<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 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 S.W. Everett Mall Way
P. O. Box 2215
Everett, Washington 98203
(Address of Principal Executive Office) (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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (S229.405 of this chapter) is not contained herein, and will
not be contained, to the best of the registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [X]
The aggregate market value of common stock held by nonaffiliates at December 31,
1995 was $146,745,365 based on the price at December 31, 1995.
The issuer has one class of common stock (no par value) with 6,326,260 shares
outstanding as of February 29, 1996.
Documents Incorporated by Reference
Portions of Annual Report to Shareholders for the year ended:
December 31, 1995..................Part II
1996 Proxy Statement...............Part III
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Annual
Item Number Shareholders' Proxy
- ----------- Form 10-K Report Statement
PART I Page Page Page
- ------ --------- ------------- ---------
<S> <C> <C> <C>
1 Business 1-5
Statistical Disclosure Index 6
2 Properties 16-17
3 Legal Proceedings 18
4 Submission of Matters to
a Vote of Security Holders 18
PART II
5 Market for Registrant's Common
Stock and Related Shareholder
Matters 30-31
6 Selected Financial Data 18
7 Management's Discussion and
Analysis of Financial Condition
and Results of Operations 23-33
8 Financial Statements and
Supplementary Data 19
9 Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure 19
PART III
10 Directors and Executive
Officers of Frontier
Financial Corporation 3-6
11 Executive Compensation 6-8
12 Security Ownership of Certain
Beneficial Owners and
Management 5
13 Certain Relationships and
Related Transactions 22 18 8
PART IV
14 Exhibits, Financial Statement
Schedules and Reports on
Form 8-K 21
Signatures 24
</TABLE>
i
<PAGE> 3
PART I
ITEM 1 - BUSINESS
Frontier Financial Corporation (FFC) is a Washington corporation which was
incorporated in 1983 and is registered as a bank holding company under the Bank
Holding Company Act of 1956. As part of a plan of reorganization consummated
following the close of business September 30, 1983, FFC acquired all of the
stock of Frontier Bank (the Bank), issuing its common stock in an exchange for
the Bank's common stock on a share-for-share basis. FFC has two subsidiaries;
the Bank, which is engaged in a general banking business and in businesses
related to banking, and FFP, Inc., a nonbank corporation which leases property
and equipment to the Bank.
The Bank
The Bank is a state-chartered banking association with its principal office
located in Everett, Snohomish County, Washington. It was founded in September,
1978 by Robert J. Dickson and local business persons. The Bank is an "insured
bank" as defined in the Federal Deposit Insurance Act.
The Bank engages in general banking business, including the acceptance of
demand, time and savings deposits and the making of loans. As of December 31,
1995, the Bank conducted its business operations out of 16 offices located in
Snohomish and King Counties, of which four offices are located in Everett, one
office each is located in Arlington, Snohomish, Smokey Point, Lake Stevens,
Marysville, Lynnwood, Mill Creek, Edmonds, Stanwood, Bothell, Woodinville and
Monroe.
Banking Services
The Bank provides a full range of consumer banking services including savings
accounts, checking accounts, installment and commercial lending, safe deposit
facilities, time deposits and other consumer and business related financial
services. In addition to consumer oriented activities, the Bank maintains a
strong commercial lending program, servicing businesses headquartered in the
Bank's principal market area. At the end of 1983, the Bank began to offer a
discount brokerage service to its customers. In September of 1984, the Bank
opened its Real Estate Division, offering a broad range of home, construction
and commercial long-term financing. The Trust Department opened for business in
March of 1985. This department offers a full array of trust services to its
customers. In May 1988, the Bank opened a Private Banking Office to give
personal service to upscale customers. In August 1989, the Bank acquired,
through a merger, three banking offices of Citizens Bank of Snohomish County,
and a real estate origination department. In January 1991, the Bank opened an
office in Mill Creek, providing a full range of consumer banking services.
In March 1991, the Bank opened an Insurance and Investment Center which markets
annuities, life insurance products, and mutual funds to Bank customers and the
general public. In July 1992, the Bank opened its Stanwood office. In November
1992, the Bank acquired through merger, Edmonds National Bank, which had one
office. In July 1993, the Bank acquired through merger, The Bank of Northshore,
which had two offices located in Bothell and Woodinville, King County,
Washington. This merger marked the first time the Bank branched outside of
Snohomish County. In June 1995, the Bank opened an office in Monroe, providing
a full range of consumer banking services.
-1-
<PAGE> 4
Employees
At December 31, 1995, the Bank had 281 full and part time employees. The Bank
considers its relations with employees to be very good.
Competition
All phases of the Bank's activities are highly competitive. The Bank competes
actively with national and state banks, mutual savings banks, savings and loan
associations, finance companies, credit unions, brokerage houses, and other
financial institutions operating in its service area. Some of these financial
institutions have greater resources than those of the Bank. On December 31,
1995, the Bank had total assets of $735.2 million and deposits of $641.2
million.
Supervision and Regulation
FFC, as a bank holding company, is subject to regulation under the Bank Holding
Company Act of 1956 (the Act), as amended, and is registered with the Board of
Governors of the Federal Reserve System. FFC is required to file quarterly
reports with the Federal Reserve, and is subject to their examination.
The Act requires prior approval of the Board of Governors before acquiring
substantially all the assets of, or direct or indirect ownership or control of,
more than 5% of the voting shares of any bank.
The Act also prohibits the acquisition by a bank holding company of the assets
or shares of a bank located outside the state in which the principal operations
of the banking subsidiaries are conducted unless such acquisition is
specifically authorized by the laws of the state in which the Bank to be
acquired is located. The Act does not place territorial restrictions on the
activities of nonbank subsidiaries of bank holding companies.
Under the Act, FFC is prohibited, with certain exceptions, from acquiring direct
or indirect ownership or control of more than 5% of the voting shares of any
company which is not a bank, and from engaging in any business other than
banking, except that FFC may engage in, and may own shares of companies engaged
in certain businesses determined by the Board of Governors to be so closely
related to banking so "as to be a proper incident thereto". Such related
businesses include, by determination of the Board of Governors, the making or
acquiring of loans or extensions of credit such as would be made by a mortgage,
finance, credit card or factoring company; leasing of personal property where
the leasing arrangements are functionally equivalent to extensions of credit;
and acting as an insurance agent or broker of insurance directly related to
extensions of credit of the Bank or other closely related businesses. The Act,
however, prohibits tie-in arrangements in connection with the extension of
credit or provision of services.
The Bank, as a state chartered bank, is subject to supervision, examination and
regulation by the State Supervisor of Banking and the Federal Deposit Insurance
Corporation (the FDIC). The deposits of the Bank are insured by the FDIC to the
extent provided by law.
-2-
<PAGE> 5
Various requirements and restrictions under the laws of the United States and
the State of Washington affect the operations of the Bank. Federal regulations
include requirements to maintain reserves against deposits, restrictions on
interest which may be paid on business demand deposits, limitations on the
nature and the amount of loans which may be made and the interest that may be
charged thereon, restrictions relating to investments or other activities,
limitations based on capital and surplus, and limitations on payments of
dividends. The approval of the Supervisor is required to pay dividends which
exceed the Bank's net profits for that year plus its retained net profits for
the preceding two years. Federal law also restricts the amount which can be
loaned to the Corporation or any of its nonbank subsidiaries to 10% of the
Bank's capital stock and surplus, and restricts the total of such loans to 20%
of the Bank's capital stock and surplus.
The Financial Institutions Reform, Recovery and Enforcement Act of 1989
(FIRREA) became effective on August 9, 1989. Among other things, this far
reaching legislation: 1) phased in significant increases in the FDIC insurance
premiums by 1993; 2) created two deposit insurance pools within the FDIC, one
to insure commercial and savings bank deposits and the other to insure savings
associations deposits; 3) permitted bank holding companies to acquire healthy
savings associations; 4) permitted commercial banks that meet certain housing
related asset requirements to secure advances and other financial services from
their local Federal Home Loan Bank; 5) created the Resolution Trust Corporation
to pay the cost of resolving insolvent savings associations financed by the
taxpayers and the savings associations; 6) restructured the federal regulatory
agencies for savings associations; 7) required higher minimum capital levels
for savings associations; and 8) has greatly enhanced the regulator's
enforcement powers by removing procedural barriers, sharply increasing the
civil and criminal penalties for violating statutes and regulations, and
providing increased appropriations to the Justice Department to finance
prosecutions for crimes against depository institutions.
On December 19, 1991, the Federal Deposit Insurance Corporation Improvement Act
of 1991 (FDICIA) was enacted. FDICIA substantially revises the depository
institution regulatory and funding provisions in the Federal Deposit Insurance
Act and makes revisions to several other federal banking statutes. Among other
things, FDICIA requires the Federal Banking Regulators to take prompt corrective
action in respect to depository institutions that do not meet minimum capital
requirements. The FDICIA created regulations establishing five capital tiers:
"Well Capitalized"; "Adequately Capitalized"; "Under-Capitalized";
"Significantly Under-Capitalized"; and "Critically Under-Capitalized". Under the
regulations, a depository institution would be considered Well Capitalized if it
maintains a leverage ratio of at least five percent and a risk-based Tier I
capital ratio of at least six percent and a risk-based total capital ratio of at
least ten percent, and is not otherwise designated to be in troubled condition.
Also, a depository institution will be deemed Under-Capitalized if it fails to
meet any applicable minimum capital measure; Significantly Under-Capitalized if
it is significantly below such measure; and Critically Under-Capitalized if it
fails to meet a level of tangible equity of two percent of total assets. If a
depository institution is neither Well Capitalized nor Under-Capitalized, it
will be considered Adequately Capitalized. A depository institution may be
deemed to be in a capitalization category that is lower than is indicated by its
actual capital position if it receives an unsatisfactory examination rating.
-3-
<PAGE> 6
The FDICIA generally prohibits a depository institution from making any
capital distribution, including the payment of dividends or payment of any
management fee to its holding company, if the depository institution would
thereafter be Under-Capitalized. Under-Capitalized depository institutions are
subject to restrictions on borrowing from the Federal Reserve System. In
addition, Under-Capitalized depository institutions are subject to growth
limitations and are required to submit capital restoration plans. A depository
institution holding company must guarantee the capital plan up to the amount
equal to the lesser of five percent of the depository institution's assets at
the time it becomes Under-Capitalized or the amount of the capital deficiency
when the institution fails to comply with the plan. The Federal Banking
Agencies may not accept a capital plan without determining, among other things,
if the plan is based on realistic assumptions and is likely to succeed in
restoring the depository institution's capital. If a depository institution
fails to submit an acceptable plan, it is treated as if it is Significantly
Under-Capitalized.
Significantly Under-Capitalized depository institutions may be subject to a
number of requirements and restrictions, including orders to sell sufficient
voting stock to become Adequately Capitalized, requirements to reduce total
assets, and the cessation of receipt of deposits from correspondent banks.
Critically Under-Capitalized depository institutions are subject to employment
of a receiver or a conservator.
The FDICIA also required the FDIC to revise its risk-based capital guidelines by
June 19, 1993 to take into account interest rate risk, concentration of credit
risk, and risk associated with nontraditional activities. It also required the
guidelines to reflect the actual performance and expected risk of loss of
multi-family mortgages. These provisions affect the capital standing of all
institutions, and may result in a need for increased capital.
As of December 31, 1995, the Bank was Well Capitalized, and maintained a
leverage ratio of 8.81%, a risk-based Tier I capital ratio of 11.07%, and a
risk-based total capital ratio of 12.33%.
The Corporation's common stock is registered under Section 12(g) of the
Securities Exchange Act of 1934 and the Corporation is subject to the periodic
reporting and proxy solicitation requirements, as well as other requirements of
federal and state securities law.
Effect of Governmental Policies
The Bank is affected not only by general economic conditions, but also by the
monetary and fiscal policies of the United States Government and various
agencies, particularly the Federal Reserve System. In its role of implementing
its monetary policy, the Federal Reserve Board has the power to regulate the
national supply of bank credit through such methods as open market operations in
the United States Government securities markets, control of the discount rate on
member bank borrowings, and establishment of reserve requirements against bank
deposits. These means are used in varying combinations and have an influence
over the growth of bank loans, investments, and deposits. They may also affect
interest rates charged on loans or paid on deposits.
-4-
<PAGE> 7
The nature and timing of future changes in monetary policies and their impact on
the Bank are not predictable. As a consequence of extensive regulation of
commercial banking activities in the United States, the Bank's business is
particularly susceptible to being affected by Federal legislation and
regulations which may have the effect of increasing the cost of doing business
or limiting permissible activities.
FFP, Inc.
On April 4, 1988, the Corporation formed a new subsidiary corporation called
FFP, Inc. The purpose of this corporation is to purchase and lease property and
equipment to the Bank. The reason for this approach was to preclude placing
nonearning assets on the books of the Bank or the Corporation.
It is intended that future purchases of fixed assets will be made by FFP, Inc.
The assets of FFP, Inc. as of December 31, 1995 are the premises and equipment
of the Bank's Lynnwood, Stanwood, Administrative, Monroe, Smokey Point and
Snohomish offices. At this time, it is not anticipated that FFP, Inc. will
engage in any other type of business.
-5-
<PAGE> 8
STATISTICAL DISCLOSURE INDEX
The schedules listed below set forth the statistical information relating to
Frontier Financial Corporation and subsidiaries (unless otherwise stated) in
accordance with Guide 3. This information should be read in conjunction with the
consolidated financial statements.
<TABLE>
<CAPTION>
Annual
Form 10-K Report
Page Page
--------- -------
<S> <C> <C>
I. Distribution of Assets, Liabilities
and Stockholders' Equity; Interest
Rates and Interest Differential:
A. Consolidated Average Balance
Sheets/Interest Income and
Expense/Rates 32
B. Changes in Net Interest Income
and Expense due to Rate and 33
Volume
II. Investment Portfolio:
A. Analysis of Investment Securities
at Year-end 7 10
B. Maturity Distribution of Investment
Securities 7 11
III. Loan Portfolio:
A. Types of Loans 8 12
B. Loan Maturities and Sensitivity to
Changes in Interest Rates 8 12 & 29
C. Impaired assets 9 13
D. Credit Concentrations 14
IV. Summary of Loan Loss Experience:
A. Analysis 12
B. Allocation of Allowance for Possible
Loan Losses 13
V. Deposits:
Average Interest and Noninterest
Bearing Deposit Balances 32
VI. Return on Equity and Assets:
Selected Financial Ratios 14
VII. Borrowings 15
</TABLE>
-6-
<PAGE> 9
Analysis of Investment Securities
The Aggregate amortized recorded values of investment securities at December 31
are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
(In thousands) Amortized Amortized Amortized
Cost Cost Cost
-----------------------------------------
<S> <C> <C> <C>
U.S. Treasury $ 2,759 $ 2,758 $ 5,214
U.S. Agencies 48,591 39,588 44,121
Municipal Bonds 30,045 32,814 31,067
Corporate Bonds 51,568 55,869 69,486
FHLB Stock 7,542 7,083 1,621
Certificates of Deposit 3,050 -- --
-----------------------------------------
Totals $143,555 $138,112 $151,509
=========================================
</TABLE>
Maturity Distribution of Investment Securities
The following table sets forth the maturities of investment securities at
December 31, 1995. Taxable equivalent values are used in calculating yields
assuming a tax rate of 34%.
<TABLE>
<CAPTION>
(In thousands) After 1 Yr After 5 Yrs Totals &
(Amortized cost used) Within But Within But Within After Weighted
1 Year/ 5 Years/ 10 Years/ 10 Years/ Average
Yield Yield Yield Yield Yield
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S. Treasury $ 1,996 $ 511 -- $ 252 $ 2,759
7.63% 7.71% -- 7.16% 7.60%
U.S. Agencies $ 5,310 17,232 $25,720 329 48,591
6.33% 5.99% 7.02% 8.86% 6.59%
Municipal Bonds 116 1,125 15,951 12,854 30,046
8.51% 10.53% 9.19% 8.50% 8.94%
Corporate Bonds 10,261 17,845 23,461 -- 51,567
5.30% 6.29% 6.88% -- 6.37%
FHLB Stock 7,542 -- -- -- 7,542
6.44% -- -- -- 6.44%
Certificates of Deposit 3,050 -- -- -- 3,050
5.64% -- -- -- 5.64%
---------------------------------------------------------------------------
TOTALS $28,275 $36,713 $65,132 $13,435 $143,555
===========================================================================
6.01% 6.30% 7.50% 8.48% 6.99%
===========================================================================
</TABLE>
-7-
<PAGE> 10
Types of Loans
Major classifications of loans, net of deferred loan fees, at December 31 are as
follows:
<TABLE>
<CAPTION>
(In thousands) 1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Commercial $126,914 $121,218 $118,871 $113,706 $ 91,727
Real Estate Commercial 171,590 151,829 89,430 67,130 50,066
Real Estate Construction 94,393 99,278 71,355 67,425 53,116
Real Estate Mortgage 92,342 79,264 70,600 52,312 47,976
Installment 19,749 18,923 19,350 20,247 20,568
--------------------------------------------------------
TOTAL $504,988 $470,512 $369,606 $320,820 $263,453
========================================================
</TABLE>
Loan Maturities and Sensitivity to Changes in Interest Rates
The following table shows the amounts and maturity analysis of loans outstanding
as of December 31, 1995. Also, the amounts are classified as to fixed and
variable rate sensitivity for amounts due after one year.
