After scrutiny, Frontier Bank closed by regulators

EVERETT, Wash. -- When Frontier Bank branches reopen Monday, they'll have a new name: Union Bank.

Frontier Financial Corp., the parent company of the long-time Everett institution, was closed by state regulators Friday. In nearly seamless succession, the Federal Deposit Insurance Corp. immediately assumed receivership of the bank and sold it to Union Bank of San Francisco.

The sale marks the end of a long fight by Frontier. Under increased scrutiny from regulators for more than a year, the bank has long struggled to break free from bad real estate loans and find investors to stop large losses.

Regulators started pounding the final nails in Frontier's coffin earlier this year when it labeled the bank "critically undercapitalized" and told officials to turn things around by April 15 or risk being sold to the highest bidder.

Brad Williamson, director of the state Department of Financial Institution's Division of Banks, said Frontier executives put up an admirable fight to recapitalize the bank. But large loan losses related to construction projects coupled with the state's economic climate was too high of a mountain to climb.

"I think in all cases, management tries desperately to bring the bank back to a safe condition," Williamson said. "But (Frontier CEO) Pat Fahey and the management at Frontier they really made a tremendous effort to recapitalize the institution."

Effective immediately, all Frontier depositors are customers of Union Bank. Frontier branches will be closed on Saturday for restructuring. Customers can still use their accounts by writing checks, using ATMs and debit cards and doing other banking through Frontier's website.

Branches will reopen Monday morning as Union Bank.

Frontier is the sixth Washington-based bank to close this year, according to FDIC data. City Bank of Lynnwood just two weeks ago landed on the failed-bank list, when regulators sold the foreclosure-plagued institution to Oak Harbor-based Whidbey Island Bank.

In 2009, 140 banks were shuttered across the U.S, the highest number in nearly two decades. FDIC officials predict more banks will close this year than last year.

Williamson is hesitant to say if that prediction will be true of Washington state.

"Nationally, I tend to agree with the FDIC," he said. "I don't really like to talk about local closures because we're starting to see shift in the capital markets."

Speculation about the bank's forced sale sent Frontier's stock soaring during the past week. But stock prices dropped 22 percent in trading Friday, ending the day at $3.57.

In after-hours trading before news of the closure, the stock continued to decline.

The drivers probably didn't know they were some of Frontier Bank's last customers when they pulled their cars through the drive-through at the branch on Highway 99 in Lynnwood on Friday evening.

It was business as usual.

The green 'open' lights above the lanes blinked over to red at 5:58 p.m. then they went dark.

The branch's doors locked at 6 p.m. Most of the interior lights went out.

A similar scene played out after closing Friday in downtown Everett. Branch employees gathered for meetings, visible through windows along Colby Avenue.

Jim Kavaney of Marysville used the cash machine outside the branch and said he was disappointed to hear about the closure.

"I've banked with them forever," he said. "I feel bad because I like Frontier, I like the people."

Last year, the scene looked different.

For several months in 2009, it appeared the bank had found a way to break free from the downward spiral: a group of investors headed by a New York hedgefund manager hoped to take over the company.

The deal would have injected Frontier with a $427 million cushion. That wouldn't only have saved Frontier, it could have meant expansion as it bought other failed banks through forced-sales.

Regulators didn't approve the deal in time for a deadline. Frontier CEO Pat Fahey relaunched a search for new investors, but didn't find a suitable match in time.

Frontier has been an Everett institution since 1978. It was conceived in a Black Angus restaurant over in a dinner meeting that brought founder Bob Dickson together with future Everett Mayor Ed Hansen.

Dickson ran the bank as CEO for decades, handing the reins over to his son, John Dickson, in 2003.

When bad real estate loans started taking a toll on the bank in 2008, John Dickson moved from CEO to bank president. And Frontier's board of directors voted to appoint retired banker Fahey to the top position.

Fahey fired John Dickson in March when he refused to cancel a family vacation to Hawaii despite the looming FDIC deadline.

When reached at his home Friday, John Dickson declined to comment.

On Tuesday, he sold thousands of Frontier shares worth more than $39,000, according to filings with the U.S. Securities and Exchange Commission.

Bob Dickson, 76, was more contemplative about the death notice delivered to the bank he helped found.

Frontier was a victim of recession, he said. The bank was not making subprime loans, Dickson pointed out; it was loaning money to builders.

Frontier took a massive blow when builders defaulted on their loans after the housing market collapsed.

"It's not only Frontier Bank," Dickson said. "Many other community banks were hit hard by this."

Union Bank went on a buying spree in April.

A subsidiary of UnionBanCal Corp., Union Bank recently acquired $600 million in assets from Tamalpais Bank after the FDIC seized that bank, based in San Rafael, Calif.

Union Bank's presence dwarfs Frontier's: 346 banking offices in California, Oregon, Washington and Texas and two international offices.

Union Bank's assets total $85.2 billion. It acquired $3.2 billion in total assets from Frontier and $2.5 billion in deposits, along with Frontier's 50 branch offices in Washington and Oregon.

A big incentive for Union Bank was the FDIC agreeing to a loss-share transaction on $3.04 billion of Frontier's less-desirable assets.

"I think it's a good match," said Williamson, the state director of banks. "Union Bank doesn't have a lot of presence in Washington state. And Frontier Bank gives them an immediate presence."

In a prepared statement, Union Bank CEO Masaaki Tanaka agreed: "We have been looking for the right opportunity to expand in the region for some time and Frontier Bank's commercial and consumer businesses match well with our own, particularly in retail and corporate banking, and wealth management."