<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For the Quarter ended March 31, 1995
Commission File Number 0-15540
FRONTIER FINANCIAL CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Washington 91-1223535
------------------------------- ----------------------------
(State or Other Jurisdiction of (IRS Employer Identification
Incorporation or Organization) Number)
332 SW Everett Mall Way
P. O. Box 2215
Everett, Washington 98203
(Address of Principal Administrative Offices) (Zip Code)
(206) 514-0719
(Registrants Telephone Number, Including Area Code)
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock (No Par Value)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
The issuer has one class of common stock (no par value) with 6,302,300 shares
outstanding as of March 31, 1995.
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FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
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INDEX TO QUARTERLY REPORT ON FORM 10-Q
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March 31, 1995
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<TABLE>
<CAPTION>
PART I - Financial Information Page
- - - - - - - ------------------------------ ------
<S> <C>
Item 1. Financial Statements.
Consolidated Balance Sheet - March 31, 1995
and Year End 1994. 1
Consolidated Statement of Income - Three Months
Ended March 31, 1995 and 1994. 2
Consolidated Statement of Cash Flows - Three Months
Ended March 31, 1995 and 1994. 3-4
Statement of Changes in Stockholder's Equity -
March 31, 1995 5
Notes 6-8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operation. 9-16
PART II - Other Information
- - - - - - - ----------------------------
Item 1. Legal Proceedings. 17
Item 4. Submission of Matters to a Vote of Security Holders. 17
Item 5. Other Information. 17
Item 6. Exhibits and Reports on Form 8-K. 17
Signature 18
</TABLE>
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FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
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CONSOLIDATED BALANCE SHEET (Note 1)
- - - - - - - --------------------------------------------------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
(In thousands)
March 31, Dec 31,
ASSETS 1995 1994
- - - - - - - ------ ---- ----
<S> <C> <C>
Cash & Balances Due from Depositary Institutions $23,847 $22,081
Securities: (Note 2)
Available for Sale-Market Value 42,508 42,278
Held to Maturity-Amortized Cost (Market Value
12-31-94, $89,200) 92,995 94,048
------------------------
Total Securities 135,503 136,326
Federal Funds Sold 27,625 1,120
Loans: (Note 3)
Loans, Net of Unearned Income 476,883 470,512
Less: Allowance for Loan Losses (12,452) (10,410)
------------------------
Net Loans 464,431 460,102
Mortgage Loans Held for Sale 343
Premises & Equipment, Net 11,687 11,845
Other Real Estate Owned 394 1,118
Intangible assets 531 550
Other Assets 10,247 9,426
------------------------
TOTAL ASSETS $674,608 $642,568
========================
LIABILITIES
- - - - - - - -----------
Deposits:
Non-Interest Bearing $70,375 $71,754
Interest Bearing 505,330 467,849
------------------------
Total Deposits 575,705 539,603
Federal Funds Purchased 9,615
Federal Home Loan Bank advances 37,500 37,500
Long-term debt 546 565
Other Liabilities 6,782 4,826
------------------------
TOTAL LIABILITIES 620,533 592,109
------------------------
EQUITY CAPITAL (Note 4)
- - - - - - - -----------------------
Common Stock 43,970 43,917
Unrealized Gains/(Losses) on AFS Securities
Net of Tax effect (Note 2) (700) (1,179)
Retained Earnings 10,805 7,721
------------------------
TOTAL CAPITAL 54,075 50,459
------------------------
TOTAL LIABILITIES & CAPITAL $674,608 $642,568
--------------------------- ========================
</TABLE>
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The accompanying notes are an intergral part of these financial statements.
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FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
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CONSOLIDATED STATEMENT OF INCOME (Note 1)
- - - - - - - --------------------------------------------------------------------------------
(Unaudited)
(In thousands, Except for Per Share Amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------
March 31, March 31,
1995 1994
---- ----
<S> <C>
INTEREST INCOME
Interest & Fees on Loans $12,765 $9,538
Interest on Investments 2,299 2,501
---------------------
Total Interest Income 15,064 12,039
---------------------
INTEREST EXPENSE
Interest on Deposits 5,758 4,359
Interest on Borrowed Funds 607 222
---------------------
Total Interest Expense 6,365 4,581
---------------------
Net Interest Income 8,699 7,458
---------------------
PROVISION FOR LOAN LOSSES (700) (850)
NONINTEREST INCOME
Securities Gains/(Losses) (2)
Service Charges on Deposit Accounts 402 360
Other Noninterest Income 429 534
---------------------
Total Noninterest Income 831 892
NONINTEREST EXPENSE
Salaries & Employee Benefits 2,546 2,270
Occupancy Expense 581 487
Other Noninterest Expense 1,001 1,156
---------------------
Total Noninterest Expense 4,128 3,913
INCOME BEFORE INCOME TAX 4,702 3,587
---------------------
APPLICABLE INCOME TAX (1,618) (1,259)
NET INCOME $3,084 $2,328
=====================
Average Number of Shares Outstanding
for the Period 6,300,324 6,274,187
PER SHARE COMMON STOCK $0.49 $0.37
=====================
</TABLE>
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The accompanying notes are an integral part of these financial statements.
