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20 years later, Goldome, Empire collapses linger; Lessons learned still have influence on today's bankers

Jan. 24, 1990. May 31, 1991.

Two dates, 16 months apart. Two days that will live in infamy in Buffalo history.

Those were the days, more than 20 years ago, when federal regulators swooped in and seized Buffalo-based Empire of America and Goldome, respectively, shuttering two institutions with long histories and sending shock waves throughout the Buffalo Niagara region.

At the time, they were two of the top U.S. savings banks, with branches in several states.

But they were already teetering on the edge of failure with sharply depleted capital -- a result of a series of missteps, overly ambitious expansion, heavy losses on loans, and significant changes to the rules under which they had operated.

"It was a real heartbreaker for many, certainly for the region, to have what we had and see it come tumbling down," said John R. Koelmel, CEO of First Niagara Financial Group. "It was difficult for everyone."

Two decades later, the legacies of those failures live on, not only in stories and memories, but in the veterans of those banks who remain active in the banking and business community today.

They also survive through the successes of two of the area's biggest banks today -- M&T Bank Corp. and KeyCorp, which split the spoils of Goldome and Empire, launching their own growth locally.

Perhaps more importantly, local bankers seem to have taken to heart the lessons learned from those mega-failures during that previous crisis -- even if they did it subconsciously.

"As a general rule, one learns from one's mistakes, not one's successes," said M&T chairman and CEO Robert G. Wilmers.

So while the banking industry nationally seems to have repeated many of the same mistakes -- excessive growth out of market, improper lending, bad judgments on real estate -- Western New York's institutions have not only survived the worst recession in more than 70 years, but have thrived.

"This business isn't that complicated. We work hard to keep it simple," said Koelmel, who was lead auditor at KPMG Peat Marwick handling the Empire account. "Those of us who have a sound balance sheet, strong foundation, and good business model, you're successful and sustainable in the best as well as the worst of times."

M&T and First Niagara have since snapped up seven banks between them in Pennsylvania, Maryland, Connecticut and Delaware, taking advantage of the turmoil and their own strength to push further up the ranks of the biggest banks.

And they've done so by expanding more cautiously in adjacent markets, sticking to their knitting, holding fast to underwriting standards, and ensuring they have more than enough capital on hand to support their business by either raising it or socking it away from earnings.

"One of the lessons that's been learned over time is 'don't grow too fast,' " said David Nasca, CEO of Evans Bancorp in Hamburg, who worked at Goldome and later at First Niagara. "Goldome grew very fast. Empire grew very fast. That's not typically an industry that reacts really quickly to fast growth."

Rather, he said, companies have to first make sure they have the right infrastructure, management and controls in place to handle such expansion, Nasca said.

That's exactly what M&T and First Niagara did.

"Our success has been predicated on rebolstering our capital base and ensuring we have a strong capital position as we've gone every step of the way," Koelmel said. "You've seen us invest heavily in talent."

The dual failures 20 years ago were a massive jolt to the Buffalo psyche. The names Goldome and Empire -- or "The Big E" -- were relatively new when the institutions collapsed, but the savings banks themselves had been part of the Western New York fabric since the mid-1800s. That's when the former Buffalo Savings Bank and Erie County Savings Bank were founded in 1846 and 1854, respectively.

They grew up along with Buffalo itself, plodding along with steady growth and solid profits for most of their history. They survived financial panics, recessions and depressions, and emerged after World War II as strong but staid banks.

Indeed, not until the 1970s and early 1980s, under Empire's Paul A. Willax and Goldome's Ross B. Kenzie, did the two savings banks begin the radical transformation that would abruptly end with failure a few years later. They didn't even adopt new names until 1982.

It took only a few years for everything to change, as lawmakers and regulators loosened restrictions on the industry, banks chased loans and other business in search of profits, and a real estate bubble arose that led to inflated values, lax lending standards and loans that shouldn't have been made.

That tale may sound eerily familiar. In fact, while the specific environment in which Empire and Goldome operated was significantly different than the last few years, there were remarkable similarities as well.

"There's one word that describes what happened to the banks then and today: ego," said Lou Sidoni, who was a vice president at Goldome until 1988, before helping start Jamestown Savings Bank and Greater Buffalo Savings Bank.

Both periods saw intense competitive pressure on banks, and a need or desire to grow and boost profits. Both saw banks look far afield from their home base and traditional business, rapidly expanding across the country through acquisition and branching binges to high-flying markets with a greater potential for rapid gains.

Both periods also witnessed lenders abandoning good underwriting, focusing on fees and commissions instead. And both involved accounting gimmicks or what turned out to be shams.

"I think the lessons that they didn't learn 20 years ago was you can't take shortcuts for quarterly profits. You need to take a long view of growth and profitability," Nasca said. "The reason the banks here are doing well is the banks here didn't get caught. The bankers here largely avoided what the rest of the country sort of went after."

