The ugliness of New Frontier Bank
A warning about this post: I use anonymous sources so take it through that filter. However, everything posted was told to me independently by more than one source, or I was able to verify another way.
Bill Jackson, Ag reporter for the Greeley Tribune, said it best when he wrapped up his article about Ag producers who face economic ruin following the collapse of New Frontier Bank. Jackson wrote, “it could get real ugly.”
Most businesses that had a loan with NFB have been told to find a new lender or face their loan being packaged and sold to an out of state bank for pennies on the dollar. According to a phone conversation between one business owner and the FDIC, loans are “going to be sold to an outside lender. It’s not going to be anything here in town or maybe even in the state. You’re never going to be able to actually talk to anybody to get anything done in person. It will always be over the phone.”
And even one day late on a payment could constitute a violation of the terms of the loan, which allows the out-of-state bank to call in the loan. The FDIC representative warned, “it’s in your best interest to get the loan refinanced before it’s sold.”
There are a several problems with this suggestion. First, there is no capital. Second, the FDIC has made it harder for banks to loan by raising the required capitalization levels. Three, many of these loans are underwater as it is so they don’t qualify even if the capital is available. And four, banks have no incentive to loan when they know that in a few short weeks they can buy the notes at auction for pennies on the dollar. I’ve heard from some former NFB customers that have been to dozens of lenders with no success.
Couple the financial mess with low commodity prices and hundreds of wells shut down two years ago, and we face a grave future. Agriculture is a $1.5 billion business in Weld County, making it 8th in the nation in agricultural product sales and the only county in the top ten outside of California. This important industry is in trouble. According to Jackson,
Many veteran agribusiness people are predicting the fallout from New Frontier’s closure will be worse than when the Greeley packing plant of Monfort was shut down for two years in the early 1980s, and the financial woes farmers faced in the mid-1980s with double-digit interest rates and commodity prices at the bottom of the barrel.
On my show last week, Carrie Linker, executive director of the Morgan County Executive Development Corporation, voiced another frightening possibility about what could happen if farmers, ranchers and dairies go bankrupt. Banks foreclose and sell to anyone who will buy. Buyers may include municipalities that only want the land for the water rights that go with it. Front range cities could buy the water and allow the once fertile farm land to dry up in order to satisfy thirsty populations.
Ag isn’t the only troubled industry since the closure of NFB. According to reliable sources, commercial real estate is about to see the bottom drop. Source predictions include:
-
double digit unemployment
-
up to $1 billion of commercial real estate flooding an already saturated market as owners try to avoid foreclosure and banks try to get what they can for properties that are upside down.
-
additional bank closures possible
A land developer told me that the impending implosion of the commercial real estate market will make the recent devaluation in the residential market look like a “day at Disneyland.”
It’s clear that the FDIC doesn’t know how to handle the situation. They don’t have enough people on the ground in Greeley to make decisions. I called the FDIC last week and have yet to receive a call back. According to former NFB customers, that seems to be the pattern with federal agency.
To paraphrase Jackson, the picture isn’t pretty. A longtime resident who is close to the situation described No CO’s economic future: “Think of the New Frontier closure as an earthquake that caused a tsunami that is currently out at sea. The forecast is we are about to get slammed and all we can do is prepare. Sadly some people are still walking on the beach oblivious to the danger.”
Jackson is right, it could get ugly, real ugly.
June 1st, 2009 at 5:53 pm
[...] is nearly 9 percent; the economy continues to contract; GM is bankrupt; New Frontier Bank’s collapse continues to plague all of Northern Colorado; and the Greeley teachers’ union (GEA) wants [...]
June 17th, 2009 at 10:35 am
[...] I do not support bailouts. The worst thing about them, is that the government gets to pick winners and losers. Clearly, Northern Colorado has been tagged a loser. It’s also clear that those in charge underestimated the pain of closing NFB versus keeping it afloat with TARP money. We are in uncharted waters. In my opinion, neither the FDIC, Governor Ritter, nor our congressional delegation (Congresswoman Markey and Senators Benett and Udall) ever grasped the magnitude of the situation. The economic multiplier effect will be in the billions of dollars. This is our economic tsunami. [...]
August 5th, 2009 at 10:14 am
Amy - I wook with a Denver based firm that is considering buying some of these loans. I saw your blog and albeit somewhat late, thought you would like to read my perspedctive. First off - the FDIC has created a process whereby not anyone with a few extra bucks can bid on these particular assets. According to the FDIC’s sales process - bidders have to be pre-qualified as experienced ag lenders, but not necessarily be a bank. Secondly, while I agree that many of these loans, which by the way are not paying as agreed, will sell for substantial discounts - it is what they are worth. Thirdly, I don’t agree with your source’s statement that all future communication will occur over the phone and be as impersonal as your blog seems to indicate. The buyers of these loans know what they are getting into and, assuming there is a willingness and ability to work with the buyer, I believe the borrowers will be better off than they where with the failed institution. One reason for this is the note buyers typically are not constrained by the heavy regulations which govern banks. However, if the borrowers stick their head in the sand and/or hold their hand out for gratuities, they will likely lose their farms. In most cases, the borrowers are going to end up at a new bank or farm credit organization with less debt that they have today.
August 7th, 2009 at 1:39 pm
Hello Steve –
Thank you for your comments. I appreciate you taking time to read and comment. This is a huge issue for us in Northern Colorado.
Couple of points:
According to the FDIC, the loans are being bundled. Every piece of property tied to a NFB loan (that will be sold) has not seen a 60-70 percent decline in valuation. The bundle of loans collectively might have dropped but not each individual property. So someone will get loans on property worth much more than what they are paying. Otherwise why would anyone bother to buy the bundled loans.
Second point, my source on future communication occuring over the phone or via email but not in person is the FDIC.
Thanks again for your comments.
August 10th, 2009 at 7:07 am
[...] you are in Northern Colorado and have even as much as a dozen degrees of separation between you and New Frontier Bank. According to the Greeley Tribune: Iron Mountain is now the second domino to fall after the [...]
August 14th, 2009 at 8:30 pm
This question is for Steve or anyone that wants to answer it. If these dairy man are going to be better off after they get bought up, how can that be? Their loans being bought for pennies on the dollar are just for their new frontier loans, this does’nt mean that they will get a new line of credit. My wife and I work in the dairy industry and last we checked they are still losing money. Alot of these dairies are just getting by on their milk checks. That does’nt include making their loan payments or buying feed or any extra costs that could arise. I also heard that once a business or individual gets their loan bought through an auction, or bailed out that they become higher risk to whichever bank is going to loan to them. With all this how can it be true that they are better off after they go to auction? I do not see it, but maybe somebody has an answer. I think they will all fail, We know of dairies that have everything paid off and are struggling to stay afloat. thank you for your time.