Peninsula Daily News Staff and News Services
When Frontier Bank branches reopen in Port Angeles, Port Townsend and Sequim on Monday, they’ll have a new name — Union Bank.
After struggling for more than a year under a massive pile of soured real estate loans, Frontier was closed by state and federal regulators at 6 p.m. Friday.
In nearly seamless succession, the Federal Deposit Insurance Corp. immediately assumed receivership of the 31-year-old bank, owned by Everett-based Frontier Financial Corp., and sold it to Union Bank of San Francisco.
All of Frontier depositors immediately became customers of Union Bank, and services are expected to continue without interruption.
While Frontier branches were closed on Saturday for restructuring, customers could still use their accounts by writing checks, use ATMs and debit cards and do other banking through Frontier’s Web site.
Union Bank, one of the nation’s largest banks with $85.2 billion in assets, is a subsidiary of Tokyo-based Mitsubishi UFJ Financial Group, which owns Japan’s largest bank.
Union already has three Washington branches — in Seattle, Bellevue and Tacoma — and Frontier’s three North Olympic Peninsula branches and 47 other offices in Washington and Oregon will join them on Monday morning.
Frontier’s failure will cost the federal deposit-insurance fund an estimated $1.37 billion — more than any bank failure in state history.
Union Bank assumed about $2.5 billion in deposits of Frontier, which had $3.6 billion in assets and was the fifth-largest bank headquartered in Washington state.
Union Bank paid no premium for the deposits and assumed all of the failed bank’s assets.
But a big incentive for Union Bank was the FDIC agreeing to a “loss-sharing agreement” on $3.04 billion of Frontier’s less-desirable assets.
Though the specific terms weren’t immediately released, such agreements typically obligate the FDIC to cover 80 percent of an institution’s losses on the acquired assets.
Loss-sharing deals, once rare, have become common during this banking crisis.
It was the state’s sixth bank failure this year — and the largest state-based bank to fail since Washington Mutual’s collapse in September 2008.
Frontier was one of seven banks under U.S. supervision that were closed on Friday.
Three were three in Puerto Rico, two in Missouri and one in Michigan.
In all, regulators have shuttered 64 banks so far this year — a faster pace than in 2009, during which 140 banks were closed.
Frontier was one of two troubled state-based banks with branches on the Peninsula being carefully monitored by government regulators.
The other is Sterling Savings Bank, the second-largest state-based bank.
Sterling has 175 branches, including Port Angeles and Forks.
Last week Spokane-based Sterling announced a $134.7 million investment in the bank by a Boston equity firm.
It is part of the bank’s ongoing “recapitalization and recovery effort” to raise enough money to meet requirements imposed by federal regulators.
While most of the state’s 90-odd banks and thrifts are at least reasonably healthy, more than two dozen, including Frontier and Sterling, have been operating under some degree of enhanced regulatory oversight.
Two other banks with Peninsula branches were closed in the last 12 months — Bainbridge Island-based American Marine Bank, taken over on Jan. 30 by Tacoma-based Columbia Bank, and Bremerton-based Westsound Bank, closed on May 9, 2009.
Westsound’s accounts were assumed by Kitsap Bank,
Tim Wennes, chief retail banking officer of Union Bank, would not comment on the bank’s employment plans — but said the bank intends to keep all of Frontier’s branches.
Frontier had about 700 employees at year-end.
“I think it’s a good match,” said Brad Williamson, bank director for the state Department of Financial Institutions.
“Union Bank doesn’t have a lot of presence in Washington state. And Frontier Bank gives them an immediate presence.”
In a written 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.”
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.
“Frontier’s management team has worked hard to recapitalize the bank throughout the past year,” Williamson said in a statement.
“However, the economic climate has made this task very difficult, and the continuing loan losses finally brought the bank’s capital to an unsustainable level.”
Like many other local banks that have run aground, Frontier heavily emphasized lending to developers and homebuilders.
Such loans accounted for more than a third of the bank’s total loan portfolio.
While Frontier’s strategy led to big profits during the housing boom, it crippled the bank once the merry-go-round stopped and many of its borrowers couldn’t pay back their loans.
The bank was considered “critically undercapitalized” by regulators, who in mid-March gave it 30 days to raise new capital or sell itself.
As of the end of 2009, Frontier held more than $1 billion of construction and development loans — and well over half of those loans were listed as past due or “nonaccrual,” meaning the bank either wasn’t receiving any payments at all or less than the original loan terms.
The bank wrote off $337.3 million in bad loans last year, and it had set aside $376.1 million to cover loans expected to go bad in the future.
But its chargeoffs and loan-loss provisions eroded the bank’s capital base and led to heavy losses at the holding company.
Frontier Financial lost $295.1 million, or $62.61 a share, last year.
This past summer, Frontier appeared to have found a white knight.
SP Acquisition Holdings, an investment vehicle created by New York-based hedge fund Steel Partners, agreed to pay $24.4 million in stock and warrants for Frontier and pump more than $400 million into the bank.
But the plan required approvals from a battery of state and federal regulators.
Those approvals weren’t complete by SP’s early-October deadline to either buy an operating business or return its investors’ money, and the deal collapsed.
