<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For the Quarter ended September 30, 1996
Commission File Number 0-15540
FRONTIER FINANCIAL CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Washington 91-1223535
- ------------------------------- ----------------------------
(State or Other Jurisdiction of (IRS Employer Identification
Incorporation or Organization) Number)
332 SW Everett Mall Way
P. O. Box 2215
Everett, Washington 98203
(Address of Principal Administrative Offices) (Zip Code)
(206) 514-0719
(Registrants Telephone Number, Including Area Code)
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock (No Par Value)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes /X/ No / /
The issuer has one class of common stock (no par value) with 6,815,671 shares
outstanding as of September 30, 1996.
<PAGE> 2
FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
INDEX TO QUARTERLY REPORT ON FORM 10-Q
September 30, 1996
<TABLE>
<CAPTION>
PART I - Financial Information Page
----
Item 1. Financial Statements.
<S> <C>
Consolidated Balance Sheet - September 30, 1996
and Year End 1995. 1
Consolidated Statement of Income - Three Months and Nine Months
Ended September 30, 1996 and 1995. 2
Consolidated Statement of Cash Flows - Nine Months
Ended September 30, 1996 and 1995. 3-4
Statement of Changes in Stockholder's Equity -
September 30, 1996. 5
Notes 6-8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operation. 9-16
PART II - Other Information
Item 1. Legal Proceedings. 17
Item 4. Submission of Matters to a Vote of Security Holders. 17
Item 5. Other Information. 17
Item 6. Exhibits and Reports on Form 8-K. 17
Signature 18
</TABLE>
-i-
<PAGE> 3
FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (Note 1)
(Unaudited)
<TABLE>
<CAPTION>
(In thousands)
September 30, December 31,
ASSETS 1996 1995
--------- ---------
<S> <C> <C>
Cash & Balances Due from Depositary Institutions $ 25,602 $ 19,708
Securities: (Note 2)
Available for Sale-Market Value 100,985 102,300
Held to Maturity-Amortized Cost (Market Value 12-31-95, 38,885 42,676
--------- ---------
Total Securities $43,889) 139,870 144,976
Federal Funds Sold 7,795 55,930
Loans: (Note 3)
Loans, Net of Unearned Income 587,674 504,717
Less: Allowance for Loan Losses (13,010) (11,897)
--------- ---------
Net Loans 574,664 492,820
Mortgage Loans Held for Sale 278 271
Premises & Equipment, Net 13,606 11,758
Other Real Estate Owned 444 590
Intangible assets 416 473
Other Assets 10,145 8,657
--------- ---------
TOTAL ASSETS $ 772,820 $ 735,183
========= =========
LIABILITIES
Deposits:
Non-Interest Bearing $ 82,923 $ 83,281
Interest Bearing 558,296 557,937
--------- ---------
Total Deposits 641,219 641,218
Federal Funds Purchased 2,633 2,935
Securities sold under repurchase agreements 8,207 4,661
Federal Home Loan Bank advances 37,500 15,000
Long-term debt 129 136
Other Liabilities 7,034 5,880
--------- ---------
TOTAL LIABILITIES 696,722 669,830
--------- ---------
EQUITY CAPITAL (Note 4)
Common Stock 57,130 44,084
Unrealized Gains/(Losses) on AFS Securities
Net of Tax effect(Note 2) (629) 933
Retained Earnings 19,597 20,336
--------- ---------
TOTAL CAPITAL 76,098 65,353
--------- ---------
TOTAL LIABILITIES & CAPITAL $ 772,820 $ 735,183
========= =========
</TABLE>
- --------------------------
The accompanying notes are an integral part of these financial statements.
