Silverado 5… Silverado: A Contemporary Sequel: New Frontier Bank of Greeley

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(Fifth in a series – for the other entries: Silverado 1; Silverado 2: Silverado 3: Silverado 3a; Silverado 4; Silverado 4a

– for more on the New Frontier Bank of Greeley)

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Is it deja view all over again?

The resemblances between the collapse of Greeley’s New Frontier Bank last month with a more famous bank collapse 22 years ago of Denver’s Silverado Bank are striking, at least on some levels. It does not appear that regulating errant banks has progressed much – either on the federal or state level – or that in this age of deregulating everything, that `the markets’ (in this case the banks) are particularly good at that non existent form of self control called `self regulation’.

A front page story and the first of a two part `special report’ by Mike Moffeit and Aldo Svaldi ran in Sunday’s December 27, 2009 Denver Post. The second part of the report appeared the next day.The series featured an investigation of the collapse of the New Frontier Bank of Greeley which was closed by federal regulators on April 10,2009 and reopened as the Deposit Insurance National Bank of Greeley just long enough to pay off FDIC insured account holders before closing a month later. With a billion dollars in debt,  Frontier left a slew of small – and not so small – businesses in N0rthern Colorado and throughout the Northwest without lines of credit and with valueless stock causing a cascade of consequent business collapses.

2009 – A Very Bad Year…

Founded in 1998, the bank had a relatively short run, lasting only 11 years. With a name vaguely similar to `Silverado’, New Frontier (same idea anyhow), closed its doors in April after going in the hole for $1 billion. A goodly portion of New Frontier’s lending consisted of acquisition, development and construction loans in Colorado as well as agricultural production, farmland and dairy loans in Colorado, Kansas and Texas. As the real estate development market collapsed after the financial crisis hit, and the price of milk plummeted in part due to the same reaons combined with a oversupply of milk on the market, both sectors – dairy farming and real estate took a big hit undermining New Frontier’s loans to these sectors. As an article in the Northern Colorado Business Report put it:

Northern Colorado’s dairy industry curdled in 2009, as low milk prices, tight credit, dropping foreign demand and the demise of one of the region’s biggest agribusiness lenders all came together to create a perfect stormof bad news for milk producers…

Intimately connected with the collapse of New Frontier was the implosion of the Johnson Dairy which filed for bankruptcy in January of 2009. Johnson Dairy was one of the biggest producers in Colorado and the United States as a whole. Its owner, John D. Johnson claimed assets of $10 million and $50 million (quite a range there) along with depbts of between $50 million and $100 million. Johnson alledges that he had been pressured by New Frontier to take out loans he didn’t need and lease animals owned by relatives of a New Frontier official as part of the reason for his company’s crisis.

By the beginning of 2009 it was no doubt that New Frontier was in trouble. A full 35% of its loan portfolio was delinquent at the end of the first quarter, compared with an average rate of less than 4% at Colorado’s other state-chartered banks. While New Frontier had, according to the Wall Street Journal , adopted the classic model of small-town banks nationwide, making business loans within generally small geographic radius to entrepreneurs, farmers and developers…”it had lent so recklessly, with so few controls that despite the assets on the books, it was little more than a `financial mirage,’ ” according to Fred Joseph, acting Colorado banking commissioner.

Of the $1 billion in debts, some $150 million was not FDIC insured meaning that those holding these particular assets have simply lost their investment.In this age of deregulation, it had run into a classic case of over-extension. It had loaned out money `aggressively’, loaning out far more than it had in assets. According to the FDIC report on New Frontier’s collapse, from 2005-2007 New Frontier’s institutional growth rate was in the 94th percentile for peer institutions, meaning that compared to banks of the same general categories it was lending money at a very high rate, with many of the loans going to developers.

Careless Lending Practices

Many of its loans were carelessly conceived and too easily gotten especially in the past five years. And many of the lenders defaulted, leaving the bank in financial straits.  To compensate its over-extended loans it desperately tried to attact deposits and investors in the bank itself.  Like the Savings and Loan banks of the 1980s,Frontier tried to recoup capital by raising interest rates on cd’s and ultimately engaging in questionable practices such as giving out loans in exchange for lenders buying stock in the bank.

For example, the bank was willing to loan a person or a company $1 million. But to get the loan the lender had to buy $200,000 of stock in the bank or providing the bank with some kind of collateral – property, furniture, anything which might boost the banks’ asset base, at least `in principle’. Most of these deals vary from being just shady to downright illegal and they open the bank, in its desperation to all kinds of shady and criminal elements with whom they are willing to deal to boost their numbers. I don’t know how far this kind of thing goes with New Frontier, but it was all too common in the S&L scandal days of the 1980s.