Of course, the origins of the two crises differ. Unlike the record low interest rates today, banks in the 1970s and early 1980s were faced with high and even inflationary rates, driven by heavy U.S. government borrowing and the oil crisis.

At the same time, they had federal caps on how much they could pay on deposits, and the lowest state cap on mortgage rates in the country. And there were other restrictions on their expansion, growth and ability to offer certain services.

"If you think about the industry in the '70s, it was largely like a utility. It had fixed rates. It was regulated. And it was pretty sleepy," Nasca said.

So banks like Empire and Goldome were struggling mightily by 1980, unable to compete with alternatives for depositors, unable to charge enough on loans to be profitable, and unable to grow as executives wanted.

"Banks were looking for ways to bring in money. It was really hard," Sidoni said.

Under pressure from the industry, federal lawmakers and regulators lifted certain key restrictions on both commercial and savings banks in the 1980s, including the ability to pay higher rates on deposits.

At the same time, savings banks aggressively pushed into commercial real estate lending in high-flying markets, hiring veteran lenders from commercial banks and pursuing loan opportunities with developers.

"Show me a thrift that went under and I'll show you a thrift that hired commercial bankers to make loans," Sidoni said. "The commercial bankers loved to get in with the savings banks, so they could make those deals."

Property values were soaring, developers were building new projects everywhere, and loans were being made with extremely lenient underwriting and terms, with little or no down payments, based on inflated appraisals. Fraud was rampant. And many savings banks expanded into other businesses they were less familiar with.

Meanwhile, Empire and Goldome decided to pursue growth outside their traditional arenas. That meant beyond Western New York, and the only way to do that at the time was to buy failed banks in other markets that the federal government was seeking to unload at minimal cost to taxpayers.

The result was that both went on acquisition binges at the behest of bank regulators from 1980 to 1986. Goldome bought three failed banks and tripled in size within 98 days, from $3 billion to $9 billion. It also bought two healthy institutions in Florida that turned out troubled. Empire bought 13 banks in five years, growing to $8.4 billion.

Together, they gained distant operations in Florida, Texas, California and Michigan.

"It was a far-flung, disparate geography. There's not a whole lot of connectivity there. They gobbled up what was available, versus what made sense," Koelmel said. "You've seen us take a much more regionalized geographically focused approach."

They also had significant accounting shortfalls on their books, because of the enormous gap between deposits and assets in the acquired banks. Regulators allowed them to count that gap as "goodwill" and record it as an asset on their books, so they would still be solvent while that was in effect.

Then, the bubble burst.

Land values tumbled, developers and other borrowers struggled and loan losses mounted. And Congress in 1989 changed the accounting rules as part of its bailout, taking away the ability of Goldome, Empire and others to count the "goodwill" toward capital, leaving a massive hole on their balance sheets.

"What really happened with those two banks was the rules changed. They did the deals with the government, and all of a sudden they had negative net worth," said Kevin Brady, director of marketing at Evans, and a former Empire banker.

The result of all of these factors were the failures of Goldome and Empire, as well as hundreds of other banks during the savings and loan crisis.

Fast-forward two decade, and it seems familiar.

"Bankers tend to repeat themselves. They're like the lemmings that follow each other," Sidoni said. "The ones that don't are the ones that survive."

In the late 1980s, major banking, insurance, and securities firms complained that Depression-era rules hindered their ability to compete globally. In 1998, Congress, under pressure from the industries, did away with regulations separating the three industries. That allowed banks to move heavily into investment banking and capital markets, including the packaging, marketing and sale of mortgage-backed securities and complex derivatives.

Meanwhile, the residential real estate market boomed over the next decade, as home prices soared across the country. Mortgage brokers and lenders, eager for more profits and growth, aggressively marketed products with lax underwriting, based on inflated property values, with no documentation and without regard to a borrower's ability to repay. Banks and Wall Street, equally eager for profits, sold the loans to investors, while pressuring the mortgage pipeline for more.

Again, in 2007 and 2008, the bubble burst. Property values plummetted, borrowers defaulted on mortgages they couldn't afford and couldn't refinance, losses mounted, and bank capital levels tumbled, leading to hundreds of bank failures over the next few years.

"If you take too much risk for not enough reward, no surprise, it's not sustainable. It doesn't work," Koelmel said. "Surprise, surprise, you end up paying the same price today that you did 20 years ago. If it didn't work then, there's a high probability it's not going to work today."

The difference this time: No banks in Western New York failed, mainly because none had strayed the way others did this time around. In part, that's a result of Western New York's own economy and housing market, which remained stable through the recent crisis. The Goldome and Empire collapses also shaped their views.

"The wisdom of experience allows us to sense opportunity, but also to avoid mistakes, in part because we might well have made them before and learned from them," Wilmers said in his annual shareholders message last year.