<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 June 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
Incorporation or Organization) Identification Number)
</TABLE>
332 SW Everett Mall Way
P. O. Box 2215
Everett, Washington 98203
-------------------------------------------- ---------
(Address of Principal Administrative Offices) (Zip Code)
(206) 514-0719
---------------------------------------------------
(Registrant's 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 6,308,184 shares
outstanding as of June 30, 1995.
<PAGE> 2
FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
INDEX TO QUARTERLY REPORT ON FORM 10-Q
June 30, 1995
<TABLE>
<CAPTION>
Page
PART I -- Financial Information ----
<S> <C>
Item 1. Financial Statements.
Consolidated Balance Sheet -- June 30, 1995
and Year End 1994. 1
Consolidated Statement of Income -- Three and Six Months
Ended June 30, 1995 and 1994. 2
Consolidated Statement of Cash Flows -- Six Months
Ended June 30, 1995 and 1994. 3-4
Statement of Changes in Stockholder's Equity -- June 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)
June 30, December 31,
ASSETS 1995 1994
------- ------------
<S> <C> <C>
Cash & Balances Due from Depositary Institutions $ 20,047 $ 22,081
Securities: (Note 2)
Available for Sale--Market Value 43,518 42,278
Held to Maturity--Amortized Cost (Market Value 12-31-94, $89,200) 91,133 94,048
-------- --------
Total Securities 134,651 136,326
Federal Funds Sold 54,180 1,120
Loans: (Note 3)
Loans, Net of Unearned Income 480,195 470,512
Less: Allowance for Loan Losses (12,666) (10,410)
-------- --------
Net Loans 467,529 460,102
Mortgage Loans Held for Sale 696
Premises & Equipment, Net 12,529 11,845
Other Real Estate Owned 1,246 1,118
Intangible assets 512 550
Other Assets 8,947 9,426
-------- --------
TOTAL ASSETS $700,337 $642,568
======== ========
LIABILITIES
Deposits:
Non-Interest Bearing $ 77,263 $ 71,754
Interest Bearing 535,441 467,849
-------- --------
Total Deposits 612,704 539,603
Federal Funds Purchased 1,180 9,615
Federal Home Loan Bank advances 22,500 37,500
Long-term debt 180 565
Other Liabilities 6,075 4,826
-------- --------
TOTAL LIABILITIES 642,639 592,109
-------- --------
EQUITY CAPITAL (Note 4)
Common Stock 43,994 43,917
Unrealized Gains/(Losses) on AFS Securities
Net of Tax effect(Note 2) (68) (1,179)
Retained Earnings 13,772 7,721
-------- --------
TOTAL CAPITAL 57,698 50,459
-------- --------
TOTAL LIABILITIES & CAPITAL $700,337 $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 SIX MONTHS ENDED
------------------- --------------------
June 30, June 30, June 30, June 30,
1995 1994 1995 1994
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest & Fees on Loans $12,804 $10,453 $25,570 $19,992
Interest on Investments 2,503 2,314 4,802 4,815
------- ------- ------- -------
Total Interest Income 15,307 12,767 30,372 24,807
------- ------- ------- -------
INTEREST EXPENSE
Interest on Deposits 6,774 4,578 12,531 8,953
Interest on Borrowed Funds 344 356 952 562
------- ------- ------- -------
Total Interest Expense 7,118 4,934 13,483 9,515
------- ------- ------- -------
Net Interest Income 8,189 7,833 16,889 15,292
------- ------- ------- -------
PROVISION FOR LOAN LOSSES (150) (850) (850) (1,700)
NONINTEREST INCOME
Securities Gains/(Losses) (4) (4) (2)
Service Charges on Deposit Accounts 408 398 809 758
Other Noninterest Income 417 496 847 1,030
------- ------- ------- -------
Total Noninterest Income 821 894 1,652 1,786
NONINTEREST EXPENSE
Salaries & Employee Benefits 2,414 2,240 4,961 4,510
Occupancy Expense 547 695 1,128 1,182
Other Noninterest Expense 1,785 1,499 2,786 2,656
------- ------- ------- -------
Total Noninterest Expense 4,746 4,434 8,875 8,348
INCOME BEFORE INCOME TAX 4,114 3,443 8,816 7,030
------- ------- ------- -------
APPLICABLE INCOME TAX (1,147) (987) (2,765) (2,247)
NET INCOME $ 2,967 $ 2,456 $ 6,051 $ 4,783
======= ======= ======= =======
Average Number of Shares Outstanding
for the Period 6,302,787 6,276,305 6,302,787 6,276,305
PER SHARE COMMON STOCK $ 0.47 $ 0.39 $ 0.96 $ 0.76
======= ======= ======= =======
</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)
