Walter Mix knows a thing or two about bank failures. As head of the California Department of Financial Institutions during the tail end of the savings and loan crisis and throughout most of the 1990s, he was personally responsible for closing down nearly 30 banks across the state. Now, as managing director of the Los Angeles office of international consulting firm LECG LLC, Mix is finding his experience comes in handy as the industry struggles through another period of painful losses and bank closures.

Question: What are the biggest challenges for banks that acquire a failed competitor?

Answer: The management team needs to have sufficient experience with respect to strategic issues. In other words, there needs to be a good fit between the acquirer and the (acquired bank) as to products, geography, service lines and what I would call culture. The other issue is integration risk. They need to have a team of people at the acquiring institution that possesses the ability to seamlessly integrate the two institutions.

Q: What problems do they face if they are not sufficiently prepared?


A: You can face problems like deposit runoff, damaging customer relationships and the improper management of problem loans. You need to have the ability to work out problem loans. That’s why the regulator is concerned about having an appropriate board and management at the acquiring institution. Acquiring failed institutions isn’t for everybody.

Q: Why do you think Los Angeles has been the home of so many bank failures?

A: If you look at it, here in California, you’ve got 1st Centennial out in the Redlands area and that was real estate construction. Then kind of the same thing with Alliance Bank, but the loans were on properties out in like Victorville. Then you’ve got PFF and Downey that’s basically option-ARMs and land development loans, which are some of the riskiest of all. Those are the underlying issues.

Q: Many large banks seem to think they can see the light at the end of the tunnel. Are community and regional banks through the worst of it yet?

A: I wouldn’t say “yet.” We’re still in the process of resolving a number of troubled institutions here in the state. A number of these institutions are fairly sizable within the context of the California banking system. You probably know who some of them are.

Q: Will the many troubled institutions be able to work through their problems?

A: There are some that have franchise value in terms of customers, deposits, other services they provide. They’ll be able to ride through these headwinds. There will be others who frankly didn’t have strong marketplace presence. The market is sorting through this. You’ve got private equity people out there doing just that, and other banks that are doing just that. The process is pretty actively under way.

Q: Would you explain the commissioner’s role in all this?

A: I was involved in just about every step of the process in getting (banks) ready for actual closure. We worked with the FDIC very closely on the actual resolution and merger with a strong, surviving institution after the closure. We were very active in supervising institutions.

Q: Did you actually go to the banks to shut them down?

A: I did once. More typically, I was sitting in my office with lawyers, senior bank regulators and the FDIC. They put the documents in front of me and upon my signing the documents it becomes closed.

Q: So you were essentially the executioner. What did it feel like to end the life of a bank?

A: Every time we had to close an institution, while I’m always a glass-half-full kind of guy, I always thought in the back of my mind that there were employees at the bank and shareholders who were going to be affected.

Q: Were there ever times when you were about to close a bank and then it was saved at the last minute?

A: Yep. That’s a reason why we were very thoughtful and methodical about taking any drastic action to close an institution. I can remember some cases where toward the very end of the process of getting ready to close and capital actually arrived which brought them up to the acceptable capital range.

Q: Then some banks may have been on the brink of death without even knowing it?

A: They knew it.

Q: How is that?

A: When they don’t receive positive feedback from due diligence on an open (market) acquisition or capital infusion and (the FDIC brings in) potential buyers to look at the institution it can become clear to the existing management and board that they’re headed toward drastic action by the regulators.

Q: What lessons can we learn from these tumultuous periods in the banking industry?

A: One of the big takeaways is concentrations in real estate, both then and now, are highly problematic. I would put more focus on diversifying away when the times are good from concentrations in categories like real estate, and particularly commercial real estate, which I believe is clearly the next shoe to drop.

Q: How will this turmoil reshape the local banking industry?

A: You’re going to see many of the larger community banks merged or closed. This should create stronger and more safe and sound larger community and regional institutions. That’s my hope. What that will do is lead to a whole new round of new institutions forming and new opportunities in niches that are left open in the marketplace.