<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 September 30, 1995
Commission File Number 0-15540
FRONTIER FINANCIAL CORPORATION
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C>
Washington 91-1223535
(State or Other Jurisdiction of (IRS Employer Identification
Incorporation or Organization) Number)
</TABLE>
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 6,309,833 shares
outstanding as of September 30, 1995.
<PAGE> 2
FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
INDEX TO QUARTERLY REPORT ON FORM 10-Q
September 30, 1995
<TABLE>
<CAPTION>
PART I - Financial Information Page
<S> <C>
Item 1. Financial Statements.
Consolidated Balance Sheet - September 30, 1995
and Year End 1994. 1
Consolidated Statement of Income - Three and Nine Months
Ended September 30, 1995 and 1994. 2
Consolidated Statement of Cash Flows - Nine Months
Ended September 30, 1995 and 1994. 3-4
Statement of Changes in Stockholder's Equity -
September 30, 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>
-i-
<PAGE> 3
FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (Note 1)
(Unaudited)
<TABLE>
<CAPTION>
(In thousands)
September 3 December 31,
ASSETS 1995 1994
----------- ------------
<S> <C> <C>
Cash & Balances Due from Depositary Institutions $ 25,328 $ 22,081
Securities: (Note 2)
Available for Sale-Market Value 52,891 42,278
Held to Maturity-Amortized Cost (Market Value 12-31-94, $89,200) 87,681 94,048
-------- --------
Total Securities 140,572 136,326
Federal Funds Sold 63,320 1,120
Loans: (Note 3)
Loans, Net of Unearned Income 494,063 470,512
Less: Allowance for Loan Losses (13,155) (10,410)
-------- --------
Net Loans 480,908 460,102
Mortgage Loans Held for Sale 685
Premises & Equipment, Net 11,903 11,845
Other Real Estate Owned 687 1,118
Intangible assets 493 550
Other Assets 9,151 9,426
-------- --------
TOTAL ASSETS $733,047 $642,568
======== ========
LIABILITIES
Deposits:
Non-Interest Bearing $80,228 $71,754
Interest Bearing 563,923 467,849
-------- --------
Total Deposits 644,151 539,603
Federal Funds Purchased 1,300 9,615
Securities sold under repurchase agreements 4,205 0
Federal Home Loan Bank advances 15,000 37,500
Long-term debt 173 565
Other Liabilities 7,115 4,826
-------- --------
TOTAL LIABILITIES 671,944 592,109
-------- --------
EQUITY CAPITAL (Note 4)
Common Stock 44,008 43,917
Unrealized Gains/(Losses) on AFS Securities
Net of Tax effect(Note 2) (111) (1,179)
Retained Earnings 17,206 7,721
-------- --------
TOTAL CAPITAL 61,103 50,459
-------- --------
TOTAL LIABILITIES & CAPITAL $733,047 $642,568
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-1-
<PAGE> 4
FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME (Note 1)
(Unaudited)
(In thousands, Except for Per Share Amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------- ------------------
Sept 30, Sept 30, Sept 30, Sept 30,
1995 1994 1995 1994
------- ------- ------- --------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest & Fees on Loans $13,217 $11,339 $38,787 $31,331
Interest on Investments 3,043 2,314 7,844 7,129
------- ------- ------- -------
Total Interest Income 16,260 13,653 46,631 38,460
------- ------- ------- -------
INTEREST EXPENSE
Interest on Deposits 7,667 4,742 20,200 13,662
Interest on Borrowed Funds 228 585 1,195 1,180
------- ------ ------- -------
Total Interest Expense 7,895 5,327 21,395 14,842
------- ------ ------- -------
Net Interest Income 8,365 8,326 25,236 23,618
------- ------ ------- --------
PROVISION FOR LOAN LOSSES (325) (950) (1,175) (2,650)
NONINTEREST INCOME
Securities Gains/(Losses) 0 (191) (4) (193)
Service Charges on Deposit Accounts 382 406 1,192 1,164
Other Noninterest Income 509 315 1,373 1,344
------- ------ ------- --------
Total Noninterest Income 891 530 2,561 2,315
NONINTEREST EXPENSE
Salaries & Employee Benefits 2,406 2,347 7,367 6,858
Occupancy Expense 566 455 1,694 1,637
Other Noninterest Expense 777 995 3,563 3,650
------- ------- ------- -------
Total Noninterest Expense 3,749 3,797 12,624 12,145
INCOME BEFORE INCOME TAX 5,182 4,109 13,998 11,138
------- ------- ------- -------
