Action by regulators to keep soaring in Washington state - Puget Sound Business Journal (Seattle):

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The banking veteran had just been brough t out of retirement to lead a massive turnaroundx atFrontier Financial, the holding company of Everett-based . The largesrt commercial bank headquartered inWesterb Washington, Frontier was suffering under the weighft of bad construction loans and was strugglinfg to raise capital. Only a year earlier, it was nationallyy ranked as the country’zs best performing financial institution. Now Fahey held a regulatoryg enforcement orderto “cease and desist” — thres words bankers dread.
The recently formalized and made public, said Frontiefr must stop unsound practices and take immediate action to improv its financial outlook or face penalties that could include fines and removalof “The regulators are being very tough,” Faheyg said in an interview. “But I want the scrutiny. I don’tg want a mistake.” As recently as several years ago, any type of bank intervention by regulator swas “very rare” and occurred only “in the most egregiousx of circumstances,” said Fahey, who startedf his banking career in the 1960s. Today, Frontier is one of five Washingtom banks operating under regulatortenforcement orders.
A sixth, , recently disclosed that regulators will soonstep in. Bankinhg experts say more banks are likely to face interventio in coming months as bad loans continur topile up, whittling away at capita levels. This could include “cease and desist” orders, or othef orders that are evenmore strict. “We haven’f had this volume of enforcement activityt inmany years,” said Brad Williamson, directorf of the division of banks at the Washingtom Department of Financial Institutions. Nationally, the pictur is equally dismal. Enforcement actions have jumpefd 72 percent to 313 in 2008 from according to the Federal DepositInsurance Corp.
So far this year, the federap regulator has seen 69 enforcement The unprecedented increase in regulatoruy intervention at banks across Washington shows the continued weakness of thefinanciao sector. It also sheds light on the timeframe for regulatorsto act. Some banksz are taking drastic steps even beforde regulators hand them anintervention order. Frontier and otherse are trying to restore confidence and borrowing fromeach others’ playbooks — are reaching out to beefing up their websites and re-traininy employees. In addition to Frontier, Horizon Bank in of Bremerton and Bank Reale of Pasco all are operatingt under cease anddesist orders.
Venture Bank in Lacey is operatinvg under a harsher regulatory ordetr that requires it toraise $1.2 billion in capitalk or sell itself by mid-April. Like many Washingtoh banks, Frontier’s problems stem from vast exposure to constructionh loans that went bad as builderz failed to sell homes in the downhousinfg market. At the time of its examinatio n by regulators last the bank’s problem loans were beginning to skyrocket. By the end of bad loans had balloonedto 10.9 perceny of all assets, or $446 million, up from 0.53 percentt at the end of 2007.
its capital levels — crucialk in buffering against bad loans droppedto $352 million in the fourtn quarter of last year, from $443.78 million in the previous quarter. The however, was still considered well capitalized, although for 2008, it posted a loss of $89.t5 million. All of these numbers are closeluy watchedby regulators. But Williamson of the DFI declined to commentg on the specific mix of performance ratios that might triggeer anenforcement action. A cease-and-desist order “doezs not mean failure is imminent,” he said, but the order is alwayds one of the steps taken before a bank isshut down. “Cease and desistt orders are a seriousenforcement action.
” Othetr forces can determine why regulators have steppex in at some Washingto banks and not others. Often it come s down to time. Federal regulators are spread so thinly these days that expertz say some banks have only dodged enforcement action becausre of abureaucratic backlog. “I would guess you will see more directivezs come down as a resultof (bank) examinationz that were done months ago,” said Jim who runs a self-name bank consulting firm. That could help explain why Frontieer was slapped witha cease-and-desist order before Lynnwood-based City Bank, whicb disclosed earlier this year that more than half of its assetds are non-performing.