If enough of the loans `go south’, the bank collapses, its debts overshadowing its assets. But part of what makes all this something akin to a perfect storm, or crime is that many of these banks are FDIC insured, so that if the bank goes belly up, the federal government will make up the losses, which only increases the wrecklessness of  some loan officers and bank officials who cynically reason: what do we have to loose – the federal government will cover us.  In an industry where there is a witches brew of poor regulations and insurance in case of failure, the banks take wreckless risks in their struggle with each other to find customers. To make up for the loss, the bill will be passed on to consumers and taxpayers in the form of higher bank fees. In an apparent response to the Post story, U.S. Senators Bennet and Udall along with US Congresswoman Betsey Markey have asked the nation’s attorney general, Eric Holder to investigate possible federal fraud charges.

Frontier – Largest Bank Failure of the year up until that time…

At the time of its closing, New Frontier,claimed assets of around$2 billion. According to a report in the Colorado Independent, at the time that New Frontier went under, it was the 23rd US bank to fail in 2009 and the largest one in the nation to go down. By the end of the year, according to FDIC, more than 175 banks throughout the United States would fail, up from 25 in 2008 and a mere 3 in 2007.  A large majority of the failures came towards the end of the year, in the fall and early winter when the numbers seemed to skyrocket. These figures, if they continue, besides suggesting that the financial downturn is far from over, begin to compare with the level of bank failures during the S&L scandal days of the 1980s . During the period from 1980 to 1992, banks were failing at a rate of a 100 a year that included a six year period (1986-1992) where from 200-550 banks failed annually. According one estimate, the combined cost of the bank failures for 2008-9 cost the federal government and tax payers $57 billion, a nice chunk of change in these hard times.

Too Big To Fail …or Too Small To Bail Out?

There is another aspect to all this as it must be put in the broader context of the current financial crisis and the bailout. While the Obama Administration is willing to bail out the largest of the country’s banks and financial institutions because they are `too big to fail’ , most of these 175 bank failures in 2009 were of smaller and medium sized bank of the stature of `too small to bail out’. So they collapse – in part because of the economic crisis and the failure of creditors to pay on their loans, in part because of the kind of illicit and thoughtless practices of banks like New Frontier. Once a bank fails it is taken over by the FDIC which does several things.

1. First it pays off the federally insured deposits, now up to $250,000 an account.
2. Then it auctions off the banks assets and sells its loans. In New Frontier’s case, the loans, worth about $500 million were sold for a mere 37 cents on the dollar generating $157 million to different vulture capitalist concerns, most out of state, that then foreclose on the loans, squeezing out what it can from the lenders and in many cases driving them directly into bankruptcy. The federal government absorbs the loss of value on all this. Bank mortgages are sold on the open market at pennies on the dollar with the new owners often ready to foreclose as quickly as possible to extract whatever case value that might be left.
3. At the same time, it looks for a new buyer for the bank. So whom is it in this financial crisis that can afford to buy a failed bank? Well, the larger financial institutions and banks  that were bailed out by the government in the first place. As a result the concentration of financial power narrows that much more into the hands of the biggest players….with the government kind enough to absorb the `toxic’ or failed loans. Not a bad deal if you’re a big bank.

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While the Obama Administration is willing to bail out the largest of the country’s banks and financial institutions because they are `too big to fail’ , most of these 175 bank failures in 2009 were of smaller and medium sized bank of the stature of `too small to bail out’.

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Interestingly enough, the explosion of 2009 US bank failures, after a period of relative calm, was not a surprise. There were a number of financial analysts who predicted as much. One of them, Meredith Whitney predicted that the number of bank failures in 2009 would quadruple over their 2008 figure, suggesting that as many as 300 US banks would implode. Her final number might have been off but she certainly put her finger in the trend. In August of last year she explained `The small-business owner on Main Street continues to see liquidity come away’.  The underlying problem is the sluggishness in consumer spending, inhibiting bank growth. As a result of being shut down by federal authories, the bank  left many farmers, small businesses and others in financial jeopardy. New Frontier loans — either held now by the federal government or purchased by other banks — are being recalled and forcing some businesses to close.In a written statement, U.S. Senator Bennet noted:

“The failure of New Frontier devastated too many farmers and small-business owners across northern Colorado.”

