Two Colorado businessmen who made their names in the office supply, agricultural, and technology industries are leading an investor group trying to save New Frontier Bancorp with $30 million of new capital.
But not even they are sure if the amount will be enough — or whether the $2 billion-asset Greeley company is salvageable.
Credit losses from construction and development have piled up, and loans in other sectors are beginning to crack. New Frontier relies heavily on brokered deposits, and regulators have called for it to replace its management team.
So the investors, led by Gary Jacobs and Mark Wong, are waiting for a third-party review of its loans before making the infusion, which would give them a stake of at least 51%. Depending on what the review finds, Mr. Jacobs said, the group could look to raise another $20 million from other investors — or just pack it in.
"We are going through the portfolio loan by loan," Mr. Jacobs said. "Our hope is that the evaluation will display that the bank has the ability on the vast majority of those loans to be repaid. However, it could show that it is worse than expected, and then we will have a decision to make."
Despite its many problems, New Frontier has great potential, he said. It has by far the largest deposit share in its home market of Weld County, 38% — more than four times that of its largest competitor.
He said he envisions a restructured New Frontier doubling its network of three branches over the next four years. That expansion might include opening a branch in Boulder, where he and Mr. Wong are based.
Mr. Jacobs also said he wants to preserve a regional pillar.
"New Frontier Bank is an important part of the northern Colorado community and economy, and if we can prop it up with new capital, a better relationship with regulators, and a better management with proper processes and procedures, we will be doing a great service to that community," he said.
Given the severity of the economic crisis, banking experts questioned why the investors did not choose a firm with fewer problems.
"I don't know why you would touch that," said Michael Iannaccone, the president of MDI Investments Inc. in Chicago. "Maybe they are thinking they are buying 51% control of this $2 billion bank with lots of problems for $30 million. … If they can reduce the size of the bank and still end up with enough capital, it is a steal, … but it is a big gamble, maybe too big."
Mr. Jacobs was the founding investor and chief financial officer of Corporate Express Inc., an office supply company, in the 1990s. He joined the global technology firm Storage Technology Corp. in its first years of business in the early 1970s and served in various senior positions there.
Mr. Wong has founded five agricultural companies and is currently the chief executive of Agrivida Inc., an agricultural biotechnology firm.
Last month their Colorado Financial Holdings LLC announced the deal to invest in New Frontier. If all goes as planned, the deal should close by April 10.
Mr. Jacobs said he also considers Colorado more resilient than other parts of the country. Its December unemployment rate was 6.1%, versus the national average of 7.2%, according to the Bureau of Labor Statistics. He said the state's population is expected to grow this year, so there will be people to absorb homes for sale.
To serve at the helm of New Frontier, the investors have enlisted Jim Slavik, a veteran of General Electric Co.'s finance arm, who was the chief executive of its $7.5 billion-asset Cosmos Bank in Taiwan during its turnaround. Before that he had been the chief operating officer of a GE-owned Czech Republic bank during its cleanup.
Mr. Jacobs said he is hoping a cash infusion from private investors will help New Frontier get $52 million from the Treasury Department's Troubled Asset Relief Program. The company has received no indication of whether it will be approved for such capital, he said.
"We want the bank to be well capitalized following the close of the transaction," Mr. Jacobs said, and the loan review is meant to help avoid any surprises.
That might be the tricky part.
The Federal Deposit Insurance Corp. accused the current management team of "failing to accurately reflect the condition of the bank in published statements and consolidated reports of condition and income" in a Dec. 2 cease-and-desist order.
And what has been reported is not pretty. According to Karen Dorway, the president of BauerFinancial Inc., a bank rating agency in Coral Gables, Fla., New Frontier's nonperforming assets at yearend increased 127% from a year earlier, to $119.1 million, or 7.8% of tangible assets. Loans for residential construction and development dominated the nonperformers. The company has $374 million of construction and development loans, making up a quarter of total loans.
The order required the CEO and chief lending officer positions to be vacated within 90 days and filled with executives who have "a demonstrated ability in managing a bank of comparable size and … prior experience in upgrading a low quality loan portfolio."
At Dec. 31, New Frontier had a leverage ratio of 7.7% and a total risk-based capital ratio of 10.4%, according to an FDIC call report. The order required it to raise the leverage ratio to 8% and the total risk-based capital ratio of 12%.
New Frontier has "an inadequate level of capital protection for the kind and quality of assets" it holds, the order said.
Ms. Dorway, whose firm has given New Frontier a rating of two out of five stars, said the $30 million would boost the leverage ratio to 10.2%, though the total risk-based capital ratio would end up at just 11.9%.
"It appears that they will have further deterioration," she said. "That capital won't quite get them the numbers they need."
Mr. Jacobs said problems from other parts of the portfolio could be coming down the pike. As the investors began their due diligence in early January, Johnson Dairy, the largest milk producer in Colorado and a New Frontier borrower, filed for protection from creditors under Chapter 11 of the federal Bankruptcy Code.
He would not reveal New Frontier's exposure to the dairy firm, except to say it is material and "an unpleasant surprise."
Mr. Slavik, who is expected to become CEO next month, said that once due diligence is completed, the new management team would fill open positions (including the lending slot), raise credit standards, make sure the allowance for credit losses is adequate, and rework the portfolio. The ongoing review would give the new team an insight into which borrowers New Frontier needs to continue to work with, which loans it can or should sell, and where it needs to take its lumps.
"We've got to get the bank right-sized," he said. "In the short to medium term, we won't be growing the bank."
New Frontier relies too much on brokered deposits, which made up 43% of its $1.6 billion of deposits at Dec. 31, Mr. Slavik said. (Even without brokered deposits, it would still be Weld County's largest deposit holder.) Once it is back on solid footing, he said, it would focus on gathering core deposits — something it should do well. "It has the busiest branches I have ever seen."
Mr. Jacobs said his group could "make a fair rate return" on their investment, though he has additional motivations. "The potential rewards are both economic and psychological," he said. "Knowing that I could be a part of helping a community pass through challenging economic times, that is the psychological part."