THAT’S NOT MY FAULT…THAT’S NOT MY FAULT…THAT’S NOT MY FAULT

6/16/09

This morning’s (i.e., Tuesday, 6/16/09’s) Wall Street Journal featured a compelling first page story of New Frontier Bank, a small to mid-sized ($2 billion in assets at its peak) community bank in Greeley, CO that was closed by the FDIC on 4/10/09, leaving many borrowers, and much of Greeley and the surrounding area, in the lurch. New Frontier’s story, if it is unique at all, is unique only in its starkness and the concentration of its effects. The failure of a community banks can, needless to say, be devastating for the geographic locale it serves.

There is some debate about whether New Frontier failed due to “faith in the community” or due to shoddy lending practices and risky funding practices. The statistics tend to indicate the latter. New Frontier routinely had a 95% to 105% loan to deposit ratio vs. a national average among FDIC insured institutions of 85%. 35% of New Frontier’s loan portfolio was delinquent at the end of this year’s first quarter, just before the FDIC seizure. The average for other Colorado state chartered banks is 4%. 70% of Greeley’s deposits were brokered deposits. It appears that while Larry Seastrom, New Frontier’s founder and CEO, may have had the heart of George Bailey, he had the banking skills of Uncle Billy, or maybe Ken Lewis.

The interesting segment of the article on New Frontier’s demise was not, however, the reasons for its demise but the reactions of one of its customers, Ms. Tina Gasner, an accountant who took out a $260,000 loan from New Frontier to start MeMe’s Brick Oven Pizza. The business is failing; 16 of its 26 employees have been laid off and Ms. Gasner is behind on the business and personal loans she took out from New Frontier. At last count, ten other banks have refused to refinance her loan.

So who does Ms. Gasner blame? The economy? No. Her skill as a business person? No. Local tastes? No. The quality of her product? No. She blames New Frontier Bank. As Ms. Gasner put it:

“I’m an accountant. I’m not stupid. But you’re in a place of trust when you approach a bank, when they’re saying ‘This is a good plan, you’ll make a profit.’ That’s why I went forward.”

Leave aside for a moment whether this was a good loan; it clearly wasn’t. Just note what Ms. Gasner is saying: She went forward with her plan because the bank said it was a good plan. Do you suppose she went to the bank and said “Hey, fellas, do you think this is a good plan? I was kind of wondering about that. If you think it’s a good plan and you’ll give me $260 grand, I’ll go ahead with it. But if you don’t think so, then I guess I’ll go back to my accounting job.” If that was her approach, we can come to three conclusions:

1. New Frontier was an even more slipshod bank than we thought; who makes loans to such an insouciant borrower?
2. No wonder Ms. Gasner can’t get her loans refinanced.
3. Ms. Gasner ought to appear in entrepreneurship classes (“Entrepreneurship classes”? Sounds like a contradiction in terms, but that is grist for another post.) as an example of the attitudes incompatible with small business ownership.

It is safe to assume, however, that Ms. Gasner, like most potential small business owners, went into the bank exuding optimism, telling her loan officer what a great idea MeMe’s was and that she surely deserved the loan for this surefire opportunity. If that was not her approach, and her fervent belief, she had no business being an entrepreneur. One wonders what her reaction would have been had she been refused the loan. Further, one of the faults she find with the bank was that it took as collateral equipment she was leasing. (New Frontier denies this.) One also wonders how strongly she objected to such haphazard, and probably illegal, lending practice when the bank was assembling the loan package.

To hear Ms. Gasner tell it now, she is arguing that it’s not her fault that her business failed; it was the fault of the bank that was stupid enough to lend her the money.

Just how unique do you think Ms. Gasner is?