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FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
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CONSOLIDATED STATEMENT OF CHANGES IN CASH FLOWS
- - - - - - - --------------------------------------------------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
(In thousands)
THREE MONTHS ENDED
------------------
CASH FLOWS FROM OPERATING ACTIVITIES March 31, 1995 March 31, 1994
- - - - - - - ------------------------------------ -------------- --------------
<S> <C> <C>
Net Income $ 3,084 $ 2,328
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization (80) 245
Provision for loan losses 700 850
Provision for losses on ORE
Increase in income taxes payable 1,015 760
Deferred taxes
Decrease in interest receivable (557) (601)
Increase(Decrease) in interest payable 973 (20)
Loss on sale of AFS securities (2)
Loans originated for sale (3,413) (4,793)
Proceeds from sale of loans 3,071 5,237
Other operating activities 254 (469)
------------------------------------
Net cash provided by operating activities 5,047 3,535
------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
- - - - - - - ------------------------------------
Net cash flows from Fed Funds Sold (26,505) (1,000)
Proceeds from sales of investments 105
Proceeds from maturities of investments 1,845 3,767
Purchase of investment securities (154) (3,452)
Net cash flows from loan activities (4,975) (24,251)
Purchases of premises and equipment (61) (327)
Proceeds from the sale of other real estate 696 221
Cash invested in other real estate
Other investing activities 8 (1)
-----------------------------------
Net cash used by investing activities (29,146) (24,938)
-----------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
- - - - - - - ------------------------------------
Net change in demand deposit accounts (36,160) 16,795
Net change in certificates of deposit 72,262 (1,805)
Proceeds from issuance of stock 53 45
Principal payments on long term debt (675) (86)
Advances from FHLB 7,500 15,000
Repayment of FHLB advances (7,500)
Net change in Federal Funds purchased (9,615) (5,405)
Other financing activities
-----------------------------------
Net cash provided by financing activities 25,865 24,544
-----------------------------------
</TABLE>
(Continued on next page)
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FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
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CONSOLIDATED STATEMENT OF CHANGES IN CASH FLOWS-(Continued)
- - - - - - - --------------------------------------------------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
(In thousands)
THREE MONTHS ENDED
------------------
March 31, 1995 March 31, 1994
-------------- --------------
<S> <C> <C>
INCREASE IN CASH AND DUE FROM BANK $ 1,766 $ 3,141
CASH & DUE FROM BANKS AT BEGINNING
OF YEAR 22,081 23,440
--------- ---------
CASH AND DUE FROM BANKS AT END
OF PERIOD $ 23,847 $ 26,581
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
- - - - - - - ------------------------------------------------
Cash paid during the year for interest $ 5,386 $ 4,585
Cash paid during the year for income taxes 600 500
Real estate taken as settlement for loan
obligations
Real estate taken as settlement for loan
obligations - financed by bank $ 28 $ 0
</TABLE>
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The accompanying notes are an integral part of these financial statements.
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FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
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CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY (Note 4)
- - - - - - - --------------------------------------------------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
(In thousands, except for number of shares)
Net Unrealized
Common Stock Retained Gains (Losses)
Shares Amount Earnings On Securities Total
--------- ------- -------- -------------- -------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1992 1,144,898 $27,974 $ 5,283 $33,257
- - - - - - - -------------------------- ===============================================================
Net Income for 1993 7,746 7,746
Stock Options Exercised 10,377 138 138
Stock Dividend 114,557 6,540 (6,540)
Fractional Shares Purchased (Net) 441 26 26
Three-For-One Split 2,529,204
---------------------------------------------------------------
Balance, December 31, 1993 3,799,477 34,678 6,489 41,167
- - - - - - - -------------------------- ===============================================================
Adoption of SFAS No. 115 $1,143 1,143
Net Income for 1994 10,360 10,360
Stock Options Exercised 16,100 96 96
Stock Dividend 380,295 9,128 (9,128)
Fractional Shares Purchased 563 15 15
Valuation of Available For Sale
Securities (2,322) (2,322)
---------------------------------------------------------------
Balance, December 31, 1994 4,196,435 43,917 7,721 (1,179) 50,459
- - - - - - - -------------------------- ===============================================================
Net Income for the first
three months of 1995 3,084 3,084
Stock Options Exercised 4,866 45 45
Three-for-two Stock Split 2,100,650
Fractional Shares Purchased 35 8 8
Valuation of Available for Sale
Securities 479 479
---------------------------------------------------------------
Balance, March 31, 1995 6,301,986 $43,970 $10,805 ($700) $54,075
- - - - - - - ----------------------- ===============================================================
</TABLE>
- - - - - - - ----------------------------------------
The accompanying notes are an integral part of these financial statements.
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FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - - - - - - --------------------------------------------------------------------------------
NOTE 1. The accompanying unaudited consolidated financial statements
have been prepared in accordance with generally accepted
accounting principles for interim financial information, and
with instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting
principles for complete financial statements. All
adjustments made to the unaudited interim financial
statements were of a normal recurring nature. In the opinion
of management, all adjustments considered necessary for a
fair presentation have been included. Operating results for
the three months ended March 31, 1995 are not necessarily
indicative of the results that may be expected for year-end
December 31, 1995. For further information, refer to the
consolidated financial statements and footnotes thereto
included in the Corporation Annual Report on 10-K for the
year ended December 31, 1994.