APPLICABLE INCOME TAX (1,748) (1,308) (4,513) (3,554)
NET INCOME $3,434 $2,801 $9,485 $7,584
======= ======= ======= =======
Average Number of Shares Outstanding
for the Period 6,304,498 6,279,240 6,304,498 6,279,240
PER SHARE COMMON STOCK $0.54 $0.45 $1.50 $1.21
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
-2-
<PAGE> 5
FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
(In thousands)
NINE MONTHS ENDED
-----------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES September 30, 1995 September 30, 1994
------------------ ------------------
<S> <C> <C>
Net Income $ 9,485 $ 7,584
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization 710 831
Provision for loan losses 1,175 2,650
Provision for losses on ORE 5
Increase in income taxes payable (119) (364)
Deferred taxes (100)
Decrease in interest receivable (692) (551)
Increase(Decrease) in interest payable 1,583 480
Loss on sale of HTM securities (4) (193)
Loans originated for sale (13,198) (13,310)
Proceeds from sale of loans 12,513 14,256
Other operating activities 1,472 98
--------- --------
Net cash provided by operating activities 12,925 11,386
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Net cash flows from Fed Funds Sold (62,200) 0
Proceeds from sales of HTM securities 88 6,821
Proceeds from maturities of investments 10,763 8,724
Purchase of AFS securities (12,365) (7,935)
Purchase of HTM securities (713) 0
Net cash flows from loan activities (23,359) (82,205)
Purchases of premises and equipment (368) (479)
Proceeds from the sale of other real estate 1,325 532
Cash invested in other real estate (101) 0
Other investing activities (83)
-------- --------
Net cash used by investing activities (86,930) (74,625)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in demand deposit accounts (40,870) (14,277)
Net change in certificates of deposit 145,418 40,104
Proceeds from issuance of stock 91 89
Principal payments on long term debt (779) (242)
Advances from FHLB 0 30,000
Repayment of FHLB advances (22,500) 0
Net change in Federal Funds purchased (4,110) 5,990
Other financing activities 2 0
-------- --------
Net cash provided by financing activities 77,252 61,664
-------- --------
</TABLE>
(Continued on next page) -3-
<PAGE> 6
FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN CASH FLOWS-(Continued)
(Unaudited)
<TABLE>
<CAPTION>
(In thousands)
NINE MONTHS ENDED
-----------------------------------------
September 30, 1995 September 30, 1994
------------------ ------------------
<S> <C> <C>
INCREASE IN CASH AND DUE FROM BANKS $3,247 ($1,575)
CASH & DUE FROM BANKS AT BEGINNING
OF YEAR 22,081 23,440
------- -------
CASH AND DUE FROM BANKS AT END
OF PERIOD $25,328 $21,865
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest $19,784 $14,316
Cash paid during the year for income taxes 4,630 3,880
Real estate taken as settlement for loan
obligations 883 187
Real estate taken as settlement for loan
obligations - financed by bank $90 $0
</TABLE>
The accompanying notes are an integral part of these financial statements.
-4-
<PAGE> 7
FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY (Note 4)
(Unaudited)
<TABLE>
<CAPTION>
(In thousands, except for number of shares)
Common Stock Net Unrealized
------------------------ 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
nine months of 1995 9,485 9,485
Stock Options Exercised 12,399 83 83
Three-for-two Stock Split 2,100,650
Fractional Shares Purchased 349 8 8
Valuation of Available for Sale
Securities 1,068 1,068
--------- ------- ------- ------ -------
Balance, September 30, 1995 6,309,833 $44,008 $17,206 ($111) $61,103
========= ======= ======= ====== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
-5-
<PAGE> 8
FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
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 nine months ended September 30, 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 Form 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 September 30, 1995, the Corporation had no securities
classified as "Trading", and all other securities in the portfolio
were classified as HTM or AFS.