<TABLE>
<CAPTION>
Maturity
-----------------------------------------------
(In thousands) Within 1 - 5 After
1 Year Years 5 Years Total
-----------------------------------------------
<S> <C> <C> <C> <C>
Commercial $ 67,068 $ 54,035 $ 6,136 $127,239
Real Estate Commercial 20,130 142,618 9,579 172,327
Real Estate Construction 62,442 34,121 76 96,639
Real Estate Mortgage 18,750 72,975 986 92,711
Installment 4,727 9,156 5,875 19,758
-----------------------------------------------
TOTAL $173,117 $312,905 $22,652 $508,674
===============================================
</TABLE>
Loans maturing after one year with:
<TABLE>
<CAPTION>
1 - 5 After
Years 5 Years
------------------
<S> <C> <C>
Fixed Rates $247,932 $ 5,750
Variable Rates 64,973 16,902
------------------
TOTAL $312,905 $22,652
==================
</TABLE>
It is not uncommon to rollover loans at the maturity period, provided that the
rate and terms of the loan conform to the current policy.
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<PAGE> 11
Loan Administration
The Bank provides revolving lines of credit to many of its borrowers. Such lines
are approved by the Director's Loan Committee ("Loan Committee") or other
administrative level committee or person if the amount exceeds the lending units
authorized loan limit.
Credit Review personnel, under the direction of the Credit Administrator,
examine the loan portfolio regularly. Reports are made by the Senior
Vice-President/Credit Administrator to senior management and the Loan Committee,
and follow-up corrective action is monitored. Problem loan reports are prepared
for management review on a regular basis.
Certain problem loans are placed on a nonaccrual basis in conformance with
defined policy. The Loan Committee regularly reviews information reports on
classified and delinquent loans. Comparative summaries of delinquent loans are
also provided on a regular basis to senior management and to the Board of
Directors.
Management closely monitors the adequacy of the loan loss reserve and an
analysis is performed four times a year. The allowance is maintained at a level
deemed sufficient to meet potential losses.
The reviews, examinations and actions described above are in addition to the
periodic examinations by federal and state regulatory agencies, as well as the
Bank's internal audit department and the Bank's outside public accounting firm.
Impaired Assets (Previously referred to as Nonperforming Assets)
Loans are placed in a nonaccrual status when, in the opinion of management, the
collection of additional interest is doubtful, or when the loan becomes ninety
(90) days past due in principal or interest. When a loan is placed on a
nonaccrual status, all interest previously accrued but not collected is reversed
and charged against interest income. Income on nonaccrual loans is then
recognized only to the extent cash is received and where the future collection
of principal is probable. Accruals are resumed only when the loan is brought
current, or when, in the opinion of management, the borrower has demonstrated
the ability to resume payments of principal and interest on a regular basis.
The dollar amount of loans placed in nonaccrual or past due 90 days or more as a
percentage of total loans was .87%, .57% and .44% for year-end 1995, 1994 and
1993 respectively. These loans have a variety of situations, some of which may
lead to foreclosure or involve a bankruptcy case. Others may continue payment as
the borrower's financial situation improves. A very small amount represents
federally insured loans. The rise at year end 1995 occurred primarily as a
result of two particular borrowers which, together, constituted $4.0 million, or
91% of total nonaccruing loans. While these loans appear adequately secured by
real estate, it was nonetheless felt prudent to place them in nonaccrual.
Management monitors these loans on a frequent basis and conducts aggressive
collection efforts, unless constraints are placed on the Bank by the bankruptcy
courts. These efforts are directed toward the best long-term results for the
Bank, and to the extent reasonable, to the borrower as well.
-9-
<PAGE> 12
Loans past due 90 days or more and nonaccruing loans on which the accrual of
interest has been discontinued as of December 31st are as follows:
(In thousands)
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Commercial $ 175 $ 866 $ 893 $ 1,068 $ 463
Real Estate 4,228 1,736 721 1,028 1,796
Installment 14 59 21 19 8
-------------------------------------------------------
TOTAL $ 4,417 $ 2,661 $ 1,635 $ 2,115 $ 2,267
=======================================================
Total Loans at end
of period $504,988 $470,512 $369,606 $320,820 $263,453
=======================================================
As a percent of
total loans 0.87% 0.57% 0.44% 0.66% 0.86%
=======================================================
</TABLE>
There are certain amounts of interest collected on the above loans and included
in income, and amounts that have not been accrued which are indicated in the
table below:
<TABLE>
<CAPTION>
(In thousands)
At December 31, 1995 1994 1993 1992 1991
- --------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total interest income which
would have been recorded
during the period under
original terms of loans above $501 $261 $203 $229 $338
Portion of interest
income included in
net income for the
period $378 $207 $98 $112 $106
Commitments for additional
funds related to loans
above -0- -0- -0- -0- -0-
</TABLE>
Restructured loans are those loans that had problems in the past, and a
concession was made in the interest rate, principal amount, and/or the repayment
schedule has been modified to the extent that there has been tangible impairment
of value. These loans are monitored on a regular basis for performance.
The recorded value of restructured loans at year-end for the last five years
was insignificant, and therefore not shown.
-10-
<PAGE> 13
The Bank originates commercial, commercial real estate, mortgage and installment
loans primarily in Snohomish and north King Counties. Loan growth in 1995 was at
a somewhat slower pace than previous years. Total loans as of December 31, 1995
and 1994 were $505.0 and $470.5 million, respectively. The percent of the growth
in net loans for year-end 1995 was 7.2%, or an addition of $34.0 million in net
loans during 1995.
The area's economy is diversified with trade, high-tech, military and service
industries. Military personnel assigned to the new Everett Naval facility began
arriving in the later part of 1995, and it is expected that continuing increases
in personnel will serve to further diversify and stabilize the local economy.
While management estimates that the loan portfolio is reasonably diversified,
the quality of the portfolio is related to the strength and stability of real
estate values which are controlled by the local economy.
The Boeing Company continues to be one of the major employers in Snohomish
County. The labor strike in the fourth quarter of 1995 slowed retail sales
growth during the time, but it would appear that this slowing and concerns over
the past downsizing at Boeing were somewhat mitigated by the increased
diversification of the local economy. However, concern still persists regarding
the employment stability of Boeing, and, accordingly, management will continue
to exercise caution in the execution of the Bank's lending activities.
A concern on the national level is the continued negotiations on balancing the
federal budget. The government shut downs in the last quarter 1995 combined with
the uncertainty of reaching a compromise over the federal deficit may have
adverse effects on the credit and equity markets, which could affect consumer
and business confidence locally.
Other Real Estate Owned
As of December 31, 1995, the Bank had four parcels of other real estate owned
(OREO) on its books, which totaled $.6 million. One parcel is under a
contingent earnest money agreement to purchase, and one other parcel is sold
under the equivalent of the instalment sale method. The remaining two parcels
are pending sale. No losses are expected on sales of OREO which are recorded at
the lower of cost or fair value, less estimated costs to sell. No particular
trends are noted at this time.
The table below shows the book value of OREO at December 31st:
<TABLE>
<CAPTION>
(In thousands) 1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Other Real Estate Owned $590 $1,118 $683 $1,139 $107
</TABLE>
-11-
<PAGE> 14
Summary of Loan Loss Experience
The following table provides an analysis of net losses by loan type for the last
five years:
<TABLE>
<CAPTION>
(In thousands) 1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Balance at beginning
of year $ 10,410 $ 7,368 $ 5,906 $ 4,117 $ 3,498
Provision charged to
operating expense 1,525 3,900 3,012 2,249 936
Deduct:
Loans charged-off:
Commercial (1,250) (1,111) (1,886) (1,556) (439)
Real Estate (875) (879) (290) (390)
Installment (87) (100) (93) (56) (75)
--------------------------------------------------------------
Total charged-off loans (2,212) (2,090) (2,269) (2,002) (514)
Less recoveries:
Commercial 1,245 613 500 222 159
Real Estate 901 557 151 157 9
Installment 28 62 68 53 29
--------------------------------------------------------------
Total recoveries 2,174 1,232 719 432 197
Net charge-offs (38) (858) (1,550) (1,570) (317)
Allowance for possible loan
losses assumed in merger 1,110
--------------------------------------------------------------
Balance at end of year $ 11,897 $ 10,410 $ 7,368 $ 5,906 $ 4,117
==============================================================
Net total loans at
end of period $504,988 $470,512 $369,606 $320,820 $263,453
Daily average loans $485,430 $426,344 $338,029 $284,239 $245,172
Ratio of net charged-off
loans during period to
average loans outstanding 0.01% 0.20% 0.46% 0.55% 0.13%
=============================================================
</TABLE>
-12-
<PAGE> 15
It is the policy of Frontier Financial Corporation and its subsidiary to
charge-off any loan or portion of a loan that is deemed uncollectible in the
ordinary course of business. The entire allowance for possible loan losses is
available to absorb such charge-offs.
In the opinion of management, if a loan represents a long-term liquidation
project, particularly when the liquidation is under the control of the
bankruptcy courts, a decision may be made to write off the asset. Many
charge-offs will ultimately have recoveries in full or significant part, and
some are currently under repayment programs.
For fiscal year-end 1995, the Bank experienced the lowest level of net losses to
average total loans in the last five years. This low level is attributed to the
Bank's recoveries during 1995 of several significant charge-offs. All of the
major dollar recoveries were from charge-offs that occurred in prior years.
As indicated by the chart showing the "Summary of Loan Loss Experience", the
Bank has recovered a significant portion of its charged-off loans for fiscal
years 1995 and 1994. The chart also indicates that the Bank's net charge-offs
for fiscal years 1992 and 1993 were substantially higher. The higher level for
those fiscal years is primarily attributed to loans acquired through
acquisition.
Charged-off loans that continue to be actively pursued for collection as of
fiscal year-end 1995, total $3.4 million. While additional recoveries are
expected, the amounts and timing cannot be determined with certainty.
Based on certain characteristics of the portfolio, potential losses can be
anticipated for major loan categories. In the following table, the allowance for
possible loan losses at year-end, for the last five years, has been allocated
among major loan categories based primarily on their historical net charge-off
experience, along with consideration of factors such as quality, volume,
anticipated economic conditions, and other business considerations.
<TABLE>
<CAPTION>
(In thousands, except percents)
Loan Loan Loan Loan Loan
1995 Category 1994 Category 1993 Category 1992 Category 1991 Category
Reserve Percent Reserve Percent Reserve Percent Reserve Percent Reserve Percent
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $ 7,138 25.1% $ 6,246 25.8% $4,781 32.2% $4,370 35.3% $3,581 34.7%
Real Estate 4,283 71.0% 3,748 70.2% 2,425 62.6% 1,359 58.4% 412 57.5%
Installment 476 3.9% 416 4.0% 162 5.2% 177 6.3% 124 7.8%
-------------------------------------------------------------------------------------------------------------
TOTAL $11,897 100.0% $10,410 100.0% $7,368 100.0% $5,906 100.0% $4,117 100.0%
=============================================================================================================
</TABLE>
Historical net charge-offs are not necessarily accurate indicators of future
losses since net charge-offs vary from period to period due to economic
conditions and other factors that cannot be accurately predicted. Thus, an
evaluation based on historical loss experience of individual loan categories is
only one of many factors considered by management in evaluating the adequacy of
the overall allocation, and in determining the amount of the provision for
possible loan losses. Other factors are the continuing level of nonperforming
loans, credit concentrations, and uncertain economic conditions. At December 31,
1995, based on current economic conditions, the total of the allocation for
possible loan losses is, in management's opinion, adequate to provide for future
losses. However, a worsening of the economy in the Bank's market area
could negatively affect loan performance and underlying collateral values. The
full impact of such a trend on the condition of the Bank cannot be estimated.
-13-
<PAGE> 16
Credit Concentrations
At year-end 1995, 16.8% of the Bank's loan portfolio was in residential and
commercial construction and land development projects centered in Snohomish and
King Counties. Management has established a Real Estate Review Committee which
meets periodically to monitor local economic conditions, and the performance of
borrowers in this industry. The chart below indicates the amount of those loans,
and as a percent of total loans for the period:
<TABLE>
<CAPTION>
At December 31,
(In thousands) 1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Construction $ 50,675 $ 55,551 $ 38,324 $ 34,399 $ 32,856
Land Development 33,946 38,582 28,835 29,012 16,873
--------------------------------------------------------
TOTAL $ 84,621 $ 94,133 $ 67,159 $ 63,411 $ 49,729
========================================================
Total Loans at end of period $504,988 $470,512 $369,606 $320,820 $263,453
========================================================
Construction and Land
Development loans as a
percent of total loans 16.8% 20.0% 18.2% 19.8% 18.9%
========================================================
</TABLE>
Deposits
For the average amount of deposits and rates paid on such deposits for years
ended December 31, 1995, 1994, and 1993 please refer to page 32 of Annual Report
to Shareholders.
Maturities of time certificates of deposit over $100,000 at year end 1995, are
shown below:
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
3 months or less $29,667
Over 3 months through 6 months 18,932
6 months through 12 months 19,025
Over 12 months 24,077
-------
TOTAL $91,701
=======
</TABLE>
Significant Financial Ratios
Ratios for the years ended December 31, 1995, 1994 and 1993 are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Return on Average Assets 1.82% 1.69% 1.50%
Return on Average Equity 21.59% 22.21% 20.59%
Cash dividends paid/dividend payout -0- -0- -0-
Average Equity to Average Assets 8.45% 7.63% 7.28%
</TABLE>
-14-
<PAGE> 17
Borrowings
<TABLE>
<CAPTION>
Short-Term Borrowings Weighted Weighted Weighted
(In thousands) Average Average Average
Interest Interest Interest
At December 31, 1995 Rate 1994 Rate 1993 Rate
---- -------- ---- -------- ---- --------
<S> <C> <C> <C> <C> <C> <C>
Year-end balance: $ 7,596 5.51% $ 9,615 4.58% $6,040 2.69%
Highest month end
balance during
the period: $12,400 $34,000 $6,040
------- ------- ------
</TABLE>
For information regarding average balances and yields, please refer to page 32
of 1995 Annual Report to Shareholders.
Long-Term Debt
For detailed information relating to long term debt, please refer to Note 9,
page 15, of 1995 Annual Report to Shareholders.
-15-
<PAGE> 18
ITEM 2 - PROPERTIES
The Bank's Evergreen Way Office (previously the Main Office) is a two story
building constructed in 1979, and owned by the Bank. This building has
approximately 13,000 square feet, and is fully utilized by the Bank.
The Bank's first branch, the Downtown Everett Office, opened in 1980 in rented
facilities at 2831 Wetmore Ave, was relocated in 1994 one block from its
previous location. FFP, Inc. has entered into a long term lease with a director
of the Bank who owns the property located at 2831 Colby Ave. The Bank
utilizes 12,000 square feet, all of the main floor of the building.
The Bank owns the Arlington Office premises which consists of a single story
building with approximately 3,000 square feet. Contiguous to the Arlington
Office is a parcel of land on which five apartments are located. The Bank owns
these apartments. The Arlington Office was acquired through merger with The Bank
of Arlington in August, 1982. The Bank of Arlington had one office.
FFC owned the property previously occupied by the Trust Department, Private
Banking, and the Insurance & Investment Center, located at 2612 Wetmore Avenue,
Everett, Washington. In 1994, these departments combined operations in the new
facility located at 2831 Colby with the Downtown Everett Office. The property at
2612 Wetmore has been disposed of. In September 1985, a drive-up facility was
constructed on this site to serve the Downtown Everett community, and will
remain in operation at the same location.
FFP owns property in Snohomish, which is rented by the Bank for its Snohomish
Office. There are also eight apartments on the property. Currently a mobile
banking facility is being utilized by the Bank. In the second quarter of 1996,
the construction of a permanent building will begin which will occupy most all
of the property. Completion is expected by September 1996. All of the new
facility will be occupied by the Bank.
FFP, Inc. owns the property in Lynnwood, which is rented by the Bank for its
Lynnwood Office. The office opened for business in June 1988, and has
approximately 3,200 square feet. The office is located on Highway 99, which is
heavily traveled.
The South Point Office of the Bank has been relocated approximately 100 yards
from its previous location, and renamed the Main Office of the Bank. This office
is now located on the ground floor of the financial center constructed in 1993
(please see next page).
The Bank acquired the Marysville Office by merger with Citizens Bank of
Snohomish County in August 1989. This building has approximately 5,000 square
feet, and is fully utilized by the Bank. On the same property are two buildings,
which are presently rented to other business concerns. The Bank owns the land
and the buildings.
-16-
<PAGE> 19
The Smokey Point Office was also added to the branch network by the same merger
in August 1989. This office was relocated within a few blocks of the original
site in June 1995. FFP owns the land and building and leases it to the Bank. The
office has 3,500 square feet and is fully utilized by the Bank.
The Bank also acquired its Lake Stevens Office by the same merger. The Bank owns
the building, but leases the land from nonaffiliates. The building is a mobile
facility type construction, and has 1,800 square feet, which is fully utilized
by the Bank.
The Bank's Mill Creek Office is located approximately five miles east of
Lynnwood, Washington. The office was opened in January 1991, and has 2,600
square feet, all being utilized by the Bank. The property and building are
leased from nonaffiliates.
