Greeley-based New Frontier Bank started out the year facing hard times and its April closure by government regulators could echo in the region for years to come.
The Federal Deposit Insurance Corp. took New Frontier into receivership on April 10 after the Colorado Division of Banking Board voted to close it. The regulator has and continues to divest New Frontier assets including real estate holdings and loans, some of which have gone for pennies on the dollar.
New Frontier is one of only three Colorado-based banks to fail since 2000, according to the FDIC, and is by far the largest. Colorado Springs-based Colorado National Bank and Pueblo’s Southern Colorado National Bank also failed this year but held only $123.5 million and $39.5 million in assets respectively.
New Frontier hadn’t been in the $100 million-asset range for nearly a decade. From 2005 to 2006, it nearly doubled its assets and passed the $1 billion mark. By the end of 2008, it had reached $2 billion. Superficially, the bank’s phenomenal growth seemed a sign of success, but actually led to its demise.
According to a material loss review from the FDIC’s Office of the Inspector General released in early November, New Frontier failed because of inadequate risk management practices related to rapid growth, loan concentrations, loan underwriting and a heavy reliance on non-core funding sources – brokered deposits rather than local deposits. The report detailed how examiners at the state and federal level expressed concern about New Frontier as early as 2004, but also pointed out that the bank’s growth rate didn’t really pick up until the period between 2005 and 2007.
“In retrospect, a stronger supervisory response at earlier examinations may have been prudent in light of the extent and nature of the risks and the institution’s lack of adequate or timely corrective action,” the report stated. “Stronger supervisory action may have influenced New Frontier’s board and management to constrain their excessive risk-taking during the institution’s rapid growth period.”
New Frontier’s asset quality was deemed “critically deficient” during its September 2008 regulatory examination. Its adversely classified assets stood at $265 million, or 134 percent of Tier 1 capital and allowance for loan losses, and grew to 260 percent in the month prior to the closure.
Risk not worth taking
New Frontier’s board attempted a major capital raise that would have pumped at least $30 million into the bank from a single investor group. Colorado Financial Holdings started working with New Frontier in late 2008 with in-depth due diligence starting in February. But by the end of March, the investors decided New Frontier was a risk not worth taking, and the deal was dissolved.
The closure of New Frontier is proving costly not only to the FDIC but also to the Northern Colorado community. Loan customers were left scrambling to refinance at other institutions or face the prospect of their loans being sold in packages to investors. Loans sold by the FDIC maintain their original terms, so customers in good standing and not in need of secondary financing are not likely to see any changes. However, other customers could face foreclosure from an essentially anonymous investor who purchased the loan at a great discount expecting to make a quick profit, even if repayment isn’t for the full amount owed.
While many local bankers considered purchasing New Frontier loans, most decided to take a pass. “A preponderance of the loans (we reviewed) were not bankable,´ said New West Bank President Leroy Leavitt.
In general, non-bank investors buying loan packages are less likely to work with borrowers to modify loans, as Kendall Printing discovered. The 25-year-old Greeley company, a Bravo! Entrepreneur Award winner in 1999, abruptly closed its doors in November when Summitbridge Credit Investments decide to collect immediately on the portfolio of New Frontier loans it acquired from the FDIC. It included six loans to Kendall for a total of $7.4 million.
Leavitt and other bankers worry what this could mean for Northern Colorado well into the future.
“Now we’re starting to see the after-effects,” Leavitt said. “Their payables might be my customers’ receivables.”
Bank of Choice purchased some loans from the FDIC sale in what president Darrell McAllister described as a defensive move. The package included loans that were to Bank of Choice customers that the bank didn’t want to see come under duress from an inflexible loan situation.
In all, New Frontier had $1.4 billion in loans around the time it was closed – a glut that could not be absorbed in the community even if they had all been bankable. It could be years before any and all echoes from the closure of what was once Northern Colorado’s fastest growing bank fade away.