Frontier bank’s merger plans fall apart

Published 10:28 pm Monday, October 5, 2009

EVERETT — Frontier Financial Corp. is seeking a new white knight investor today after a merger that would have provided a $427 million cushion for the beleaguered bank was called off late Sunday night.

The deal with SP Acquisition Holdings of New York was called off after it became clear that federal regulatory agencies wouldn’t approve the merger in time for a Saturday deadline.

“I guess you could say the process got in the way,” Frontier Chief Executive Pat Fahey said Monday.

That means the troubled bank’s lifeline was rescinded. SP Acquisition Holdings, a so-called “blank check” company founded with the purpose of buying another business by Oct. 10, will cease to exist this Saturday.

That leaves Frontier looking for investors with enough capital to rescue the bank from a portfolio of bad real estate loans.

“I just refuse to give up,” Fahey said. “This company has a very strong value to the community here.”

Frontier has been plagued by plummeting stock prices, defaulting loans and regulatory censure since the first signs of recession paralyzed the construction industry. A federal cease-and-desist order earlier this year first called attention to the gravity of the bank’s situation.

Frontier announced in July it would be acquired by the holding company, a move that would dilute the value of Frontier stock but inject the bank with enough capital to expand into southwest Washington and Oregon.

The merger was contingent on shareholder approval at both companies. But shareholder meetings scheduled for Thursday were canceled.

Early returns of shareholder votes were heavily in favor of going ahead with the merger, Fahey said.

With the merger off the table, it isn’t clear how — if it all — Frontier will secure capital to resolve its bad loans.

The bank is playing catch-up now, searching for a new investor after several months of being contractually prohibited from pursuing them. But because of preparation for the merger, Frontier’s loan portfolio has been scrutinized more closely than other banks — and that could be appealing to potential investors, Fahey said.

That, coupled with an economy that seems more stable, could mean a light at the end of the tunnel for Frontier.

“As we now seek to find other avenues for capital, there’s a lot less uncertainty about the economy and the condition of our portfolio,” Fahey said.

But the failed merger didn’t come as a surprise to some analysts. A report authored by FIG Partners, an Atlanta-based broker outlined skepticism about the plan in August.

“This merger faces significant hurdles to be completed, and we have our doubts,” the report read. “We doubt regulators will budge on the cease-and-desist order and also where SP Acquisition shareholders have a full understanding of what they are buying; losses at (the bank) could be much greater than what management is estimating.”

It concluded: “Our opinion is that a substantial change in operating strategy requires a change in culture and not just new capital.”

Frontier’s stock plunged 24 percent Monday, registering at 72 cents when markets closed.

The bank received a NASDAQ 180-day warning last month after stock prices fell below $1 for 30 straight business days. The warning means the bank’s stock could be dropped from the exchange.

SP Acquisition Holdings, headed by hedge fund manager Warren Lichtenstein, will be liquidated and distributed to stockholders, according to the rules set out in the firm’s certificate of incorporation.

Read Amy Rolph’s small-business blog at cmg-northwest2.go-vip.net/heraldnet/TheStorefront. Contact her at 425-339-3029 or arolph@heraldnet.com.