SIX MONTHS ENDED
------------------------------------
June 30, 1995 June 30, 1994
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 6,051 $ 4,783
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization (166) 584
Provision for loan losses 850 1,700
Provision for losses on ORE
Increase in income taxes payable (915) (865)
Deferred taxes (100)
Decrease in interest receivable (76) (372)
Increase (Decrease) in interest payable 1,286 85
Loss on sale of HTM securities (4)
Loans originated for sale (7,144) (9,936)
Proceeds from sale of loans 6,448 10,636
Other operating activities 1,504 305
-------- --------
Net cash provided by operating activities 7,834 6,820
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Net cash flows from Fed Funds Sold (53,060) (3,295)
Proceeds from sales of HTM securities 88 105
Proceeds from maturities of investments 4,026 6,710
Purchase of investment securities (460) (5,634)
Net cash flows from loan activities (8,063) (64,041)
Purchases of premises and equipment (789) (770)
Proceeds from the sale of other real estate 727 221
Cash invested in other real estate
Other investing activities
-------- --------
Net cash used by investing activities (57,531) (66,704)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in demand deposit accounts (50,586) 4,646
Net change in certificates of deposit 122,353 16,062
Proceeds from issuance of stock 78 77
Principal payments on long term debt (747) (149)
Advances from FHLB 15,000
Repayment of FHLB advances (15,000)
Net change in Federal Funds purchased (8,435) 27,960
Other financing activities
-------- --------
Net cash provided by financing activities 47,663 63,596
-------- --------
</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)
SIX MONTHS ENDED
-----------------------------------
June 30, 1995 June 30, 1994
------------- -------------
<S> <C> <C>
INCREASE IN CASH AND DUE FROM BANKS $(2,034) $ 3,712
CASH & DUE FROM BANKS AT BEGINNING OF YEAR 22,081 23,440
------- -------
CASH AND DUE FROM BANKS AT END OF PERIOD $20,047 $27,152
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest $12,182 $ 9,399
Cash paid during the year for income taxes 3,680 3,100
Real estate taken as settlement for loan
obligations 883 187
Real estate taken as settlement for loan
obligations - financed by bank $28 $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)
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
six months of 1995 6,051 6,051
Stock Options Exercised 10,750 69 69
Three-for-two Stock Split 2,100,650
Fractional Shares Purchased 349 8 8
Valuation of Available for Sale
Securities 1,111 1,111
--------- ------- ------- ------- -------
Balance, June 30, 1995 6,308,184 $43,994 $13,772 $ (68) $57,698
- ---------------------- ========= ======= ======= ======= =======
</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 six months ended June 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 June 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 June 30, 1995:
AGGREGATE FAIR VALUE AND AMORTIZED COST OF INVESTMENTS
<TABLE>
<CAPTION>
Gross Gross
(In thousands) Amortized Unrealized Unrealized Aggregate
Cost Gains Losses Fair Value
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
AFS SECURITIES:
Equities $ 7,303 $ 7,303
U.S. Treasuries 2,506 $ 74 2,580
U.S. Agencies 19,695 246 $ (336) 19,605
Corporate securities 14,119 146 (235) 14,030
-------- ------ ------- --------
43,623 466 (571) 43,518
HTM SECURITIES:
U.S. Treasuries 252 15 267
U.S. Agencies 18,502 87 (175) 18,414
Municipal securities 32,206 969 (220) 32,955
Corporate securities 39,681 561 (383) 39,859
Mortgage Backed Securities 492 22 (3) 511
-------- ------ ------- --------
Totals $ 91,133 $1,654 $ (781) $ 92,006
-------- ------ ------- --------
Totals $134,756 $2,120 $(1,352) $135,524
======== ====== ======= ========
</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 $ 9,418 $ 9,405 $ 8,251 $ 8,229
1-5 Yrs 28,427 28,352 17,967 18,075
5-10 Yrs 5,778 5,761 44,440 45,002
Over 10 Yrs 20,475 20,700
------- ------- ------- -------
$43,623 $43,518 $91,133 $92,006
======= ======= ======= =======
</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