In July 1992, the Bank opened its Stanwood Office in leased quarters. In 1994,
FFP constructed a new facility in the immediate area, on land purchased. The
building has 3,500 square feet, and is fully utilized by the Bank.
In November 1992, the Bank acquired its Edmonds Office by merger with Edmonds
National Bank. This building has approximately 11,300 square feet and is fully
utilized by the Bank. The land is being leased by the Bank from nonaffiliates,
but the Bank owns the building.
In May 1993, FFP completed construction of a financial center in south
Everett, to house the Main Office of the Bank and the Executive Offices of the
Corporation. The three story building has approximately 42,100 square feet and
is fully utilized by the Bank and Corporation. The building houses all of the
operations functions of the Bank, including the data processing center and the
real estate loan center.
In July 1993, the Bank acquired the Bothell Office through merger with The Bank
of Northshore. This office, previously the Main Office of the Bank of
Northshore, has approximately 1,800 square feet, and is fully utilized by the
Bank. Both the land and building are owned by the Bank.
The Bank acquired its Woodinville Office through the same merger. This office
has approximately 1,300 square feet, and is one of three suites in an office
building. The Bank is renting the office from nonaffiliates.
In 1994, FFP purchased property located at 201 West Main St. in Monroe,
Washington. This property is leased to the Bank for its Monroe Office which was
opened in June 1995. The building has 3,500 square feet, and is fully utilized
by the Bank.
As of December 31, 1995, the Bank had sixteen branch offices, including the Main
Office.
-17-
<PAGE> 20
ITEM 3 - LEGAL PROCEEDINGS
There are no material legal proceedings.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to security holders during the
fourth quarter of 1995.
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
Please see 1995 Annual Report to Shareholders, page 30 and 31.
ITEM 6 - SELECTED FINANCIAL DATA
(In thousands, except per share data)
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
% Change
AT YEAR END 1995 1994 1993 1992 1991 1994-1995
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total assets $735,183 $642,568 $558,043 $486,656 $380,446 14.4%
Net loans 493,091 460,102 362,238 314,914 259,336 7.2%
Deposits 641,218 539,603 506,538 448,818 349,532 18.8%
Long-term debt 136 565 737 1,414 1,023 -75.9%
Investment securities 144,976 136,326 151,509 89,062 58,681 6.3%
Shareholders' equity 65,353 50,459 41,167 33,257 26,025 29.5%
FOR THE YEAR
Interest income 63,086 52,945 44,324 40,251 34,483 19.2%
Interest expense 29,347 20,639 17,782 18,938 18,496 42.2%
Securities gains(losses) -- (355) -- 45 25 NM
Provision for loan losses 1,525 3,900 3,012 2,249 936 -60.9%
Net income 12,615 10,360 7,746 5,647 4,574 21.8%
Earnings per share $ 2.00 $ 1.65 $ 1.24 $ 0.91 $ 0.77 21.2%
Return on Average
Assets 1.82% 1.69% 1.50% 1.36% 1.33%
Equity 21.59% 22.21% 20.59% 19.39% 19.08%
Avg. equity/avg. assets 8.45% 7.63% 7.28% 7.00% 6.98%
</TABLE>
NM=Not Meaningful
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Please see 1995 Annual Report to Shareholders, pages 23 through 33.
-18-
<PAGE> 21
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Annual
Form Report to
10-K Shareholders
Page Page
-------------------------
<S> <C> <C>
Report of Independent Public Accountants 23
Report of Management 1
Consolidated Balance Sheet at
December 31, 1995 and 1994 3
Consolidated Statement of Income for the Years
Ended December 31, 1995, 1994 and 1993 4
Consolidated Statement of Cash Flows for the
Years Ended December 31, 1995, 1994 and 1993 5
Consolidated Statement of Changes in
Shareholders' Equity 6
Condensed Balance Sheet (Parent Only) at
December 31, 1995 and 1994 21
Condensed Statement of Income (Parent Only) for the
Years Ended December 31, 1995, 1994 and 1993 21
Condensed Statement of Cash Flows (Parent Only)
for Years Ended December 31, 1995, 1994 and 1993 22
Notes to Consolidated Financial Statements 7-22
</TABLE>
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
-19-
<PAGE> 22
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF FRONTIER FINANCIAL CORPORATION
Please see pages 3 thru 6 of 1996 Proxy Statement.
ITEM 11 - EXECUTIVE COMPENSATION
Please see pages 6 thru 8 of 1996 Proxy Statement.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Please see page 5 of 1996 proxy statement.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Please see page 8 of 1996 Proxy Statement; and,
Note 13, page 18 of 1995 Annual Report to Shareholders; and
Page 22 of this Form 10-K report.
-20-
<PAGE> 23
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of the report:
1. Financial Statements.
Financial statements required by Item 8 of this report are
incorporated by reference, from the Annual Report to Shareholders,
attached hereto as an exhibit.
2. Financial Statement Schedules.
Additional financial statement schedules filed with this report are
included in Item 14(d) and are as follows:
Schedule I - Amounts Receivable from Certain Persons
Schedules other than those listed above are omitted because of the
absence of the condition under which they are required or because
the information called for is included in the financial statements
or notes thereto.
3. Exhibits.
(3) Articles of Incorporation and By-Laws are incorporated
herein by reference to Exhibits 3(a) and 3(b) to
Registration on Form S-14, File No. 2-82420.
(11) Statement Regarding Computation of Earnings Per Share.
(13) Annual Report to Shareholders for the year ended December
31, 1995. (Pages 1 to 33, inclusive)
(21) Subsidiaries of Registrant is incorporated by reference
from Part I, page 1 thru 5 of this report.
(27) Financial Data Schedule (This exhibit is included only in
the electronic EDGAR filing version of this Form 10-K. The
Financial Data Schedule is not a separate financial
statement, but a schedule that summarizes certain standard
financial information extracted directly from the
financial statements in this filing.)
(b) Reports on Form 8-K:
No Form 8-K's were filed, nor required to be filed for any event
during the fourth quarter ended December 31, 1995.
(c) Exhibits - See list of exhibits set forth above at Item 14(a)3.
(d) Financial Statement Schedules:
Schedules required to be filed in response to this portion of Item
14 are listed above in Item 14(a)1 and 2. The report of
independent public accountants covering these items is included on
page 23 of this Form 10-K.
-21-
<PAGE> 24
SCHEDULE I
FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
AMOUNTS RECEIVABLE FROM CERTAIN PERSONS
<TABLE>
<CAPTION>
(In thousands)
Balance at
Year Ended Balance at Deductions December 31
December 31 January 1 Additions Collections Write-offs all current
----------- ---------- --------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
1995
Nine $10,044 $4,123 $ (5,615) $0 $ 8,552
Directors
and Three
Officers
1994
Eight $ 5,969 $7,695 $ (3,620) $0 $10,044
Directors
and Three
Officers
1993
Six $ 8,328 $8,561 $(10,920) $0 $ 5,969
Directors
and Two
Officers
1992
Eight $ 6,842 $5,958 $ (4,472) $0 $ 8,328
Directors
and Three
Officers
1991
Eight $ 5,525 $3,937 $ (2,620) $0 $ 6,842
Directors
and Two
Officers
</TABLE>
-22-
<PAGE> 25
MOSS ADAMS LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
Frontier Financial Corporation
We have audited the consolidated financial statements and related financial
statement schedules of Frontier Financial Corporation and subsidiaries listed
in item 14 (a) 1 and 2 of the Annual Report on Form 10-K of Frontier Financial
Corporation for the year ended December 31, 1995. These financial statements
are the responsibility of the Corporation's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
from material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Frontier Financial
Corporation and subsidiaries as of December 31, 1995 and 1994, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1995, in conformity with generally accepted
accounting principles. In our opinion, the financial statement schedules
referred to above, when considered in relation to the basic financial
statements taken as a whole, present fairly the information required to be
included therein.
As discussed in Note 1 to the financial statements, in 1994 the Corporation
changed its method of accounting for investment securities.
/s/ MOSS ADAMS LLP
Everett, Washington
January 22, 1996
23
<PAGE> 26
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
March 20, 1996 /s/ Robert J. Dickson
Date ----------------------------------------
Robert J. Dickson
President & Chief Executive Officer
March 20, 1996 /s/ James F. Felicetty
Date ----------------------------------------
James F. Felicetty
Secretary/Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated:
March 20, 1996 /s/ Robert J. Dickson
----------------------------------------
Robert J. Dickson, Director
March 20, 1996 /s/ David A. Dujardin
----------------------------------------
David A. Dujardin, Director
March 20, 1996 /s/ Edward D. Hansen
----------------------------------------
Edward D. Hansen, Director
March 20, 1996 /s/ William H. Lucas
----------------------------------------
William H. Lucas, Director
March 20, 1996 /s/ James H. Mulligan
----------------------------------------
James H. Mulligan, Director
March 20, 1996 /s/ Alwyn L. Nelson
---------------------------------------
Alwyn L. Nelson, Director
March 20, 1996 /s/ Edward J. Novack
----------------------------------------
Edward J. Novack, Secretary of the Board
March 20, 1996 /s/ J. Donald Regan
----------------------------------------
J. Donald Regan, Director
March 20, 1996 /s/ Roger L. Rice
----------------------------------------
Roger L. Rice, Director
----------------------------------------
Roy A. Robinson, Director
March 20, 1996 /s/ William J. Robinson
----------------------------------------
William J. Robinson, Director
March 20, 1996 /s/ Edward C. Rubatino
----------------------------------------
Edward C. Rubatino, Chairman of the Board
March 20, 1996 /s/ Arthur W. Skotdal
----------------------------------------
Arthur W. Skotdal, Director
-24-
<PAGE> 27
EXHIBIT INDEX
EXHIBIT
NUMBER
- -------
11 Computation of Earnings Per Share.
13 Frontier Financial Corporation and Subsidiaries 1995 Annual Report to
Shareholders
<PAGE> 1
EXHIBIT 11
FRONTIER FINANCIAL CORPORATION
COMPUTATION OF EARNINGS PER SHARE
Year Ended December 31,
-----------------------
1995 1994 1993
---- ---- ----
Net Income $12,614,926 $10,360,273 $7,746,419
=========== =========== ==========
Computation of average
shares outstanding:
Shares outstanding
at beginning of year 4,196,435 3,799,477 1,144,898
Additional shares deemed
outstanding because of
stock dividends 380,858 494,453
Shares issued pursuant
to stock splits 2,100,650 2,093,986 4,615,640
Shares issued during
the year times average
time outstanding during
the year 9,987 7,637 4,316
--------- --------- ---------
Average Shares Outstanding 6,307,072 6,281,958 6,259,307
========= ========= =========
Primary Earnings Per Share $2.00 $1.65 $1.24
========= ========= =========
The effect of stock options outstanding has a dilutive effect of less than 3%
of total outstanding shares, and is therefore not shown.
<PAGE> 1
EXHIBIT 13
Frontier Financial Corporation and Subsidiaries Annual Report to
Shareholdes for year ended 1995.
<PAGE> 2
- --------------------------------------------------------------------------------
FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
REPORT OF MANAGEMENT
- --------------------------------------------------------------------------------
The management of Frontier Financial Corporation and its subsidiaries has
prepared and is responsible for the integrity and fairness of the financial
statements and other financial information included in this annual report. The
financial statements are prepared in accordance with generally accepted
accounting principles and prevailing practices of the banking industry and, when
appropriate, include amounts based on management's best estimates and judgment.
Management has established and is responsible for maintaining an internal
control environment designed to provide reasonable assurance that transactions
are properly authorized, assets are safeguarded and financial records are
reliably maintained. The internal control environment includes: an effective
financial accounting structure; a comprehensive internal audit function; an
independent Audit Committee of the Board of Directors; and extensive financial
and operating policies and procedures. The Corporation's management also fosters
an ethical climate supported by a code of conduct along with appropriate
selection and training of personnel.
The Audit Committee of the Board of Directors, composed solely of outside
directors, meets periodically with management, the independent accountants and
the internal auditors to ensure that each is properly discharging its
responsibilities with regard to the financial statements and internal accounting
controls. The independent accountants have full and free access to the Audit
Committee and meets with it to discuss auditing and financial reporting matters.
The Corporation's financial statements are audited by Moss Adams LLP, the
Corporation's independent auditors. Their audits were conducted in accordance
with generally accepted auditing standards and include a consideration of the
internal control structure, tests of accounting records and other audit
procedures necessary to allow the auditors to express their opinion on the
fairness of the financial statements.
Management recognizes that there are inherent limitations in the effectiveness
of any internal control environment. However, management believes that, as of
December 31, 1995, the Corporation's internal control environment provided
reasonable assurance as to the integrity and reliability of the financial
statements and related financial information.
Management is responsible for compliance with the federal and state laws and
regulations concerning restrictions and loans to insiders designated by the FDIC
as safety and soundness laws and regulations.
Management assessed the Corporation's compliance with the designated laws and
regulations relating to safety and soundness. Based on this assessment,
management believes that the Corporation complied, in all significant respects,
with the designated laws and regulations related to safety and soundness for the
year ended December 31, 1995.
ROBERT J. DICKSON JAMES F. FELICETTY
President and Chief Executive Officer Secretary/Treasurer
- --------------------------------------------------------------------------------
PAGE ONE
- --------------------------------------------------------------------------------
<PAGE> 3
[MOSS-ADAMS LLP LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
Frontier Financial Corporation
We have audited the accompanying consolidated balance sheet of Frontier
Financial Corporation and subsidiaries as of December 31, 1995 and 1994, and
the related consolidated statements of income, changes in shareholders' equity,
and cash flows for each of the three years in the period ended December 31,
1995. These financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Frontier Financial
Corporation and subsidiaries as of December 31, 1995 and 1994, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1995, in conformity with generally accepted
accounting principles.
As discussed in Note 1 to the financial statements, in 1994 the Corporation
changed its method of accounting for investment securities.
