Banking Law

The Denver Business Journal's Renee McGaw discusses a quirky result of the recent meltdown in the community banking sector: a number of the banks that have hit the skids and are under regulatory enforcement agreements or orders were started and run by bankers who made a bundle with their first bank and we're trying to replicate their previous success.

An impressive number of the regulatory orders signed so far this year involve second-time-around banks whose founders fared very well with previous banks, in some cases selling them for tens of millions of dollars in the early 2000s. But regulators have signaled concern about their second incarnations.

According to professional recruiter Tim Pendergast, there's a certain irony in all this.

?What?s ironic is that not only did these investors try to duplicate the same business model a decade later, but many hired back the same people and used the same or very similar bank names in round two.?

I don't see it as much ironic as unfortunate. As Ms. McGaw points out, most community banks have traditionally made much of their money in an area where they seem to be able to compete with their bigger brethren: commercial real estate. As some bank consultants have opined with perfect 20/20 hindsight, that made them vulnerable when the subprime mortgage bubble popped and the resulting domino effect cratered all real estate prices, including commercial real estate. If only these bankers had possessed the foresight that so many armchair quarterbacks seem to possess in 2010! If only they had foreseen the inevitability of the worse economic recession since the 1930s, they wouldn't have concentrated so heavily in commercial real estate, but would have diversified into C&I (whoops, also taking a beating) or "safe" investments like FNMA preferred stock (whoops, also the cause of many banks taking it the shorts) or AAA mortgage-backed securities ('nuff said)!

There's no question that a number of banks failed to diversify their asset base suffciiently. It's also true that no one expected the debacle we're now wallowing in, other than a few contrarians who went short and got rich and (according to at least one of my correspondents) regulatory Chicken Little's whose warnings were ignored and/or actively suppressed. The rest of us idiots who were actually in the arena slugging it out might have been uneasy, but never saw the train that hit us.

I'm sure a number of these "replayers" wish they had a chance to "rewind," but that's not how life operates, is it? On the other hand, as Ms. McGaw points out, merely because a bank operates under an enforcement order doesn't mean it's not going to make it out of the swamp and onto dry land eventually. What it does mean is that it won't be repeating its past mistakes. How any of these banks are going to make money in an economy like this one is going to be a challenge, regardless of asset concentration or diversification. "Don't make commercial real estate loans" is the easy part. "What's the alternative in this economy?" is the tough nut to crack, whether or not this is your second time around.

P.S. A community bank CEO lets his inner snark run free.