NOTE 2. INVESTMENT SECURITIES
---------------------
On January 1, 1994, the Corporation adopted Statement of
Financial Accounting Standard No. 115 (FAS 115), "Accounting
for Certain Investments in Debt and Equity Securities". This
statement establishes standards of financial accounting and
reporting for investments in debt and equity securities that
have a readily determinable fair value. This statement
requires all securities within the Corporation's portfolio to
be classified in one of three groups: 1) Trading securities;
2) securities Held-To-Maturity (HTM), and 3) securities
Available-For-Sale (AFS).
At March 31, 1995, the Corporation had no securities
classified as "Trading", all other securities in the
portfolio were classified as HTM or AFS.
Securities that are classified as HTM, are carried at cost,
adjusted for amortizaton of premiums and accretion of
discounts which are recognized as adjustments to income.
With some exceptions, securities classified as HTM may only
be sold within three months of maturity.
Securities that are classified as AFS, are carried at fair
value, adjusted for amortization of premiums and accretion of
discounts which are recognized as adjustments to income.
Unrealized gains and losses are excluded from earnings
and reported as a separate component of equity capital. AFS
securities may be sold any time.
Gains and losses on both HTM and AFS securities that are
disposed of prior to maturity, are based on the net proceeds
and the adjusted carrying amount of the specific security sold
as an adjustment to income.
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FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 2 - (Continued)
- - - - - - - --------------------------------------------------------------------------------
The tables below display the characteristics of the AFS and HTM portfolios as
of March 31, 1995:
AGGREGATE FAIR VALUE AND AMORTIZED COST OF INVESTMENTS
------------------------------------------------------
<TABLE>
<CAPTION>
(In thousands) Amortized Gross Unreal- Gross Unreal- Aggregate
Cost ized Gains ized Losses Fair Value
--------------------------------------------------------
<S> <C> <C> <C> <C>
AFS SECURITIES:
- - - - - - - --------------
Equities $ 7,194 $ 7,194
U.S. Treasuries 2,506 $ 41 2,547
U.S. Agencies 19,699 127 $ (849) 18,977
Corporate securities 14,171 87 (468) 13,790
--------------------------------------------------------
43,570 255 (1,317) 42,508
HTM SECURITIES:
- - - - - - - --------------
U.S. Treasuries 252 (9) 243
U.S. Agencies 18,608 34 (823) 17,819
Municipal securities 32,320 787 (495) 32,612
Corporate securities 41,175 149 (1,574) 39,750
Mortgage Backed Securities 640 16 (15) 641
--------------------------------------------------------
Totals $ 92,995 $ 986 ($2,916) $ 91,065
--------------------------------------------------------
Totals $136,565 $1,241 ($4,233) $133,573
========================================================
</TABLE>
<TABLE>
<CAPTION>
MATURITY SCHEDULE OF SECURITIES
-------------------------------
Available For Sale Held To Maturity
------------------ ----------------
Amortized Fair Amortized Fair
MATURITY* Cost Value Cost Value
-------- ---- ----- ---- -----
<S> <C> <C> <C> <C>
0-1 Yr $ 8,401 $ 8,416 $15,697 $15,384
1-5 Yrs 29,469 28,643 22,816 22,558
5-10 Yrs 5,700 5,449 35,953 34,887
Over 10 Yrs 18,529 18,236
-----------------------------------------------------------
$43,570 $42,508 $92,995 $91,065
===========================================================
</TABLE>
* Contractual maturity or call date.
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FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 2 - (Continued)
- - - - - - - --------------------------------------------------------------------------------
CHANGES IN AFS AND HTM SECURITIES
---------------------------------
<TABLE>
<S> <C>
For the Quarter Ended March 31, 1995:
------------------------------------
AFS SECURITIES
--------------
Proceeds From Sales $0
Gross Realized Gains
Gross Realized Losses
Gross Gains & Losses Included In Earnings From
Transfers To The Trading Category
Net Change In Unrealized Holding Gains Or
Losses Included In The Separate
Component of Equity Capital $479
HTM SECURITIES
--------------
Sales Or Transfers From this Category $0
</TABLE>
NOTE 3. LOANS
-----
The following is an analysis of the loan portfolio by major type of
loans:
<TABLE>
<CAPTION>
March 31, 1995 Dec 31, 1994*
-------------- ------------
<S> <C> <C>
Commercial $122,468 $121,623
Real Estate:
Commercial 166,490 152,439
Construction 92,614 101,473
Residential 79,995 79,614
Instalment 19,196 18,935
-------- --------
480,763 474,084
Unearned Fee Income (3,537) (3,572)
-------- --------
Total Loans $477,226 $470,512
======== ========
</TABLE>
NOTE 4. The Board of Directors declared 10% stock dividend and a three-for-two
stock split which were paid March 21, 1994 and March 20, 1995
respectively.
* Prior period amounts restated to conform to current presentation.
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FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- - - - - - - --------------------------------------------------------------------------------
AND RESULTS OF OPERATIONS.