/s/ Moss Adams LLP
Everett, Washington
January 22, 1996
- --------------------------------------------------------------------------------
PAGE TWO
- --------------------------------------------------------------------------------
<PAGE> 4
- --------------------------------------------------------------------------------
FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
In Thousands December 31,
- ------------ ------------
1995 1994
---- ----
<S> <C> <C>
ASSETS
Cash and due from banks $ 19,708 $ 22,081
Federal funds sold 55,930 1,120
Investment securities
Available for sale, at fair value 102,300 42,278
Held to maturity (Fair value 1995: $43,889; 1994: $89,200) 42,676 94,048
-------- --------
Total investment securities 144,976 136,326
Loans 504,988 470,512
Less allowance for loan losses (11,897) (10,410)
-------- --------
Net loans 493,091 460,102
Premises and equipment, net 11,758 11,845
Other real estate owned 590 1,118
Other assets 9,130 9,976
-------- --------
TOTAL ASSETS $735,183 $642,568
======== ========
LIABILITIES
Deposits
Noninterest bearing accounts $ 83,281 $ 71,754
Interest bearing accounts 557,937 467,849
-------- --------
Total deposits 641,218 539,603
Federal funds purchased and securities sold
under agreements to repurchase 7,596 9,615
Other liabilities 5,880 4,826
Federal Home Loan Bank advances 15,000 37,500
Long-term debt 136 565
-------- --------
TOTAL LIABILITIES 669,830 592,109
-------- --------
COMMITMENTS (Note 14)
SHAREHOLDERS' EQUITY
Common stock, no par value;
10,000,000 shares authorized;
6,322,255 and 4,196,435 shares issued
and outstanding in 1995 and 1994 44,084 43,917
Retained earnings 20,336 7,721
Unrealized gains(losses) on available for
sale securities, net of tax effect 933 (1,179)
-------- --------
TOTAL SHAREHOLDERS' EQUITY 65,353 50,459
-------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $735,183 $642,568
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
- --------------------------------------------------------------------------------
P A G E T H R E E
- --------------------------------------------------------------------------------
<PAGE> 5
- --------------------------------------------------------------------------------
FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF INCOME
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
In Thousands, except for per share amounts Year Ended December 31,
- ------------------------------------------ -----------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 52,146 $ 43,595 $ 35,223
Interest on federal funds sold 2,194 52 991
Interest on investment securities
taxable 6,781 7,237 6,247
exempt from federal income tax 1,965 2,061 1,863
-------- -------- --------
Total interest income 63,086 52,945 44,324
-------- -------- --------
INTEREST EXPENSE
Interest on deposits 27,855 18,764 17,594
Interest on FHLB advances 1,297 1,255 --
Interest on federal funds purchased
and securities sold under
agreements to repurchase 175 538 35
Interest on long-term debt 20 82 153
-------- -------- --------
Total interest expense 29,347 20,639 17,782
-------- -------- --------
Net Interest Income 33,739 32,306 26,542
PROVISION FOR LOAN LOSSES (1,525) (3,900) (3,012)
-------- -------- --------
Net interest income after
provision for loan losses 32,214 28,406 23,530
-------- -------- --------
OTHER INCOME
Service charges 1,578 1,574 1,530
Gain on sale of mortgage loans 174 316 1,286
Securities losses (4) (355) --
Other 1,669 1,375 1,567
-------- -------- --------
Total other income 3,417 2,910 4,383
-------- -------- --------
OTHER EXPENSE
Salaries 7,109 6,792 6,242
Employee benefits 2,868 2,533 2,318
Occupancy 2,494 2,316 2,367
FDIC insurance premium 633 1,110 1,008
State business taxes 859 719 589
Losses recognized on other
real estate owned -- 5 563
Other 3,201 3,176 3,689
-------- -------- --------
Total other expense 17,164 16,651 16,776
-------- -------- --------
INCOME BEFORE INCOME TAX 18,467 14,665 11,137
PROVISION FOR INCOME TAX (5,852) (4,305) (3,391)
-------- -------- --------
NET INCOME $ 12,615 $ 10,360 $ 7,746
======== ======== ========
PER SHARE OF COMMON STOCK $2.00 $1.65 $1.24
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
- --------------------------------------------------------------------------------
P A G E F O U R
- --------------------------------------------------------------------------------
<PAGE> 6
- --------------------------------------------------------------------------------
FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
In Thousands Year Ended December 31,
- ------------ -----------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 12,615 $ 10,360 $ 7,746
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization 959 1,044 955
Provision for loan losses 1,525 3,900 3,012
Provision for losses on other real estate owned -- 5 563
Deferred taxes (398) (769) (1,020)
Increase (decrease) in income taxes payable 177 (1,158) 767
Decrease in interest receivable (409) (309) (831)
Increase (decrease) in interest payable 1,611 707 (564)
Proceeds from sales of mortgage loans 17,241 17,045 50,785
Origination of mortgage loans held for sale (17,512) (16,050) (50,305)
Gain (loss) on sale of available for sale securities (4) 355 --
Other operating activities (152) 112 230
--------- --------- ---------
Net cash provided by operating activities 15,653 15,242 11,338
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Net cash flows from federal funds sold (54,810) (1,120) 41,210
Proceeds from sales of available for sale securities 87 10,782 --
Proceeds from maturities of available for sale
and held to maturity securities 19,150 12,153 24,695
Purchase of investment securities held to maturity (24,165) (9,230) (87,010)
Net cash flows from loan activities (35,587) (101,951) (50,365)
Purchases of premises and equipment (450) (1,669) (3,088)
Proceeds from the sale of other real estate owned 1,423 566 385
Cash invested in other real estate owned (101) (178) (462)
--------- --------- ---------
Net cash used by investing activities (94,453) (90,647) (74,635)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in demand deposit accounts (43,205) (39,912) 81,656
Net change in certificates of deposit 144,820 72,976 (23,936)
Net change in federal funds purchased (2,019) 3,575 5,240
Advances from the Federal Home Loan Bank -- 45,000 --
Repayments to the Federal Home Loan Bank (22,500) (7,500) --
Principal payments on long-term debt (812) (172) (677)
Other financing activities 143 79 169
--------- --------- ---------
Net cash provided by financing activities 76,427 74,046 62,452
--------- --------- ---------
DECREASE IN CASH AND DUE FROM BANKS (2,373) (1,359) (845)
CASH AND DUE FROM BANKS AT BEGINNING OF YEAR 22,081 23,440 24,285
--------- --------- ---------
CASH AND DUE FROM BANKS AT END OF YEAR $ 19,708 $ 22,081 $ 23,440
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for interest $ 27,736 $ 19,932 $ 18,346
Cash paid during the year for income taxes $ 6,073 $ 5,554 $ 3,639
</TABLE>
SUPPLEMENTAL INFORMATION ABOUT NONCASH INVESTING AND FINANCING ACTIVITIES
Other real estate acquired in settlement of loans in 1995, 1994 and 1993 was
$883 thousand, $187 thousand, and $195 thousand, respectively. Sales of other
real estate financed by the Bank in 1995 and 1993 were $90 thousand, and $127
thousand, respectively.
The accompanying notes are an integral part of these financial statements.
- --------------------------------------------------------------------------------
P A G E F I V E
- --------------------------------------------------------------------------------
<PAGE> 7
- --------------------------------------------------------------------------------
FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
In Thousands, except number of shares
- -------------------------------------
Net Unrealized
Common Stock Retained Gains (Losses)
Shares Amount Earnings On Securities Total
--------- --------- --------- ------------ ---------
<S> <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, (net) 563 15 -- -- 15
Unrealized losses on available
for sale securities, net of tax
effect -- -- -- (2,322) (2,322)
--------- --------- --------- --------- ---------
Balance, December 31, 1994 4,196,435 43,917 7,721 (1,179) 50,459
Net income for 1995 -- -- 12,615 -- 12,615
Stock options exercised 24,821 159 -- -- 159
Three-for-two split 2,100,651 -- -- -- --
Fractional shares purchased, (net) 348 8 -- -- 8
Unrealized gains on transfer from
held to maturity to available
for sale, net of tax effect -- -- -- 237 237
Unrealized gains on available
for sale securities, net of tax
effect -- -- -- 1,875 1,875
--------- --------- --------- --------- ---------
Balance, December 31, 1995 6,322,255 $ 44,084 $ 20,336 $ 933 $ 65,353
========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
- --------------------------------------------------------------------------------
P A G E S I X
- --------------------------------------------------------------------------------
<PAGE> 8
- --------------------------------------------------------------------------------
FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTE ONE - BASIS OF PRESENTATION, NATURE OF OPERATIONS AND SUMMARY OF
- --------------------------------------------------------------------------------
SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
BASIS OF PRESENTATION - The consolidated financial statements include the
accounts of Frontier Financial Corporation (the Corporation or FFC), a bank
holding company, and its wholly-owned subsidiaries, Frontier Bank (the Bank),
and FFP, Incorporated (FFP). FFP owns certain real property which is leased to
the Bank for use in its operations. Significant intercompany account balances
and transactions have been eliminated. Assets held by the Bank in an agency or
fiduciary capacity are not included in the accompanying financial statements.
NATURE OF OPERATIONS - The Corporation is primarily engaged in providing a full
range of banking and mortgage services to individual and corporate customers
through the Bank. The Bank also provides other services such as trust services
and insurance and financial service brokerage activities. The Corporation is
subject to competition from other financial institutions. The Corporation is
also subject to regulation by certain federal and state agencies and undergoes
periodic examinations by those regulatory authorities.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INVESTMENT SECURITIES - Effective January 1, 1994, the Corporation adopted
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt Equity Securities". Investments in equity and debt
securities are classified into one of three categories: 1) held to maturity, 2)
available for sale, or 3) trading. Investment securities are categorized as held
to maturity when the Corporation has the positive intent and ability to hold
those securities to maturity. Securities which are held to maturity are stated
at cost, adjusted for amortization of premiums and accretion of discounts which
are recognized as adjustments to interest income. Investment securities
categorized as available for sale are generally held for investment purposes (to
maturity), although unanticipated future events may result in the sale of some
securities. Available for sale securities are recorded at fair value, with the
net unrealized gain or loss included as a separate component of shareholders'
equity net of the related tax effect. Realized gains or losses on dispositions
are based on the net proceeds and the adjusted carrying amount of securities
sold, using the specific identification method.
The Corporation did not have any investment securities categorized as trading
securities at December 31, 1995 and 1994.
LOANS AND RELATED INCOME - On January 1, 1995 the Corporation adopted Statement
of Financial Accounting Standards (SFAS) No. 114, "Accounting by Creditors for
Impairment of a Loan". Under this Statement, a loan is impaired when, based on
current information and events, it is probable that a creditor will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. Concurrently, the Corporation adopted SFAS No. 118, "Accounting by
Creditors for Impairment of a Loan-Income Recognition and Disclosures". This
Statement amends SFAS No. 114 to require information about certain impaired
loans and their related income recognition. The adoption of these statements did
not have a material effect on the Corporation's financial condition and results
of operations. Loans are stated at the principal balance outstanding, adjusted
for unearned discounts, and the net of unamortized nonrefundable fees and
related direct loan origination costs. Interest income is accrued as earned.
- --------------------------------------------------------------------------------
P A G E S E V E N
- --------------------------------------------------------------------------------
<PAGE> 9
- --------------------------------------------------------------------------------
NOTE ONE - Continued
- --------------------------------------------------------------------------------
Net deferred fees and costs are generally amortized into interest income as an
adjustment to the loan yield. Expenses deferred (principally origination
expense) and recognized in the yield adjustment result in a reduction in
noninterest expense.
Nonrefundable fees related to lending activities other than direct loan
origination or purchase are recognized as credit related fees and included in
noninterest income during the period the related service is provided. These fees
include agency, standby letter of credit, loan commitment, and loan servicing
fees.
A loan is considered impaired when management determines it is probable that all
contractual amounts of principal and interest will not be paid as scheduled in
the loan agreement. These loans include nonaccruing loans past due 90 days or
more, loans restructured in the current year, and other loans that management
considers to be impaired.
Loans are placed on nonaccrual status when, in the opinion of management, the
collection of additional interest is doubtful or when the loan becomes 90 or
more days past due. When a loan is placed on nonaccrual status, all interest
previously accrued, but not collected, is reversed and charged against interest
income. Income on nonaccrual loans is then recognized only to the extent cash is
received and where the future collection of principal is probable. Accruals are
resumed only when the loan is brought current, or when, in the opinion of
management, the borrower has demonstrated the ability to resume payments of
principal and interest. Interest income on restructured loans is recognized
pursuant to the terms of the new loan agreement. Interest income on other
impaired loans is monitored and based upon the terms of the underlying loan
agreement. However, the recorded net investment in impaired loans, including
accrued interest, is limited to the present value of the expected cash flows of
the impaired loan or the observable fair market value of the loan or the fair
market value of the loan's collateral.
ALLOWANCE FOR LOAN LOSSES - The allowance for loan losses is maintained at a
level management believes is adequate to provide for potential loan, loan
commitment and standby letter of credit losses. The allowance is based on a
continuing review of loans, loan commitments and standby letters of credit which
includes consideration of actual loss experience, changes in the size and
character of the portfolio, identification of individual problem situations
which may affect the borrower's ability to repay, and evaluations of the
prevailing and anticipated economic conditions.
Material estimates that are particularly susceptible to significant change,
relate to the determination of the allowance for loan losses and the valuation
of real estate acquired in connection with foreclosures or in satisfaction of
loans. In connection with the determination of the allowance for loan losses and
the valuation of foreclosed assets held for sale, management obtains independent
appraisals for significant properties.
Management believes the allowance for loan losses and the valuation of
foreclosed assets held for sale are adequate. While management uses available
information to recognize losses on loans and foreclosed assets held for sale,
changes in economic conditions necessitate revision of these estimates in future
years. In addition, various regulatory agencies, as an integral part of their
examination processes, periodically review the Corporation's allowance for loan
losses and valuation of foreclosed assets held for sale. Such agencies may
require the Corporation to recognize additional losses based on their judgment
using information available to them at the time of their examination.
- --------------------------------------------------------------------------------
P A G E E I G H T
- --------------------------------------------------------------------------------
<PAGE> 10
- --------------------------------------------------------------------------------
NOTE ONE - Continued
- --------------------------------------------------------------------------------
LOANS HELD FOR SALE - Mortgage loans originated and designated as held for sale
are carried at the lower of cost or estimated fair value, as determined by
quoted market prices, in aggregate. Net unrealized losses are recognized in a
valuation allowance by charges to income. Gains or losses on the sale of such
loans are based on the specific identification method.
PREMISES AND EQUIPMENT - Premises and equipment are shown at cost and
depreciated using the straight-line and accelerated methods. Depreciation
expense is computed over the following estimated useful lives:
Premises: 7 to 39 1/2 years
Furniture, fixtures and equipment: 3 to 7 years
OTHER REAL ESTATE OWNED - Other real estate owned consists principally of
properties acquired through foreclosure and is stated at the lower of cost or
estimated market value. Losses arising from the acquisition of property, in full
or partial satisfaction of loans, are charged to the allowance for loan losses.
Subsequent to the transfer to foreclosed assets held for sale, these assets
continue to be recorded at the lower of cost or fair value (less estimated costs
to sell), based on periodic evaluations. Generally, legal and professional fees
associated with foreclosures are expensed as incurred. Costs incurred to improve
property prior to sale are capitalized, however, in no event are recorded costs
allowed to exceed fair value. Subsequent gains, losses, or expenses recognized
on the sale of these properties are included in noninterest income or expense.
INCOME TAX - The Corporation reports income and expenses using the accrual
method of accounting and files a consolidated tax return. The Corporation
accounts for income taxes on the liability method. The liability method
recognizes the amount of tax payable at the date of the financial statements, as
a result of all events that have been recognized in the financial statements as
measured by the provisions of currently enacted tax law and rates.
RETIREMENT PLANS - The Corporation has a profit sharing and salary deferral plan
and a money purchase pension plan which covers eligible employees. The
Corporation's contributions to the plans were $1.2 million in 1995, $1.1 million
in 1994, and $838 thousand in 1993. Contributions to the profit sharing plan are
discretionary while contributions to the money purchase pension plan are
currently 5% of employees eligible salaries. Both plans are funded during the
period in which they are committed by the Board of Directors.
INCOME PER SHARE - Income per share has been calculated on the basis of the
weighted average number of shares outstanding during the period after giving
retroactive effect to stock dividends and stock splits. The dilutive effect of
common stock options is not material.
CASH EQUIVALENTS - For purposes of reporting cash flows, cash and cash
equivalents include cash on hand, and amounts due from banks. Cash and cash
equivalents have an original maturity of three months or less.
USE OF ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes.
RECLASSIFICATIONS - Certain amounts in prior years' financial statements have
been reclassified to conform to the 1995 presentation.
- --------------------------------------------------------------------------------
P A G E N I N E
- --------------------------------------------------------------------------------
<PAGE> 11
- --------------------------------------------------------------------------------
NOTE TWO - INVESTMENT SECURITIES
- --------------------------------------------------------------------------------
Investments in federal funds sold are made with major banks which are approved
by the Board of Directors. The Bank has an investment policy that permits
holding securities rated only in one of the four highest rating categories by a
nationally recognized credit rating organization.
The aggregate amortized cost and fair values of investment securities at
December 31 are as follows:
<TABLE>
<CAPTION>
In Thousands
- ------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
1995
Available for sale (AFS)
U.S. Treasury $ 2,759 $ 96 -- $ 2,855
U.S. Agencies 46,381 552 $ (246) $ 46,687
Corporate bonds 44,197 1,144 (125) 45,216
FHLB Stock 7,542 -- -- 7,542
--------- --------- --------- ---------
100,879 1,792 (371) 102,300
--------- --------- --------- ---------
Held to maturity (HTM)
U.S. Agencies 2,210 19 $ (12) 2,217
State and municipal bonds 30,046 1,289 (55) 31,280
Corporate bonds 7,370 9 (37) 7,342
Certificates of deposit 3,050 -- -- 3,050
--------- --------- --------- ---------
42,676 1,317 (104) 43,889
--------- --------- --------- ---------
Total Securities $ 143,555 $ 3,109 $ (475) $ 146,189
========= ========= ========= =========
1994
Available for sale (AFS)
U.S. Treasury $ 2,506 $ 3 $ (6) $ 2,503
U.S. Agencies 20,252 28 (1,089) 19,191
Corporate bonds 14,223 35 (757) 13,501
FHLB stock 7,083 -- -- 7,083
--------- --------- --------- ---------
44,064 66 (1,852) 42,278
--------- --------- --------- ---------
Held to maturity (HTM)
U.S. Treasury 252 -- (18) 234
U.S. Agencies 19,336 17 (1,307) 18,046
State and municipal bonds 32,814 541 (1,507) 31,848
Corporate bonds 41,646 40 (2,614) 39,072
--------- --------- --------- ---------
94,048 598 (5,446) 89,200
--------- --------- --------- ---------
Total Securities $ 138,112 $ 664 $ (7,298) $ 131,478
========= ========= ========= =========
</TABLE>
- --------------------------------------------------------------------------------
P A G E T E N
- --------------------------------------------------------------------------------
<PAGE> 12
- --------------------------------------------------------------------------------
NOTE TWO - INVESTMENT SECURITIES (Continued)
- --------------------------------------------------------------------------------
Contractual maturities of investment securities as of December 31, 1995 are
shown below. Expected maturities will differ from contractual maturities because
issuers may have the right to call or prepay obligations with or without call or
prepayment penalties.
<TABLE>
<CAPTION>
In Thousands Available for Sale Held to Maturity
- ------------ Amortized Fair Amortized Fair
Maturity Cost Value Cost Value
-------- -------- ------- -------
<S> <C> <C> <C> <C>
0-1 Yr $15,530 $15,599 $12,745 $12,726
1-5 Yrs 35,587 35,980 1,126 1,175
5-10 Yrs 49,181 50,087 15,951 16,748
Over 10 Yrs 581 634 12,854 13,240
-------- -------- ------- -------
$100,879 $102,300 $42,676 $43,889
======== ======== ======= =======
</TABLE>
In December, the Bank transferred securities with an amortized cost of $43.8
million from the held to maturity portfolio to the available for sale portfolio
under one time reassessment guidelines issued by the Financial Accounting
Standards Board in November 1995.
Proceeds from sales of available for sale securities in 1995 and 1994 were $87
thousand and $10.8 million, respectively. Gross gains were $35 thousand in 1994.
Gross losses were $4 thousand and $390 thousand in 1995 and 1994, respectively.