-1-
<PAGE> 4
FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME (Note 1)
(Unaudited)
(In thousands, Except for Per Share Amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
--------- --------- --------- ---------
1996 1995 1996 1995
---- ---- ---- ----
INTEREST INCOME
<S> <C> <C> <C> <C>
Interest & Fees on Loans $ 14,877 $ 13,217 $ 42,320 $ 38,787
Interest on Investments 2,318 3,043 7,826 7,844
----------- ----------- ----------- -----------
Total Interest Income 17,195 16,260 50,146 46,631
----------- ----------- ----------- -----------
INTEREST EXPENSE
Interest on Deposits 6,721 7,667 20,889 20,200
Interest on Borrowed Funds 716 228 1,396 1,195
----------- ----------- ----------- -----------
Total Interest Expense 7,437 7,895 22,285 21,395
----------- ----------- ----------- -----------
Net Interest Income 9,758 8,365 27,861 25,236
----------- ----------- ----------- -----------
PROVISION FOR LOAN LOSSES (700) (325) (1,200) (1,175)
NONINTEREST INCOME
Securities Gains/(Losses) 0 0 0 (4)
Service Charges on Deposit Accounts 388 382 1,179 1,192
Other Noninterest Income 740 509 1,639 1,373
----------- ----------- ----------- -----------
Total Noninterest Income 1,128 891 2,818 2,561
NONINTEREST EXPENSE
Salaries & Employee Benefits 2,695 2,406 7,943 7,367
Occupancy Expense 616 566 1,635 1,694
Other Noninterest Expense 797 777 2,955 3,563
----------- ----------- ----------- -----------
Total Noninterest Expense 4,108 3,749 12,533 12,624
INCOME BEFORE INCOME TAX 6,078 5,182 16,946 13,998
----------- ----------- ----------- -----------
APPLICABLE INCOME TAX (2,097) (1,748) (5,729) (4,513)
NET INCOME $ 3,981 $ 3,434 $ 11,217 $ 9,485
=========== =========== =========== ===========
Average Number of Shares Outstanding
for the Period 6,793,075 6,745,813 6,793,075 6,745,813
PER SHARE COMMON STOCK $ 0.59 $ 0.51 $ 1.65 $ 1.41
=========== =========== =========== ===========
</TABLE>
- ----------------------------
The accompanying notes are an integral part of these financial statements.
-2-
<PAGE> 5
FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN CASH FLOWS
(Unaudited)
<TABLE>
(In thousands)
NINE MONTHS ENDED
CASH FLOWS FROM OPERATING ACTIVITIES Sept. 30, 1996 Sept. 30, 1995
- ------------------------------------ -------------- --------------
<S> <C> <C>
Net Income $ 11,217 $ 9,485
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization 1,017 710
Provision for loan losses 1,200 1,175
Provision for losses on ORE 0 0
Increase in income taxes payable 411 (119)
Decrease in interest receivable (588) (692)
Increase(Decrease) in interest payable (461) 1,583
Loss on sale of HTM securities 0 (4)
Loans originated for sale (16,389) (13,198)
Proceeds from sale of loans 16,216 12,513
Other operating activities 906 1,472
-------- ---------
Net cash provided by operating activities 13,529 12,925
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Net cash flows from Fed Funds Sold 48,135 (62,200)
Proceeds from sales of HTM securities 0 88
Proceeds from maturities of investments 26,206 10,763
Purchase of AFS securities (8,237) (12,365)
Purchase of HTM securities (14,276) (713)
Net cash flows from loan activities (84,312) (23,359)
Purchases of premises and equipment (880) (368)
Proceeds from the sale of other real estate 305 1,325
Cash invested in other real estate (281) (101)
Other investing activities 1 0
-------- ---------
Net cash used by investing activities (33,339) (86,930)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in demand deposit accounts 11,440 (40,870)
Net change in certificates of deposit (11,922) 145,418
Proceeds from issuance of stock 119 91
Principal payments on long term debt (112) (779)
Advances from FHLB 35,000 0
Repayment of FHLB advances (12,500) (22,500)
Net change in Federal Funds purchased 3,244 (4,110)
Other financing activities 435 2
-------- ---------
Net cash provided by financing activities 25,704 77,252
-------- ---------
</TABLE>
(Continued on next page) -3-
<PAGE> 6
FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN CASH FLOWS-(Continued)
(Unaudited)
<TABLE>
<CAPTION>
(In thousands)
NINE MONTHS ENDED
-----------------
Sept. 30, 1996 Sept. 30, 1995
-------------- --------------
<S> <C> <C>
INCREASE IN CASH AND DUE FROM BANKS $ 5,894 $ 3,247
CASH & DUE FROM BANKS AT BEGINNING
OF YEAR 19,708 22,081
------- -------
CASH AND DUE FROM BANKS AT END
OF PERIOD $25,602 $25,328
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest $22,764 $19,784
Cash paid during the year for income taxes 5,416 4,630
Real estate taken as settlement for loan
obligations 0 883
Real estate taken as settlement for loan
obligations - financed by bank $ 570 $ 90
</TABLE>
- --------------------------------------
The accompanying notes are an integral part of these financial statements.