Securities that are classified as HTM, are carried at cost,
adjusted for amortization 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 at 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.
-6-
<PAGE> 9
FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - (Continued)
The tables below display the characteristics of the AFS and HTM portfolios as
of September 30, 1995:
AGGREGATE FAIR VALUE AND AMORTIZED COST OF INVESTMENTS
<TABLE>
<CAPTION>
(In thousands) Amortized Gross Unreal- Gross Unrea- Aggregate
Cost ized Gains ized Losses Fair Value
--------- ------------- ------------ ----------
<S> <C> <C> <C> <C>
AFS SECURITIES:
Equities $ 7,412 $ 7,412
U.S. Treasuries 2,507 61 2,568
U.S. Agencies 27,115 219 (364) 26,970
Corporate securities 16,027 142 (228) 15,941
-------- ------ ------- --------
53,061 422 (592) 52,891
HTM SECURITIES:
U.S. Treasuries 252 12 264
U.S. Agencies 16,965 64 (211) 16,818
Municipal securities 31,967 1,129 (114) 32,982
Corporate securities 38,025 458 (439) 38,044
Mortgage Backed Securi 472 20 (3) 489
-------- ------ ------- --------
Totals $ 87,681 $1,683 ($767) $ 88,597
-------- ------ ------- --------
Totals $140,742 $2,105 ($1,359) $141,488
======== ====== ======= ========
</TABLE>
MATURITY SCHEDULE OF SECURITIES
<TABLE>
<CAPTION>
Available For Sale Held To Maturity
---------------------- ----------------------
Amortized Fair Amortized Fair
MATURITY * Cost Value Cost Value
------- ------- ------- -------
<S> <C> <C> <C> <C>
0-1 Yr $10,018 $10,024 $ 8,085 $ 8,059
1-5 Yrs 29,637 29,483 15,899 16,016
5-10 Yrs 13,406 13,384 44,666 45,074
Over 10 Yrs 19,031 19,448
------- ------- ------- -------
$53,061 $52,891 $87,681 $88,597
======= ======= ======= =======
</TABLE>
* Contractural maturity.
-7-
<PAGE> 10
FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - (Continued)
CHANGES IN AFS AND HTM SECURITIES
For the Quarter Ended September 30, 1995:
<TABLE>
<S> <C>
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 ($43)
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>
September 30, 1995 Dec 31, 1994*
------------------ -------------
<S> <C> <C>
Commercial $126,731 $121,623
Real Estate:
Commercial 168,545 152,439
Construction 93,961 101,473
Residential 89,977 79,614
Instalment 19,243 18,935
-------- --------
498,457 474,084
Unearned Fee Income (3,709) (3,572)
-------- --------
Total Loans $494,748 $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.
-8-
<PAGE> 11
FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
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 in the third
quarter of 1995. Net income was $3.4 million versus $2.8 million for the third
quarter of 1994, or up 25.1%. The reasons for the results in 1995 were due to
a reduction in the provision for loan losses, reflecting good loan quality, and
an increase in noninterest income of $.4 million, or 68.1% over the same period
in 1994. This marks the forty-seventh consecutive quarter in which Frontier's
earnings exceeded the prior years' comparable quarter. In the discussion
below, comparison is with the third quarter of 1994, unless otherwise stated.
Annualized return on average assets (ROA) was 1.92% in 1995, and 1.79% in 1994.
