NEW YORK — Shares of Frontier Financial Corp. fell as much as 16% Tuesday after the Washington-based regional bank said it agreed to make changes to its lending policies, administration and management as part of a cease-and-desist order from federal and state regulators.

Under the agreement, which is with the Federal Deposit Insurance Corp. and State of Washington Department of Financial Institutions, Frontier is required to achieve and maintain a higher Tier 1 capital level, strengthen its management and increase directors' oversight over the bank, among other things.

Chief Executive Patrick M. Fahey said the company intends to fully comply with terms of the agreement. Fahey, who was appointed in December, six months after the regulators started a safety-and-soundness review of Frontier, also noted some of the changes, such as those to the bank's management, have already been made.

Frontier's shares were off 11% in recent trading Tuesday to $1.32. Earlier, the shares fell as low as $1.25. The stock is now down 70% year to date and 93% from a year ago.

Other banks are trading down Tuesday, but not as much as Frontier. The KBW Regional Banking Index was down 3% in recent trading.

In a note to clients, D.A. Davidson analyst Jeff Rulis called the cease-and-desist order "not entirely surprising given Frontier's large problem asset base, risky loan mix (heavy construction focus), and limited capital surplus."

He gave the bank credit for being "extremely forthright with its issues; a stance we believe may buy the bank valuable time and favor with regulators."

Still, Rulis, who maintained his underperform rating on Frontier's stock, said, "We continue to be very cautious on the shares until we gain some incremental clarity on the capital and credit fronts."

Under its agreement with the FDIC and Washington's DFI, Frontier is required to achieve and maintain a Tier 1 capital level of 10% of its total assets. At the end of 2008, the ratio was 8.53%. The company said it has been working with an investment adviser to identify new sources of capital.

"Obviously, any progress on the capital side would be welcome, but we fear FTBK's capital raising options may be limited," Rulis told clients.

Frontier said it has also worked to preserve its capital by selling assets and cutting expenses. In December, the company eliminated its dividend and sold its 8% stake in Washington Banking Co. (WBCO) for $5.5 million. Frontier noted it has also eliminated its bank board meeting fees and reduced executive salaries, while other salaries have been frozen and a hiring freeze has been set in place.

Rulis said asset sales may be the least dilutive and/or disruptive option for Frontier to continue to preserve capital. Still, he warned "the difficult task will be unloading assets that buyers may be reticent to purchase - as imagined, construction and land development loans may sell slowly or at heavily discounted prices."

The agreement also requires Frontier to strengthen its management, increase directors' participation in the bank's oversight and more closely supervise efforts to upgrade its loan portfolio. Fahey said those changes have already been made.

The bank said it has also created a new business banking division "to diversify its loan portfolio and provide a more stable source of core deposits."

Frontier said the agreement will have no impact on depositors.

Frontier noted it focused on residential construction and development lending, and has been heavily affected by the sharp downturn in the economy and the Northwest housing market in particular.

In December, Fahey replaced founder Bob Dickson as chairman and Dickson's son John as chief executive. The company said at the time that Fahey, a Frontier director and a former Wells Fargo & Co. executive, would be responsible for implementing a revised business plan focused on growing a business banking franchise, rebalancing the loan portfolio and cultivating business banking deposits.

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