<TABLE>
<S> <C>
For the Quarter Ended June 30, 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 $632
HTM SECURITIES
--------------
Sales Or Transfers From this Category $ 92
</TABLE>
NOTE 3. LOANS
The following is an analysis of the loan portfolio by major type of
loans:
<TABLE>
<CAPTION>
June 30, 1995 Dec 31, 1994*
------------- ------------
<S> <C> <C>
Commercial $124,605 $121,623
Real Estate:
Commercial 166,209 152,439
Construction 92,587 101,473
Residential 81,553 79,614
Instalment 19,456 18,935
-------- --------
484,410 474,084
Unearned Fee Income (3,519) (3,572)
-------- --------
Total Loans $480,891 $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 continues to reach new highs. Net
income for the second quarter of 1995 was $3.0 million versus $2.5 million for
the second quarter of 1994, or up 20.8%. The reasons for the results in 1995
were due to a reduction in the provision for loan losses, reflecting continued
loan quality, and an increase in net interest income of $.4 million, or 4.5%
over the same period in 1994. This marks the forty-sixth consecutive quarter
in which Frontier's earnings exceeded the prior years' comparable quarter. In
the discussion below, comparison is with the second quarter of 1994, unless
otherwise stated.
Annualized return on average assets (ROA) was 1.77% in 1995, and 1.63% in 1994.
Annualized return on average stockholder's equity (ROE) in 1995 was 21.0%, as
compared to 21.8% in 1994. Earnings per share for the period were $.47 for
1995, and $.39 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 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,
on the positive side, Boeing has certified the new 777 and has the largest
backlog in the first 6 months of 1995, than any other plane manufacturer in the
world. Another positive side of the local economy is that the Everett Naval
Station began operation in Spring of 1994, and an aircraft carrier group has
been assigned to the base, scheduled for arrival in 1996. In 1994, loan demand
was brisk for the first six months of the year, increasing $62.8 million, while
a slowing in the first six months of 1995 to $10.4 million or 2.2% perhaps is
some indication of the effect of past reductions on the local economy.
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 June 30, 1995 1994 $ Change % Change
- --------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Loans $480,891 $433,352 $47,539 11.0%
Investments * 134,756 150,679 (15,923) -10.6%
Federal Funds Sold 54,180 3,295 50,885 NM
Total Assets $700,337 $626,408 $73,929 11.8%
</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 June 30, 1995 1994 $ Change % Change
- --------------------- ------- ------- ---------- --------
<S> <C> <C> <C> <C>
Noninterest bearing deposits $ 77,263 $ 73,558 $ 3,705 5.0%
Interest bearing deposits 535,441 453,690 81,751 18.0%
-------- -------- -------- -----
Total deposits 612,704 527,248 85,456 16.2%
Federal Funds purchased 1,180 34,000 (32,820) NM
Long-term debt 22,680 15,681 6,999 44.6%
Capital $ 57,698 $ 46,029 $ 11,669 25.4%
</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 $9.9
million, or 12.8% and Savings accounts (previously the main funding source)
decreased $90.3 million, or 37.8%. On the other hand, CD's increased $161.1
million, or 118.8%. 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, at that time, general interest
rates began to increase, 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 six months of 1995, while deposits continued to increase, loan
demand has not been sufficient to absorb the excess liquidity. Therefore,
federal funds sold increased over $50 million during this period. 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 (NIM), which is
net interest income as an annualized percent of total average quarterly assets,
of the Corporation initially increased. However, in the first quarter of 1995
interest rates leveled off, and in the second quarter, 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 .49%, from 9.35% in 1994 to 9.84% in 1995. The cost of interest
bearing liabilities increased 1.23%, from a 4.15% in 1994 to a 5.38% in 1995.
