Evaluating the causes of the Failure of the New

1
Frontier Bank

EVALUATING THE CAUSES OF THE

FAILURE OF NEW FRONTIER BANK

Group Members:
Lionel Morant ID#0805330
Keitho Spencer ID#0416391
Oniel Wright ID#0704912

Subject: Treasury Management

Tutor: Mrs Valoris Smith
University of Technology, Jamaica.
Class:

BBA4 (F) Fin

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Frontier Bank

Evaluating the causes of the Failure of the New

Table of Contents
Executive Summary 2
Introduction..2
Overview of the company 3
Chronological time line 4
Principal causes for failure.. 7
Literature Review..9
Risk management objectives10

Treasury management concepts................................................................. 11

Recommended step...12
Reference.. 13

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Evaluating the causes of the Failure of the New

Executive Summary
The purpose of this paper is to examine a failed financial institution that operates whether
locally or internationally. The research will identify the main cause for the failure and what were
the problems faced before the failure and what could have been appropriately used to alleviate
the problems thus preventing any future failures. The New Frontier Bank is the failed financial
institution that will be examined. According to the (Office of Inspector General October 2009),
the New Frontier was established in December 1998 as a state-chartered, non-member bank. The
institution had a total of three locations, consisting of a main office in Greeley, Colorado, and
two full-service branches in nearby Windsor and Longmont, Colorado. New Frontier was
wholly owned by the New Frontier Bancorp (Bancorp), a one-bank holding company. Much of
New Frontiers lending consisted of acquisition, development, and construction (ADC) loans in
Colorado and agricultural production, farmland, and dairy (agricultural) loans in Colorado,
Kansas, and Texas.
Introduction
Over the pass period of years there has been many reports of financial institutions that
have experience failure for one reason or another. When a financial institution fails it is usually
accompanied by some kind of consequences that are usually unfavorable on the side of the
stakeholders. Banks sometimes fail due the down turn in the economy known as Recession, thus
the failure of any bank is said to have great adverse effect on the economy, as it impact on
employment, earnings, financial development and other associated public interests. The New
frontier Bank is one such financial institution that has fallen into such a dilemma.
Overview of the company

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On April 10, 2009, the Banking Board of the Colorado Division of Banking (CDB)
closed New Frontier Bank (New Frontier) of Greeley, Colorado, and named the FDIC as
receiver. On April 23, 2009, the FDIC notified the Office of Inspector General (OIG) that New
Frontiers total assets at closing were $1.8 billion and the estimated loss to the Deposit Insurance
Fund (DIF) was $668.9 million. As required by section 38(k) of the Federal Deposit Insurance
(FDI) Act, the OIG conducted a material loss review of the failure of New Frontier.
New Frontier failed because its Board and management did not implement adequate risk
management practices pertaining to (1) rapid growth and significant concentrations of ADC and
agricultural loans, (2) loan underwriting and credit administration, and (3) heavy reliance on
non-core funding sources. However, the actions taken by New Frontiers Board and management
to address these concerns and recommendations were not timely or adequate. Also contributing
to New Frontiers losses was an incentive compensation program that paid a commission to a
senior lending official based on the volume of loans and fees that the official originated.
New Frontier was wholly owned by the New Frontier Bancorp (Bancorp), a one-bank
holding company. Collectively, the institutions directors owned approximately 15 percent of
Bancorps outstanding stock. However, no individual shareholder owned more than 10 percent of
Bancorp, and the companys shares were widely-held. Following its establishment in 1998, New
Frontier embarked on a business strategy of rapid asset growth. Much of this growth was fueled
through the institutions loan portfolio and included risky ADC and agricultural lending. New
Frontiers growth was particularly pronounced during 2005 through 2007, when the institutions
growth rate for net loans and leases was in the 94th percentile or higher for its peer institutions.
Chronological time line

