Real estate losses punish Everett’s Frontier Bank

  • By Yoshiaki Nohara, Herald Writer
  • Thursday, January 29, 2009 8:53pm
  • BusinessEverett

EVERETT — Frontier Financial Corp. posted a nearly $90 million loss for the last quarter of 2008 as it continued to suffer significant losses from past real estate loans.

The report issued Thursday marked the fifth consecutive quarter that the parent company of Everett-based Frontier Bank saw its earnings drop. The company has fallen into the red for the past two quarters.

The bank has been trying to reduce its losses in construction and land development loans, but its problems grew at the end of 2008, when almost 11 percent of its assets were described as nonperforming. That’s up from 4.9 percent for the previous quarter on Sept. 30.

“There’s a lot of uncertainty in this market,” said Pat Fahey, the company’s chairman and chief executive officer.

The company lost $89.5 million, or $1.90 per diluted share, in the fourth quarter ended on Dec. 31. Part of the loss was on paper rather than in actual cash. The company’s stock declined during the quarter, pushing its estimated value to less than its book value. As a result, the bank recorded a $77.1 million noncash charge for the drop. Fahey said that doesn’t affect the bank’s actual capital or liquidity.

The company also reported a net operating loss of $16.7 million.

The news pushed the company’s stock down sharply. It closed at $1.93 per share, down 87 cents or 31 percent.

Fahey said the bank is still well capitalized based on government regulations.

The company’s quarterly loss set its loss for 2008 at $89.7 million. That’s down from an annual profit of $73.9 million in 2007.

Fahey said Frontier officials are responding to “these challenging and unprecedented times.”

Rooted in real estate

Frontier officials are scrambling to diversify the company’s loan portfolio, which relies heavily on building and real estate. As of Sept. 30, about 86 percent of the bank’s $3.8 billion in loans were tied to real estate.

The bank reduced construction and land development loans by $108 million during the fourth quarter. Still, nonperforming loans in that area increased from $183 million to $359 million during that three-month period.

Frontier finished setting up a new business banking division with 38 officers, said Fahey, who has more than 40 years of experience in banking. The goal is to increase business lending to cushion mounting losses in real estate loans.

“It will take time,” he said. “We are focusing on what we can control.”

Fahey was named the bank’s top executive in December, as part of the bank’s management shake-up. Fahey replaced Bob Dickson, the bank’s founder, as the company’s board chairman, and John Dickson, the founder’s son, as the bank’s chief executive.

Most banks in Washington have taken hits from the sagging real estate market, said Brad Williamson, who is in charge of the banks division of the state Department of Financial Institutions. Some are weathering the downturn better than others.

Earlier this month, the state closed the Bank of Clark County for lack of capital and liquidity. That was the first bank closure in the state since Emerald City Bank of Seattle in 1993. The Bank of Clark County, which was immediately taken over by Umpqua Bank of Roseburg, Ore., didn’t do a good job of dealing with problematic real estate loans, Williamson said.

Consumers should know that Bank of Clark County didn’t lose deposits because of the closure, Williamson said. He noted the federal government insures up to $250,000 in individual deposit at all covered banks.

Meanwhile, Frontier still maintains a healthy level of capital. During the last quarter, its total capital ratio slightly increased to 10.91 percent. Banks with a capital ration of 10 percent or better are considered well capitalized under government regulations.

Frontier isn’t even close to the situation that the Bank of Clark County found itself in, Fahey said.

Seeking capital

Frontier released its latest earnings two days after Cascade Financial Corp. reported it earned $2.5 million during the final quarter.

The parent company of Cascade Bank turned a profit despite losses in the slow housing market. In November, the bank locked in $39 million from the U.S. Treasury’s capital purchase program, funded by the $700 billion bailout Congress approved. The new capital helped the bank increase lending to businesses and consumers.

Frontier has applied for the same program; it’s yet to get an answer.

“We are not counting on it,” Fahey said. “We are hopeful for it, but we are moving forward,” Fahey said, adding that the bank has been trying to raise capital from private entities.

Hunkering down

With few exceptions, Frontier has stopped creating new real estate construction, land development and completed lot loans. It generated new loans worth $58.6 million during the fourth quarter, down $117 million from the previous quarter.

Frontier has decided to suspend the payment of its quarterly cash dividend, starting in the first quarter of 2009.

Frontier, founded in 1978, has more than 50 branches in Washington and Oregon. Its business model rooted in real estate loans isn’t working anymore, Fahey said. The housing crisis that’s stemmed from subprime mortgages is battering the bank, even though it didn’t engage in lending those risky mortgages.

“It hit so fast and so severely,” he said.

Reporter Yoshiaki Nohara: 425-339-3029 or ynohara@heraldnet.com.

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