Noting this trend, management has reduced the rates paid on deposit accounts
during the second quarter. Additionally, management will place increased
emphasis on further reducing overhead costs and increasing other non-interest
income to minimize the compaction of the NIM. Please see "Liquidity" 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
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 and net interest income data for the periods are shown below:
<TABLE>
<CAPTION>
(In thousands)
Quarter ended June 30, 1995 1994 $ Change % Change
- ---------------------- -------- -------- ------- --------
<S> <C> <C> <C> <C>
Loans $479,328 $413,295 $ 66,033 16.0%
Investments * 135,717 150,206 (14,489) -9.6%
Federal Funds Sold 26,494 1,558 24,936 1600.5%
Total Earning Assets 641,539 565,059 76,480 13.5%
-------- -------- ------- -------
Total Assets 670,402 604,227 66,175 11.0%
Noninterest bearing deposits 70,766 71,921 (1,155) -1.6%
Interest bearing deposits 512,968 452,205 60,763 13.4%
-------- -------- ------- -------
Total deposits 583,734 524,126 59,608 11.4%
Fed Funds purchased 329 14,750 (14,421) -97.8%
Long-term Debt 23,012 15,683 7,329 46.7%
Capital 56,614 45,089 11,525 25.6%
Total interest income 15,565 13,030 2,535 19.5%
Total interest expense 7,118 4,934 2,184 44.3%
Net Interest Income $ 8,447 $ 8,096 $ 351 4.3%
</TABLE>
* Shown at amortized cost.
In 1995, average earning assets as a percent of total average assets were
95.7%, and 93.5% in 1994. This ratio indicates how efficiently assets are
being utilized. Average loans were 71.5% and 68.4% respectively. Investments
as a percent of average assets for the same periods were 20.2% as compared to
24.9%. 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 this period.
On a tax equivalent basis, net interest income was $8.4 million in 1995, versus
$8.1 million in 1994. The NIM in 1995 was 5.04%, and 5.36% in 1994.
The increase of $351 thousand in net interest income in 1995 was due to an
increase in interest income of $2.5 million, and an increase in the cost of
deposits of $2.1 million.
The increase in the average balance of earning assets increased interest income
by $1.6 million, and an increase in interest rates increased interest income by
$.9 million, for a net increase of $2.5 million.
-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 yield on loans increase from 10.26% in 1994 to 10.85% in 1995. Commercial
loans had the sharpest increase from 9.58% to 10.74%. The yield on Investments
increase from 6.91% in 1994 to 7.05% in 1995, and the yield on Fed Funds sold
increased from 4.05% in 1994 to 6.13% in 1995.
The increase in the average balance of interest bearing liabilities increased
interest expense by $1.1 million, and an increase in interest rates increased
interest expense by $1.0 million, for a net increase of $2.1 million.
The yield on total interest bearing deposits increased from 4.09% in 1994 to
5.36% in 1995. Short term borrowings increased from 4.78% to 5.76%, and long
term debt increased from 5.13% to 5.98%.
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 second quarter of 1995
as compared to the same period in 1994, is reflective of depositors maintaining
larger account balances to avoid service charges. The number of deposit
accounts increased 11.9% over the last year, while service charge income
increased only $10 thousand, or 2.4%. The decline of $78 thousand in "other"
noninterest income reflects the continued perception by potential clients that
long-term mortgage interest rates are high. In the second quarter of 1994,
secondary market loan fees totaled $116 thousand, while the total for the
second quarter of 1995 was $31 thousand. Contributing to the decline is a
decrease in insurance and investment department fee income of $57 thousand for
the same period. This decline is attributable to the volatility of equity
funds in 1994, and a reduction of staff in the department.
Trust department fees increased from $117 thousand to $147 thousand, or 25.6%,
and the market value of trust assets at quarter end 1995 was $93.0
million, as compared to $68.4 million for the prior year, or an increase of
36.0%.
