Frontier Bank sets new course

Published 11:11 pm Thursday, December 11, 2008

EVERETT — Frontier Bank is taking aggressive steps to diversify its loan portfolio to weather mounting losses in the sagging real estate market.

The Everett-based bank is creating a new business banking division to generate more commercial and business loans. That’s a switch from the bank’s traditional focus on home construction, land development and commercial real estate, which makes up about 80 percent of the bank’s portfolio, Pat Fahey, the bank’s board chairman and chief executive officer, said Thursday.

“We are going to aggressively and resolutely change the mix of our portfolio because we must. That’s prudent,” said Fahey, 66.

Fahey, who has more than 40 years of experience in banking, was named as the bank’s new top executive earlier this week as part of a major restructuring of Frontier’s management team. Fahey replaced Bob Dickson, the bank’s founder, in the board position and John Dickson, the founder’s son, as chief executive of the bank.

Fahey said his experience in business banking should help the 30-year-old bank transform in tough times.

The community bank with 51 branches in Western Washington lost $17.8 million in its third quarter because of anticipated bad loans in the real estate market and losses from securities, reflecting the weak housing market that’s yet to see the bottom, Fahey said. That caused the bank to cut bonuses for its executives. The bank also continues to set aside money for additional bad loans.

Frontier Bank has applied for the U.S. Treasury’s capital purchase program. If its application is approved, it could get up to $115 million — or 3 percent of its total assets — from the government, Fahey said. In return, the government would get preferred stock in the bank with 5 percent interest for five years and 9 percent in later years.

That’s probably the least expensive way to raise capital in a tight financial market, Fahey said. It could be months before the Treasury decides on the bank’s application.

The bank is also mulling over how to get capital from private entities, Fahey said.

“We are exploring a lot of options,” he said. “That’s all I can say about that. We are not just sitting here to wait for things to happen.”

Last month, Cascade Financial Corp. of Everett secured $39 million through the same program.

As the financial crisis deepened this fall, Frontier Bank became the target of short-sellers who aim to make money when a stock falls. Rumors that the government had denied the bank’s application attracted many short-sellers and brought down the value of the bank’s shares.

“Short-sellers look for areas where they see potential problems,” Fahey said.

In other words, the bank was vulnerable to rumors because its portfolio heavily relies on the troubled real estate market, he added. Expanding on business banking would help the bank become more stable.

Frontier Bank has employees who specialize in business banking, Fahey said. On Wednesday, it named Milt Douglas to lead a team of business bankers to develop a strong local business franchise.

Being a local bank should help Frontier meet the requests of local businesses in a timely way that major national banks can’t, Fahey said.

“We are working very hard to correct courses and adapt to the economic condition,” he said.

Frontier Bank, which has about 800 employees, doesn’t plan to lay off people in 2009, Fahey said. It continues to cut expenses.

The bank is at a crossroads and needs to change, Fahey said.

“I’ve been through many economic cycles, but nothing like this,” he said.

Frontier Financial Corp.’s stock on Thursday closed at $2.56, down 23 cents or 8.24 percent.