- - - - - - - --------------------------------------------------------------------------------
HIGHLIGHTS
Consolidated net income of the Corporation reached a new high at the end of the
first quarter of 1995. Net income was $3.1 million versus $2.3 million for the
first quarter of 1994, or up 32.5%. The main reason for the results was an
increase in net interest income of $1.2 million for the quarter, up 16.6% over
the first quarter of 1994. This marks the forty-fifth consecutive quarter in
which Frontier's earnings exceeded the prior years' comparable quarter.
Annualized return on average assets (ROA) was 1.89% for the first quarter of
1995, and 1.62% for the same period in 1994. Annualized return on average
stockholder's equity (ROE) for the first quarter of 1995 was 23.4%, as compared
to 21.8% for the first quarter of 1994. Earnings per share for the period was
$.49 for 1995, and $.37 for 1994. Earnings per share have been adjusted for
the three-for-two stock split paid on March 20, 1995.
FINANCIAL REVIEW - ECONOMIC ENVIRONMENT
The lending and other activities of Frontier are located in Snohomish County,
Washington, but also include the northern part of King County, Washington, by
having two offices located in Bothell and Woodinville. The major city in
Snohomish County is Everett, and the major city in King County is Seattle, the
largest city in the state. An important segment of the Snohomish County economy
is the Boeing Company, which has its 747 and 777 assembly plant in Everett.
Boeing also has other assembly plants and facilities in the Puget Sound area.
In 1994, Boeing completed a workforce reduction of 19% which began in 1993.
Since that time, there has been an announcement that Boeing will continue its
workforce reductions, which may effect 6,500 personnel. No specifics have been
released regarding which assembly plants will be affected, or to what degree.
However, on the positive side, Boeing is close to certifying the new 777 and
in the spring of 1994, the Everett naval station began operations. An aircraft
carrier group has been assigned to the base, and is scheduled arrival in 1996.
The effect on the local economy of continued workforce reductions is not
predictable, however, the Corporation has done well in the past, and management
remains cautiously optimistic regarding the future.
BALANCE SHEET
Below are abbreviated balance sheets at the end of the respective quarters
which indicate the changes that have occurred in the major portfolios of the
Corporation over the past year:
<TABLE>
<CAPTION>
Period ended March 31, 1995 1994 $ Change % Change
- - - - - - - ---------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Loans $477,226 $394,808 $ 82,418 20.9%
Investments* 136,565 151,157 (14,592) -9.7%
Federal Funds Sold 27,625 1,000 26,625 NM
Total Assets $674,608 $585,582 $ 89,026 15.2%
</TABLE>
* Shown at amortized cost.
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FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
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Management's Discussion and Analysis of Financial Condition and Results of
- - - - - - - --------------------------------------------------------------------------------
Operations - Balance Sheet - (Continued)
- - - - - - - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period ended March 31, 1995 1994 $ Change % Change
- - - - - - - ---------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Noninterest bearing deposits $ 70,375 $ 73,930 ($3,555) -4.8%
Interest bearing deposits 505,330 447,507 57,823 12.9%
---------------------------------------------
Total deposits 575,705 521,437 54,268 10.4%
Federal Funds purchased 635 (635) NM
Long-term debt 37,879 15,721 22,158 140.9%
Capital $54,075 $43,505 $10,570 24.3%
</TABLE>
At the end of the first quarter of 1995, a trend continued which began in the
second quarter of 1994. The financing of asset growth relies on time
certificates of deposit (CD's), rather than core deposits (NOW, Money Market
and Savings) and borrowed funds. Over the last year, all deposit account
totals decreased except for CD's. NOW and Money Market accounts decreased
$9.2 million, or 11.3% and Savings accounts (previously the main funding
source) decreased $80.1 million, or 33.4%. On the other hand, CD's increased
$147.0 million, or 115.8%. This change in deposit acquisition mix was planned
by management. Over the past year, loans have grown 20.9% while deposits grew
only 10.4%. The difference was made up by other borrowings which have grown
140.9% over the same period. However, federal funds sold, also increased $27
million during the same period which has allowed for the elimination of federal
funds purchased and provides increased liquidity to retire other borrowings
when practical.
In 1994, as general interest rates substantially increased, the rates on CD's
were increased to a level which was more attractive than the rates paid on
savings accounts. As a result, depositors began shifting out of savings into
CD's. This increased the cost of funds to the Corporation, but also extended
the duration of the deposit life to better match the assets. At the same time,
the rise in interest rates have also prompted increases on the asset side of the
balance sheet and, as a result, the net interest margin (please see below) of
the Corporation initially increased. However, in the first quarter of 1995
interest rates leveled off, and management estimates that the net interest
margin may decrease as the lag effect of repricing liabilities catches up with
assets which repriced more rapidly. To demonstrate this, the yield on earning
assets at the end of the first quarter of 1995 increased .70%, increasing from
9.29% at quarter end 1994 to 9.99% at quarter end 1995. The cost of interest
bearing liabilities increased .87%, going from a 4.05% to a 4.92% in 1995.
Management will place increased emphasis on further reducing overhead costs
and increasing other non-interest income to soften possible adverse effects of
this compaction of the net interest margin. Please see "Liquidity" for a
further discussion.