Total noninterest expense increased $312 thousand, or 7.0% in 1995. Salaries
and Employee Benefits increased to $2.4 million, or 7.8%, from $2.2 million in
1994. Salaries increased $97 thousand to $1.9 million, or 5.5% from $1.8
million a year ago. Employee benefits increased $77 thousand to $.5 million,
or 16.6% from $.5 million a year ago. The increase in salaries was due to
merit raises. The employee benefits increase of $77 thousand was attributable
to an increase in the profit sharing reserve of $69 thousand. Occupancy
expense decreased $148 thousand, or 21.3% during the period. Approximately 39%
of occupancy expense is depreciation which decreased from $217 thousand in 1994
to $212 thousand in 1995, or 2.0%. The other decrease in occupancy expense was
attributable to higher expenses incurred in the second quarter of 1994 for
maintenance and repairs of bank offices. Other expenses increased 19.0%, or
$285 thousand in 1995. This increase was attributable to increases in FDIC
insurance, other insurance, taxes and other fees.
SECURITIES PORTFOLIO
A portion of the decrease in securities held to maturity was due to the sale of
mortgage backed securities totaling $92 thousand. These securities were sold
due to favorable interest rates, and qualified for sale due to the short length
of time to maturity, or the principal balance was reduced to less than 15% of
the original par amount.
-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 June 30, 1995 1994
- --------------------- -------- --------
<S> <C> <C>
Non-accruing loans $ 1,926 $ 1,626
Loans past due 90 days or more and
still accruing 5
Restructured loans 139
Other real estate owned 1,246 649
-------- --------
Total non-performing loans $ 3,316 $ 2,275
======== ========
Total loans at end of period $480,891 $433,352
-------- --------
As a percent of total loans outstanding 0.69% 0.52%
======== ========
</TABLE>
It is the bank's 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 increased $597 thousand or 92.0% in 1995.
This occurred due to one high-end and two average value home foreclosures out of
construction loans. Beyond that, the dollar amount of other real estate owned
at second quarter 1995 represents three separate land parcels, of a commercial
nature. As a subsequent event, other real estate owned was reduced by the sale
of a home in the amount of $578 thousand. As of June 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 $81.8 million in 1995, or 16.8% of
total loans, and $95.0 million in 1994, or 21.9% 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 higher interest rates and a slight cooling of the local economy.
At June 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 June 30, 1995, the allowance for possible loan losses
increased to $12.7 million, or 2.60% of total loans, from $8.6 million, or
1.98% 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 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
June 30, 1995 and 1994. This discussion addresses those periods of time.
Net cash provided by operating activities in 1995 totaled $7.8 million as
compared to $6.8 million in 1994. The largest component providing net cash was
income of $6.1 million in 1995 and $4.8 million in 1994.
Real estate secondary market loans originated for sale in 1995 were down $2.8
million from the same period in 1994, or 28.1%. This follows a trend which
developed in 1993 caused by higher long-term interest rates.
Net cash of $64.0 million in 1994 was used for the loan portfolio. What cash
flows came from maturing investments was reinvested at the same volume. In
1995, the loan portfolio has required only $8.0 million in funding due to
decreased demand, and the excess of $53.1 million from deposit acquisition went
into federal funds sold for liquidity purposes.
In 1994, all the financing of loan activities came from the acquisition of a
mix of demand deposit accounts, CD's, fed funds purchased and advances from
the FHLB, providing a total of $63.6 million. Noninterest bearing and interest
bearing demand deposits and savings accounts (core deposits) provided $4.6
million in 1994, and time CD's provided $16.1 million. However, the mix of the
funding has changed 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 $50.6 million and CD's increased by $122.4
million. With the excess liquidity provided by the increase in CD's in 1995,
the Corporation was able to repay FHLB advances of $15.0 million, and fed funds
purchased of $8.4 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, treasury and agency securities in the 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 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 second quarter of 1994, the gap of the Corporation was a
negative (32.4%) 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 5.36% to 5.04% at the end of June 1995. At the end
of June 1995, the gap was a negative (15.7%) of earning assets. In the second
quarter of 1995, management responded to the reduction in the NIM by reducing
rates paid on liabilities.