Investments in states and political subdivisions represent purchases of
municipal bonds, with localities principally in western Washington. Investments
in corporate bonds are made in companies located and doing business throughout
the United States. Approximately 16% and 24% of the investments in corporate
bonds at December 31, 1995 and 1994, respectively, consisted of investments in
companies doing business in the financial services industry. These bonds were
all rated in the top four investment grades as required by the Bank's investment
policy.
Investment securities, with a book value of $18.7 million and $12 million with
fair values of $18.8 million and $11.8 million in 1995 and 1994, respectively,
were pledged to secure U.S. Government and public deposits as required by law.
NOTE THREE - LOANS
The Bank originates commercial, real estate mortgage, construction and land
development, and installment loans primarily in Snohomish and north King
Counties. Although the Bank has a diversified loan portfolio, local economic
conditions may affect borrowers' ability to meet the stated repayment terms.
Collateral for each loan is based on a credit evaluation of the customer, and
such collateral may, depending on the loan, include accounts receivable,
inventory, equipment, real estate or other collateral. Loans are originated at
both fixed and variable interest rates.
- --------------------------------------------------------------------------------
P A G E E L E V E N
- --------------------------------------------------------------------------------
<PAGE> 13
- --------------------------------------------------------------------------------
NOTE THREE - LOANS (Continued)
- --------------------------------------------------------------------------------
Major classifications of loans at December 31 are as follows:
<TABLE>
<CAPTION>
In Thousands 1995 1994
- ------------ -------- --------
<S> <C> <C>
Commercial $127,239 $121,600
Real estate commercial 172,327 152,528
Real estate construction 96,639 101,408
Real estate mortgage 92,711 79,613
Installment 19,758 18,935
-------- --------
508,674 474,084
Less deferred loan fees (3,686) (3,572)
-------- --------
$504,988 $470,512
======== ========
</TABLE>
Contractual maturities of loans as of December 31, 1995 are shown below.
Expected maturities will differ from contractual maturities because borrowers
may have the right to prepay loans with or without prepayment penalties.
<TABLE>
<CAPTION>
In Thousands Within 1-5 After
- ------------ 1 Year Years 5 Years Total
-------- -------- ------- --------
<S> <C> <C> <C> <C>
Commercial $67,068 $54,035 $6,136 $127,239
Real estate commercial 20,130 142,618 9,579 $172,327
Real estate construction 62,442 34,121 76 $96,639
Real estate mortgage 18,750 72,975 986 $92,711
Installment 4,727 9,156 5,875 $19,758
-------- -------- ------- --------
$173,117 $312,905 $22,652 $508,674
======== ======== ======= ========
</TABLE>
<TABLE>
<CAPTION>
1-5 After
Years 5 Years
-------- -------
<S> <C> <C>
Loans Maturing After
One Year With:
Fixed Rates $247,932 $5,750
Variable Rates 64,973 16,902
-------- -------
$312,905 $22,652
======== =======
</TABLE>
- --------------------------------------------------------------------------------
P A G E T W E L V E
- --------------------------------------------------------------------------------
<PAGE> 14
- --------------------------------------------------------------------------------
NOTE THREE - LOANS (Continued)
- --------------------------------------------------------------------------------
LOAN LOSS RESERVE
Changes in the allowance for loan losses are summarized below:
<TABLE>
<CAPTION>
In Thousands 1995 1994 1993
- ------------ ------- ------- ------
<S> <C> <C> <C>
Balance at the beginning of year $10,410 $ 7,368 $5,906
Provision charged to operating expense 1,525 3,900 3,012
Deduct:
Loans charged-off (2,212) (2,090) (2,269)
Less recoveries 2,174 1,232 719
------- ------- ------
Net charged-off loans (38) (858) (1,550)
------- ------- ------
Balance at the end of year $11,897 $10,410 $7,368
======= ======= ======
</TABLE>
At December 31, 1995, the Bank had loans amounting to $4.4 million that were
specifically classified as impaired with an average balance of $3.5 million. The
allowance for loan losses related to these loans was approximately $1.5 million.
Interest collected on these loans in cash and included in income amounted to
$378 thousand in 1995. If interest on these loans had been accrued, such income
would have approximated $501 thousand in 1995. At December 31, there were no
commitments to lend additional funds to borrowers whose loans were classified as
impaired.
Loans past due 90 days or more on which the accrual of interest has been
discontinued as of December 31, 1994 totaled $2.7 million. Interest collected on
these loans and included in income amounted to $207 thousand in 1994. If
interest on these loans had been accrued, such income would have been
approximately $261 thousand in 1994.
The effects of troubled debt restructurings are not considered material to the
Corporation's financial position and results of operations.
OTHER REAL ESTATE OWNED
From time-to-time management has written-off various parcels of other real
estate owned due to unresolved issues relating to permitting, zoning and
wetlands. Management is attempting to work through the above mentioned issues to
be able to effectively market these properties. Contingent gains could be
realized should the above issues be favorably resolved.
NOTE FOUR - PREMISES AND EQUIPMENT
Premises and equipment at December 31 are comprised of the following:
<TABLE>
<CAPTION>
In Thousands 1995 1994
- ------------ ------- -------
<S> <C> <C>
Premises $ 9,001 $ 8,903
Furniture, fixtures and equipment 5,193 4,699
Land 3,811 3,739
Construction in progress 13 74
------- -------
18,018 17,415
Less accumulated depreciation (6,260) (5,570)
------- -------
$11,758 $11,845
======= =======
</TABLE>
Depreciation expense on premises and equipment totaled $881 thousand in 1995,
$952 thousand in 1994, and $863 thousand in 1993.
- --------------------------------------------------------------------------------
P A G E T H I R T E E N
- --------------------------------------------------------------------------------
<PAGE> 15
- --------------------------------------------------------------------------------
NOTE FIVE - INTEREST BEARING DEPOSITS
- --------------------------------------------------------------------------------
The major classifications of interest bearing deposits at December 31 are as
follows:
<TABLE>
<CAPTION>
In Thousands 1995 1994
- ------------ -------- --------
<S> <C> <C>
Money market and NOW accounts $ 69,945 $ 70,670
Savings 141,396 195,404
Time deposits, $100,000 and over 91,701 72,643
Other time deposits 254,895 129,132
-------- --------
$557,937 $467,849
======== ========
</TABLE>
The total remaining maturity schedule for time deposits is as follows:
<TABLE>
In Thousands
- ------------
<S> <C>
Year ending December 31, 1996 $246,659
1997 35,128
1998 32,839
1999 12,806
2000 17,353
Thereafter 1,811
--------
$346,596
========
</TABLE>
NOTE SIX - CREDIT ARRANGEMENTS
The Bank is a member of the Federal Home Loan Bank of Seattle. As a member, the
Bank has a committed line of credit up to 14% of total assets. Borrowings
generally provide for interest at the then current published rates. There was
$15.0 million and $37.5 million outstanding at December 31, 1995 and 1994,
respectively.
At December 31, 1995, committed lines of credit agreements totaling
approximately $26 million were available to the Bank from unaffiliated banks.
Such lines generally provide for interest at the lending bank's federal funds
rate or other money market rates. There were no borrowings outstanding or
compensating balance requirements under these credit arrangements at December
31, 1995 and 1994.
In addition, at December 31, 1995 the Bank has a committed line of credit up to
$3.8 million from the Federal Reserve Bank (FRB). Borrowings generally provide
for interest at rates as published by the FRB and are secured by U.S. Treasury
and Agency securities. There were no borrowings outstanding at December 31, 1995
and 1994.
NOTE SEVEN - FEDERAL HOME LOAN BANK (FHLB) ADVANCES
At December 31, 1995, FHLB advances were scheduled to mature as follows:
<TABLE>
<CAPTION>
Interest
In Thousands Amount Rates
- ------------ ------- -------
<S> <C> <C>
One to two years $ 5,000 4.7%
Three to four years 5,000 5.4%
Five to ten years 5,000 5.8%
-------
$15,000
=======
</TABLE>
- --------------------------------------------------------------------------------
P A G E F O U R T E E N
- --------------------------------------------------------------------------------
<PAGE> 16
- --------------------------------------------------------------------------------
NOTE SEVEN - FEDERAL HOME LOAN BANK (FHLB) ADVANCES (Continued)
- --------------------------------------------------------------------------------
Advances from FHLB are collateralized by qualifying first mortgage loans and
government agencies as described in the Advances, Security and Deposit Agreement
with the FHLB.
The maximum outstanding and average outstanding balances and average interest
rates on advances from the FHLB were as follows for the year ended December 31:
<TABLE>
<CAPTION>
In Thousands 1995 1994
- ------------ ---- ----
<S> <C> <C>
Maximum outstanding at any month-end $ 37,500 $ 37,500
Average outstanding 22,541 23,260
Weighted average interest rates:
Annual 5.75% 5.40%
End of Year 5.30% 5.58%
</TABLE>
NOTE EIGHT - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
The Bank has sold certain securities of the U.S. Government and its agencies and
other approved investments under agreements to repurchase. The securities
underlying the agreements were held by a safekeeping agent under control by the
Bank.
At December 31, 1995, securities under agreements to repurchase were $4.7
million. The average daily balance of outstanding agreements during the period
was $1.4 million with maximum outstanding agreements at any month-end of $5.7
million.
NOTE NINE - LONG-TERM DEBT
At December 31, long-term debt was as follows:
<TABLE>
<CAPTION>
In Thousands 1995 1994
- ------------ ---- ----
<S> <C> <C>
Mortgage note, with interest payable monthly
at 9.5% per annum. Collateralized by a deed
of trust. -- $325
Mortgage note, due in monthly installments of
$3 thousand, including interest at 10% per
annum. The principal remaining any time after
December 1996 is due upon demand. Collater-
alized by a deed of trust. $136 170
Note payable to a bank, due in semiannual pay-
ments of $35 thousand, plus interest quarterly at
the bank's prime rate plus 3/4%. Collateralized
by Frontier Bank stock. -- 70
---- ----
$136 $565
==== ====
</TABLE>
The approximate principal reduction of long-term debt through 1996 is $136
thousand.
- --------------------------------------------------------------------------------
P A G E F I F T E E N
- --------------------------------------------------------------------------------
<PAGE> 17
- --------------------------------------------------------------------------------
NOTE TEN - INCOME TAX
- --------------------------------------------------------------------------------
The components of the provision for income tax are as follows:
<TABLE>
<CAPTION>
In Thousands 1995 1994 1993
- ------------ ------- ------- -------
<S> <C> <C> <C>
Current $ 6,250 $ 5,074 $ 4,411
Deferred (398) (769) (1,020)
------- ------- -------
$ 5,852 $ 4,305 $ 3,391
======= ======= =======
</TABLE>
Deferred taxes result from temporary differences in recognition of income and
expense which are reported in different periods for financial reporting purposes
and for income tax purposes. The sources of the differences and the resulting
deferred income tax provision are as follows:
<TABLE>
<CAPTION>
In Thousands 1995 1994 1993
- ------------ ------- ------- -------
<S> <C> <C> <C>
Loan fees $ (49) $ 510 $ (30)
Provision for loan losses (596) (1,095) (779)
Other items - net 247 (184) (211)
------- ------- -------
$ (398) $ (769) $(1,020)
======= ======= =======
</TABLE>
The following table shows the nature and components of the Corporation's net
deferred tax assets, established at an estimated tax rate of 34% at December 31:
<TABLE>
<CAPTION>
In Thousands
- ------------
1995 1994
------- -------
<S> <C> <C>
DEFERRED TAX ASSETS
Allowance for possible loan
losses, in excess of tax
reserves $ 3,952 $ 3,355
Other deferred tax assets 769 794
------- -------
Total deferred tax assets 4,721 4,149
------- -------
DEFERRED TAX LIABILITIES
Other deferred tax liabilities (1,152) (978)
------- -------
Total deferred tax liabilities (1,152) (978)
------- -------
Net deferred tax assets $ 3,569 $ 3,171
======= =======
</TABLE>
The Corporation believes, based upon the available information, that all
deferred assets will be realized in the normal course of operations.
Accordingly, these assets have not been reduced by a valuation allowance.
- --------------------------------------------------------------------------------
P A G E S I X T E E N
- --------------------------------------------------------------------------------
<PAGE> 18
- --------------------------------------------------------------------------------
NOTE TEN - INCOME TAX (Continued)
- --------------------------------------------------------------------------------
A reconciliation of the effective income tax rate with the federal statutory tax
rate is as follows:
<TABLE>
<CAPTION>
In Thousands 1995 1994 1993
- ------------ ---- ---- ----
Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ----
<S> <C> <C> <C> <C> <C> <C>
Income tax provision
at statutory rate $ 6,502 35% $ 4,986 34% $ 3,787 34%
Effect of nontaxable
interest income (574) -3% (624) -4% (499) -5%
Other (76) -- (57) -- 103 1%
------- ---- ------- ---- ------- ----
$ 5,852 32% $ 4,305 30% $ 3,391 30%
======= ==== ======= ==== ======= ====
</TABLE>
NOTE ELEVEN - SHAREHOLDERS' EQUITY AND REGULATORY MATTERS
On January 17, 1996, the Board of Directors declared a 7% stock dividend,
payable March 18, 1996, to shareholders of record as of January 17, 1996.
The Federal Reserve Board establishes minimum capital levels for banks and bank
holding companies. These guidelines require banks and holding companies to
maintain a minimum leverage ratio of core capital (which excludes the allowance
for loan losses) to total adjusted average assets. For the most highly-rated
holding companies, this ratio must be at least 3%, and for others it must be 4%
to 5%. Failure to meet minimum capital requirements can initiate certain
mandatory actions by regulators that, if undertaken, could have a direct
material effect on the Corporation's financial statements. At year-end 1995, the
Corporation's leverage ratio was 8.81%, compared to 8.04% at year-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 shareholders' equity, less goodwill, while
Tier II capital includes the allowance for possible loan losses, subject to a
limitation of 1.25% of risk-adjusted assets. The chart below indicates the
Corporation's capital components at December 31:
<TABLE>
<CAPTION>
In Thousands 1995 1994
- ------------ ---- ----
<S> <C> <C>
Shareholders' equity $ 65,353 $ 50,459
Less goodwill (364) (401)
Adjusted for unrealized (gain)loss on
available for sale securities (933) 1,179
--------- ---------
Tier I capital 64,056 51,237
--------- ---------
Eligible portion of the allowance
for possible loan losses 7,292 6,614
--------- ---------
Tier II capital $ 71,348 $ 57,851
========= =========
Total adjusted risk-based assets $ 578,719 $ 525,348
========= =========
Tier I capital ratio 11.07% 9.75%
========= =========
Tier I and Tier II capital ratio 12.33% 11.01%
========= =========
</TABLE>
- --------------------------------------------------------------------------------
P A G E S E V E N T E E N
- --------------------------------------------------------------------------------
<PAGE> 19
- --------------------------------------------------------------------------------
NOTE ELEVEN - SHAREHOLDERS' EQUITY AND REGULATORY MATTERS (Continued)
- --------------------------------------------------------------------------------
Under federal regulations, the Bank is limited, unless previously approved, as
to the amount it may loan to the holding company and other affiliates to 10% of
its capital stock and surplus (approximately $3.4 million at December 31, 1995
and 1994, respectively).
Under State of Washington regulations, dividends declared by the Bank to be paid
to the holding company in any one calendar year may not, without regulatory
approval, exceed its net income for that year combined with its retained net
income for the preceding two years (approximately $31.8 million at December 31,
1995).
Federal Reserve Board regulations require maintenance of certain minimum reserve
balances on deposit with the Federal Reserve Bank. The average amount of such
balances was $4.7 million in 1995 and $4.6 million in 1994.
NOTE TWELVE - EMPLOYEE STOCK OPTION PLAN
The Corporation has an Incentive Stock Option Plan (the Plan) for the benefit of
key employees. The option price is fair market value at date of grant and the
option is exercisable after six months and expires 10 years from the date of
grant. Shares and amounts of options exercised in 1995, 1994, and 1993 are
disclosed in the Consolidated Statement of Changes in Shareholders' Equity. At
December 31, 1995 options for 157,441 shares were outstanding at prices ranging
from $3 to $29 per share. The price range has been adjusted for stock splits and
dividends since the date options were granted. At December 31, 1995, the number
of shares as to which options were exercisable was 144,565. Maximum shares that
may be issued pursuant to the Plan, as restated, were 1,757,908 of December 31,
1995.
NOTE THIRTEEN - RELATED PARTY TRANSACTIONS
Loans to directors, executive officers and their affiliates are subject to
regulatory limitations. Such loans had aggregate balances and activity during
1995, 1994 and 1993 as follows and were within regulatory limitations:
<TABLE>
<CAPTION>
In Thousands 1995 1994 1993
- ------------ ---- ---- ----
<S> <C> <C> <C>
Balance at beginning of year $ 10,044 $ 5,969 $ 8,328
New loans or advances 4,123 7,695 8,561
Repayments (5,615) (3,620) (10,920)
-------- -------- --------
Balance at end of year $ 8,552 $ 10,044 $ 5,969
======== ======== ========
</TABLE>
NOTE FOURTEEN - COMMITMENTS AND CONTINGENT LIABILITIES
The Bank leases various branch offices under agreements which expire between
1996 and 2014. The agreements contain various renewal options and require the
Bank to maintain the properties.