At the end of the first quarter 1995, average earning assets as a percent of
total average assets were 95.3%, and 93.3% at the end of the first quarter of
1994. Average loans were 73.1% and 66.8% respectively. While loan growth has
been strong over the past year, management has recognized a slowing of demand
in the first quarter of 1995. Investments as a percent of average assets for
the same periods were 21.1% as compared to 26.3%. This decline in the
investment portfolio over the last year was planned by management as funds
from all maturities and calls were designated for the loan portfolio growth.
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FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
- - - - - - - --------------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition and Results of
- - - - - - - --------------------------------------------------------------------------------
Operations
- - - - - - - --------------------------------------------------------------------------------
Net Interest Income
- - - - - - - --------------------------------------------------------------------------------
NET INTEREST INCOME
Net interest income is the difference between total interest income and total
interest expense. Several factors contribute to changes in net interest
income. These include the effects of changes in average balances, changes in
rates on earning assets and rates paid for interest bearing liabilities, the
level of noninterest bearing deposits, stockholder's equity, and the level of
nonaccrual loans.
The earnings from certain assets are exempt from federal income tax, and it is
customary in the financial services industry to analyze changes in net interest
income on a "tax equivalent" or fully taxable basis. Under this method,
nontaxable income from loans and investments is adjusted to an amount which
would have been earned if such income were subject to federal income tax. The
discussion below presents an analysis based on "taxable equivalent" amounts at
a 34% tax rate. (However, there are no tax equivalent additions to
noninterest income and expense amounts discussed below.) Abbreviated quarterly
average balance sheets for the periods are shown below:
<TABLE>
<CAPTION>
(In thousands)
Quarter ended March 31, 1995 1994 $ Change % Change
- - - - - - - ----------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Loans $476,258 $383,911 $ 92,347 24.1%
Investments* 137,247 151,442 (14,195) -9.4%
Federal Funds Sold 8,960 1,436 7,524 524.0%
Total Earning Assets 620,889 536,789 84,100 15.7%
----------------------------------------------
Total Assets 651,355 575,062 76,293 13.3%
Noninterest bearing deposits 67,938 69,358 (1,420) -2.0%
Interest bearing deposits 482,964 438,817 44,147 10.1%
----------------------------------------------
Total deposits 550,902 508,175 42,727 8.4%
Fed Funds purchased 3,764 6,965 (3,201) -46.0%
Long-term Debt 38,352 12,391 25,961 209.5%
Capital $ 52,822 $ 42,786 $ 10,036 23.5%
</TABLE>
* Shown at amortized cost.
Net interest income was $8.9 million for the first quarter of 1995, versus $7.7
million for the first quarter of 1994. The net interest margin (NIM), which
is net interest income as an annualized percent of total average quarterly
assets, for the first quarter of 1995 was 5.50%, and 5.37% for the first
quarter of 1994.
The increase of $1.2 million in net interest income in the first quarter of
1995, as compared to 1994 was due to an increase in interest income of $3.0
million, and an increase in the cost of deposits of $1.8 million.
The increase in the average balance of earning assets increased interest income
by $2.2 million, and an increase in interest rates increased interest income
by $.8 million, for a net increase of $3.0 million.
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FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
- - - - - - - --------------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition and Results of
- - - - - - - --------------------------------------------------------------------------------
Operations - Net Interest Income - (Continued)
- - - - - - - --------------------------------------------------------------------------------
The increase in the average balance of interest bearing liabilities increased
interest expense by $1.2 million, and an increase in interest rates increased
interest expense by $.6 million, for a net increase of $1.8 million.
NONINTEREST INCOME AND EXPENSE
Noninterest income continues to decline since the rapid increase in interest
rates in 1994. The increase in service charges for the first quarter of 1995
as compared to the same period in 1994, is reflective of the growth of the
Corporation over the period. The decline of $105 thousand in "other"
noninterest income reflects the continued perception by potential clients that
long-term mortgage interest rates are high. In the first quarter of 1994,
secondary market loan fees totaled $112 thousand (down at that time $105
thousand or 48% from the 1993 period), while the total for the first quarter
of 1995 was $35 thousand. Contributing to the decline is a decrease in
insurance and investment department fee income of $37 thousand for the same
period. This decline is attributable to less interest on the part of
investors in mutual funds after the poor performance of the funds in 1994, and
a reduction of staff in the department. Management currently has a plan in
effect which is estimated to increase net profits at a lower level of gross
revenues.
Trust department fees increased from $105 thousand to $116 thousand, or 10.5%,
and the market value of trust assets managed at quarter end 1995 was $77.3
million, as compared to $68.4 million the prior year, or an increase of 13.0%.
Total noninterest expense increased $215 thousand, or 5.5% in the first quarter
of 1995, when compared to 1994. Salaries and Employee Benefits increased to
$2.5 million, or 12.2%, from $2.3 million in 1994. Salaries increased $157
thousand to $2.0 million, or 8.7% from $1.8 million a year ago. Employee
benefits increased $119 thousand to $.6 million, or 25.1% from $.5 million a
year ago. The increase in salaries was due to a 1% increase in staff, and an
increase in bonus pay and merit raises. The employee benefits increase of
$119 thousand was attributable to an increase in the profit sharing reserve of
$194 thousand, with decreases in various other benefit areas. Occupancy
expense increased $94 thousand, or 19.3% during the period. Approximately 38%
of occupancy expense is depreciation which decreased from $222 thousand in
1994 to $219 thousand in 1995, or 1.6%. The other increase in occupancy
expense was attributable to increased office rental costs. Other expenses
decreased 13.4%, or $155 thousand in the first quarter of 1995 when compared
to the first quarter of 1994. This is the result of managements' plan to
reduce overhead costs as a means of offsetting the decrease in other fee
income discussed above.