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November 2006: An FDIC Report of Examination reminds New Frontier's management

of the importance of sound loan underwriting and credit administration to the continued
satisfactory credit quality of its loan portfolio, given the (bank's) aggressive growth and
credit conditions.
October 2007: Weld County grand jury indicts R. Dean Juhl on two counts of theft and
one count of forgery. Juhl served on the New Frontier board, reportedly resigning in
March 2007.
February 2008: Regulators issue a memorandum of understanding on the bank as a
warning to clean up its books; the order contained 15 provisions addressing areas such as
capital, dividend payments, asset quality, loan policies, bank staffing, volatile liability
dependence and violations.
Juhl pleads guilty to felony theft, receiving 30 days in jail, 100 hours of community
service and a four-year deferred sentence.
September 30, 2008: Bank examiners determine the bank's liquidity position had
become critically deficient. Examiners determined the bank's probability of failure was
high.
Dec. 2, 2008: The FDIC issues a 26-page cease-and-desist order requiring the bank to
stop its unsound banking practices, restate its Sept. 30, 2008, financial reports, remove
its president and chief lending officer, and find enough capital to protect against potential
loan losses.
January 2009: One of the bank's largest customers, John Johnson, owner of Johnson
Dairy, files for Chapter 11 bankruptcy, claiming almost $60 million in personal and
business loans from the bank. He later claimed the bank's loan practices helped put him

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in his financial mess. He files a lawsuit within his bankruptcy proceedings, charging
bank officials created a bit of a shell game involving his loans, in which they'd move his
money from the bank to avoid regulators and set up straw borrowers to loan Johnson's
operation more money than banking regulations allow. The straw borrowers are thirdparty borrowers used as a cover, whereby they'd take out the loans and Johnson would
essentially make the payments to them through complicated leasing arrangements.
Johnson also charged that chief lending officer Greg Bell manipulated the loans, driving
kickbacks to himself, his parents and his in-laws, as well as a bank director. He claims
bank officers in June 2008 also took advantage of his cash-strapped position to promise
him a $5 million loan on condition that he put $1 million of that into bank stock to help
capitalize the bank and keep regulators at bay. Bank officials claim the allegations are
ridiculous.
February 2009: Sunrise Community Health Center sues New Frontier Bank and Wells
Fargo bank for a mix-up in accounts. Sunrise transferred its accounts from New Frontier
to Wells Fargo, and more than $3 million was successfully transferred. However,
$391,853, ended up in the wrong account of a man in Texas. Bank officials deny
wrongdoing, claiming Wells Fargo should have fixed the error.
March 2009: Bank assets shrink to $1.77 billion, and the bank's losses hit $98 million.
April 3, 2009: Colorado Financial Holdings backs out of the deal to infuse money into
New Frontier Bank, leaving the bank open for an FDIC takeover.
April 10, 2009: FDIC officials take over New Frontier, which is expected to cost $669
million. Deposit and loan customers are instructed they have 30 days to move their
money to other banks.

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July 2009: The FDIC puts roughly $750 million in agriculture loans on the auction block
to qualified bidders. The auction is later downgraded to $450 million.
July 17, 2009: Iron Mountain Autoplex's sales division is closed by the state after failing
to pay off more than $640,000 in car loans on 45 vehicle trade-ins. Iron Mountain had
$6.75 million in business loans and lines of credit out through New Frontier that it
couldn't pay. The dealer also owed several million more to Chrysler Financial and other
area banks.
Nov. 12, 2009: Kendall Printing Co. in Greeley closes its doors after 25 years. The
company's $7.4 million in loans due to New Frontier were sold to Denver-based
Summitbridge Credit Investments, which called in the loans.
Dec. 15, 2009: More than 60 investors claiming total losses of more than $13 million sue
New Frontier board members and officials claiming mismanagement and reckless
practices caused the bank's ultimate failure. By mid-March, investors determine they will
have to drop the lawsuit and the FDIC stated they would collect any money the investors
could recover in the lawsuit.
Feb. 25, 2010: The FDIC announces the sale of $610 million in loans from now-failed
banks, including $220 million in past-due New Frontier loans

Outline of the Causes of the Failure

The eventual failure of New frontier bank is strongly attributed to the fact that its board and
management defaulted on their fiduciary responsibilities to address:
1. Accelerated growth and the immense focus on ADC and agricultural loans,

