EVERETT, Wash. ( TheStreet) -- Frontier Financial ( FTBK) dropped sharply on heavy volume Monday after the bank and SP Acquisition Holdings ( DSP) terminated their merger agreement.

SP Acquisition, a New York-based asset-acquisition company sponsored in part by Steel Partners, said in July it would buy Frontier Financial for about $24 million in stock and warrants. On Monday, Frontier Chairman and CEO Pat Fahey said both companies could not secure the required regulatory approvals in sufficient time to complete the transaction.

As TheStreet.com reported on Sept. 23, SP Acquisition warrants had plummeted in late September, an indication traders believed there is a low probability of a deal being completed. While the warrants had traded near 40 cents earlier in the month, they had dropped to 15 cents on Sept. 23. On Monday, those warrants were trading only at only a fraction of a penny.

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Fahey added that Frontier would continue to work to resolve loan problems and shore up its capital position. In a regulatory filing last month, SP Acquisition Holdings said Frontier expects that its Tier 1 leverage capital ratio will drop below 4% as of Sept. 30, which would mean the bank would be considered "undercapitalized" by federal regulatory guidelines.

In March, Frontier said it signed a Cease and Desist Order with the Federal Deposit Insurance Corp. and Washington State Department of Financial Institutions. Under the agreement, Frontier agreed to achieve and maintain a Tier 1 capital level of 10% of its total assets. The bank's Tier 1 capital ratio at year end 2008 was 8.53%.

Should that Tier 1 capital ratio drop below 3%, Frontier would be considered "significantly undercapitalized," which could result in further restrictions put in place or regulatory actions being taken, "including the potential closure of the bank," the September filing said.

Frontier shares were falling Monday by 16 cents, or 16.8%, to 79 cents. Earlier in the session, the stock touched an intraday low of 65 cents. More than four million shares changed hands by 1:30 p.m. EDT Monday, compared to the stock's 50-day average daily volume of 1.5 million, according to the Nasdaq.

Frontier has a 43.6 million-share float with a short interest float of 9.8% as of Sept. 10, according to Yahoo! Finance.

Read more about today's high-volume stocks like Trident Microsystems in earlier "Pump Up the Volume" posts.

-- Written by Robert Holmes in New York.

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