-12-
<PAGE> 15
- - - - - - - --------------------------------------------------------------------------------
FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
- - - - - - - --------------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition and Results of
- - - - - - - --------------------------------------------------------------------------------
Operations - Loans
- - - - - - - --------------------------------------------------------------------------------
LOANS
NON-PERFORMING ASSETS
Non-performing assets are summarized as follows:
<TABLE>
<CAPTION>
(In thousands)
Period Ended March 31, 1995 1994
- - - - - - - --------------------- --------- ---------
<S> <C> <C>
Non-accruing loans $ 1,630 $ 1,787
Loans past due 90 days or more and
still accruing 15
Restructured loans
Other real estate owned 394 462
----------------------
Total non-performing loans $ 2,024 $ 2,264
======================
Total loans at end of period $477,226 $394,808
----------------------
As a percent of total loans outstanding 0.42% 0.57%
======================
</TABLE>
It is the banks practice to discontinue accruing interest on loans that are
delinquent in excess of 90 days. Some problem loans which are less than 90 days
delinquent are also placed into non-accrual status if the success of collecting
full principal and interest is in doubt.
Restructured loans are those loans that had problems in the past, and that have
been restructured in such a way that some forgiveness of debt or other terms has
occurred.
Management works diligently on the collection or liquidation of non-performing
assets. The overall level of non-performing assets to total loans is felt to be
modest. Other real estate owned declined $68 thousand or 14.7% when comparing
first quarter 1995 with first quarter 1994. This was accomplished by write-
downs in book value of over $130 thousand. The dollar amount of other real
estate owned at first quarter end 1995 represents three separate land parcels,
of a commercial nature. As of March 31, 1995, all in-substance foreclosures
are included in other real estate owned, and the carrying values of all
parcels are below their market value.
CREDIT CONCENTRATIONS
There is some concentration of credit in the real estate construction and land
development industry. These loans totaled $84.6 million at March 31, 1995, or
17.7% of total loans, and $76.8 million at March 31, 1994, or 19.5% of total
loans. Many years ago, management established a real estate loan committee
which meets quarterly to review the economic conditions and building industry
trends. As a result, there have been very limited losses on these types of
loans. Also, some slowdown in construction lending has been noted in the last
two quarters, reflecting higher interest rates and a slight cooling of the
local economy.
At March 31, 1995 and 1994, the Corporation had an immaterial amount of foreign
loans and no loans related to highly leveraged transactions.
-13-
<PAGE> 16
- - - - - - - --------------------------------------------------------------------------------
FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
- - - - - - - --------------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition and Results of
- - - - - - - --------------------------------------------------------------------------------
Operations
- - - - - - - --------------------------------------------------------------------------------
Allowance for Possible Loan Losses
- - - - - - - --------------------------------------------------------------------------------
ALLOWANCE FOR POSSIBLE LOAN LOSSES
For the quarter ended March 31, 1995, the allowance for possible loan losses
increased to $12.5 million, or 2.61% of total loans, from $8.5 million, or
2.14% of total loans at March 31, 1994. Management closely monitors the
adequacy of the loan loss reserve, and an analysis is performed regularly.
In determining the adequacy of the allowance, management considers numerous
factors, including the continuing level of non-performing loans, credit
concentrations, and economic conditions. Real estate values continue to be
stable and show modest rates of appreciation, but a worsening of the economy
in Frontier's market area could negatively affect loan performance and
underlying collateral values. The current level of reserves is deemed to be
adequate for the present conditions and provides for some unforeseen
contingencies as well.
LIQUIDITY AND INTEREST RATE SENSITIVITY
LIQUIDITY
The primary function of asset/liability management is to ensure adequate
liquidity and maintain an appropriate balance between interest sensitive earning
assets and liabilities. Liquidity management involves the ability to meet
the cash flow requirements of customers who may be either depositors wanting
to withdraw funds, or depositors who have credit needs.
The statement of cash flows on page 3 and 4 of this report provides information
on the sources and uses of cash for the respective year-to-date periods ending
March 31, 1995, and March 31, 1994. This discussion addresses those periods of
time.
Net cash provided by operating activities for 1995 totaled $5.0 million as
compared to $3.5 million in 1994. The largest component providing net cash was
income of $3.1 million for 1995 and $2.3 million for 1994.
Real estate secondary market loans originated for sale in 1995 were down $1.4
million from the same period in 1994, or 28.8%. This follows a trend which
developed in 1993 caused by higher long-term interest rates.
Net cash of $24.9 million in 1994 was used for investment activities in the
loan portfolio. What cash flows came from maturing investments was reinvested
at the same volume. In 1995, the loan portfolio required only $5.0 million in
funding due to demand, and the excess from deposit acquisition went into federal
funds sold for liquidity purposes.