-4-
<PAGE> 7
FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY (Note 4)
(Unaudited)
<TABLE>
<CAPTION>
(In thousands, except for number of shares) Net Unrealized
Common Stock Retained Gains (Losses)
Shares Amount Earnings On Securities Total
------ ------ -------- ------------- -----
<S> <C> <C> <C> <C> <C>
Balance, December 31, 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
10% Stock Dividend 380,295 9,128 (9,128)
Fractional Shares Purchased 563 15 15
Valuation of Available For Sale
Securities (2,322) (2,322)
--------- ------- ------- ------ -------
Balance, December 31, 1994 4,196,435 43,917 7,721 (1,179) 50,459
========= ======= ======= ===== =======
Net Income for 1995 12,615 12,615
Stock Options Exercised 24,821 159 159
Three-for-two Stock Split 2,100,651 0
Fractional Shares Purchased 348 8 8
Unrealized gains on transfer from held to
maturity to available for sale, net of
tax effect 237 237
Valuation of Available for Sale
Securities 1,875 1,875
--------- ------- ------- ------ -------
Balance, December 31, 1995 6,322,255 $44,084 $20,336 $ 933 $65,353
========= ======= ======= ===== =======
Net Income for the first
nine months of 1996 11,217 11,217
Stock Options Exercised 16,288 99 99
7% Stock Dividend 442,831 11,956 (11,956) 0
Fractional Shares Purchased 797 20 20
Shares exchanged for minority
investment 33,500 971 971
Valuation of Available for Sale
Securities (1,562) (1,562)
--------- ------- ------- ------ -------
Balance, September 30, 1996 6,815,671 $57,130 $19,597 ($ 629) $76,098
========= ======= ======= ===== =======
</TABLE>
-5-
<PAGE> 8
FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. The accompanying unaudited consolidated financial statements have
been prepared in accordance with generally accepted accounting
principles for interim financial information, and with instructions to
Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. All
adjustments made to the unaudited interim financial statements were of
a normal recurring nature. In the opinion of management, all
adjustments considered necessary for a fair presentation have been
included. Operating results for the nine months ended September 30,
1996 are not necessarily indicative of the results that may be expected
for year-end December 31, 1996. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Corporation Annual Report on Form 10-K for the year ended December 31,
1995.
NOTE 2. INVESTMENT SECURITIES On January 1, 1994, the Corporation adopted
Statement of Financial Accounting Standard No. 115 (FAS 115),
"Accounting for Certain Investments in Debt and Equity Securities".
This statement establishes standards of financial accounting and
reporting for investments in debt and equity securities that have a
readily determinable fair value. This statement requires all securities
within the Corporation's portfolio to be classified in one of three
groups: 1) Trading securities; 2) securities Held-To-Maturity (HTM),
and 3) securities Available-For-Sale (AFS).
At September 30, 1996, the Corporation had no securities classified as
"Trading", and all other securities in the portfolio were classified as
HTM or AFS.
Securities that are classified as HTM, are carried at cost, adjusted
for amortization of premiums and accretion of discounts which are
recognized as adjustments to income. With some exceptions, securities
classified as HTM may only be sold within three months of maturity.
Securities that are classified as AFS, are carried at fair value,
adjusted for amortization of premiums and accretion of discounts which
are recognized as adjustments to income. Unrealized gains and losses
are excluded from earnings and reported as a separate component of
equity capital. AFS securities may be sold at any time.
Gains and losses on both HTM and AFS securities that are disposed of
prior to maturity, are based on the net proceeds and the adjusted
carrying amount of the specific security sold as an adjustment to
income.
