Community bankers in Tennessee had plenty of reason to fret a couple of years ago. Commercial real estate values were plummeting, and weakness in the sales of automobiles - a top source of manufacturing revenue in the state - raised the specter of layoffs.

But the anticipated hit in auto manufacturing jobs never materialized as the central Tennessee plants of Nissan and General Motors Corp.'s Saturn division became huge successes. So capital, and luck, saved the state's 200-plus community banks from the real estate crunch.

"Tennessee has been lucky through the bad economic times of the last three years," said Kathryn Edge, assistant commissioner of financial institutions. "It hasn't been a great time, but there are strong trends toward an economic recovery."

Fallout from Realty Slump

Five years ago, when James D. Harris helped found a bank in the tony Nashville suburb of Brentwood, his business plan didn't include a drop in commercial real estate prices.

"Most of our market is retail and it's affluent," said the president of $84 million-asset Brentwood National Bank. "While we weren't impacted by it directly, many of our customers were in the real estate investment business. We had a few years of higher-than-normal reserves, but that has slackened off recently."

Mr. Harris said the booming residential construction market around Nashville is his best hope for the near future.

Brentwood's core capital stands at 13.5%, and its return on average equity has hovered between 6% and 7%.

Insulated from Problem

Brentwood's capital, while on the high side, is indicative of Tennessee's small banks. Of the 249 banks in Tennessee, 239 have asset sizes of less than $500 million. And only a handful of these small banks have a core capital ratio under 6%. So both size and capital strength insulated these banks from the commercial real estate problem.

Of greater concern is the automotive industry.

"Where the automotive industry goes so goes our community," said Mike Rowland, chief executive of Hardeman County Bank in Bolivar, Tenn. Much of the economy is based around a plant that manufactures mirrors for automobiles.

He said $71 million-asset Hardeman County Bank, though profitable, has not grown significantly in 10 years. And, with the uncertain future of the American automotive industry, he doesn't see that changing.

"The best we can hope for in a town like this is to steal some business away from some other small bank," Mr. Rowland said.

Jennifer Ver Linden, a DRI/ McGraw-Hill analyst, says stealing business will be especially difficult now that Kentucky has enacted an economic incentive package granting income tax credits to new or expanding manufacturers, service industries, and existing operations that would shut down without the credits.

However, she says, "Stronger growth in Tennessee's existing industries will help to offset the fact that Kentucky may be the region's winner in the struggle for new industries."

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