In an encouraging sign for struggling banking companies nationwide, Frontier Financial Corp. in Everett, Wash., has found a buyer.

SP Acquisition Holdings Inc., a blank check company with $429 million to spend, has agreed to buy the $4 billion-asset Frontier through a share exchange and then recapitalize its bank.

Pat Fahey, Frontier's chairman and chief executive, said in an interview Friday that the company has not figured out exactly how much capital will be left after the bank is recapitalized. But he said he expects there to be enough for it to be a contender for deals.

"As opportunities present themselves we would be one of the better positioned banks to take advantage of things as far as assisted transactions and that sort of thing," he said.

Fahey said the company had talked to more than 30 interested investors since last fall but that they backed away because of the economy and regulatory environment.

"This is a day when Irish eyes are smiling," he said. "We had to do a lot of tough things over the past year to keep this bank going and put us in a position where this was possible."

Industry watchers said the deal offers hope for other banks with high levels of nonperforming assets that have had difficulty finding funding, as well as for the Pacific Northwest, whose residential real estate market is among the hardest-hit in the country.

"It is an interesting development, considering it happened to Frontier, given their high level of problem assets," said Brett Rabatin, an analyst at Sterne, Agee & Leach Inc. in Nashville. "It is also interesting that it happened in the Pacific Northwest, where there is a lot of talk" of investing in banks "but we aren't seeing anything get done."

Still, big hurdles — like approval from both companies' shareholders and from regulators — remain for the deal to close (which the companies said they expect to happen in the fourth quarter).

"If the deal goes through, it would be a positive for the industry, showing that private capital solutions exist for ailing banks. But that 'if' is not certain at this point," said Matthew Anderson, a partner in the market research firm Foresight Analytics LLC.

As at many Pacific Northwest institutions, Frontier's capital levels have been damaged by soured construction and development loans. The company and its bank subsidiary are operating under regulatory orders that require the subsidiary to increase its Tier 1 leverage ratio to 10%.

With capital markets virtually immobile for troubled banks, industry watchers said that requirement was a tall order.

"There weren't a lot of options available to them," said Sara Hasan, an analyst at McAdams Right Ragen in Seattle. "So a deal that allows them to keep operating and meet regulatory requirements and build their business going forward is a good deal."

A representative of SP Acquisition said he could not answer questions about the deal but that Frontier's management is expected to stay in place.

Blank check acquisitions are rare in the banking industry, and they have often fallen apart. One reason is that the investment vehicles are set up so their shareholders can veto deals and still make money. In recent years, these shareholders often rejected proposed banking deals because the prices were too rich, but these days, that is not the case.

Each share of Frontier's common stock is to be exchanged for 0.053 share of SP Acquisition, plus 0.053 warrants exercisable at $11.50 a share for seven years.

Hasan said the deal values Frontier's shares at 51.675 cents apiece, less than the 91-cent price at Wednesday's close. Despite the low price, she said the deal is good for shareholders "because the alternative if the company wasn't able to secure capital in some other way at this point was looking a lot like FDIC receivership. Something is always better than nothing."

On Wednesday, Frontier Financial said it had lost $50 million in the second quarter, 47% more than the year earlier. Nonperforming assets grew to 20.53% of the total, from 16.25% at the end of the first quarter.

At June 30, the bank subsidiary's Tier 1 leverage capital ratio had fallen to 6.49%, from 7.37% at the end of March, Federal Deposit Insurance Corp. data show.

The bank's total risk-based capital ratio fell below the traditional regulatory threshold for well capitalized banks, to 9.13%. At the end of March it was 10.13%.

Foresight Analytics' Anderson said that, for Frontier to meet the regulatory minimums set for the subsidiary bank, the company needed to raise $135 million.

SP Acquisition was formed in 2007 by Steel Partners, a New York investment firm. The special-purpose acquisition company raised about $426 million in an initial public offering and set out to buy an operating business.

Another such blank check company, Global Consumer Acquisition Corp., announced a deal in mid-July to buy operations in Nevada from Colonial BancGroup Inc. and Capitol Bancorp Ltd.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.