Patrick Fahey, chairman, president and chief executive of First Sound Bank (FSWA) in Seattle, believes in second chances.

Fahey's prior turnaround effort — Frontier Financial in Everett, Wash. — failed in 2010. He took the helm of Frontier in 2008 intent on salvaging a bank scarred by losses on commercial real estate. He brokered a deal to sell the institution but was unable to secure regulatory approval.

Armed with lessons learned from that experience, Fahey joined First Sound as a consultant in 2011, helping negotiate a critical settlement of an adverse jury verdict involving a leasing business the company bought in 2008.

Since becoming CEO in January 2012, Fahey has helped First Sound improve its finances and address troubled loans. The $131 million-asset company also raised capital and exited the Troubled Asset Relief Program last month at a steep discount.

The following is an excerpt of a recent interview with Fahey.

How would you describe the first year at First Sound?
FAHEY:
It was pretty intense. I had been happily retired and was involved in helping a little bit on a consulting basis. When I took over [as CEO in January 2012], my effort had to be twofold. One was to get additional capital and the other was to resolve a significant level of nonperforming assets. We did both.

After the capital raise we now exceed the threshold for the regulatory definition of a capitalized bank. It is important to say it that way — we haven't been declared well capitalized by the FDIC, but we exceed the requirements for a well-capitalized bank.

It sounds like you had a big improvement in nonperforming loans. What did you do to bring it down?
I brought in a new chief credit officer, who had a fair amount of special asset experience. He's been very effective in aggressively working with troubled borrowers and digging in. The bank was pretty much hunkered down during the recession. I was also able to negotiate a resolution of a large [loan of] a little over $5.6 million. It was a participation loan from a larger bank. In negotiation, I was able to [secure] $1.5 million in default interest, which helped our capital ratios, and payment in full on the $5.6 million property.

I think there had been a reluctance to [resolve loans] before. The bank wasn't in a capital position to do it; we would have taken too big of a hit. Improving the condition of the bank gave us some cushion to reducing a price to get rid of a foreclosed property or resolve a problem loan.

It sounds like you had to resolve the lawsuit first.
Resolving the lawsuit was critical. I think there's no doubt the bank would have been closed in January 2012 if we hadn't been able to resolve the lawsuit. The bank had a 2.07% [Tier 1 leverage ratio] at the end of 2011. That's the point at which the bank would not have been allowed to continue by the FDIC. They would have seized the bank.

It sounds like you're a good negotiator. Do you have a secret for that?
It takes perseverance. Part of it is convincing someone that the best alternative is to come to an agreement. Part of it is determination. You fight a little harder when you're up against the ropes.

What's the plan now that the bank is on more solid ground?
When you are significantly undercapitalized and everyone is aware of that, it is very difficult to attract new business. People are not anxious to transfer to a bank where they might have the FDIC as a partner in their loan.

We have begun to develop business. We hired a very seasoned relationship officer in December who has quite a following. We have in the neighborhood of $14 or $15 million in new loans. Previously we were fighting a retrenchment battle. The good news is we have deliberately shrunk the asset size of the bank . . . so we still have significant excess liquidity that we can redeploy into loans.

I think the bank is well positioned to aggressively compete. We've got the capital, the liquidity and, best of all, the personnel to do it. We can now be a very effective community bank that's in the business of lending to small and midsize businesses.

I feel so fortunate to have a staff that was very loyal in hanging in during this difficult period, and for customers who were amazingly loyal. The shareholders were essentially local individuals, and many of them invested in this new capital round. Our directors have been instrumental in developing and referring business.

Did you launch a campaign to tell people when you became well capitalized?
The publicity surrounding our phoenix-rising-from-the-ashes story has certainly been helpful. One of the principal ways a community bank can develop business is getting re-involved in the community. We can't afford to compete with a big bank in terms of advertising noise but you can develop contacts that can prove fruitful in developing business.

How were you able to raise capital for First Sound?
I'm still pinching myself as to the reception we had. I've been around banking for over 40 years and know a lot of people. A lot of people that had invested in Pacific Northwest Bank — the bank I had started and ultimately sold to Wells Fargo in 2003 — did very well in that investment, so I was able to present the case to some of them. They had some confidence that this was going to work.

There aren't a lot of banks like this around that are business-oriented community banks in the greater Seattle area. We're right in the economic hub of the Northwest. We've got a lot of major companies headquartered here and a lot of supporting small to midsize businesses. That was part of the attractiveness for some investors, even a few that were out of state.

Why were you able to save First Sound but not Frontier?
We essentially had Frontier saved but, for reasons I'll never understand, the Federal Reserve would not approve the private equity investment in time.

First Sound is strictly a bank. It doesn't have a holding company, so it is strictly subject to the FDIC and the state. Both regulators were extremely supportive. I felt pretty strongly that [First Sound] could be saved, and the people here have had the will and ability to help make it happen. I didn't do this by myself.

You don't sound bitter about the Frontier experience.
It was just unfortunate. At the time there was an aversion to having private equity firms invest in banks. That changed later on.

You left retirement to join First Sound. Are you planning to stay there for the long haul?
I am. That question was frequently asked during the capital raising effort, and I'm committed to seeing it through to where the bank is well positioned to have some succession in place. Then I would ultimately like to stay involved in something that is a little less than 150% of my time.

As we can afford it, perhaps I could continue as executive chairman [with new management in place]. I'm committed to stay involved. I think I owe it to the people who have invested — not that I am the be-all and end-all of this thing.

Several banks have completed big turnarounds and found buyers. Is that in your plan?
My view is if you run a bank with a view toward selling you'll run it wrong. What we need to focus on is converting liquidity into good earning asset loans and getting the bank increasingly profitable. I think we have an opportunity to continue as a viable institution in the greater Seattle area providing good support to business.

I think it is fair to say some people probably invested with the bank with the thought that [a sale] could happen. But I think that's a ways off if, it happens at all. My obligation is to do what's in the best interest of the shareholders, of which I'm one. I figure those chips will fall where they may.

Would you oversee another turnaround?
I don't think so. That's not in my plan. I have a boat here on Puget Sound, and I go down to see if it is still there every once and a while. I think I've had a good long career. It's generally been successful, and I'm excited that we've been able to fix this one.

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.