The Turnaround Artist

After a long and successful career in banking, Pat Fahey is taking on his most vexing challenge: bringing Frontier Bank back from the brink.

Few would fault Pat Fahey if, at age 67 and with a noteworthy career in Washington banking already on his résumé, he chose to sit out the industry’s ugliest financial mess in decades.

Instead, though, Fahey has taken on what may be the toughest assignment in his banking life—getting Everett-based Frontier Financial Corp., the parent company of Frontier Bank, through the downturn.

Frontier is, in the words of McAdams Wright Ragen banking analyst Sara Hasan, “in a precarious spot.” Frontier lost $33.8 million in this year’s first quarter. Non-performing loans jumped to more than 16 percent of total assets, compared with less than 1 percent a year ago. The stock, which as recently as late 2007 traded above $30 a share, fell below $2 a share Jan. 30 and has only rarely nudged above it, and not for long. The dividend is gone. And federal and state regulators have slapped Frontier with a cease-and-desist order requiring the bank to come up with a plan for returning to profitability.

“It’s the toughest thing I’ve ever been involved in—certainly not the way I intended to have the final act in my career play out,” Fahey says. “But we’re going to give it a heck of a go, and we’re making progress.”

So why is he doing it? “As a banker, Pat has always been a builder of banks and businesses,” says Phyllis Campbell, who worked with Fahey when both were with Spokane-based Old National Bank. (Campbell later became president of US Bank in Washington and now has her own challenging assignment, running the Northwest regional office of JPMorgan Chase, the new owner of Washington Mutual.)

“He’s doing it because he really believes in the greater good,” Campbell adds. “He believes if he can pull what was a good institution through to the other side; he probably owes it to the community to do it.”

Fahey’s also doing it because he was asked. After leaving Old National and its successor, US Bank, he started Pacific Northwest Bank in Seattle, building it into a $3-billion institution before selling it to Wells Fargo in 2003. He joined Frontier’s board in 2006—and almost immediately began voicing concern about how the bank’s balance sheet was structured.

Frontier had built itself into a regional bank with more than $4 billion in assets and 51 branches, largely on the strength of residential real estate construction and development lending. In late 2007, Bank Director magazine called Frontier the best performing among the nation’s 150 largest banks in the United States.

“That model had actually worked very well for the company since its inception more than 30 years ago,” Fahey says. There weren’t signs of a downturn looming, “but if past is prologue, you could assume that at some point there’s going to be a downturn.” While Frontier had made it through earlier real estate slumps in decent shape, “it just seemed prudent in my mind” to begin shifting the bank’s orientation.

As it turned out, the current slump not only hit more deeply—“No one’s seen one like this,” Fahey says—but also more quickly than Frontier could get out of its way. With Frontier’s financial results unraveling and regulators unhappy, the board asked Fahey to take over.

“It was nothing I was seeking to do,” he notes, “believe me it wasn’t.”

But it’s his job now. Since being named chairman and chief executive of Frontier in December, Frontier and Fahey have been cutting expenses, trying to reduce problem real estate loans while building a book of business lending to help diversify the portfolio and looking for additional capital.

“We must, must change the business model of this bank,” Fahey explains. “It’s going to take some fairly radical changes in the organization and the structure and policies and the way we do things. It’s change or else.”

An important element of Fahey’s job is to keep communicating with customers, employees and shareholders. “He’ll get the facts out on the table,” Campbell says. “He doesn’t shirk from challenges and he doesn’t shirk from full disclosure and hitting things head-on. I do think that personality trait will serve him well.”

Fahey’s track record as a banker, including previous turnaround situations, may provide some reassurance to crucial audiences. Says Hasan, “He’s very well respected, not only by bankers but by the regulatory bodies.”

Still, she adds, Frontier’s situation is “going to be kind of a nail biter.” Notes Campbell, “I wish him well but I worry that this is the kind of assignment that even a walk-on-water individual, which he is, is going to have a tough time navigating….

“But if anyone can do it, Pat’s going to be the one to pull it off.”

Fahey says he feels up to the challenge, however long it takes. “I told the board I would stick with this until I’d done what I could to right the ship. It’s not going to be overnight.”

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