BusinessTN

Most consumers do not realize that the Federal Deposit Insurance Corp. (FDIC) maintains a "problem institution" list that names those financial institutions under scrutiny by the FDIC because their weakened state puts them at risk of failure.

Unfortunately for consumers, only the FDIC is privy to the list; the problem institutions are never identified by name out of the very real concern that troubled consumers might withdraw their money and attempt to find a safer venue.

In September 2009, the number of at-risk institutions on the list increased by 36% after a $3.7 billion second quarter loss, bringing the list of problem banks up from 305 to 416, the highest number in 15 years.

With such a large percentage of our nation's economic power concentrated in a handful of "too-large-to-fail" banks, and with so many of those larger banks at the very least in precarious straits, what does that mean for those banks that are "small enough to fail" -- the community banks?

For some, it just means that the templated banking business model is a thing of the past. "If someone is shopping for a bank, I'd point out that the days of all banks having the same business models are over," says Jim Rieniets, president of InsBank, established in 2000 in Nashville. "As customers' needs, available technologies and specializations have changed, so have the business models."

While large banks may offer more in terms of assets diversification, consumers should use the same criteria when shopping for a bank as they would when shopping for any other large purchase that carries with it a degree of risk. "Depending on the customers' needs," Rieniets says, "big banks might be better, but smaller business owners need decision makers who aren't trying to fit them into formulas."

In an environment where one can't even be sure that large means healthy, banking with people you know becomes even more appealing.

"We're in the business of relationship-building with our customers," says William "Sammy" Stuard, president of F&M Bank, which is headquartered in Clarksville and has branches in several counties in the Middle Tennessee area. "It's not about the number of assets; it's your attitude and how you manage the bank -- your philosophy and approach to banking in the communities in which you live."

While Stuard acknowledges the tough times faced by the industry as a whole, he points to a Volunteer State-themed silver lining for both large and small banks alike.

"Historically, we've had a strong financial industry in this state," Stuard says. "These are tough times like most of us have never before seen, but we’ve had no bank closures in the state of Tennessee since the bottom of the market dropped out earlier this year."

Unfortunately for consumers, just as the FDIC's "problem institution" list is privileged information, so, too, is the information that reveals a bank's good rating. For Rieniets, that just reinforces the value of choosing a locally owned and operated community bank over a larger, "name-brand" bank. At your community bank, you're more likely to know the bank's other customers -- you probably do business with them yourself.

Ultimately, regardless of the health or hurt of the banking industry, the advantages touted by community banks over larger banks have not changed. According to Rieniets, when it comes to making decisions, enacting change or fixing deleterious behaviors, larger banks make "broad strokes with very little flexibility." As a result, large banks tend to judge everyone by the same yardstick, he says, so even a durable business owner who is a better planner with more resources and liquidity may be treated the same as someone who is a far greater risk. "Smaller, more localized business owners need decision-makers who aren't trying to fit them into formulas," Rieniets says.

Stuard agrees that this is the key to the success of the community bank and its customers. "We're very familiar with businesses in the communities we serve. The boomers are retiring, and new folks are coming in—local people. They want to bank with people who know their parents and grandparents...One of the greatest things we experience at F&M Bank is when we loan money to a young person, watch that person grow his or her business and become successful, and then see that person's children take over the business."

Both Rieniets and Stuard believe that there is opportunity in the market now for community banks to grow and prosper, although both admit that a proliferation of new banks is unlikely. In fact, according to Greg Gonzales, commission of the Tennessee Department of Financial Institutions, there have been no new bank applications this year.

In June 2009, banks were hit with the FDIC's "special assessment," monies collected from the banking industry designed to replenish the FDIC fund. "This was not anticipated in January when we budgeted," Stuard says, "and there could be another assessment this year."

Assessments such as these impact a bank's earnings for some time. "When it comes to earnings, we have to either make more money or spend less on overhead -- at F&M, we have slowed our growth plans until we see where this is headed. Our first priority is our customers."

Keeping that priority at the forefront may be the key to weathering the industry's ups and down while staying off the FDIC's list of problem-plagued institutions.