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
second quarter end 1995 was $57.7 million. This amount compares to $45.4
million at June 30, 1994, an increase of $12.3 million, or 27.1%. 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 June 30,
1995, the Corporation's leverage ratio was 8.56%, compared to 7.54% 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 10.34% and 11.60% at June 30, 1995, and 9.03% and 10.29% at
June 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
On April 19, 1995, the annual meeting of shareholders was held at the
Everett Golf and Country Club, Everett, Washington. At that meeting,
shareholders were asked to vote for the election of Directors. Of
6,302,300 shares outstanding and authorized to vote, 4,971,698 were
represented in person or by proxy. There were proxies representing
4,630,740 shares, and there were persons in attendance representing
340,958 shares. 78.9% of the total outstanding shares were represented
at the meeting. Each incumbent Director was re-elected as shown below
with the affirmative votes cast for each Director indicated next to
their name.
<TABLE>
<S> <C> <C> <C>
Robert J. Dickson 4,969,300 J. Donald Regan 4,969,300
David A. Dujardin 4,969,300 Roger L. Rice 4,967,006
Edward E. Hansen 4,967,907 Clark I. Ricketts 4,961,903
William H. Lucas 4,956,458 Roy A. Robinson 4,968,868
James H. Mulligan 4,969,291 William J. Robinson 4,946,102
Alwyn L. Nelson 4,851,874 Edward C. Rubatino 4,968,912
Edward J. Novack 4,969,300 Arthur W. Skotdal 4,953,367
</TABLE>
At the same meeting, shareholders were asked to approve a proposal by
the Board of Directors to increase the number of authorized shares from
10,000,000, no par value, to 20,000,000, no par value. The
shareholders approved the proposal by voting 4,859,411, or 77.1% in
favor; 87,335, or 1.4% against; and 24,952, or .4% abstained.
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.
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 June 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: August 7, 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 Six Months Ended June 30,
---------------------------------
1995 1994
---------- ----------
<S> <C> <C>
Net Income $6,051,077 $4,783,499
========== ==========
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 2,092,102
Shares issued during the
year times average time
outstanding during the year 5,702 4,482
---------- ----------
Average shares outstanding 6,302,787 6,276,305
========== ==========
Primary earnings per share $0.96 $0.76
========== ==========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 10-Q OF
FRONTIER FINANCIAL CORPORATION FOR PERIOD ENDED JUNE 30, 1995.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1995
<PERIOD-END> JUN-30-1995
<CASH> 20,047
<INT-BEARING-DEPOSITS> 535,441
<FED-FUNDS-SOLD> 54,180
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 43,518
<INVESTMENTS-CARRYING> 91,133
<INVESTMENTS-MARKET> 92,006
<LOANS> 480,891
<ALLOWANCE> 12,666
<TOTAL-ASSETS> 700,337
<DEPOSITS> 612,704
<SHORT-TERM> 8,680
<LIABILITIES-OTHER> 6,075
<LONG-TERM> 15,150
<COMMON> 43,994
0
0
<OTHER-SE> 13,704
<TOTAL-LIABILITIES-AND-EQUITY> 700,337
<INTEREST-LOAN> 25,570
<INTEREST-INVEST> 4,802
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 30,372
<INTEREST-DEPOSIT> 12,531
<INTEREST-EXPENSE> 13,483
<INTEREST-INCOME-NET> 16,889
<LOAN-LOSSES> 850
<SECURITIES-GAINS> (4)
<EXPENSE-OTHER> 8,875
<INCOME-PRETAX> 8,816
<INCOME-PRE-EXTRAORDINARY> 8,816
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,051
<EPS-PRIMARY> .96
<EPS-DILUTED> 0
<YIELD-ACTUAL> 9.84
<LOANS-NON> 1,926
<LOANS-PAST> 5
<LOANS-TROUBLED> 139
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 10,410
<CHARGE-OFFS> 399
<RECOVERIES> 1,805
<ALLOWANCE-CLOSE> 850
<ALLOWANCE-DOMESTIC> 12,666
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