In 1994, all the financing of investment and loan activities came from the
acquisition of core deposits and advances from the FHLB. However, the mix of the
funding has changed substantially in 1995. Noninterest bearing and interest
bearing demand deposits and savings accounts (core deposits)
-14-
<PAGE> 17
- - - - - - - --------------------------------------------------------------------------------
FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
- - - - - - - --------------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition and Results of
- - - - - - - --------------------------------------------------------------------------------
Operations.
- - - - - - - --------------------------------------------------------------------------------
Liquidity - (Continued)
- - - - - - - --------------------------------------------------------------------------------
provided $16.8 million in 1994, and time CD's continued to run off by $1.8
million. In 1995, a reversal of the trend shows time CD's are doing all of the
funding, and core deposits are running off. During this period, the Corporation
rolled over borrowings at the FHLB to preserve liquidity. The Corporation has
borrowed a total of $45.0 million from the FHLB, and repaid $7.5 million.
Management has many sources of liquidity, such as, the sale of student loans
and SBA loans, the sale of AFS securities, additional borrowings from the FHLB,
participation in the Treasury department's short-term note program, borrowings
from the Federal Reserve Bank, or additional borrowings at correspondent banks.
Additionally, the entire HTM securities portfolio is subject to sale under
repurchase agreements. The Corporation has a policy that liquidity of 12.5% of
total assets be maintained as a minimum and has done so.
INTEREST RATE SENSITIVITY
Interest rate sensitivity is closely related to liquidity because each is
directly affected by maturity, or repricing, of assets and liabilities.
Management considers any asset or liability which matures, or is subject to
repricing, within one year to be interest sensitive, although continual
monitoring is also performed for other time intervals. The difference between
interest sensitive assets and liabilities defined period of time is known as
the interest sensitive "gap", and may be either positive or negative. If
positive, more assets reprice before liabilities. If negative, the reverse is
true. In theory, if the gap is positive, a decrease in general interest rates
might have an adverse impact on earnings as interest income decreases faster
than interest expense. Conversely, an increase in interest rates would
increase net interest income as interest income increases faster than interest
expense. However, the exact impact of the gap on future income is uncertain
both in timing and amount because interest rates for the Corporation's assets
and liabilities do not necessarily change at the same time, or by the same
amount. Also, the sensitivity of the assets and liabilities can change rapidly
as the result of market conditions and customer patterns.
At the end of the first quarter of 1994, the gap of the Corporation was a
negative 29.4% of earning assets, with rate sensitive liabilities exceeding
rate sensitive assets. This would suggest that increasing general interest
rates would decrease the net interest margin. Interest rates did increase over
the past year, and the net interest margin increased from 5.37% to 5.50% at
the end of March 1995. At the end of March 1995, the gap was a negative 24.0%
of earning assets.
The gap cannot anticipate management actions with regard to when rates are
actually increased or decreased, and to what degree, but the gap does indicate
the ability management may have to change rates.
The Corporation does not use interest rate risk management products such as
interest rate swaps or hedges, or other derivative securities.
-15-
<PAGE> 18
- - - - - - - --------------------------------------------------------------------------------
FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
- - - - - - - --------------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition and Results of
- - - - - - - --------------------------------------------------------------------------------
Operations.
- - - - - - - --------------------------------------------------------------------------------
Capital
- - - - - - - --------------------------------------------------------------------------------
CAPITAL
During 1994, the Federal Reserve and other regulatory agencies issued final
amendments to its risk-based capital rules. Under these rules, institutions
are directed not to include in Tier I capital the net unrealized holding gains
(losses) on available-for-sale securities. In addition, net unrealized losses
on marketable equity securities should continue to be deducted when computing
Tier I capital This rule has the effect of valuing available-for-sale debt
securities at amortized cost, rather than fair value, for purposes of
calculating the risk-based and leverage capital ratios. Therefore, the
Corporation will now report capital for both financial statement purposes and
regulatory purposes.
Consolidated capital of the Corporation for financial statement purposes at
first quarter end 1995 was $54.1 million. This amount compares to $43.5
million at March 31, 1994, an increase of $10.6 million, or 24.3%. Almost
all of the increase was attributable to retained earnings. The market value
of AFS securities at quarter end 1994 was a negative $37 thousand, and a
negative $700 thousand at quarter end 1995.
Under the rules referred to above, banks and holding companies are required to
maintain a minimum "leverage" ratio (primary capital ratio) of core capital
(which excludes the allowance for loan losses) to total average assets for the
current quarter. For the most highly rated holding companies, this ratio must
be at least 3 percent, and for others, it must be 4 or 5 percent. At March 31,
1995, the Corporation's leverage ratio was 8.35%, compared to 7.48% at quarter
end 1994. In addition, holding companies are required to meet minimum
risk-based capital guidelines, under which risk percentages are assigned to
various categories of assets and off-balance-sheet items to calculate a
risk-adjusted capital ratio. Tier I capital generally consists of common
stockholder's equity, less goodwill and some intangibles, while Tier II capital
includes the allowance for possible loan losses, subject to 1.25% limitation of
risk-adjusted assets. Regulatory capital requires Tier I capital of 4% of
risk-adjusted assets and total capital (combined Tier I and Tier II) of 8%.