-6-
<PAGE> 9
FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - (Continued)
The tables below display the characteristics of the AFS and HTM portfolios as of
September 30, 1996:
AGGREGATE FAIR VALUE AND AMORTIZED COST OF INVESTMENTS
<TABLE>
<CAPTION>
(In thousands) Amortized Gross Unreal- Gross Unreal- Aggregate
Cost ized Gains ized Losses Fair Value
--------- ------------- ------------- ----------
AFS SECURITIES:
<S> <C> <C> <C> <C>
Equities $ 9,107 $ 9,107
U.S. Treasuries 2,759 24 2,783
U.S. Agencies 46,767 113 (903) 45,977
Corporate securities 43,041 364 (582) 42,823
Mortgage Backed Securities 280 15 295
-------- --------- --------- --------
101,954 516 (1,485) 100,985
HTM SECURITIES:
U.S. Agencies 1,250 3 (2) 1,251
Municipal securities 30,640 771 (130) 31,281
Corporate securities 2,624 (2) 2,622
Mortgage Backed Securities 96 96
Certificates of deposit 4,275 4,275
-------- --------- --------- --------
Totals $ 38,885 $ 774 ($ 134) $ 39,525
-------- --------- --------- --------
Totals $140,839 $ 1,290 ($ 1,619) $140,510
======== ========= ========= ========
MATURITY SCHEDULE OF SECURITIES
Available For Sale Held To Maturity
------------------ ----------------
Amortized Fair Amortized Fair
MATURITY Cost Value Cost Value
-------- ---- ----- ---- -----
0-1 Yr $ 24,604 $ 24,608 $ 8,363 $ 8,364
1-5 Yrs 25,305 25,353 1,144 1,173
5-10 Yrs 50,515 49,482 16,945 17,434
Over 10 Yrs 1,530 1,542 12,433 12,554
-------- --------- --------- --------
$101,954 $ 100,985 $ 38,885 $ 39,525
======== ========= ========= ========
</TABLE>
-7-
<PAGE> 10
FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - (Continued)
CHANGES IN AFS AND HTM SECURITIES
<TABLE>
<CAPTION>
<S> <C>
For the Quarter Ended September 30, 1996:
-----------------------------------------
AFS SECURITIES
--------------
Proceeds From Sales $0
Gross Realized Gains --
Gross Realized Losses --
Gross Gains & Losses Included In Earnings From
Transfers To The Trading Category --
Net Change In Unrealized Holding Gains Or
Losses Included In The Separate
Component of Equity Capital ($23)
HTM SECURITIES
--------------
Sales Or Transfers From this Category $0
</TABLE>
NOTE 3. LOANS
The following is an analysis of the loan portfolio by major type
of loans:
<TABLE>
<CAPTION>
Sept. 30, 1996 Dec 31, 1995
-------------- ------------
<S> <C> <C>
Commercial $ 120,127 $ 127,239
Real Estate:
Commercial 226,727 172,327
Construction 126,066 96,639
Residential 97,261 92,711
Instalment 22,095 19,758
--------- ---------
592,276 508,674
Unearned Fee Income (4,324) (3,686)
--------- ---------
Total Loans $ 587,952 $ 504,988
========= =========
</TABLE>
NOTE 4. The Board of Directors declared a three-for-two stock split and a 7%
stock dividend which were paid March 20, 1995 and March 18, 1996
respectively.
-8-
<PAGE> 11
FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
HIGHLIGHTS
Consolidated net income of the Corporation for the third quarter of 1996 was
$4.0 million versus $3.4 million for the third quarter of 1995, or up 15.9%. The
reason for the increase in net income in 1996 was due to an increase in net
interest income of $1.4 million, or 16.6%. This marks the fifty-first
consecutive quarter in which Frontier's earnings exceeded the prior years'
comparable quarter. In the discussion below, comparison is with the third
quarter of 1995, unless otherwise stated.
Annualized return on average assets (ROA) was 2.10% in 1996, and 1.92% in 1995.
Annualized return on average stockholder's equity (ROE) in 1996 was 21.18%, as
compared to 22.94% in 1995. Earnings per share were $.59 for 1996, and $.51 for
1995. Earnings per share have been adjusted for the seven percent stock dividend
paid on March 18, 1996.
FINANCIAL REVIEW - ECONOMIC ENVIRONMENT
The lending and other activities of Frontier are located in Snohomish County,
Washington, but also include the northern part of King County, Washington. The
major city in Snohomish County is Everett, and the major city in King County is
Seattle, the largest city in the state. An important segment of the Snohomish
County economy is the Boeing Company, which has its 747 and 777 assembly plant
in Everett. Boeing also has other assembly plants and facilities in the Puget
Sound area. In 1994, Boeing completed a workforce reduction of 19% which began
in 1993. In 1995, there was an announcement that Boeing will continue its
workforce reductions, which effected 12,000 additional personnel. This year,
however, Boeing announced the need to hire 6,700. It has been reported that
Boeing stagnates in the first half of the decade and grows in the second half.