Annualized return on average stockholder's equity (ROE) in 1995 was 22.9%, as
compared to 23.4% in 1994. Earnings per share were $.54 for 1995, and $.45 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. 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 12,000 additional
personnel, of which 6,300-6,500 early retirements are included. No specifics
have been released regarding which assembly plants will be affected, or to what
degree. However, since the first quarter of 1995, management has noted a
decline in the number of loan applications in 1995. For example, in 1994, loan
demand was brisk for the first nine months of the year, increasing $80.0
million, while slowing in the first nine months of 1995 to $24.2 million or
5.2%. Perhaps this is some indication of the effect of past reductions on the
local economy. Management responded to this trend, and placed increased
emphasis on loan development beginning in the first quarter of 1995. However,
on the positive side, Boeing has certified the new 777 and has a large backlog.
Another positive side of the local economy is that the Everett Naval Base which
began operations in spring of 1994. An aircraft carrier group has been
assigned to the base, scheduled for arrival in 1996. 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 September 30, 1995 1994 $ Change % Change
- -------------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Loans $494,748 $450,641 $44,107 9.8%
Investments * 140,572 143,292 (2,720) -1.9%
Federal Funds Sold 63,320 0 63,320 NM
Total Assets $733,047 $627,979 $105,068 16.7%
</TABLE>
* Shown at amortized cost.
-9-
<PAGE> 12
FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Balance Sheet - (Continued)
<TABLE>
<CAPTION>
Period ended September 30, 1995 1994 $ Change % Change
- -------------------------- ------- ------- -------- --------
<S> <C> <C> <C> <C>
Noninterest bearing deposits $80,228 $75,997 $4,231 5.6%
Interest bearing deposits 563,923 456,271 107,652 23.6%
Total deposits 644,151 532,268 111,883 21.0%
Federal Funds purchased 1,300 12,030 (10,730) NM
Long-term debt 15,173 31,078 (15,905) -51.2%
Capital $61,103 $48,032 $13,071 27.2%
</TABLE>
A trend that began in the second quarter of 1994 continues into 1995. 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 and
noninterest bearing deposits. NOW and Money Market accounts decreased $4.3
million, or 5.8% and Savings accounts (previously the main funding source)
decreased $66.4 million, or 31.2%. On the other hand, CD's increased $178.4
million, or 105.7%. This change in deposit acquisition mix was planned by
management. Prior to the second quarter of 1994, assets were funded mainly
with core deposits, rather than CD's. However, after that time, general
interest rates began to increase, and the rates on CD's were increased to a
level which was more attractive than the rates paid on core deposits. As a
result, depositors began shifting 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. During the first nine months of 1995, while deposits
continue to increase, loan demand has not been sufficient to absorb the excess
liquidity. Therefore, federal funds sold has increased over $63 million during
this period. However, the rise in interest rates have also prompted rate
increases on the asset side of the balance sheet and, as a result, the net
interest margin (NIM), which is net interest income as an annualized percent of
total average quarterly assets, of the Corporation increased in 1994. However,
in the first quarter of 1995, general interest rates leveled off, and the NIM
began slowly declining. Management estimates that the decline in the net
interest margin will continue as the lag effect of repricing liabilities
catches up with assets.
To demonstrate the pressure on the NIM, the yield on earning assets in 1995
increased .28%, from 9.34% in 1994 to 9.62% in 1995. The cost of interest
bearing liabilities increased 1.27%, from a 4.21% in 1994 to a 5.48% in 1995.
Management responded by reducing the rates paid on deposit accounts during the
second and third quarters. Additionally, management will place increased
emphasis on further reducing overhead costs and increasing other non-interest
income. Please see below for a further discussion.
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.
-10-
<PAGE> 13
FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Net Interest Income - (Continued)
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 interest
expense or noninterest income and expense amounts discussed below.)
