NASHVILLE — For community bankers trying to figure out how they will make money going forward, the next six months are pivotal.

That is the time to acknowledge and fix asset-quality problems and line up capital to finance expansion when the economy recovers. It is also the time to repair relations with regulators, who have a lot to say about asset values and capital needs.

"Look at the regulator as a partner rather than the police," William F. Sammon, a senior vice president and managing director of equity capital markets at Howe Barnes Hoefer & Arnett Inc. in Chicago, said in an interview Friday. "Communicate. Make sure the regulators know you" have a strategy.

"Bankers who are just hoping for the best put themselves in peril," he said. "It's that thinking that could spur a lot of M&A activity."

Julie Stackhouse, the senior vice president of supervision at the Federal Reserve Bank of St. Louis, told a gathering of bankers here last week that small banks ought to consider merging with like-minded banks to gain the scale needed to keep pace with technology and handle the burden of regulatory compliance. Merging, especially for those in rural areas, could help diversify a bank's products and geography, she said.

The 200 or so Tennessee bankers at the gathering were asked to raise a hand if they were considering a merger; not a single hand went up. Of course, this may not be something a banker wants to admit in front of his rivals.

"I guarantee there were 50 banks in that room that have had that discussion recently," Sammy Stuard, the president and CEO of F&M Bank in Clarksville, said in an interview after the meeting. "If you can't raise capital, you have to do something — shrink or get out."

Philip K. Smith, the president of Gerrish McCreary Smith, a law and consulting firm in Memphis, predicted consolidation will claim 2,000 to 2,500 banks, bringing the nation's total to 6,000 or fewer.

A great deal of that consolidation will be in the form of mergers, but plenty of banks will fail.

"There are going to be a lot of banks that just die," Meredith Whitney, the chief executive of Meredith Whitney Advisory Group LLC, told the Tennessee bankers. "Some banks are too big to fail while others are too small to matter. For the teeny-tiny banks, there is no place to go."

Whitney's advice tracked Stackhouse's: "Merge with a clean, small bank, and you can raise equity. Get enough scale, and go after the big guys."

Whitney said large banks "are still playing defense, so it's a jump ball" to win borrowers' business.

Claire Tucker, the president and CEO of CapStar Bank in Nashville, agreed.

"Big-bank fatigue has created tremendous opportunities for community banks," she said during a panel discussion. "Borrowers want predictability, and they want customized service."

Smith said community banks must refocus their operations on making loans at reasonable rates, pricing deposits reasonably and picking up some fee income. These are not exactly revolutionary tactics, but maybe that's the point. Community banking is not supposed to be glitzy.

In an interview, David Hayes, the president and CEO of Security Bank in Dyersburg, said community banking is about making plain-vanilla loans for homes, or cars or to a small business. It is about playing a role in the community, and it's increasingly about holding down costs.

"We just plug away every day," Hayes said. "We will survive. We always have. We will find ways."

But Hayes also told the group of bankers, "I'm measuring my career by how many more exams I have" before retiring. "It's two compliance and four safety and soundness."

Regulation will get worse before it gets better, especially because Congress is expected to enact a major reform this summer. Many community banks view regulation as the greatest threat to their survival.

"This regulatory reform legislation could determine what the future of community banking is," Bradley L. Barrett, the president of the Tennessee Bankers Association, said in a phone interview. "There was fear for many years that large banks would be the demise of community banks. I am concerned that Congress could be the demise of community banks."

Barrett, who has worked at the banking group for more than 30 years, said the regulatory burden may lead some bankers to quit the business. "Some folks are going to throw up their hands and say the model doesn't work any more," he said.

Beyond regulation, a headwind facing community banking is the commercial real estate market — the backbone of most community banks' lending portfolios. K.C. Conway, a CRE specialist from the Federal Reserve Bank of Atlanta, told the Tennessee bankers that the market is two to four years away from hitting bottom.

One glimmer of hope — without securitization, the big banks are making fewer loans, so community banks can grab share — is dimmed by the fact that demand is down, at least from borrowers that examiners will approve of.

Like other bankers interviewed for this story, H. McCall Wilson Jr., the president and CEO of Bank of Fayette County, remained upbeat. Community banks like his, which has $295 million of assets, provide a level of service that will find a customer base, he said.

Yet Wilson sees a wave of consolidation coming. "Community banks are here to stay, but they will be larger," he said. "The technology and compliance costs will eat [smaller banks] alive."

A community bank will need a minimum of $250 million of assets, he said, but "to be a really strong community bank you will need to be $750 million to $1 billion to afford all these costs."

Greg Gonzalez, the commissioner of Tennessee's department of financial institutions, is also optimistic.

"I feel good about the future," he said. "A number of things just need to come together: We need access to capital, a stronger economy; we need more jobs, and we need some consolidation."

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