Based on these requirements, the Corporation's Tier I and combined Tier II
capital ratios were 10.08% and 11.35% at March 31, 1995, and 9.15% and 10.41%
at March 31, 1994.
Management constantly monitors the level of capital of the Corporation, and
believes that capital is adequate to meet present needs. As an ongoing process,
management considers, among other things, the present and anticipated needs of
the Corporation, current market conditions, and other relevant factors,
including regulatory requirements which may necessitate changes in the level of
capital.
-16-
<PAGE> 19
- - - - - - - --------------------------------------------------------------------------------
FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
- - - - - - - --------------------------------------------------------------------------------
PART II - OTHER INFORMATION
- - - - - - - --------------------------------------------------------------------------------
Item 1. Legal Proceedings
No material legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders in the
first quarter 1995.
Item 5. Other Information
On July 2, 1993, the merger between Frontier Financial Corporation and
Frontier Bank was consummated, with The Bank of Northshore, Bothell
and Woodinville, Washington, wherein the two branches of The Bank of
Northshore were merged into Frontier Bank. At the time of the merger,
The Bank of Northshore had $19.8 million in total assets, $14.4
million in loans, $18.2 million in total deposits, and $1.2 million in
capital. These two branches are called the Bothell and Woodinville
Offices of Frontier Bank. The merger was accounted for as a
pooling-of-interest. 41,192 shares of common stock were issued
pursuant to this transaction.
At the January 18, 1995 meeting of the Board of Directors of the
Corporation, a three-for-two stock split was declared payable March
20, 1995 to shareholders of record January 18, 1995. At the same
meeting, the Board approved a resolution to submit a proposal to the
shareholders to amend the Articles of Incorporation to increase the
authorized shares of common stock from 10,000,000 shares, no par
value, to 20,000,000, no par value. At the April 19, 1995 annual
meeting of shareholders, better than a two-thirds majority of
shareholders approved the proposal.
Item 6. Exhibits and Reports on Form 8-K
(a) (11) Computation of earnings per share is attached as Exhibit 11
(b) No amendments to filed documents or reports on Form 8-K
have been filed in the quarter ended March 31, 1995.
-17-
<PAGE> 20
- - - - - - - --------------------------------------------------------------------------------
FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
- - - - - - - --------------------------------------------------------------------------------
SIGNATURE
- - - - - - - --------------------------------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FRONTIER FINANCIAL CORPORATION
Date: May 8, 1995 /s/ James F. Felicetty
------------------------------------
James F. Felicetty
Secretary/Treasurer
-18-
<PAGE> 1
- - - - - - - --------------------------------------------------------------------------------
FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
- - - - - - - --------------------------------------------------------------------------------
COMPUTATION OF EARNINGS PER SHARE
- - - - - - - --------------------------------------------------------------------------------
EXHIBIT 11
- - - - - - - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For Three Months Ended March 31,
--------------------------------
1995 1994
---------- ----------
<S> <C> <C>
Net Income $3,084,229 $2,327,904
========== ==========
Computation of average
shares outstanding
Shares outstanding at
beginning of year 4,196,435 3,799,477
Additional shares deemed
outstanding because of
stock dividends 380,858
Additional shares deemed
outstanding because of
stock split 2,100,650 2,091,396
Shares issued during the
year times average time
outstanding during the year 3,239 2,456
---------- ----------
Average shares outstanding 6,300,324 6,274,187
========== ==========
Primary earnings per share $0.49 $0.37
========== ==========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q OF
FRONTIER FINANCIAL CORPORATION.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1995
<PERIOD-END> MAR-31-1995
<EXCHANGE-RATE> 1,000
<CASH> 23,847
<INT-BEARING-DEPOSITS> 505,330
<FED-FUNDS-SOLD> 27,625
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 42,508
<INVESTMENTS-CARRYING> 92,995
<INVESTMENTS-MARKET> 91,065
<LOANS> 476,883
<ALLOWANCE> 12,452
<TOTAL-ASSETS> 674,608
<DEPOSITS> 575,705
<SHORT-TERM> 22,500
<LIABILITIES-OTHER> 6,782
<LONG-TERM> 15,546
<COMMON> 43,970
0
0
<OTHER-SE> 10,105
<TOTAL-LIABILITIES-AND-EQUITY> 674,608
<INTEREST-LOAN> 12,765
<INTEREST-INVEST> 2,299
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 15,064
<INTEREST-DEPOSIT> 6,365
<INTEREST-EXPENSE> 6,365
<INTEREST-INCOME-NET> 8,699
<LOAN-LOSSES> 700
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 4,128
<INCOME-PRETAX> 4,702
<INCOME-PRE-EXTRAORDINARY> 4,702
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,084
<EPS-PRIMARY> 0.49
<EPS-DILUTED> 0
<YIELD-ACTUAL> 9.99
<LOANS-NON> 1,630
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 10,410
<CHARGE-OFFS> 98
<RECOVERIES> 1,440
<ALLOWANCE-CLOSE> 12,452
<ALLOWANCE-DOMESTIC> 700
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