Abbreviated quarterly average balance sheets and net interest income data for
the periods are shown below:
<TABLE>
<CAPTION>
(In thousands)
Quarter ended September 30, 1995 1994 $ Change % Change
- --------------------------- -------- -------- -------- ---------
<S> <C> <C> <C>
Loans $485,364 $442,781 $42,583 9.6%
Investments * 136,229 147,627 (11,398) -7.7%
Federal Funds Sold 60,023 1,173 58,850 NM
Total Earning Assets 681,616 591,581 90,035 15.2%
-------- -------- ------ ------
Total Assets 714,641 626,913 87,728 14.0%
Noninterest bearing deposits 75,447 73,266 2,181 3.0%
Interest bearing deposits 554,810 456,187 98,623 21.6%
-------- -------- ------- ------
Total deposits 630,257 529,453 100,804 19.0%
Fed Funds purchased 1,384 14,963 (13,579) -90.8%
Long-term Debt 15,338 29,655 (14,317) -48.3%
Capital 59,893 47,966 11,927 24.9%
Total interest income 16,521 13,932 2,589 18.6%
Total interest expense 7,895 5,312 2,583 48.6%
Net Interest Income $8,626 $8,620 $6 0.1%
</TABLE>
* Shown at amortized cost.
In 1995, average earning assets as a percent of total average assets were
95.4%, and 94.4% in 1994. This ratio indicates how efficiently assets are
being utilized. Average loans were 67.9% and 70.6% respectively. Investments
as a percent of average assets for the same periods were 19.1% as compared to
23.5%. This decline in the investment portfolio over the last year was planned
by management as funds from all maturities and calls were designated,
initially, for the loan portfolio growth. However, these funds were directed
to federal funds sold due to decreased loan demand during the first and second
quarters. In the third quarter of 1995, management has began diverting funds
from federal funds sold, into the investment portfolio to take advantage of
higher yields.
On a tax equivalent basis, net interest income was $8.6 million in 1995, versus
$8.6 million in 1994. A small increase of $6 thousand was recorded.
The spread between the yield on earning assets and rates paid on
interest-bearing liabilities decreased in both the third quarter and the first
nine months of the year as compared with the same period in 1994 as the cost of
funds and other borrowings increased at a faster rate than loan and investment
yields.
-11-
<PAGE> 14
FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Net Interest Income - (Continued)
The annualized NIM in 1995 was 4.82%, and 5.50% in 1994.
During the third quarter, both interest income and expense increased $2.6
million.
The increase in the average balance of earning assets increased interest income
by $1.5 million, and an increase in interest rates increased interest income by
$1.1 million, for a net increase of $2.6 million.
The yield on loans increased from 10.16% in 1994 to 10.81% in 1995. Real
estate construction loans had the largest increase from 11.58% to 13.12%. The
yield on Investments increased from 6.92% in 1994 to 7.08% in 1995, and the
yield on Fed Funds sold increased from 4.66% in 1994 to 5.72% in 1995.
The increase in the average balance and rates of interest bearing liabilities
each increased interest expense by $1.3 for a total increase of $2.6 million.
The cost of NOW and money market accounts went from 2.62% in 1994, to 3.29% in
1995. Savings account costs increased from 3.79% in 1994 to 4.18% in 1995, and
time cd's increased in cost from 5.33% in 1994 to 6.48% in 1995. Short term
borrowings increased to 5.42% from 4.80%, and long term debt cost was 5.22% in
1994 and 5.30% in 1995. The cost of total interest-bearing liabilities
increased from 4.21% in 1994 to 5.48% in 1995.
NONINTEREST INCOME AND EXPENSE
Noninterest income increased in the third quarter to $891 thousand, up from
$530 thousand a year earlier. The main reason for the increase was securities
losses taken in 1994 of $191 thousand, while no losses were taken in 1995. The
decrease in service charges in 1995 as compared to 1994 is reflective of
depositors maintaining larger account balances to avoid service charges. The
number of deposit accounts increased 13.4% over the last year, while service
charge income decreased $24 thousand, or 5.9%. The increase in the remaining
other noninterest income of $194 thousand, or 61.6%, is, for the most part,
attributable to non-recurring miscellaneous income of $98 thousand and trust
department fee income.
Trust department fees increased from $116 thousand to $149 thousand, or 28.4%,
and the market value of trust assets at quarter end 1995 was $101.3 million, as
compared to $71.0 million for the prior year, or an increase of 42.7%.
