The debate over community bank consolidation also extends to institutional investors.

Some large shareholders see very few reasons for small banks — most of which are struggling with regulatory burdens and pinched margins — to stay independent. For them, going it alone is incomprehensible.

"You're either a buyer or a seller," Anton Schutz, president and chief executive of Mendon Capital Advisors in Rochester, N.Y., said during a panel discussion held Wednesday in New York and hosted by the American Bankers Association. "I believe that, in this industry, getting together is probably a good idea. You really need some scale."

It is becoming increasingly important for struggling banks to find a buyer, added Schutz, whose firm manages or advises $194 million in assets, said. Mendon, which targets a return of 15% to 25% from its investments, looks to invest in banks that have returns on equity of 9% to 11%, he said. The firm also seeks out potential sellers with strong franchises that are, as Schutz put it, "the best house on the corner."

Not everyone shares that view. Josh Siegel, chief executive of StoneCastle Financial, said he is content with a small, profitable bank remaining independent. He said StoneCastle is less focused on growth and is "happy just earning income," adding that the vast majority of community banks are earning a healthy profit.

Last month, the American Bankers Association endorsed StoneCastle, which has roughly $5 billion invested in community banks, as a source of capital for smaller institutions.

The contrasting philosophies expressed by Schutz and Siegel provide more evidence that banks seeking capital must carefully research the investors they court. Evolving from a "friends and family" ownership structure to one with outside investors requires bankers to regard new investors as partners, Schutz said.

"If you plan to grow at a nice steady pace, but you take a $10 million investment from an institutional investor who expects monetization within three years, you will have really bad board meetings in three years," Siegel added.

A successful capital campaign also hinges on bankers' ability to respond to investors' needs. Banks must calculate their needs -- the size of an investment and the number of investors — and then stick to the plan. Pulling back shares or selling investors a smaller slice than originally marketed can inflict reputational damage on a bank's management team. In turn, it could create challenges raising money in the future.

"Don't overpromise," Schutz cautioned.

Bankers' wariness of institutional investors is understandable given the influence they can wield. Still, well-run banks shouldn't fear confrontation with large investors, said Frank Sorrentino, chief executive of ConnectOne Bancorp (CNOB). The Englewood Cliffs, N.J., company held its initial public offering earlier this year.

Banks with outside investors must have enough self-awareness to realize who they're working for, Sorrentino said during the panel discussion. "If you're working for yourself [and] if your interest is not aligned with your shareholders, you are going to have a problem with institutional investors," he added.

ConnectOne has so far emerged as an exception to Schutz's merge-or-die mandate. The company, founded in 2005, has grown to $1.1 billion without any acquisitions. It had gotten to its current size by stealing business from competitors — mostly bigger banks.

"The largest institutions are the gift that keeps on giving," Sorrentino said. "More often than not, our new clients walk into our doors without being called on, saying, 'Please get us out of the bank we're in.'"

Chris Cumming is a reporter for American Banker.