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2. Proper and adequate loan underwriting facilities and credit management, and
3. High dependence on non-core funding sources foreign to the institutions.
After thorough audits and examinations experts were particular concerned the about risk
management practices employed or the lack there of, of New Frontiers in the years prior to the
institutions failure and made a numerous recommendations for improvements. Experts were
particular concerned the about risk management practices employed or the lack there of, of New
Frontiers in the years prior to the institutions failure and made a numerous recommendations
for improvements. Another contributing factor to New Frontiers terminal losses was directed at
an employee compensation initiative which was designed to reward senior lending officials
based on the volume of loans and fees that the official originated.
Finally, with deterioration in two major real estate and agricultural lending markets in
2007 and 2008, respectively, the inadequacies in New Frontiers risk management practices then
materialize into a decline in the quality of the institutions ADC and agricultural loans. The
losses and provisions associated with this decline in revenues and business activities in these
departments then had a domino effect, and rapidly depleted the institutions capital adequacies
and overall earnings, and significantly dried up its liquidity position. In response to these events
the local banking authorizes; Colorado Division of Banking (CDB) intervened and discontinued
the operations of New Frontier. This was based on a judgment that the institution in its current
capacity was deemed as having inadequate capital resources. Also business activities were
regarded as being conducted in an unlawful manner and were in violation of several international
accounting and business statutes, which rightfully justified the decision to discontinue its
operations in the best interest of all stakeholders.

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Frontier Bank

Bases on a report supplied by the Federal Deposit Insurance Corporation (FDIC) the
failure of New Frontier Bank was strongly attributed to these factors:

Unbalance loans portfolio in that there exist too many high-risk borrowers and
loans.

It lack reliability and transparency as management fail to accurately disclose the

financial conditions of the bank in publicly.

Mismanagement of funds

An ineffective Board of Directors.

Strong dependency on short-term potentially volatile deposits for funding longerterm investments.

Inadequate earnings to fund growth, support dividend payments and augment

capital.

Operating the bank with income growth instruments with little regards for
capital retention.

Literature Review
The financial sector of any economy is one of significant importance, as it is considered
to bare the reflection of all other sectors of the economy and so it strongly affects the success or

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failure of the others. In recognition of this governments have always sort to protect banks and
other financial institutions from liquidity problems and failure cognizant of the domino effect
which it will have on the other sectors and the economy on a whole.
Banks are generally regarded as being credit facilities, loans portfolios and credit
instruments. with the existence of the current financial crisis where millions have lost their
source of incomes and are unable to repay the loans obtained from banks and other institutions
before or even at the start of the recession this has severely affected the banking sector and many
banks are unable to and most of its revenues are generated from operations to meet financial
obligations. Consequently the current financial dilemma has compounded the bank failures. This
was most evident as in 2009 there was one hundred and forty (140) failed financial institutions.
This was seen to be in sharp contrast to the previous year, where only eleven (11) had failed in
the US Banking industry. This has millions of individuals defaulted on their mortgages car loans
and credit card payments which strongly affected the liquidity and capital adequacy of banks.
(Morton Glantz) posits that bank failures occur when a bank cannot meet its
responsibilities to its depositors or creditors. Capital adequacy, liquidity and risk management
techniques .these along with the implementation of adequate prudential controls are highlighted
as duties of the treasurer of the financial institution. Constant review and updating of theses
techniques are strongly recommended considering the dynamics of todays business environment
in an effort to minimize bank failures. According to (David Barr), There are a number of
reasons a bank can land on the troubled list such as if the capital level is low, capital
restoration plans are submitted. Maybe there is a bad group of loans that have to be addressed, or
changing policies and procedures need to be changed, or the board needs to be more active, or

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Frontier Bank

that the bank needs to find competent, qualified and experienced senior loan officers to oversee
the lending program to help reduce its troubles.
Finally according to Diane Ackerman, risk is the exposure to the chance of injury or loss.
David Barr, FDIC, posited that risks should be calculated that is there should be a balance
between risks and the expected returns. Therefore to effectively manage exposures to risks,
actions such as setting sufficient and acceptable credit or lending thresholds, also maintaining a
debt ratio and constantly finding ways to improve, expand and maintain the institutions longterm and short-term operations capabilities.