Total noninterest expenses decreased $48 thousand, or 1.3% in 1995. Salaries
and Employee Benefits increased to $2.4 million, or 2.5%, from $2.3 million in
1994. Salaries, alone, increased $117 thousand to $1.9 million, or 6.5% from
$1.8 million a year ago. Employee benefits decreased $58 thousand to $.5
million, or 10.4% from $.6 million a year ago. The increase in salaries was
due an increase in staff over the year of 1.5%, and merit raises. The employee
benefits decrease of $58 thousand was attributable to a decrease in the profit
sharing reserve of $33 thousand, and an increase in deferred personnel costs
associated with loan fee recognition. Occupancy expense increased $111
thousand, or 24.4% during the period. Approximately 39% of occupancy expense
is depreciation which decreased from $224 thousand in 1994 to $219 thousand in
1995, or 2.2%. The remaining increase in occupancy expense was attributable to
higher office rental and maintenance expense. Other expense decreased $218
thousand, or 22.0%, from a year earlier. The decrease was mainly attributable
to a one-time refund of $353 thousand for FDIC insurance premiums. Without
this refund, other expenses would have been up $135 thousand,
-12-
<PAGE> 15
FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Noninterest Income and Expense - (Continued)
or 13.6% over the previous year. Increases in this category were marketing, up
$13 thousand; telephone and postage, up $27 thousand; legal fees, up $36
thousand, and annual donations, up $42 thousand.
LOANS
NON-PERFORMING ASSETS
Non-performing assets are summarized as follows:
<TABLE>
<CAPTION>
(In thousands)
Period Ended September 30, 1995 1994
- -------------------------- ------ ------
<S> <C> <C>
Non-accruing loans $1,997 $2,643
Loans past due 90 days or more and
still accruing 124 0
Restructured loans 136 128
Other real estate owned 687 880
-------- --------
Total non-performing loans $2,944 $3,651
======== ========
Total loans at end of period $494,748 $450,641
-------- --------
As a percent of total loans outstanding 0.60% 0.81%
==== ====
</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 is comprised of two average value home
foreclosures out of construction loans, one older home, and two separate land
parcels of a commercial nature. As of September 30, 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 $82.9 million in 1995, or 16.5% of
total loans, and $89.5 million in 1994, or 19.6% 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 three quarters,
reflecting a cooling of the local economy.
At September 30, 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 September 30, 1995, the allowance for possible loan
losses increased to $13.2 million, or 2.66% of total loans, from $9.3 million,
or 2.07% of total loans in 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, the type of lending undertaken, 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
September 30, 1995 and 1994. This discussion addresses those periods of time.
Net cash provided by operating activities in 1995 totaled $12.9 million as
compared to $11.4 million in 1994. The largest component providing net cash
was income of $9.5 million in 1995 and $7.6 million in 1994.
Real estate secondary market loans originated for sale in 1995 were down only
slightly, $112 thousand, from the same period in 1994. This is a change in the
trend which began in 1993 when secondary market loans were declining
substantially due to increasing long-term interest rates. While the 1995
year-to-date cash flows from this function compares favorably with 1994, the
loan originations in 1994 were down substantially from the prior year.
Net cash flows from investing activities of $82.2 million in 1994 was used for
the loan portfolio, and approximately one-half of the cash flows from maturing
and sales of investments was reinvested back in the investment portfolio. In
1995, the loan portfolio has required only $23.4 million in funding due to
decreased demand and qualified applicants, and the excess of $62.2 million from
deposit acquisition went into federal funds sold.
In 1994, all the financing of loan activities came from the acquisition of a
mix of CD's, fed funds purchased and advances from the FHLB, providing a total
of $76.1 million. Noninterest bearing and interest bearing demand deposits and
savings accounts (core deposits) declined $14.3 million in 1994. The mix of
the funding has changed, somewhat, in 1995.