- --------------------------------------------------------------------------------
P A G E E I G H T E E N
- --------------------------------------------------------------------------------
<PAGE> 20
- --------------------------------------------------------------------------------
NOTE FOURTEEN - Continued
- --------------------------------------------------------------------------------
The total future minimum rental commitment through 2000 and thereafter is as
follows:
<TABLE>
In Thousands
- ------------
<S> <C>
Year Ending December 31, 1996 $ 362
1997 317
1998 277
1999 263
2000 272
Thereafter 3,227
------
$4,718
======
</TABLE>
Rental expense charged to operations was $380 thousand in 1995, $244 thousand in
1994 and $332 thousand in 1993.
The Bank enters into agreements to extend credit and standby letters of credit
to customers. These commitments are limited to a period of time and, in some
instances, provide for other conditions. These commitments are issued only after
an evaluation of credit and collateral is made, and are subject to customary
lending standards. Terms of the commitments protect the Bank in the event there
are significant changes in interest rates. Many of the commitments are expected
to expire without being drawn upon.
Commitments outstanding under these agreements at December 31, 1995 are
summarized below:
<TABLE>
In Thousands
- ------------
<S> <C>
Loan commitments $76,329
Standby letters of credit $ 2,829
</TABLE>
NOTE FIFTEEN - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial instruments is
made in accordance with the requirements of SFAS No. 107, "Disclosures About
Fair Value of Financial Instruments". The estimated fair value amounts have been
determined by the Bank using available market information and appropriate
valuation methodologies. However, considerable judgment is necessary to
interpret market data in the development of the estimates of fair value.
Accordingly, the estimates presented herein are not necessarily indicative of
the amounts the Bank could realize in a current market exchange. The use of
different market assumptions and/or estimation methodologies may have a material
effect on the estimated fair value amounts. The following methods and
assumptions were used to estimate the fair value of each class of financial
instruments for which it is practicable to estimate that value:
- --------------------------------------------------------------------------------
P A G E N I N E T E E N
- --------------------------------------------------------------------------------
<PAGE> 21
- --------------------------------------------------------------------------------
NOTE FIFTEEN - FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
- --------------------------------------------------------------------------------
Cash equivalents and federal funds sold - For those short-term instruments, the
carrying amount is a reasonable estimate of fair value.
Investment securities - For investment securities fair values are based on
quoted market prices or dealer quotes, if available. If a quoted market price is
not available, fair value is estimated using quoted market prices for similar
securities.
Loans - The fair value of loans generally is estimated by discounting the future
cash flows using the current rates at which similar loans would be made to
borrowers with similar credit ratings and for the same remaining maturities. For
certain homogeneous categories of loans, such as Small Business Administration
guaranteed loans, fair value is estimated using the quoted market prices for
securities backed by similar loans, adjusted for differences in loan
characteristics.
Deposits and federal funds purchased - The fair value of demand deposits,
savings accounts, certain money market deposits, and federal funds purchased, is
the amount payable on demand at the reporting date. The fair value of
fixed-maturity certificates of deposit is estimated by discounting the future
cash flows using the rates currently offered for deposits of similar remaining
maturities.
FHLB advances and long-term debt - Fair value is determined by discounting the
cash flow using rates currently available to the Bank for debt with similar
terms and remaining maturities.
Off-Balance sheet financial instruments - Commitments to extend credit and
letters of credit represent the principal categories of off-balance sheet
financial instruments. See Note 14 to the financial statements. The fair value
of these commitments is not material since they are for a short period of time
and subject to customary credit terms.
<TABLE>
<CAPTION>
In Thousands 1995 1994
- ------------ ---- ----
Carrying Fair Carrying Fair
Value Value Value Value
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Assets
Cash and due from banks $ 19,708 $ 19,708 $ 22,081 $ 22,081
Investment securities:
Available for sale 102,300 102,300 42,278 42,278
Held to maturity 42,676 43,889 94,048 89,200
Federal funds sold 55,930 55,930 1,120 1,120
Net loans 493,091 499,076 460,102 461,950
Liabilities
Noninterest bearing deposits 83,281 83,281 71,754 71,754
Interest bearing deposits 557,937 561,032 467,849 466,999
Federal funds purchased
and securities sold under
agreements to repurchase 7,596 7,596 9,615 9,615
FHLB Advances 15,000 14,934 37,500 36,024
Long-term debt 136 136 565 565
</TABLE>
Limitations: The fair value estimates presented herein are based on pertinent
information available to management as of December 31, 1995, and 1994. Since
December 31, 1995, and 1994, amounts have not been comprehensively revalued for
purposes of these financial statements and, therefore, current estimates of fair
value may differ significantly from the amounts presented herein. Management is
not aware of any factors that would significantly affect the estimated fair
value amounts.
- --------------------------------------------------------------------------------
P A G E T W E N T Y
- --------------------------------------------------------------------------------
<PAGE> 22
- --------------------------------------------------------------------------------
NOTE SIXTEEN - PARENT COMPANY (ONLY) FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
Condensed balance sheets at December 31:
<TABLE>
<CAPTION>
In Thousands 1995 1994
- ------------ ------- -------
<S> <C> <C>
Cash $ 138 $ 13
Investment in subsidiaries:
Bank 64,489 49,706
Nonbank 104 55
Premises, net 70 636
Other assets 552 619
------- -------
$65,353 $51,029
======= =======
Other liabilities -- $ 5
Long-term debt -- 565
Shareholders' equity $65,353 50,459
------- -------
$65,353 $51,029
======= =======
</TABLE>
Condensed statements of income for the years ended December 31:
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Income
Dividend from Bank subsidiary $ 210 $ 145 $ 50
Rental 54 105 98
Interest 2 3 2
-------- -------- --------
Total Income 266 253 150
-------- -------- --------
Expenses
Interest 13 59 71
Personnel 89 83 60
Depreciation and amortization 81 108 126
Other 184 148 77
-------- -------- --------
Total Expenses 367 398 334
-------- -------- --------
Loss before equity in undistributed income
of subsidiaries and benefit equivalent to
income taxes (101) (145) (184)
Benefit equivalent to income taxes 79 67 48
-------- -------- --------
Loss before equity in undistributed income
of subsidiaries (22) (78) (136)
Equity in undistributed
income of subsidiaries 12,637 10,438 7,882
-------- -------- --------
Net income $ 12,615 $ 10,360 $ 7,746
======== ======== ========
</TABLE>
- --------------------------------------------------------------------------------
P A G E T W E N T Y - O N E
- --------------------------------------------------------------------------------
<PAGE> 23
- --------------------------------------------------------------------------------
NOTE SIXTEEN - PARENT COMPANY (ONLY) FINANCIAL INFORMATION (Continued)
- --------------------------------------------------------------------------------
Condensed statements of cash flows for the years ended December 31:
<TABLE>
<CAPTION>
In Thousands 1995 1994 1993
- ------------ ---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities
Net income $12,615 $10,360 $7,746
Adjustments to reconcile net income to net cash
provided by operating activities
Equity in undistributed income
of subsidiaries (12,847) (10,583) (7,932)
Depreciation and amortization 80 108 126
Other operating activities (11) (23) (14)
------- ------- ------
Net cash flows from operating activities (163) (138) (74)
------- ------- ------
Cash flows from investing activities
Dividends received 210 145 50
------- ------- ------
Net cash flows from investing activities 210 145 50
------- ------- ------
Cash flows from financing activities
Sales of common stock 167 111 164
Principal payments of long-term debt (84) (172) (136)
Other financing activities (5) --- ---
------- ------- ------
Net cash flows from financing activities 78 (61) 28
------- ------- ------
Increase (decrease) in cash 125 (54) 4
Cash at beginning of year 13 67 63
------- ------- ------
Cash at end of year $138 $13 $67
======= ======= ======
</TABLE>
NOTE SEVENTEEN - NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of", and SFAS No. 123, "Accounting for Stock-Based Compensation" effective for
years beginning after December 15, 1995. Statement No. 121 addresses situations
where information indicates that a company might be unable to recover, through
future operations or sale, the carrying amount of long-lived assets,
identifiable intangibles and goodwill related to those assets. Management does
not believe the adoption of this statement will have a material effect on its
financial condition or results of operations.
Statement No. 123 specifies a fair value based method of accounting for
stock-based compensation plans and encourages (but does not require) entities to
adopt that method in place of the provisions of APB Opinion 25, "Accounting for
Stock Issued to Employees". The Corporation has not yet determined which method
of accounting will be used or what impact the adoption of this statement will
have on the Corporation's results of operations.
- --------------------------------------------------------------------------------
P A G E T W E N T Y - T W O
- --------------------------------------------------------------------------------
<PAGE> 24
- --------------------------------------------------------------------------------
FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- --------------------------------------------------------------------------------
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
OVERVIEW OF REPORTED RESULTS
The Corporation experienced record earnings for the seventeenth consecutive
year. Net income for 1995 was up $12.6 million, or 21.8% as compared to 1994 net
income of $10.4 million, which was up 33.7% compared to 1993 income of $7.7
million, which was up $2.1 million, or 37.2% from 1992. The reasons for this
continued performance are discussed below.
Earnings per share increased to $2.00 from $1.65 in 1994, and $1.24 in 1993. Per
share amounts have been adjusted giving retroactive effect to stock dividends
and stock splits.
Return on average assets (ROA) was 1.82% for 1995; 1.69% for 1994, and 1.50% in
1993. Return on average equity (ROE) for 1995 was 21.59%; 22.21% for 1994, and
20.59% for 1993.
ECONOMIC ENVIRONMENT
The Bank's lending and other activities are concentrated in Snohomish County,
Washington, but also includes the northern part of King County, by having two
branches located in Bothell and Woodinville, 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 another workforce reduction of approximately 12,000 personnel,
including 6,300 to 6,500 early retirements. Current news releases indicate that
the announced reductions have been completed, and that Boeing's management does
not anticipate any further reductions in the near future. There is unconfirmed
talk that additions to the workforce may be necessary if aircraft orders
continue at their current pace. After a four year decline in aircraft orders,
Boeing's backlog is starting to build. Analysts expect Boeing to win about 325
orders in 1996, which would be the highest in five years. The orders are likely
to be for the new 777 and the redesigned 737.
Management believes that in 1995 the Corporation began to notice the effects of
prior reductions at the Boeing Company. Since the first quarter of 1995, there
has been a decline in the number of loan applications. Comparatively, in 1994,
loan demand was brisk, increasing $100.9 million, or 27.3%. This compared to
increased loans in 1995 of $34.5 million, or 7.3%. Management responded early on
in the first quarter to this trend, and placed increased emphasis on loan
development. Management believes that this action was very important to what
loan growth the Corporation did have during the year. Although 1995 was a year
of less than dynamic loan demand, the year was also characterized by narrower
interest rate spreads, excellent expense control, and a reduction in the
provision for loan losses.
Still on the horizon and yet to fully influence the local economy, the Everett
Naval Base, which began operations in spring of 1994, will be receiving an
aircraft carrier group in 1996. Management looks forward to, and remains
cautiously optimistic about the future.
In November 1994, the long bond (30 year treasury bond) was hitting highs of
around 8.16% making it one of the worst years for returns on the bond market
since 1926. At year-end 1994, the long bond yield was 7.84%, the 10 year was
7.80%, and 5 year was 7.81%, and the one year was 7.12%. By the close of the
last business day of 1995, the bond market had made a dramatic recovery, having
one of the best rallies in history. The long bond was at 5.94%, the 10 year at
5.56%, the 5 year at 5.37%, and the one year at 5.13%. Federal funds sold
inverted the yield curve at 5.19%. Considering the change in interest rates for
1994 and 1995, it has been a challenging two years for managing the interest
rate spread.
In 1995, the base rate of the Corporation was changed as follows:
<TABLE>
<S> <C>
February 3, 1995 Up to 9.00% from 8.50%
July 10, 1995 Down to 8.75% from 9.00%
December 26, 1995 Down to 8.50% from 8.75%
</TABLE>
On February 2, 1996, the Corporation decreased its base rate to 8.25% from
8.50%. Due to lower interest rates in 1995, the Corporation's investment
portfolio, which had a net unrealized loss at year-end 1994 of $6.6 million,
increased in value to show a net unrealized gain of $2.6 million at year-end
1995.
FINANCIAL REVIEW / BALANCE SHEET
The Corporation manages its balance sheet to meet the needs of its business
strategy, which adapts to the changing economic environment, and business and
competitive factors.
- --------------------------------------------------------------------------------
P A G E T W E N T Y - T H R E E
- --------------------------------------------------------------------------------
<PAGE> 25
- --------------------------------------------------------------------------------
FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Continued
- --------------------------------------------------------------------------------
Based on the balances at year-end 1995, assets increased $92.6 million, or
14.4%; increased $84.5 million, or 15.2% in 1994, and increased $71.4 million,
or 14.7% in 1993. Average earning assets as a percent of total average assets,
were 95.6%, or $661.1 million in 1995; 94.1%, or $575.1 million in 1994, and
93.0%, or $480.6 million in 1993. Local economic conditions and an aggressive
business development program were the largest factors contributing to the growth
in earning assets.
Loans increased $34.5 million, or 7.3% in 1995. This compares to loan growth of
$100.9 million, or 27.3% in 1994, and $48.8 million, or 15.2% in 1993. In 1995,
the investment portfolio increased $8.6 million to $145.0 million, or 6.3%. The
investment portfolio decreased in 1994 versus 1993, by $15.2 million, or 10.0%.
The earning asset with the largest increase for the year was federal funds sold,
increasing from $1.1 million in 1994 to $55.9 million in 1995. The increase in
fed funds sold for the year reflects the decline in loan demand that the
Corporation experienced in 1995. Whereas in 1994, loan demand was so much
greater it was necessary to shift cash flows and additional borrowings from the
Federal Home Loan Bank of Seattle (FHLB) into loans.
The primary source of funds for earning assets are deposits and borrowings.
Total deposits were up $101.6 million, or 18.8% in 1995; increased $33.1
million, or 6.5% in 1994, and increased $57.7 million, or 12.9% in 1993. Money
Market and NOW accounts were down $.7 million, or 1.0% in 1995; down $6.8
million, or 8.8% in 1994, and down $3.4 million, or 4.3% in 1993. Savings
accounts were down $54.0 million or 27.6% in 1995, down $32.0 million, or 14.1%
in 1994; and up $81.6 million, or 55.9% in 1993. Time CD's increased $144.8
million, or 71.8% in 1995, increased $73.0 million in 1994, or 56.7%; and were
down $23.9 million, or 15.7% in 1993. The decrease in Money Market, NOW and
savings accounts for 1995 was planned by management in response to lower
interest rates. The Bank aggressively competes for consumer and business
deposits.
The 1995 results of operations compared to 1994 and 1993 include the following
contributing factors, which are discussed more fully in other sections of the
financial review.
1) Net interest income increased $1.4 million, or 4.4% in 1995; increased $5.8
million, or 21.7% in 1994, versus an increase of $5.2 million, or 24.5% in 1993.
The increase in 1995 is attributable to an increase in interest expense of $8.7
million, or 42.2% and an increase in interest income of $10.1 million, or 19.2%.
2) The provision for loan losses decreased in 1995 to $1.5 million, down from
$3.9 million in 1994, and down from $3.0 million in 1993. The reason for the
decline in the provision for 1995 was due to continued loan quality, evidenced
by lower net charge offs, and smaller growth in the portfolio. The current level
of the provision is deemed by management to be adequate given the actual loss
experience, the size of the portfolio, and anticipated economic conditions. 3)
Total noninterest expense increased $513 thousand, or 3.1% in 1995, indicating
the Corporation's continued emphasis on overhead expense control. Noninterest
expense decreased $125 thousand, or .7% in 1994.
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, shareholders' equity, and the level of nonaccrual
loans.
The cost of funds and asset yields for the Corporation during the last three
years were mixed. For the year 1993, the average yield on earning assets dropped
117 basis points, and the average cost of interest bearing liabilities dropped
137 basis points. In 1994, the yield on average earning assets dropped 1 basis
point and the average cost of interest bearing liabilities dropped 12 basis
points. In 1995, the yield on average assets was up 31 basis points, while the
average cost of interest bearing liabilities increased 107 basis points. The
slight decline in 1994 in interest bearing liabilities was in spite of the
Corporation increasing rates paid on deposit accounts fourteen times. As noted
before, 1995 was a difficult year for the interest rate spread due to less than
dynamic loan demand and paying deposit rates consistent with prudent liquidity
management. The net interest margin (net interest income divided by total
average assets) was 5.03% in 1995; 5.46% in 1994; and 5.30% in 1993 (see
"Liquidity and Interest Sensitivity" in this section). As noted on page 33 of
this report, it was the growth, or volume, which contributed mostly to the
increased net interest earnings of the Corporation for all three years. The
following is a more detailed discussion of the factors comprising 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 at a
34% rate. Tables 1 and 2 on pages 32 and 33 of this report present an analysis
of the changes in net income. Table 1 (Average Balances) indicates the changes
in the average balance of accounts, and Table 2 (Rate/Volume Analysis) indicates
the causes of the changes in net interest income; whether by changes in the
average balance (Volume) or changes in interest (Rate). The discussion below
presents an analysis based on a taxable equivalent basis, unless otherwise
stated.
