Greg Gonzales once had a reputation as a "not on my watch" commissioner when it came to bank failures in Tennessee. That all changed on a fateful Friday night last month when he closed two banks.

Tennessee also has a dozen or so struggling banks that industry observers peg as endangered, meaning that more failures could follow. Though Gonzales has joined the ranks of state commissioners who have had to pull the plug on weak banks, he says his goal for the Tennessee Department of Financial Institutions is to find a medium between being a tough regulator and an industry ally.

"Great customer service is incredibly important. I want to know what our institutions think when they see us at the door. I'm sure they're not overjoyed, but I want them to feel that we bring a fair and balanced approach," Gonzales said in an interview last week. "We aim to have clear communication. I want us to be brutally honest with the boards as to where we think they are. It doesn't do anybody any good not to be."

Gonzales, who has served as the state's bank commissioner since 2005 and has been with the department since the 1980s, said state law bars him from discussing specific Tennessee banks, which kept him from talking about the Jan. 27 failures of the $1.2 billion-asset Tennessee Commerce Bank in Franklin and the $272 million-asset BankEast in Knoxville. They were the first failures in the state since late 2002.

His approach, however, with struggling banks is easy: give them as much room as he can, but not be afraid to close them if a path to better health does not materialize.

"It boils down to if there is sufficient liquidity and if there is a viable plan. From there, we have to make a judgment," Gonzales said. "Our desire is to help them be successful and that comes through honest and very clear discussions. If they believe we have no other agenda than to help them be successful, I believe our message will be better received and they will work harder."

The relative resilience of Tennessee to the rest of the Southeast has likely made those judgment calls infrequent so far into the downturn. The state didn't experience the boom as much, so the bust has not been as detrimental. Meanwhile, areas like Nashville are relatively brimming compared to other parts of the country.

"Tennessee has been more middle of the road. It never had the run-up in prices that Florida had or the speculative building that Georgia had," said Jeff Davis, an analyst at Guggenheim Securities LLC.

That soon might change as some banks, particularly those that bet big on eastern Tennessee as a second-home oasis, run out of steam in the protracted downturn.

"The second-home market is a segment of our economy that is just not coming back under any circumstances for the time being," Davis said.

There are some signs of stress in the Tennessee market. Data from Trepp LLC, which tracks the condition of banks nationwide, had 20 banks in Tennessee on its failure watch list at Sept. 30, up from 13 a year earlier. While Tennessee could emerge as mini-hub for failures, it is still greatly behind Florida and Georgia, which had 58 and 63 banks on Trepp's watch list, respectively.

Gonzales said he has spent the last few years "putting thousands of miles on my car" visiting banks to discuss how they plan to make it through.

"One of the questions I ask boards consistently is where do you see yourself in a year, three years or five years down the road," he said. "The greatest concern I have is where community banks are going to be positioned going forward. I start with the premise that community banks are important to the economic welfare of Tennessee."

A recent study from the University of Chicago found that state bank regulators tend to be more inconsistent and less aggressive than their federal counterparts in dealing with problem banks. Observers, however, point to commissioners like Gonzales as examples of states where bank failures can be mitigated when there is a strong state commissioner who is not trigger happy.

"He is not easy on banks. He has no hesitation about burying the dead, but he won't shoot the wounded either," said Philip K. Smith, a partner at Gerrish McCreary Smith in Memphis, Tenn. "A bank may very well be headed to its last leg, but if there is sufficient liquidity, [Gonzales] thinks, 'If I don't have to close them yet, why should I? They could find a buyer or an investor.' Thank goodness for that approach."

Smith declined to name the bank, but recalled a tale from early in this banking cycle where Gonzales' approach gave his client an opportunity to find equity, ultimately saving the bank.

When state bank commissioners adopt such an attitude, they can find themselves in a tenuous relationship with the federal agencies. Gonzales said he has had disagreements with his federal counterparts, but described the overall relationship as respectful.

"I raised my right hand at the inauguration and swore to the governor and the people of Tennessee to uphold state law and that is steadfast and unshakeable," Gonzales said. "I think we have a great relationship with our federal counterparts, but they have broad national standards and as a state regulator, my job is to help apply those in a way that makes sense for the facts and conditions of Tennessee."

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