truths, whatever they may be. Credit administration a mess? Sales culture nonexistent? Technology infrastructure outdated? A disengaged board? Wrong people in the wrong jobs? Anemic revenues? Irate investors?

Whatever the problems, it's time to find solutions that allow your bank to move forward, to win more business from customers.

It won't be easy, but it is necessary. And time is running out.

"The distribution between mediocre banks and really good community banks is getting wider," Goldstein said. "There are not going to be thousands of successful community banks. There are going to be hundreds."

L.T. Hall, the chief executive of Resurgent Performance Inc., a management consulting firm in Alpharetta, Ga., which is ground zero for failed banks, found an elegant way to describe the revenue challenge facing community banks.

"Community banks that want to survive have to become more relevant to the people who walk by their branch windows every day," Hall said.

Among the changes CEOs should consider: holding people accountable and firing underperformers; hiring aggressive people, perhaps from beyond banking; investing in technology; beefing up marketing; fostering a sales culture; scrutinizing expenses; building core deposits; finding new niches or better ways to serve customers.

Rich Lievense and Tony Nuzzo are community bankers meeting larger rivals head-on. They are in different markets and use different models, but they agree success hinges on creative change.

"You have thousands of bankers who are deep in denial," Lievense said. "They keep saying, 'When are we going to get back to normal?' Those days are long gone. As an industry, unless we change and are really willing to compete and really focused on the customer, we are toast."

Lievense founded Lake Michigan Financial Corp. 13 years ago in Holland, Mich. Now it is a holding company for two banks with $1 billion in total assets. He was at the former Old Kent Financial but left after concluding he could do banking better, both for shareholders and for customers.

Lake Michigan Financial's banks have just a single office in each of four markets, and they serve customers electronically or by courier. The banks seek to compete on excellent service, not cheap prices.

"This isn't a charity. We have to make money," Lievense said. "Bank of America and Wells Fargo can open right next to me and I could care less, because I think I can outcompete them."

Both banks doggedly control costs and don't take excessive credit risks. They focus on building long-term relationships with clients. Lievense said he wins over customers who want quality service and quick decisions.

"We don't compete on price, but I guarantee you if you banked with us and you walked in the building, three people would know you by name and you won't wait 10 seconds for service," he said. "It's not built for volume.

"People said we couldn't do this, that it wouldn't work. It does."

Nuzzo opened First Commons Bank in Newton, Mass., in July 2009. It's grown to $119 million in assets. "We look for ways every day to make ourselves better, and we change," Nuzzo said.

But that's about where the similarities end.

Nuzzo has identified four things larger rivals do that he thinks irk customers. These "dissatisfiers," as he calls them, include nickel-and-dime fees.

"We are almost a fee-free bank," Nuzzo said. "We do banking the old-fashioned way: We basically buy money and we basically sell money. And we engage ourselves in the community for the betterment of the community."

The strategy is working at First Commons. But it's still quite new, and consultants argue that fee income is exactly what community banks are going to need to build to survive.

"Community bankers want to give Neiman Marcus service for Wal-Mart prices," said Chris Hargrove, the chairman and chief executive of Professional Bank Services, a consulting firm in Louisville, Ky. "That's where they are making a mistake. They want to take care of their customers the way they always have, but they don't want to charge them for it. That has to change."

Hargrove, who has clocked a quarter century in the business, predicts half of all the community banks operating today will be out of business within 10 years. To remain competitive, he said, all but small, rural banks will need to get their assets up to the $10 billion range.

"This is the toughest I've seen [the business] and I don't see it pulling out anytime soon," Hargrove said. "I think you are going to have to be a lot bigger to make it going forward."

Last week's column argued that a driving force of consolidation will be the decade-long decline in operating revenue. CEO burnout is another, major force.

Many are exhausted and overwhelmed. They've seen much of their wealth evaporate with their banks' declining valuation. They can't juice revenues and can't control costs as policymakers crack down on fee income and pile on new compliance requirements. Lousy loans continue to produce losses, examiners demand more capital, competition intensifies and investors flee.

They can't plan for the future because they are too busy putting out fires. But while some chief executives will drown in this swamp, others will capitalize on it.

Take Erwin at Palmetto. He joined the 104-year-old bank in March 2009 and became CEO that summer. The bank was hit with a consent order in June 2010, so nothing about his job is easy.

But Erwin took a proactive approach with regulators, studying previous consent orders and making changes before the Federal Deposit Insurance Corp. asked for them.

Palmetto is improving credit administration, beefing up information technology, controlling costs and scrutinizing business-line performance. It has hired gobs of talent, including a new chief financial officer in November, a new head of retail in February and a chief information officer last month.

"Making sure you have the right people and holding them accountable really has to be top of mind every single day," Erwin said.

Erwin said he expects Palmetto to return to profitability next year and then plans to use the capital it raised last fall to be an acquirer.

"We are doing all of this in preparation of being a consolidator," he said. "We know we are going to have fewer banks … and the banks that represent the best hopes for the future are going to be the banks that are successful in buying the most attractive banks out there."

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