One of the most expensive bank failures in Colorado history

The Post claims it is the most expensive bank failure in Colorado history, but I’m not so sure of that. There were some reports circulating at the time that Silverado, which was shut down in 1988 in the midst of the national savings and loan scandal, cost tax payers even more – perhaps as much as $1.5 billion. This is not to be too picky only to wonder why there was so little `historic memory’ in the Post’s reporting especially since the parallels to Silverado’s mal-practices in the 1980s are strikingly similar as will be detailed below. All the same, the story was excellent, carefully and clearly written, interesting and disturbing. The New Frontier failure is quite serious in any case, disrupting both agricultural and real estate interests in northern Colorado

The article charges the bank’s management with

• an intense history of offering poorly underwritten loans that eventually went bad. By September 2008, inspectors found $258 million worht of bad loans, a jump from a mere $3.6 million the year before.
• trying to reduce bank  loan losses by essentially cooking the books.
• insider dealing
• bank loan officials re-writing the terms of delinquent loans, disguising steady asset deterioration
• trying to protect one of its `high performance’ loan officers who had been accused of fraud while working at a previous bank
• giving a $400,000 loan to one of the bank board members whose used car business was in financial trouble despite such loans (insider deals) being illegal by state law. At the same time that Juhl was getting the bank to cover his personal losses in the used car incident, he wound up in some more trouble.  Dean Juhl , a busy man, was also a partner in JS Real Estate. For his role in JS Real Estate, Juhl was convicted of felony theft tied to persnal mortgage fraud. In this deal, he and his partner, Mark Strodtman (who faces much more severe punishment), sweethearts and upstanding citizens that they are,  induced cash-strapped homebuyers to purchase homes, then kept the mortgage money, leaving clients facing foreclosure. He pleaded guilty to stealing more than $15,000 (amount unspecified) and to second degree forgery. He got a 4 year suspended sentence but had to serve 30 days in a state prison.
• forcing … or strongly encouraging at least a dozen borrowers to, as a part of getting loans from the bank, buy stock in the bank (so as to increase the bank’s equity). Again, this is patently illegal. At least a dozen New Frontier borrowers were so pressured. One of the biggest borrowers pressured in this way – or so it was alleged, was Johnson’s Dairy, one of Colorado’s biggest.
• in the case of one bank employee – who is serving 5 years in a peniteniary for literally stealing money out of depositor’s accounts
• New Frontier loan officers were given substantial commissions for the loans they gave out – an old practice actually – that encourages the loan officer to make as many loans as possible to capitalize on commissions. One loan officer alone in 2006 received $200,000 in commissions salary. This same lending official, unnamed in the FDIC report, had responsibility for both originating and managing commercial loans as well as serving as a member of the institution’s loan approval committee.
• According to the FDIC report “the culture of the bank in July 2007 and prior did not promote a conservative approach to lending. Lenders’ concerns about keeping their job or falling out of favor with management unless aggressive loan growth occurred overwhelmed most lenders’ discipline with underwriting, analysis, and asset quality.”Similar practices were key to bringing down Silverado.

These activities bear a great resemblance to the practices which brought down the Silverado Bank in Denver in 1988 to a striking degree. As in the case of Silverado, an unhealthy amount of New Frontier’s loans went to real estate developers. The Post series shows a bar chart indicated that in the quarter between Jan 1-March 31, 2009 (just before the bank was shut down) that the great majority of loans made by New Frontier went to developers – some 534.02% as a percentage of their capital – ei, that they made loans amounting to 500% of the money they had on hand in the bank during that period

In the same light, while the Silverado Bank scandal focused on the role of Neil Bush, son of George H. W. Bush and brother of George W. Bush (the little idiot from Texas), it tend to downplay the role of much bigger players (and thieves) – a few from the middle ranks who had their hands slapped while bigger fish got away scot free – a pattern which has, to a great extent, characterized financial scandals then and now. It does not seem that the big lenders and key people at New Frontier have been brought to justice… or that they every well. And then the more salient question in both the Silverado and New Frontier collapses remains unanswered: what happened to the $1 billion in lost loans?

A poorly regulated industry with a long history of problems

As the article suggests, part of the reason that New Frontier was able to get away with so many illegal and questionable practices is the shortage of investigative staff on the state level.