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Management's Discussion and Analysis of Financial Condition and Results of
Operations - Continued
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Table 1 indicates that net interest income totaled $34.8 million in 1995, an
increase of 4.2%, $33.4 million in 1994, an increase of $6.0 million, or 21.9%,
and an increase of $5.4 million in 1993, or 24.3%. Table 2 indicates that of the
$1.4 million increase in net interest income, there was an increase in interest
income of $10.1 million and an increase in interest expense of $8.7 million,
which leaves a net increase in net interest income of $1.4 million. Using the
tables in the same fashion, Table 1 indicates that net interest income for 1994
totaled $33.4 million, which was $6.0 million over 1993. Table 2 indicates there
was an increase in interest income of $8.8 million and an increase in interest
expense of $2.8 million, which leaves an increase in net interest income of $6.0
million.
LOAN PORTFOLIO
Average loans grew $59.1 million, or 13.9% in 1995, and $88.3 million, or 26.1%
in 1994, and $53.8 million, or 18.9% in 1993. For 1995, real estate commercial
loans had the largest growth of $43.5 million, or 37.2%. This was followed by
real estate residential loans which increased $15.7 million, or 20.9% for the
year. In 1994, real estate commercial loans also had the largest growth at $41.0
million, or 53.8%, however, real estate construction loans had the second
largest growth at $27.8 million, or 41.9%. The increases in real estate
commercial and residential loans in 1995 does indicate a trend away from real
estate construction loans. This was due to a slowdown in land development in
1995. Going forward, management will continue to pursue these, and all types of
loans in accordance with established lending policies.
Rates on loans in 1995 increased 51 basis points, however, during the last two
quarters of 1995, they trended lower due to lack of demand. Management expects
that loan rates will continue to ease in 1996 unless demand increases. At
December 31, 1995, 63% of the portfolio was fixed rate and 37% was variable
rate. At December 31, 1994, 62% was fixed rate, and 38% was variable rate. At
December 31, 1993, 65% was fixed rate and 35% was variable rate.
Interest and fee income from loans increased $8.6 million, or 19.6% in 1995, and
$8.4 million, or 23.7% in 1994 as compared to 1993. Interest and fee income in
1993 increased $2.7 million, or 8.3%, as compared to 1992. The earnings on the
$59.1 million increase in 1995 average balances of loans, resulted in increased
income of $6.0 million in 1995, while an increase in interest rates increased
income by $2.6 million. The earnings on the $88.3 million increase in 1994
average balances of loans resulted in increased income of $9.5 in 1994, and a
decrease in interest rates reduced interest income by $1.2 million. The earnings
on the $53.8 million increase in 1993 average balances of loans resulted in
increased income of $5.9 million, while a decrease in interest rates decreased
income by $3.2 million. Loan fee income totaled $3.9 million in 1995, $4.0
million in 1994, compared to $2.9 million in 1993 and $2.3 million in 1992.
The Bank has a credit card department which began issuing cards to both
consumers and businesses in 1993. At year-end 1995, this department had $4.0
million in credit lines versus $3.1 million in 1994. The department had $913
thousand in active balances which is a 28.4% increase over 1994 active balances
of $711 thousand.
Management expects loan demand to remain lower than normal in 1996. However,
there has been an increase in loan applications through the Bank's secondary
market mortgage operations, and it is estimated that this trend will continue
provided long-term interest rates remain reasonably low. An increase in this
activity would increase the other income of the Corporation.
LOAN LOSS PROVISION
The provision for loan losses decreased in 1995 to $1.5 million from $3.9
million in 1994, or 60.9%, and $3.0 million in 1993, or 50.0%. The small growth
of the loan portfolio in 1995 and continued loan quality did not require as
large a contribution in 1995 as compared to prior years.
When considering the amount of the loan loss provision, management considers the
actual loss experience, changes in the size and character of the portfolio,
identification of individual problem situations which may affect the borrowers
ability to repay, and the prevailing and anticipated economic conditions.
The allowance for loan losses was 2.36% of total loans at year-end 1995, 2.21%
of total loans at year-end 1994, and 1.99% of total loans at year-end 1993. This
ratio changes when 1) loans are charged-off to the reserve; 2) a provision is
charged to expense and added to the reserve; 3) when prior loans charged-off are
recovered, or 4) when total loans increase or decrease. At year-end 1995,
management considered the reserve to be adequate. Please refer to Note 3, page
13 of this report for details regarding changes in the level of the allowance.
The allowance for loan losses as a percent of impaired loans was 371% for
year-end 1995, 256% for year-end 1994, and 222% for year-end 1993. As indicated
above, management evaluates the adequacy of the allowance for loan losses based
upon a number of factors and estimates its allowance for loan losses in relation
to the entire portfolio's estimated losses over the life
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Management's Discussion and Analysis of Financial Condition and Results of
Operations - Continued
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of the portfolio. Accordingly, the ratio of the allowance for loan losses to
impaired loans may vary greatly because the timing of certain events described
in the previous paragraph cannot be controlled. General conditions leading to
management's decision to increase the allowance include concerns about a
perceived overall slowing in the Northwest's economic environment, regional
concerns, and adverse effects of changes in government regulation and taxation.
INVESTMENTS
Total interest income from investments, including federal funds sold, increased
$1.5 million in 1995, $.5 million in 1994, and $1.5 million in 1993. The
increase in average investment balances of $26.9 million in 1995, contributed
$.9 million to income, while rate changes accounted for an increase of $.6
million to income. The increase of $6.2 million in the 1994 average balance of
investments contributed $2.2 million to income, while rate changes accounted for
a decrease of $1.7 million in income. The increase of $39.2 million in the 1993
average balance of investments contributed $3.0 million to income, while rates
accounted for a decrease of $1.5 million in income.
There were no significant securities losses in 1995, compared to securities
losses of $355 thousand in 1994. The 1994 losses were taken as part of
management efforts to improve the value, while reducing the volatility of the
portfolio. There were no securities gains or losses in 1993.
INTEREST EXPENSE
Total interest expense in 1995 increased $8.7 million, or 42.2%. In 1994 it
increased $2.9 million as compared to 1993, or 16.1% and decreased $1.2 million
in 1993 as compared to 1992. The increase of $65.5 million in the 1995 average
balance of interest bearing liabilities contributed $4.9 million to expense,
while a increase in average rate accounted for a increase of $3.8 million in
interest expense. The increase of $78.8 million in the 1994 average balance of
interest bearing liabilities contributed $4.4 million to expense, while a
decrease in average rate accounted for a decrease of $1.6 million in interest
expense. The increase of $77.9 million in the 1993 average balance of interest
bearing liabilities contributed $3.1 million to expense, while a decrease in
average rate accounted for a decrease of $4.3 million in interest expense.
OTHER NONINTEREST INCOME
Other noninterest income totaled $3.4 million in 1995, up $507 thousand, or
17.4%; in 1994 totaled $2.9 million, down $ 1.5 million, or 33.6% as compared to
an increase of $.3 million, or 7.2% in 1993. In keeping with the historical
trend, service charges increased only $4 thousand in 1995, or .2%. This compares
to a growth of $43 thousand, or 2.8% in 1994, and a decrease of $80 thousand in
1993, or 5.0% from 1992. While deposits have grown at a substantially higher
rate than service charges, the growth in accounts most susceptible to service
charges has remained reasonably flat. Also, management estimates that more
customers are maintaining higher balances to avoid service charges. The number
of accounts increased 4,882 in 1995, 1,177 in 1994; and 3,014 in 1993, or 11.5%,
2.9%, and 7.9% respectively.
Other income increased $152 thousand, or 9.0% to $1.8 million in 1995, and
decreased from $2.9 million in 1993 to $1.7 million in 1994, excluding
securities gains/(losses). The increase in 1995 is due to non-recurring income
of $157 thousand on the sale of other real estate owned, and interest of $98
thousand on amended tax returns. Otherwise, insurance and financial services
income was down $118 thousand, or 58.1% for the year, along with a decrease of
$142 thousand, or 45.0% in broker loan fees. Gains on the sale of mortgage loans
accounted for a $1.0 million decrease in other income in 1994. Income from this
same source again dropped in 1995 to $174 thousand from $316 thousand in 1994,
or 44.9%. The reason for this large decline is due to high long-term interest
rates in 1994 which all but halted the mortgage loan and refinance business.
Although 1995 brought with it lower interest rates, it was not until the fourth
quarter of 1995 that the Corporation began experiencing increased fee income
from those activities. Management estimates that income from this operation will
increase in 1996.
Trust administration income increased $116 thousand, or 25.8% to $565 thousand
in 1995, increased $10 thousand, or 2.3% in 1994 to $449 thousand, and increased
$131 thousand, or 42.5% to $439 thousand in 1993. The market value of trust
assets managed at year-end 1995 was $106.9 million, up $34.2 million, or 47.0%,
year-end 1994 was $72.7 million, up $6.4 million, or 9.7% in 1993.
OTHER NONINTEREST EXPENSE
Total noninterest expenses increased $513 thousand, or 3.1% in 1995. These
expenses decreased $125 thousand, or .7% in 1994 and increased $1.9 million, or
12.4% in 1993.
Salaries and employee benefits increased $.7 million or 7.0% for 1995. In 1994,
the increase was $.8 million, or 8.9% to $9.3 million, and $.6 million, or 7.2%
in 1993 to $8.6 million. The increase in salaries of 4.7% in 1995 was
attributable to an
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Management's Discussion and Analysis of Financial Condition and Results of
Operations - Continued
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increase in staff. Salaries increased $550 thousand to $6.8 million for the 1994
operating year, or 8.8%. This increase was due to the Bank of Northshore
personnel being on the payroll for a full year in 1994, and the remaining 5.8%
represents merit increases and Christmas bonuses.
Employee benefits increased $335 thousand, or 13.2% for 1995. This increase was
attributable to an increase of $160 thousand, or 11.9% in profit sharing
contributions, and an increase of $41 thousand, or 7.2% in social security
taxes. In 1994, employee benefits increased $215 thousand to $2.5 million, 9.3%.
The major component of this increase in employee benefits was the profit sharing
contribution by the Corporation of $1.1 million, up $262 thousand, or 31.3% from
the 1993 contribution of $.8 million. These increases are a function of
increased profits of the Corporation.
Occupancy expense was $2.5 million in 1995, up $178 thousand, or 7.7% from 1994;
$2.3 million in 1994, down $51 thousand, or 2.1% over 1993, and $2.4 million in
1993. Approximately 35% of occupancy expense is depreciation. The increase in
occupancy expense in 1995 was due to office rental costs which increased $146
thousand to $389 thousand, or 60.1%. Occupancy expense in 1994 was reflective of
what the Corporation did in prior years. In 1992, the Corporation began
construction on a new administration building, which added to occupancy expense
in 1992 and 1993. Additionally in 1993, the Corporation completed its merger
with the Bank of Northshore, which created higher occupancy expenses.
FDIC insurance premiums for 1995 were down $477 thousand or 43.0% due to the
Bank Insurance Fund reaching its congressionally mandated level. FDIC insurance
premium increases in prior years were the result of increases imposed by the
Financial Institutions Reform and Recovery Act of 1989, and higher deposit
balances. The component of other expense, titled "other", increased $25
thousand, or .8% in 1995 to $3.2 million, reflecting the continued emphasis on
maintaining low overhead costs. Other expense decreased by $513 thousand, or
13.9%, in 1994 and $248 thousand, or 7.2%, in 1993.
The Corporation's efficiency ratio for 1995 was 46.2%; 47.3% in 1994, and 54.2%
in 1993, which is considered excellent in the industry. This ratio is a measure
used by many large banks and bank holding companies, and indicates the amount of
"overhead" expenses to total revenues. The ratio is arrived at by dividing total
other noninterest expense by the sum of net interest income and other
noninterest income. The lower the number, the more efficient the organization.
LIQUIDITY
The primary function of asset/liability management is to ensure adequate
liquidity and to maintain an appropriate balance between interest-sensitive
earning assets and interest bearing liabilities. Liquidity management involves
the ability to meet the cash flow requirements of customers who either may be
depositors wanting to withdraw funds, or borrowers needing assurance that
sufficient funds will be available to meet their credit needs.
As indicated on Page 5 of this report, net cash provided by operating activities
totaled $15.7 million for 1995, $15.2 million for 1994 and $11.3 million for
1993. The largest component providing cash from operations was net income for
all three years. In 1995, the downward trend in loans originated for sale
leveled off at $17.5 million, versus $16.1 million in 1994 and $50.3 million in
1993. In the fourth quarter of 1995, it has been noted that loan originations
have increased over 1994, and management estimates that if long-term interest
rates continue to decline, these originations will increase in 1996.
Investing activities of the Corporation in 1995 were $54.8 million in federal
funds sold, $35.6 million in loans and $5.0 (net) in investments. The 1995
investing activities are a substantial change from the previous year. In 1995,
the Corporation would have preferred more loans, however, demand was weak and it
was necessary to direct funds into federal funds sold and the investment
portfolio. Note, however, that the rates paid on federal funds sold in 1995 were
generally better than treasury bonds out past seven years. In 1994, the
Corporation had excellent loan growth with $102.0 million being invested in
loans, using $10.8 million of security sales proceeds to help fund the growth.
In 1993, loans had smaller funding requirements than investments, with loans
using $50.4 million and investments using $87.0 million.
Over the last three years, the financing of investment activities has changed.
In 1993, core deposits (demand, Money Market and NOW accounts) provided most of
the funding at $81.7 million. The changes in the financing methods in 1994 and
1995 were planned by management. During this time, funding was provided by time
CD's which financed $73.0 million and $144.8 million respectively. In 1994, FHLB
net borrowings of $37.5 million were also necessary to fund growth, whereas
$22.5 million of those borrowings were repaid with excess liquidity in 1995. It
is the Corporation's intention to continue this type of funding in the future.
The charts on the following page indicate the maturity schedule for earning
assets as of December 31, 1995 and 1994:
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Management's Discussion and Analysis of Financial Condition and Results of
Operations - Continued
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<TABLE>
<CAPTION>
MATURITY SCHEDULE FOR INVESTMENTS AND LOANS
(Amortized cost used for investments)
In Thousands Percent
- ------------ Total Total of Total
0-1 1-5 After Carrying Fair Fair
Year Years 5 Years Value Value Value
---- ----- ------- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
December 31, 1995
Investments $ 28,275 $ 36,713 $ 78,567 $143,555 $146,189 20.5%
Loans 169,727 310,947 24,314 504,988 510,973 71.7%
Federal Funds sold 55,930 -- -- 55,930 55,930 7.8%
-------- -------- -------- -------- -------- -----
Total $253,932 $347,660 $102,881 $704,473 $713,092 100.0%
======== ======== ======== ======== ======== =====
</TABLE>
<TABLE>
<CAPTION>
In Thousands Percent
- ------------ Total Total of Total
0-1 1-5 After Carrying Fair Fair
Year Years 5 Years Value Value Value
---- ----- ------- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
December 31, 1994
Investments $ 13,920 $ 51,149 $ 73,043 $138,112 $131,478 21.7%
Loans 171,270 268,916 30,326 470,512 472,360 78.1%
Federal Funds sold 1,120 -- -- 1,120 1,120 0.2%
-------- -------- -------- -------- -------- -----
Total $186,310 $320,065 $103,369 $609,744 $604,958 100.0%
======== ======== ======== ======== ======== =====
</TABLE>
In addition to deposit acquisition and borrowings as a source of liquidity,
maturing loans and investments with maturities of less than one year and
overnight federal funds purchased are considered to be available for liquidity
needs.
As indicated in the charts above, $253.9 million in aggregate loans, investments
and federal funds sold were available at year-end 1995, or 36.0% of carrying
value. At year-end 1994, $186.3 million in aggregate loans, investments and
federal funds sold were available, or 30.6% of carrying value, and $142.8
million were available as of year-end of 1993, or 27.4% of carrying value.
Additional sources of liquidity available to the Corporation could be additional
sales of securities under repurchase agreements, additional borrowings from the
FHLB, participation in the Treasury Department's short-term note program,
borrowings at the Federal Reserve Bank, or borrowings from correspondent banks
(see Note 6).
The Corporation has a policy that liquidity of 12.5% of total assets be
maintained as a minimum. At year-end 1995, management considers the liquidity of
the Corporation to be more than adequate. The Corporation does not securitize
loans for liquidity purposes, or issue debt in the capital markets.
INTEREST RATE SENSITIVITY
Interest rate sensitivity is closely related to liquidity because each is
directly affected by the maturity 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. This assumes that management adjusts rates equally as general interest
rates fall. 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 can change rapidly as the result of market conditions and customer
patterns.
MANAGEMENT DOES NOT USE INTEREST RATE RISK MANAGEMENT PRODUCTS SUCH AS INTEREST
RATE SWAPS, HEDGES, OR DERIVATIVES, NOR DOES MANAGEMENT INTEND TO USE SUCH
PRODUCTS IN THE FUTURE.
