LITTLE ROCK — New Frontier Bank, the largest lender in northern Colorado, had a lot to be proud of in early 2007. Assets had grown by 66 percent the previous year and profits by 53 percent. American Banker, the industry newspaper, rated the bank the ninth-most efficient in the country.
Regulators knew the reality was different. In mid-2007, the Federal Deposit Insurance Corp., citing weak management, a rise in soured loans and an increased reliance on volatile funding, told executives to slow growth and add capital, according to board minutes of the privately held bank obtained under the Freedom of Information Act.
While Greeley, Colo.-based New Frontier's loan losses rose, it took almost two years for state and federal regulators to shut the bank - a delay that may have made the closing more costly. On April 10, the lender, whose assets had grown to $2 billion under Chief Executive Officer Larry Seastrom, became the 10th-most expensive failure of 2009, costing the FDIC $670 million. No other bank could be found to take over, and the FDIC had to charter a new one to assume the liabilities.
"The examiners should have seen a lot of this coming," said Gerard Cassidy, an analyst with Portland, Mainebased RBC Capital Markets, an investment bank owned by Royal Bank of Canada. "I shake my head when I look at some of these failures and ask, 'Where were the regulators?' We're paying a lot more than we would if they had acted sooner."
New Frontier is one of 94 banks that have been shut this year, the most since 1992. In 20 reports this year examining banks that failed in 2009 or 2008, the FDIC's inspector general criticized the agency for acting too slowly or not assertively enough to correct or close lenders.
Steven Fritts, associate director for risk-management policy at the FDIC, defended the agency's overall handlingof troubled banks and said the size of the losses was the result of an "unprecedented decline" in real estate values.
"Of course there are cases when we could have acted more swiftly," Fritts said. "We've reacted reasonably well."
He said the agency has taken steps in recent months to tighten its oversight by lowering the amount of real estate loans that banks can make relative to their capital.
Banks supervised by other regulators, including the Office of Thrift Supervision, the Office of the Comptroller of the Currency and the Federal Reserve, also have failed. The Fed came under fire from its inspector gen-eral, who issued two reports Sept. 9 saying the central bank didn't rein in excessive real estate lending at banks in California and Florida that later closed.
A review of New Frontier is set to be released by Oct. 23, according to the FDIC inspector general's office.
FDIC spokesman Andrew Gray wouldn't comment on discussions with the Colorado lender. He said the bank was "well-capitalized" in 2007, meaning it had a riskbased capital ratio of 10 percent or more, and "adequately capitalized" in 2008, with a ratio of between 8 percent and 10 percent.
"As a matter of policy, the FDIC and other agencies typically do not require formal corrective programs without corroborating evidence of a safety-and-soundness weakness at the institution that would be subject to such an order," Gray said.
The FDIC said that its insurance fund's assets fell to $10.4 billion at the end of June from $13 billion at the end of March, the lowest since the savings-and-loan crisis in 1993. In its Aug. 5 report on the 2008 failure of Duluth, Georgia-based Haven Trust Bank, the agency's inspector general said FDIC supervision "was not effective inidentifying and addressing problems early enough to prevent a material loss" to the fund.
When New Frontier failed in April, it had grown to $2 billion in assets from $795 million at the end of 2005. The bank used its swelling deposit base to increase lending to developers and dairy farmers in states as far away as Texas and Florida. It also made loans in Greeley, a city 60 miles north of Denver with a population of about 90,000 whose largest employer is meatpacker JBS USA, a subsidiary of the Brazilian company that is in the process of buying a majority interest in Texas-based Pilgrim's Pride, a major poultry company.
Fred Joseph, Colorado's acting bank commissioner, questioned whether regulators, including state officials, were tough enough with New Frontier. The state agency was the bank's primary regulator.
"With 20-20 hindsight, perhaps we could have done more," said Joseph, head of the state's division of securities and acting banking commissioner since November. "As a regulator, you want to take measured steps because you want the institution to do better. You want to give them every opportunity to correct. It's a balancing act."
Joseph said New Frontier's growth was fueled byexcessive amounts of "hot money," deposits brought in by brokers that can disappear quickly if someone else offers higher rates.
The over-reliance on such deposits was evident to state and federal regulators for years. Brokered deposits rose almost fivefold to $121 million in 2005, or 19 percent of New Frontier's total, from $26 million, or 6 percent, at the end of 2004. By March 31, 2008, they accounted for 41 percent. By comparison, brokered deposits made up 8.4 percent of the deposits at similarly sized banks nationwide in March 2008, according to FDIC reports.
"Any time a bank gets up into double digits with brokered deposits, you've potentially got a problem," said Christopher Whalen, managing director of Institutional Risk Analytics, a Torrance, Calif., firm that evaluates banks for investors. "These deposits are unstable. You can wake up one morning, and 5 percent of your deposits have left."
Joseph said the need to earn high returns to pay for the brokered deposits "led to lax underwriting" at New Frontier. The bank paid 4.62 percent in interest for every dollar of earning assets as of June 30, 2008, compared with 2.71 percent at similarly sized lenders, according to FDIC figures.
Robert Brunner, a founder and director of New Frontierand owner of Northern Feed and Bean, an animal-feed supplier in Lucerne, Colo., defended the high level of brokered deposits, saying the local deposit base wasn't large enough to support rapid growth.
"We brought into this area capital that wouldn't have been here otherwise," Brunner said.
Accusations that the bank had engaged in reckless lending were "unjustified," he said.
"It wasn't like all of a sudden we put on all these bad loans," Brunner said. "They saw what we were doing all along, and they hadn't criticized any of those loans before 2007."
The FDIC issued a memorandum of understanding on Feb. 28, 2008, requiring that New Frontier raise capital, reduce brokered deposits, slow asset growth and improve orreplace management, according to board minutes.
The confidential document, an indication that a bank is being given a last chance to meet regulators' requirements on its own, almost assured New Frontier's failure, according to Brunner.
"When we had to back away from the brokered deposits, we couldn't replace them," he said.
On March 25, New Frontier's directors were informed that the bank would have tomake a loan-loss allowance of $143 million, which would reduce its capital to about 2 percent, according to board minutes. Sixteen days later, almost two years after it first found fault with the bank, the FDIC took it over.
"There were many bad actors in the meltdown, but it wasn't just the bankers," said Cassidy, the RBC analyst. "The regulators played a role, and the size of the losses tells you the banks were not being monitored closely enough."
Business, Pages 75, 84 on 09/27/2009