An active acquirer for much of the 1990s, Frontier Financial Corp. of Everett, Wash., lost out on a number of potential deals this decade by being outbid by larger companies with deeper pockets.
But in the last two months the $3.6 billion-asset Frontier has struck two deals that would boost its assets by more than $1 billion. The latest was announced late Wednesday, when it said it would buy the $850 million-asset Washington Banking Co. in Oak Harbor for $191 million in cash and stock.
John J. Dickson, Frontier's president and chief executive officer, said the difference between now and a few years ago is that sellers are approaching his company exclusively, rather than auctioning themselves to the highest bidder.
Price matters, of course, but Mr. Dickson said it is important to some sellers to partner with companies that are most like themselves.
A bank's culture is also important to buyers, he said. "What we're really buying is the people, and if the culture is too different, the people won't stick around. We want to make sure we can retain as many people as possible."
In many ways, the deal has a familiar ring to it. Frontier, like other banking companies in its asset class, wants to add scale to compete against larger companies and diversify its balance sheet. And Washington Banking found competition for loans and deposits had become increasingly fierce and had reached a point where it either had to bulk up or find a merger partner.
"I think there are more community banks now looking at increasing credit costs, margin pressure, and regulatory burdens, that their boards are saying that now is a good time to look for a strategic combination," Mr. Dickson said.
Michal D. Cann, Washington Banking's president and CEO, said that its board identified Frontier as a potential buyer because the two companies operate in neighboring markets, and Frontier already owns a 9% stake in his company.
But Mr. Cann, too, talked about the cultural fit. "We know they'll take care of our customers and employees the same way that we have done," he said.
Mr. Cann would become a senior vice president and regional manager at Frontier.
Acquiring Washington Banking and its subsidiary, Whidbey Island Bank, would take Frontier into several markets in north Puget Sound and would expand its branch network along Interstate 5 north of Everett to the Canadian border. Currently, the bulk of Frontier's branches are clustered around Seattle and the west side of Puget Sound. When it completes the deal it announced in July for the $210 million-asset Bank of Salem, it would also have three branches in Oregon.
Mr. Dickson said that Washington Banking "is a great infill for the northwest portion of our footprint, which will be good for our customers whose businesses have multiple locations."
Another benefit of the deal is that it would diversify Frontier's balance sheet, on both the liability and the asset side, he said.
Roughly 60% of Washington Banking's deposits were core as of June 30, and its cost of funds was 3.75%. Mr. Dickson said that Frontier has a more certificates of deposit and borrowings on its books, and that buying Washington Banking would help lower its cost of funds, which was 4.3% as of June 30.
Also, Washington Banking has a more diverse loan portfolio. About half of Frontier's loans are in construction, but 44% of Washington Banking's portfolio is made up of commercial real estate and commercial and industrial loans, and another 26% are consumer (mainly indirect auto) loans.
"We're also a little bit more asset-sensitive than they are, as 57% of our loans are tied to prime and more of their loans are fixed-rate, so this deal will give us a little bit more stability in our margins," Mr. Dickson said.
As of June 30, Frontier's net interest margin was 5.76%, well above the industry average, but adding more fixed-rate loans to its books would help it withstand continued rate cuts by the Federal Reserve Board, he said.
James Bradshaw, an analyst at D.A. Davidson & Co. in Portland, Ore., applauded the deal, saying that Washington Banking "really is a true community bank.'
Jeffrey Rulis, another D.A. Davidson analyst, said the price, at 2.9% times tangible book and 22.1 times trailing earnings, is expensive.
"But then again, any sort of premium that Frontier pays" in a bank deal "they usually get back immediately," Mr. Rulis said. "Frontier is one of the most efficient banks around, and they usually get a lot of cost saves out of their deals."
Frontier's efficiency ratio was around 35% as of June 30.
It would issue 5.9 million shares of stock and pay $42.9 million in cash for the 8.6 million shares of Washington Banking that it does not already own. The deal is expected to close in the first quarter. Washington Banking shareholders would own about 11% of Frontier's stock.
Washington Banking's shares rose 32.3%% Thursday, to close at $20.24. Frontier's shares closed at $24.10, up 0.84%.