-14-
<PAGE> 17
FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
Liquidity - (Continued)
In 1995, core deposits decreased by $40.9 million and CD's increased by $145.4
million. With the excess liquidity provided by the increase in CD's in 1995,
the Corporation was able to repay FHLB advances of $22.5 million, and fed funds
purchased of $4.1 million.
Management has many sources of liquidity, such as, 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, treasury and agency
securities in the HTM securities portfolio are 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 for a 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 third quarter of 1994, the gap of the Corporation was a
negative (27.8%) of earning assets, with rate sensitive liabilities exceeding
rate sensitive assets. This would suggest that increasing general interest
rates would decrease the NIM. Interest rates did increase over the past year,
and the NIM decreased from 5.50% to 4.82% at the end of September 1995. At the
end of September 1995, the gap was a negative (15.7%) of earning assets. In
the second and third quarters of 1995, management responded to the reduction in
the NIM by reducing rates paid on liabilities, and continued emphasis on
overhead cost containment.
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
third quarter end 1995 was $61.1 million. This amount compares to $48.0 million
at September 30, 1994, an increase of $13.1 million, or 21.4%. Almost all of
the increase was attributable to retained earnings.
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 September
30, 1995, the Corporation's leverage ratio was 8.51%, compared to 7.79% 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 10.27% and 11.53% at September 30, 1995, and 9.62% and
10.88% at September 30, 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
third quarter of 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, located in
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.
Item 6. Exhibits and Reports on Form 8-K
(a) (11) Computation of earnings per share is attached as Exhibit II
(27) Financial Data Schedule
(b) No amendments to filed documents or reports on Form 8-K have
been filed in the quarter ended September 30, 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: November 6, 1995 /s/ James F. Felicetty
----------------------------
James F. Felicetty
Secretary/Treasurer
-18-
<PAGE> 1
FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
EXHIBIT II
<TABLE>
<CAPTION>
For Nine Months Ended September 30,
1995 1994
---------- ---------
<S> <C> <C>
Net Income $9,485,428 $7,584,290
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 380,244
Additional shares deemed
outstanding because of
stock split 2,100,650 2,093,080
Shares issued during the
year times average time
outstanding during the year 7,413 6,439
--------- ---------
Average shares outstanding 6,304,498 6,279,240
========= =========
Primary earnings per share $1.50 $1.21
===== =====
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FRONTIER
FINANCIAL CORPORATION AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<CASH> 25,328
<INT-BEARING-DEPOSITS> 563,923
<FED-FUNDS-SOLD> 63,320
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 52,891
<INVESTMENTS-CARRYING> 87,681
<INVESTMENTS-MARKET> 88,597
<LOANS> 494,748
<ALLOWANCE> 13,155
<TOTAL-ASSETS> 733,047
<DEPOSITS> 644,151
<SHORT-TERM> 5,505
<LIABILITIES-OTHER> 7,115
<LONG-TERM> 15,173
<COMMON> 44,008
0
0
<OTHER-SE> 17,095
<TOTAL-LIABILITIES-AND-EQUITY> 61,103
<INTEREST-LOAN> 38,787
<INTEREST-INVEST> 7,844
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 46,631
<INTEREST-DEPOSIT> 20,200
<INTEREST-EXPENSE> 21,395
<INTEREST-INCOME-NET> 25,236
<LOAN-LOSSES> 1,175
<SECURITIES-GAINS> (4)
<EXPENSE-OTHER> 12,624
<INCOME-PRETAX> 13,998
<INCOME-PRE-EXTRAORDINARY> 13,998
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,485
<EPS-PRIMARY> 1.50
<EPS-DILUTED> 1.50
<YIELD-ACTUAL> 4.14
<LOANS-NON> 1,997
<LOANS-PAST> 124
<LOANS-TROUBLED> 136
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 10,410
<CHARGE-OFFS> 517
<RECOVERIES> 2,087
<ALLOWANCE-CLOSE> 0
<ALLOWANCE-DOMESTIC> 1,175
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 13,155
</TABLE>