• Too few investigators, too many banks to regulate opens the door to all kinds of shady (and shoddy) practices.
• For example, the state has only 27 banking division examiners, not much more than they had a decade ago. Today they are overseeing nearly $40 billion in assets, an amount that has gone up 250% in the same period. Given the state hiring freeze because of the economic downturn it is not likely that the state will improve these numbers anytime soon
• By way of example, Colorado’s state securities commissioner serves `double duty’ as acting banking commissioner – a hefty load.
• Add to this the somewhat strange policy in which reports of state banking investigators are ordered destroyed within six months; as these reports are key pieces of evidence in more serious federal investigations, their absence leaves the feds with limited data for which to pursue investigations

Under-staffing has plagued Colorado regulatory agencies, which are among the nation’s least effective as a result with a shortage of investigators looking at serious white collar crime – bank and insurance fraud, or excesses of the state’s oil and gas industry. Indeed, Colorado’s state banking division has NO criminal fraud inspectors to probe suspicious activities, unlike other state agencies overseeing other financial industries. As Moffeit and Svalid pointed out in the second part of the series that in 2003

“Colorado’s average number of institutions per examiner was higher than all but one other state” in a six-state region, according to the Office of the State Auditor findings. It was the last audit of the Banking Division.

Moffeit and Svali point out that this trend has continued through the rest of the decade. But they could have pointed out that Colorado banking has been poorly regulated for the past 35 years and that this same regulatory weakness was one of the key reasons that Silverado got away with its fraudulent practices for so long before it was called on the carpet. Too few examiners keeping track of too many banks is bound to lead to problems sooner or later. This seems not to be accidental in Colorado’s case. Such lax oversight gives banks leeways to bend and it appears in the case of New Frontier wantonly break laws. Even when problems have accumulated over a period of several years, lack of oversight, combined with the fact that the state banking regulatory commission has no criminal division only add to the problem. Furthermore here in Colorado, according to Moffiet and Svaldi, the state routinely destroys inspectors’ notes and working papers upon completion of bank examinations. Interesting tradition!

There seems to be a pattern here…

There seems to be a pattern here – going all the way back before the Savings and Loan crisis in which Silverado was finally taken to task. For example, when Silverado’s problems were first brought to light, the Colorado press covering it suggested that Silverado’s losses amounted to around $500 million. Six months later, when the bank was closed by federal regulators, it’s debt had skyrocketed to $1 billion. More or less the same figures apply for New Frontier whose problems were first reported – and this rather widely – in the Colorado press and in Denver  several years ago, but also in the more northernly affected cities of Greeley and Ft. Collins.

In the case of New Frontier, again, like Silverado, suggestions of `problems’ – and the bank management’s failure to correct them – have been a part of the public record for at least three years. For a state or federal regulatory agency to actually move to fulfill its responsibilities and actually shut down a bank like New Frontier suggests rather long term and high levels of shady and illegal practices. The warning signs have been there for some time. In February 2007 already, the FDIC put New Frontier on its supervisory watch list. From then onward, the FDIC and the Colorado Division of Banking coordinated their efforts, issuing several joint warnings to the bank to no avail. As the FDIC noted in a gently self-critical manner:

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.

After The Bank Closed, The Problems Only Intensified

Now almost nine months after New Frontier closed the reverberations are still felt throughout the region. The FDIC continues to divest New Frontier assets, including real estate holdings and loans, some of which have gone for pennies on the dollar. Meanwhile the aftershocks continue:

• In August, the FDIC auctioned off 418 farm loans still on the books of New Frontier. The auction was believed to be the largest sale of farm notes since the aftermath of the 1980s savings and loan crisis. At least three quarters of thes mortgage notes were at least 60 says past due. Many Colorado farmers involved worried that they will lose their property if the mortgage purchasers decide to foreclose on their accounts. Farmers were worried that investors or banks will buy their mortgages at dirt cheap prices, and then turn around and liquidate their property as a result. One company engaged in buying these mortgages is Cattle Consultants LLC which lists Colorado Rockies owner Dick Monfort as manager.
• on December 15 of last year, nearly 60 former shareholders filed a civil lawsuit in Weld County District Court naming nine defendants – former New Frontier directors Tim Thissen, Robert Brunner, John Kammeier, Jack Renfroe, Donald Lawler, Rodney Dean Juhl (cited above) and Larry Seastrom, who was also president of the bank, and bank officers Greg Bell and Jim Rutz. These shareholders represent about $13 million worht of investments made into the bank from the months before the bank opened in 1998 trhough October 2008.
• According to the Northern Colorado Business Report the largest losses of those above belonged to two equity investment funds with $2.4 million and $1.98 million invested and one-time board member Carroll Miller, who had invested $1.35 million through a trust in his and his wife’s names.
• But what is not clear, is to whom were New Frontier largest loans made, those that defaulted. Are there New Frontier versions of Ken Good and Richard Rossmiller or were the loans spread out in smaller denominations across many more players? At least to date, scanning the news stories, there is little mention of this. Was all the money lost in dairy and real estate deals gone south or did, again like in the Silverado case, a fair amount of it disappear and is unaccounted for?