A recent pick up in consolidation among smaller banks could lure more attention from investors who want to make money on companies that are willing to sell.

After the financial crisis, private equity and other groups invested in banks they thought could be acquirers. The focus may shift to investing in smaller banks that could emerge as sellers.

BankUnited Inc.'s aborted attempt to sell last week may reveal that banks of its size — $11 billion in assets — could struggle to sell given a limited number of buyers big enough to deal. But smaller institutions may find it easier to cash out, observers said.

"The opportunity is ripe for someone to take an investment in a bank, turn it around and sell it," says Matthew Kelley, an analyst at Sterne Agee Group Inc.

A number of deals announced last week across a number of regions support that view that smaller banks are interesting in selling as regulatory costs mount and growing revenue becomes an increasingly daunting task.

First Volunteer Corp., a $651 million-asset company in Chattanooga, Tenn., said it would buy the $267 million-asset Gateway Bancshares Inc. in Ringgold, Ga. Provident New York Bancorp, with $3.1 billion in assets, agreed to acquire the $420 million-asset Gotham Bank of New York. In Texas, Prosperity Bancshares Inc. in Houston plans to buy Bank Arlington, a $37 million-asset bank that unsuccessfully tried to sell last year.

More deals are apt to take place in the next year because there are "healthy buyers flush with capital and growing liquidity," Kelley says. Many smaller banks are "boxed out of the ability to do capital-raising," he adds.

Kelley says there are "a lot of de novo banks that raised money and never reached profitability" that could be ready to sell in the next two to three years, if not sooner.

That could open the door for organized investment groups that want to participate in bank consolidation but lack the large sums of cash held by private equity firms.

Nick Emmack is part of a group of investors who don't want smaller banks to feel neglected. Emmack, joined by former community bankers in Ohio and Tennessee, have formed a company to invest in community banks.

Emmack says Community Bank Improvement Group believes that banks with as few as $500 million in assets can remain viable. Emmack, a former executive at a technology company, says banks with less than $500 million in assets should merge and cut costs.

"If you have a couple of entities with challenges and they get together, they've got a much better shot than if they stay at $200 million in assets," he says. "At the end of the day, if you have a $500 million institution, and you apply 1% to the bottom line, you're doing really well."

First Volunteer's planned purchase of Gateway serves as an example of what Community Bank Improvement Group is targeting. The deal pairs banks that both operate in the metro Chattanooga market. Neighboring community banks have seemed to be increasingly interested in joining forces before an out-of-market buyer swoops in.

"We'd rather have the small guys get together so they have a chance to survive," Emmack says. "We're not [against] the big guys, but we think it makes sense for in-market consolidation."

Paul Merski, the chief economist at the Independent Community Bankers of America, warns that investors would be mistaken to deem certain banks as too small. "The figure $500 million is just an arbitrary number," he says. "Sometimes size isn't the savior of a bank. What you really need is a size that is manageable and gets you a basic, fundamental return on investment."

Others debate whether consolidation among smaller banks is ready to heat up.

C.K. Lee, an investment banker at Commerce Street Capital LLC in Dallas, says merger activity won't accelerate until profitability improves across the industry. "It is hard to justify any merger that is earnings dilutive, and you've got such anemic earnings across the sector," he says.

The number of banks with $1 billion in assets or less fell to 6,769 last year, compared to 7,905 in 2007, based on data from the Federal Deposit Insurance Corp. The ranks of banks with $100 million or less fell nearly 30% over the same period, to 2,490.

Jack Kuntz, the president and CEO of Community Bank Improvement Group, was CEO at First Franklin Corp. when it agreed to sell to Cheviot Financial Corp. in 2010. The team includes at least three other former executives of banks that sold to larger competitors.

Emmack says his group has been meeting with banks though it has yet to invest any of the $100 million raised. He says the company is looking at banks with Tier 1 capital ratios of 4% to 9%. Community Bank Improvement Group would also require any investment to hire the group for consulting services.

"We don't want to take over the bank. We don't want to be the president or CEO," Emmack says. "Our plan will at least be to improve the operations of the bank."

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