Thomas Lohmann has been a quietly successful Twin Cities real estate developer for most of his life, building and owning -- often for decades -- modestly scaled office and retail projects.

How hard could banking be, Lohmann figured back in 2004, if he applied the same conservative, long-term approach at his new St. Paul bank?

Answer: Very hard, especially when the economy crashes and your president and chief credit officer are accused of funneling almost $2 million in loans to bogus borrowers.

On Wednesday, a federal grand jury handed down indictments against two former employees of Pinehurst Bank, John Markert and Gregory Pederson, along with businessman George Wintz Jr., who was one of Pinehurst's biggest customers. Wintz's attorney said last week that his client would plead guilty for his role in the scheme.

Pinehurst Bank, already struggling with troubled commercial real estate loans, was shut down by state regulators and sold to Wisconsin-based Coulee Bank in May 2010, a few months after the elaborate check-kiting scheme was discovered.

Lohmann, who was the bank's chairman, won't say how much money he ended up losing at Pinehurst, other than to describe it as low seven figures. Other large shareholders lost as much if not more.

Maybe right now you're thinking, "Boo hoo, Buddy." After all, it was bankers who created the economic crisis that begot the recession and this so-called recovery in the first place. And didn't Washington bail out most of those bankers, essentially saddling taxpayers with the cost of those risky bets?

Well, yes and no. If you were a "too big to fail" financial service firm that designed, invested in and peddled credit default swaps, collateralized debt obligations and other complicated financial instruments that wreaked so much havoc, chances are the Feds pulled your butt from the fire.

But small community banks, which had nothing to do with residential mortgage-backed securities or collateralized debt obligations (unless they were gullible enough to invest in them), were left to fend for themselves. You might even say they got the worst of both worlds: no bailouts, but reinvigorated regulatory scrutiny.

Some of that was deserved, if not overdue. Some community banks pursued commercial real estate loans with abandon, or made big land loans to housing developers. But with real estate values climbing, regulators let things slide. From 2004 through 2007, only eight FDIC-insured banks were closed by regulators. Since then, 369 banks have been seized, including 16 in Minnesota.

Lohmann had no inkling he was getting into a business whose fundamental dynamics were already changing.

In Minnesota, community banking traditionally had been a reliably safe and lucrative investment. The state has one of the highest numbers of independently chartered banks. Including Pinehurst, 13 community banks opened in Minnesota in 2003 and 2004, more than in any state except California, Texas, Georgia and Florida.

Lohmann's ambitions were relatively modest. He didn't want to get big fast, sell to a bigger bank, and cash the check. "I wanted to build a very profitable bank that would pay large dividends to its shareholders," he said. "I'm kind of old-fashioned that way. But it's the way I did it with my real estate, too."

Investors were quick to sign on. In two months, Lohmann raised more than $8 million from 75 investors, including the likes of then-pro football player Matt Birk. "More than half the people I asked said yes, and most of them didn't know me," Lohmann said.

Pinehurst opened in April 2004. It went through two presidents in its first three years as it struggled to build loan volume, losing money each year. When Lohmann hired Markert in 2007, a state banking official congratulated him. "He told me I'd hired the Tubby Smith of the banking industry."

Even by then, however, Pinehurst was caught in the economy's downward spiral. Many of the bank's loans were secured by commercial real estate, which was falling in value. Regulators pushed Pinehurst to set aside more money for potential loan losses, and from 2008 to 2009 those reserves soared from under $1 million to $5.5 million.

Still, Lohmann is adamant that Pinehurst wasn't as aggressive or reckless as other banks that ran into problems. Pinehurst's loan limit was $1.2 million, and in many cases the bank had secured secondary collateral, such as vacation homes. But regulators couldn't count that collateral when assessing the strength of those loans.

The five bids the FDIC received for Pinehurst might be the best evidence that its loan portfolio wasn't as weak as regulators feared. Also notable: Coulee agreed to buy Pinehurst's $61 million in assets without sharing future losses with the FDIC. Many bank buyers insist on these so-called "loss sharing" agreements.

Lohmann is astonished at the lengths Markert and Pederson went to hide the crimes they're accused of committing. The bank's auditor uncovered the scheme in early 2010, but it had escaped the notice of Pinehurst's former auditor, an independent examiner retained by the bank and an FDIC examiner. Once Pinehurst discovered the scheme, it fired the two employees and alerted authorities.

Maybe it's unlikely that Pinehurst Bank would have survived anyway. It never made a profit, and the commercial real estate market is in the fourth year of its historic slump.

All Lohmann knows for sure is that the fraud's discovery, and the $2.2 million charge the bank had to take as a result, "were the final 10 nails in our coffin."

ericw@startribune.com • 612-673-1736