UPDATE 2-Frontier Financial profit slumps on bad loan reserves

(Adds details, background, analyst comments, share movement) By Supantha Mukherjee

BANGALORE, July 22 (Reuters) - Frontier Financial Corp's FTBK.O second-quarter profit fell 89 percent, missing Wall Street targets, hurt by higher provision for bad loans, sending shares down as much as 15 percent.

The financial holding company increased its provision for loan losses to $24.5 million from $9 million in the sequential first quarter. Total non-performing assets (NPA) stood at $123.6 million with a 12-fold increase from the year-ago quarter.

The increase in NPAs was little more than expectations but not out of the realm of possibility as the company is in an area that has high concentration or exposure to construction lending, said Brett Rabatin, an analyst at FTN Midwest Securities.

"They have got a healthy reserve for the NPAs they currently have on the balance sheet, but if they continue to have additional credit issues then they will have to continue making fairly large loan loss provisions," Rabatin said.

The company reported profit of $2.1 million, or 4 cents a share, compared with earnings of $18.2 million, or 40 cents a share, last year.

Analysts expected the company to earn 8 cents a share, before special items, according to Reuters Estimates.

Net interest income fell 3 percent to $44.9 million.

"They are going to have a couple of quarters of difficult operating trends in front of them as they work through their residential construction portfolio," Rabatin said.

Problem loans were once concentrated in subprime mortgages. They have, however, been spreading to other types of lending, including prime mortgages, home equity loans, commercial real estate and construction loans.

NO MERGER ON RADAR

Last month, the Everett, Washington-based company slashed its dividend after Washington Banking Co (WBCO.O) terminated its merger agreement with the company.

Frontier Financial had agreed to buy Washington Banking for $21.40 a share in a stock-and-cash deal in September, 2007, valuing the bank at about $191.1 million.

Analyst Rabatin does not sees any acquisition by the company in the near future.

"If anyone is looking to sell right now the buyers are going to have a sceptical eye on the seller's loan portfolio and I don't see much mergers and acquisitions in this current environment," he said.

Shares of the company, which gained 25 percent last month, fell as much as $1.72, before recovering much of their losses. They were trading down 5 cents at $11.19 in morning trade on Nasdaq. (Editing by Anil D'Silva)