Risk Management Objectives

Risk management aims to facilitate the exchange of information and expertise across
countries and across disciplines. Its purpose is to generate ideas and promote good practice for
those involved in the business of managing risk. All too often assessments of risk are crudely
made and the consequences of getting things wrong can be serious, including lost opportunities,
loss of business, loss of reputation and even life where it plays a central role of any
organizations strategic management. In the case of New Frontier Bank it is quite evident that
they did not have any risk management measures in place to control and safeguard stability and
thus the failure of the bank. The main risks that were identified as the causes of the failure of
New Frontier Bank are: operational, market, liquidity and credit risk. A primary objective of risk
management is to identify and to manage (take preventive steps) to handle the uncertainties that
attend a business enterprise or that are personal to an individual.

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Treasury Management Concepts that may have helped to prevent the failure
The Federal Deposit Insurance Corporations FDIC said that the New Frontier bank's
liquidity was less than satisfactory given that 39 percent of the bank's deposits were brokered
deposits, meaning that the banks liquidity was very high. Despite the fact that the bank had
sufficient structures in place to measure, monitor and report liquidity, management's strategy of
relying on brokered deposits was risky.
The following concepts could have been put in place in order to inhibit this failure:
Risk Management techniques could have been use efficient and effectively to prevent failure. It
involves the identification, measurement, monitoring and controlling of risks to ensure that:
o The individuals who take or manage risks clearly understand it.
o Risk taking decisions are unambiguous and clear.
o Sufficient capital as a buffer is available to take risk
o The organizations risk exposure is within the limits established by Board of
Directors.
o Risk taking Decisions are in line with the business strategy and objectives set by
BOD.

Recommendations

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When the institutions primary real estate and agricultural lending markets began to
deteriorate in 2007 and 2008 respectively, weaknesses in New Frontiers risk management
practices translated into a decline in the quality of the institutions ADC and agricultural loans.
New Frontier management should have implemented risk management framework that would
effectively identify, monitor, and mitigate commercial real estate concentration risk.
In 2005, New Frontier should have established concentration limits by industry, and in
2006, the bank should have made further references to establish certain limits on the institutions
loan concentrations. In 2007, New Frontiers continued focusing on ADC lending, given the
decline in the residential real estate market, and recommended that management reduce its
exposure to residential real estate.
Capital management programs should have been put in place to ensure that capital is, and
will continue to be adequate to maintain confidence in the safety and stability of the bank. The
company should have established and implemented sound and prudent policies governing the
quantity and quality of capital required to support the bank. Appropriate and effective procedures
to monitor, on an ongoing basis, the institutions capital requirements and capital position should
also have been developed and applied.

References

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Ackerman.D. (2004). Effectively manage exposures to risks. Retrieved November 15, 2011 from
emerald insight.
Barr, D. (2007). Troubled banks. Retrieved November 15, 2011 from emerald insight.
Bank of Jamaica (1996). Standards of Sound Business Practices. Capital Management. Retrieved
November 19,2010 from http://www.boj.org.jm/pdf/Standards-Capital
%20Management.pdf.
Barrell , R. (2010). The Evolution of the Financial Crisis. National Institute Economic.

Bullard, J. (2009). Systemic Risk and the financial crisis: A Primer. Federal Reserve Bank of St.
Louis.
Dunn, S. (2009). Feds hit New Frontier Bank with reprimand,
http://www.greeleytribune.com/article/20090131/NEWS/901319969.com
Glantz M. (2003). Managing Bank Risk
Material Loss Review of New Frontier Bank, Greeley, Colorado (2009). Office of Inspector
General. www.fdicig.gov.com
Miles M. and Aldo S. (2009). New Frontier Bank failure highlights weaknesses in inspections
and oversight http://www.denverpost.com/ci_14079017#ixzz16OJC9xyJ
New Frontier's failure: Timeline of the bank's rise and fall (2005), the Federal Deposit Insurance
Corp.'s Office of Inspector General Material Loss Report and other FDIC records.
http://www.greeleytribune.com/article/20100405/NEWS/100409822.com
The Institute of Risk Management. (2010). Retrieved November 20, 2010 from
http://www.theirm.org/publications/documents/Risk_Management_Standard_030820.pdf