The Corporation's interest rate sensitive positions at December 31, 1995 and
1994 are shown in the tables on the following page:
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Management's Discussion and Analysis of Financial Condition and Results of
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REPRICING CHARACTERISTICS OF EARNING ASSETS AND INTEREST BEARING LIABILITIES
(Amortized cost used for investments)
<TABLE>
<CAPTION>
In Millions
- ----------- Total Non
0-3 4-12 within one 1-5 5-10 Over interest
December 31, 1995 Months Months Year Years Years 10 Years Sensitive Total
- ----------------- ------ ------ ---- ----- ----- -------- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Earning assets
Investment securities $ 12 $ 16 $ 28 $ 37 $ 65 $ 14 -- $ 144
Loans (1) 201 54 255 243 3 $ 4 505
Federal funds sold 56 -- 56 -- -- -- -- 56
----- ----- ----- ----- ----- ----- ----- -----
TOTAL EARNING ASSETS $ 269 $ 70 $ 339 $ 280 $ 68 $ 14 $ 4 $ 705
===== ===== ===== ===== ===== ===== ===== =====
Interest bearing liabilities
Money market & NOW $ 70 -- $ 70 -- -- -- -- $ 70
Savings deposits 141 -- 141 -- -- -- -- 141
Time deposits 89 $ 158 247 $ 98 $ 2 -- -- 347
----- ----- ----- ----- ----- ----- ----- -----
TOTAL INTEREST BEARING DEPOSITS 300 158 458 98 2 -- -- 558
Other 8 -- 8 10 5 -- -- 23
----- ----- ----- ----- ----- ----- ----- -----
TOTAL INTEREST BEARING LIABILITIES $ 308 $ 158 $ 466 $ 108 $ 7 -- -- $ 581
===== ===== ===== ===== ===== ===== ===== =====
Incremental gap ($ 39) ($ 88) ($127) $ 172 $ 61 $ 14 $ 4 $ 124
Cumulative gap ($ 39) ($127) ($127) $ 45 $ 106 $ 120 $ 124 $ 124
Gap as a percent of
total earning assets -5.5% -18.0% -18.0% 6.4% 15.0% 17.0% 17.6%
===== ===== ===== ===== ===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
In Millions
- ----------- Total Non
0-3 4-12 within one 1-5 5-10 Over interest
December 31, 1994 Months Months Year Years Years 10 Years Sensitive Total
- ----------------- ------ ------ ---- ----- ----- -------- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Earning assets
Investment securities $ 2 $ 12 $ 14 $ 51 $ 51 $ 22 -- $ 138
Loans (1) 201 59 260 201 6 1 $ 3 471
Federal funds sold 1 -- 1 -- -- -- -- 1
----- ----- ----- ----- ----- ----- ----- -----
TOTAL EARNING ASSETS $ 204 $ 71 $ 275 $ 252 $ 57 $ 23 $ 3 $ 610
===== ===== ===== ===== ===== ===== ===== =====
Interest bearing liabilities
Money market & NOW $ 71 -- $ 71 -- -- -- -- $ 71
Savings deposits 195 -- 195 -- -- -- -- 195
Time deposits 40 $ 109 149 $ 52 $ 1 -- -- 202
----- ----- ----- ----- ----- ----- ----- -----
TOTAL INTEREST BEARING DEPOSITS 306 109 415 52 1 -- -- 468
Other 17 15 32 15 -- -- -- 47
----- ----- ----- ----- ----- ----- ----- -----
TOTAL INTEREST BEARING LIABILITIES $ 323 $ 124 $ 447 $ 67 $ 1 -- -- $ 515
===== ===== ===== ===== ===== ===== ===== =====
Incremental gap ($119) ($ 53) ($172) $ 185 $ 56 $ 23 $ 3 $ 95
Cumulative gap ($119) ($172) ($172) $ 13 $ 69 $ 92 $ 95 $ 95
Gap as a percent of
total earning assets -19.5% -28.2% -28.2% 2.1% 11.3% 15.1% 15.6%
===== ===== ===== ===== ===== ===== =====
</TABLE>
(1) Includes nonaccruing loans.
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Management's Discussion and Analysis of Financial Condition and Results of
Operations - Continued
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At the end of 1995, 1994 and 1993, the gap of the Corporation was negative, with
rate-sensitive liabilities exceeding rate-sensitive assets in a one-year
horizon. This would suggest that a decrease in general interest rates would
improve net interest earnings. At year-end 1993, the net interest margin of the
Corporation was 5.30%, 5.46% in 1994 and 5.03% in 1995. General interest rates
declined in 1993, increased rapidly in 1994, and decreased in 1995. The negative
gap of (28.2%) in 1994 declined to a negative (18.0%) in 1995, or the gap became
more asset sensitive during 1995. Since interest rates declined, the general
theory of the gap would hold true as a more asset sensitive position when rates
are declining would have an adverse effect on the net interest margin, which it
did. In 1993, the gap went from (33.1%) at December 31, 1993 to (28.2%) at
December 31, 1994. For this period also, the gap became more asset sensitive,
however, the net interest margin increased to 5.46% from 5.30%. One major factor
contributes to this uncertain effect of the gap theory; interest rates do not
always change to the same extent and at the same time across all maturities of
assets and liabilities. Actually, management determines the repricing on assets
and liabilities depending on the options available to maximize profit while
maintaining liquidity. The gap reflects management's ability to change rates,
not necessarily that rates must change. For example, while savings accounts are
considered repriceable within one year for reporting purposes, it doesn't
necessarily mean that management will change those rates within a one year
period. Rather, it indicates that management may change the rates. During 1994,
management increased rates on deposit accounts fourteen times. During 1995,
management increased rates four times, and decreased rates ten times.
Management reviews gap and numerous other reports monthly. General economic
conditions and competitive factors, are also considered during the process of
asset/liability management. Due to the options available, management considers
the current rate risk position within acceptable levels. Currently, if downward
moving interest rates level off, the net interest margin will continue to
compact until the cost of funds reaches the level of current interest rates.
Management cannot predict when that will happen, or how much lower interest
rates will go.
CAPITAL
The Financial Accounting Standards Board (FASB) issued Statement No. 115,
"Accounting for Certain Investment in Debt and Equity Securities", in May 1993.
Bank holding companies were required to adopt this new accounting standard as of
January 1, 1994 for financial statement reporting. The Corporation adopted this
standard as required.
During 1994, the Federal Reserve and other regulatory agencies issued final
amendments to its risk-based capital treatment. Under this rule, institutions
are generally directed not to include in Tier I capital the components of common
shareholders' equity, "net unrealized holding gains (losses) on available for
sale debt securities". In addition, net unrealized losses on marketable equity
securities should continue to be deducted when computing Tier I capital. This
rule has the general 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.
For the Corporation's regulatory capital position, please see Note 11, page 17
of this report.
Consolidated capital of the Corporation for financial statement purposes,
increased $14.9 million in 1995 to $65.4 million, or 29.5%; $9.3 million in 1994
to $50.5 million, or up 22.6%, and increased $7.9 million in 1993 to $41.2
million, or 23.8%. In 1995, $2.1 million of the increase was attributable to the
increase in the market value of the AFS securities. Almost all of the remainder
of the increase was the retained earnings of the Bank. In 1994 a loss of $1.2
million in the AFS securities reduced the growth in capital to $9.3 million. In
1993, $6.7 million of the increase in capital came from retained earnings, the
remainder of $1.2 million was attributable to the merger with The Bank of
Northshore. Please see Note 11 of this report for other information of
shareholder's equity, dividends and capital requirements.
MARKET FOR FRONTIER FINANCIAL CORPORATION'S
COMMON STOCK AND RELATED SHAREHOLDER MATTERS
Trading in Frontier Financial Corporation's common stock has not been extensive,
but could be considered an active trading market. In 1995, private trades and
transfers totaled approximately 7% of the total number of outstanding shares.
Private trades and transfers during the year 1994 totaled approximately 6% of
the total outstanding number of shares at year-end. The Corporation's common
stock is not listed on any exchange, or the National Association of Securities
Dealers' Automated Quotation System (NASDAQ). During 1995, the market price of
common stock ranged from $24.00 to $29.00 per share (prices have been adjusted
for stock dividends and splits).
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<PAGE> 32
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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 - Continued
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At December 31, 1995, the total number of shareholders of record of Frontier
Financial Corporation's common stock was 2,609, and there were 6,322,255 shares
outstanding.
Management has established an objective to maximize the rate of internal capital
growth as the means of maintaining capital adequacy. The Corporation has not
paid cash dividends in the past. However, the Bank, or the Corporation, has paid
a stock dividend each year since 1981, except for 1995. Management believes that
issuing stock accomplishes much more than a cash dividend. The amount of cash
that could be distributed to shareholders would be far less than the liquidation
value of a stock dividend. Additionally, cash dividends reduce capital which is
needed to fund the continued growth of the Bank. Accordingly, there are no plans
at this time to pay future cash dividends.
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P A G E T H I R T Y - O N E
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<PAGE> 33
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FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
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AVERAGE BALANCES AND TAX-EQUIVALENT NET INTEREST MARGIN - Table 1
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<TABLE>
<CAPTION>
Year Ended December 31,
In Thousands 1995 1994 (1) 1993 (1)
- ------------ ---------------------------- ----------------------------- -----------------------------
Average Average Average
Interest Rates Interest Rates Interest Rates
Average Income/ Earned/ Average Income/ Earned/ Average Income/ Earned/
Balance Expense Paid Balance Expense Paid Balance Expense Paid
-------- ------- ------- -------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS
Taxable investments $106,320 $ 6,781 6.38% $114,861 $ 7,237 6.30% $ 85,952 $ 6,495 7.56%
Nontaxable investments (2) 31,872 2,977 9.34% 32,672 3,123 9.56% 23,414 2,448 10.46%
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total 138,192 9,758 7.06% 147,533 10,360 7.02% 109,366 8,943 8.18%
Federal funds sold 37,477 2,194 5.85% 1,256 52 4.14% 33,237 991 2.98%
Loans(3)
Installment 19,193 1,916 9.98% 19,430 1,819 9.36% 19,829 1,912 9.64%
Commercial(2) 124,356 13,218 10.63% 120,359 11,673 9.70% 113,007 11,047 9.78%
Real estate
Commercial 160,592 16,222 10.10% 117,087 11,219 9.58% 76,112 7,745 10.18%
Construction 90,317 11,686 12.94% 94,213 9,965 10.58% 66,381 8,192 12.34%
Residential 90,972 9,113 10.02% 75,255 8,926 11.86% 62,700 6,339 10.11%
-------- ------- ----- -------- ------- ------- -------- ------- -----
Total 485,430 52,155 10.74% 426,344 43,602 10.23% 338,029 35,235 10.42%
Total earning assets/total
interest income 661,099 64,107 9.70% 575,133 54,014 9.39% 480,632 45,169 9.40%
-------- ------- ===== -------- ------- ===== -------- ------- =====
Reserve for loan losses (12,467) (8,688) (6,584)
Cash and due from banks 20,885 24,380 24,649
Other assets 21,810 20,485 18,322
-------- -------- --------
TOTAL ASSETS $691,327 $611,310 $517,019
======== ======== ========
INTEREST BEARING LIABILITIES
Money Market &
NOW accounts $ 68,511 2,159 3.15% $ 75,865 2,000 2.64% $ 79,157 2,345 2.96%
Savings accounts 151,798 6,349 4.18% 224,657 8,606 3.83% 190,510 7,802 4.10%
Other time deposits 306,724 19,350 6.31% 151,240 8,158 5.39% 136,518 7,482 5.48%
-------- ------- ------ -------- ------- ----- -------- ------ -----
Total interest bearing
deposits 527,033 27,858 5.29% 451,762 18,764 4.15% 406,185 17,629 4.34%
Short-term borrowings 3,173 175 5.51% 11,753 538 4.58% 1,302 35 2.69%
Long-term debt 22,848 1,297 5.68% 24,077 1,337 5.55% 1,320 118 8.94%
-------- ------- ------ -------- ------- ----- -------- ------ -----
Total interest bearing
liabilities/total
interest expense 553,054 29,330 5.30% 487,592 20,639 4.23% 408,807 17,782 4.35%
-------- ------- ====== -------- ------- ===== -------- ------ =====
Noninterest bearing
deposits 73,001 72,102 66,232
Other liabilities 6,832 4,975 4,355
Shareholders' equity 58,440 46,641 37,625
-------- -------- --------
TOTAL LIABILITIES
AND CAPITAL $691,327 $611,310 $517,019
======== ======== ========
NET INTEREST INCOME $34,777 $33,375 $27,387
======= ======= =======
NET YIELD ON INTEREST
EARNING ASSETS 5.26% 5.80% 5.70%
===== ===== =====
</TABLE>
(1) Prior period data restated to conform to current presentation.
(2) Includes amounts to convert nontaxable amounts to a fully taxable equivalent
basis at a 34% tax rate.
(3) Includes nonaccruing loans.
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P A G E T H I R T Y - T W O
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<PAGE> 34
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FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
RATE/VOLUME ANALYSIS OF CHANGES IN NET INTEREST INCOME - Table 2
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year ended December 31, 1995 versus 1994 1994 versus 1993 1993 versus 1992 (1)
In Thousands Increase (Decrease) Due Increase (Decrease) Due Increase (Decrease) Due
- ------------ to Change in to Change in to Change in
------------------------------ ------------------------------- -----------------------------
Total Total Total
Average Average Increase Average Average Increase Average Average Increase
Volume Rate (Decrease) Volume Rate (Decrease) Volume Rate (Decrease)
------- ------- ---------- ------- -------- ---------- ------ ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST INCOME
Taxable investments ($538) $82 ($456) $2,184 ($1,442) $ 742 $1,668 ($758) $ 910
Nontaxable investments (77) (69) (146) 968 (293) 675 835 (464) 371
------ ------ ------ ------ ------- ------ ------ ------ ------
Total (615) 13 (602) 3,152 (1,735) 1,417 2,503 (1,222) 1,281
Federal funds sold 1,492 650 2,142 (953) 14 (939) 481 (260) 221
Loans
Installment (22) 119 97 (39) (54) (93) (85) (517) (602)
Commercial 388 1,157 1,545 718 (92) 626 1,686 (2,334) (648)
Real estate
Commercial 4,168 835 5,003 4,170 (696) 3,474 2,482 (1,234) 1,248
Construction (413) 2,134 1,721 3,435 (1,662) 1,773 564 (310) 254
Residential 1,864 (1,677) 187 1,269 1,318 2,587 1,246 1,192 2,438
------ ------ ------ ------ ------- ------ ------ ------ ------
Total 5,985 2,568 8,553 9,553 (1,186) 8,367 5,893 (3,203) 2,690
TOTAL INTEREST
INCOME 6,862 3,231 10,093 11,752 (2,907) 8,845 8,877 (4,685) 4,192
------ ------ ------ ------ ------- ------ ------ ------ ------
INTEREST EXPENSE
Money Market &
NOW accounts (194) 353 159 (98) (247) (345) 460 (1,108) (648)
Savings accounts (2,791) 534 (2,257) 1,398 (594) 804 5,318 (1,656) 3,662
Other time deposits 8,387 2,805 11,192 807 (131) 676 (2,652) (1,532) (4,184)
------ ------ ------ ------ ------- ------ ------ ------ ------
Total interest
bearing deposits 5,402 3,692 9,094 2,107 (972) 1,135 3,126 (4,296) (1,170)
Short-term borrowings (393) 30 (363) 281 222 503 11 (2) 9
Long-term debt (68) 28 (40) 2,032 (813) 1,219 (1) 6 5
------ ------ ------ ------ ------- ------ ------ ------ ------
TOTAL INTEREST
EXPENSE 4,941 3,750 8,691 4,420 (1,563) 2,857 3,136 (4,292) (1,156)
------ ------ ------ ------ ------- ------ ------ ------ ------
CHANGE IN NET
INTEREST INCOME $1,921 ($519) $1,402 $7,332 ($1,344) $5,988 $5,741 ($393) $5,348
====== ====== ====== ====== ======= ====== ====== ====== ======
</TABLE>
(1) Prior period data restated to conform to current presentation.
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P A G E T H I R T Y - T H R E E
- --------------------------------------------------------------------------------
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000716457
<NAME> FRONTIER FINANCIAL CORP
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 19,708
<INT-BEARING-DEPOSITS> 557,937
<FED-FUNDS-SOLD> 55,930
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 102,300
<INVESTMENTS-CARRYING> 42,676
<INVESTMENTS-MARKET> 43,889
<LOANS> 504,988
<ALLOWANCE> 11,897
<TOTAL-ASSETS> 735,183
<DEPOSITS> 641,218
<SHORT-TERM> 7,596
<LIABILITIES-OTHER> 5,880
<LONG-TERM> 15,136
0
0
<COMMON> 44,084
<OTHER-SE> 21,269
<TOTAL-LIABILITIES-AND-EQUITY> 735,183
<INTEREST-LOAN> 52,146
<INTEREST-INVEST> 10,940
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 63,086
<INTEREST-DEPOSIT> 27,855
<INTEREST-EXPENSE> 29,347
<INTEREST-INCOME-NET> 33,739
<LOAN-LOSSES> 1,525
<SECURITIES-GAINS> (4)
<EXPENSE-OTHER> 17,164
<INCOME-PRETAX> 18,467
<INCOME-PRE-EXTRAORDINARY> 18,467
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,615
<EPS-PRIMARY> 2.00
<EPS-DILUTED> 0
<YIELD-ACTUAL> 5.26
<LOANS-NON> 4,417
<LOANS-PAST> 4
<LOANS-TROUBLED> 122
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 10,410
<CHARGE-OFFS> 2,212
<RECOVERIES> 2,174
<ALLOWANCE-CLOSE> 11,897
<ALLOWANCE-DOMESTIC> 11,897
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