It may take awhile before the impact of increased employment can be noticed, if
at all. Since the first quarter of 1995, management had noticed a decline in the
number of loan applications. This trend continued into the first quarter of
1996, however, in the second and third quarter, loan demand has surged. Perhaps
due to Boeing activity, or, perhaps, due to the activity generated by the
near-term arrival of an aircraft carrier group to the new naval facility here in
Everett, or, perhaps, a combination of the two coupled with ambient economic
activity in other regions of Puget Sound. Regardless, the Corporation is
experiencing an increase in net interest income, but remains cautiously
optimistic.
BALANCE SHEET
Below are abbreviated balance sheets at the end of the respective quarters which
indicate the changes that have occurred in the major portfolios of the
Corporation over the past year:
<TABLE>
<CAPTION>
Period ended September 30, 1996 1995 $ Change % Change
- -------------------------- ---- ---- -------- --------
<S> <C> <C> <C> <C>
Loans $587,952 $494,748 $ 93,204 18.8%
Investments 139,870 140,572 (702) -0.5%
Federal Funds Sold 7,795 63,320 (55,525) -87.7%
Total Assets $772,820 $733,047 $ 39,773 5.4%
</TABLE>
-9-
<PAGE> 12
FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Balance Sheet - (Continued)
<TABLE>
<CAPTION>
Period ended September 30, 1996 1995 $ Change % Change
- -------------------------- ---- ---- -------- --------
<S> <C> <C> <C> <C>
Noninterest bearing deposits $ 82,923 $ 80,228 $ 2,695 3.4%
Interest bearing deposits 558,296 563,923 (5,627) -1.0%
-------- -------- -------- -----
Total deposits 641,219 644,151 (2,932) -0.5%
Federal Funds purchased
and Repurchase Agreements 10,840 5,505 5,335 96.9%
Long-term debt 37,629 15,173 22,456 148.0%
Capital $ 76,098 $ 61,103 $ 14,995 24.5%
</TABLE>
At quarter end 1996, loans were up $93.2 million, or 18.8% over the previous
year, 16.4%, or $83.0 million of which has been added in 1996. For the first
nine months of 1995, loans had increased only $24.2 million, or 5.2%.
To fund the increase in loan demand in the third quarter of 1996, both the asset
and liability sides of the balance sheet contributed. Federal funds sold
decreased $55.5 million, or 87.7%, from the same period ended a year ago.
Investments decreased over the last year by $702 thousand, or .5%, which was due
to maturities not being reinvested.
On the liability side, deposits decreased .5% during this period, so loans,
federal funds purchased, repurchase agreements, borrowings from the Federal Home
Loan Bank (FHLB), and increased capital accounted for $42.8 million of the
funding.
The mix of the interest bearing deposits looks somewhat different than it has in
quarters prior to 1996. At quarter end 1996, NOW and Money Market accounts had
increased $8.4 million, or 11.9%; savings accounts decreased $1.5 million, or
1.0%, and time deposits continued to run off, decreasing $12.5 million, or 3.6%.
In quarters prior to 1996, NOW and Money Market accounts were decreasing and
time cd's were increasing.
In 1995, the prime rate hit a peak of 9.0% and leveled off in the third quarter.
From the third quarter 1995 to present, the prime rate has declined three times
to 8.25%. At the end of the first quarter 1996, the change in net interest
income, which is interest income less interest expense, was a negative $79
thousand. At the end of the third quarter 1996, the change was an increase of
$1.4 million. This strong increase was due to two factors. 1) Time cd's are
repricing at lower rates, and 2) increased loan volume. The net interest margin
(NIM), which is net interest income as an annualized percent fo total average
quarterly assets, by quarter in 1996 was 5.29% for the third quarter, compared
with 5.29% for the second quarter of 1996, and 4.86% for the first quarter of
1996.
-10-
<PAGE> 13
FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations Net Interest Income
NET INTEREST INCOME
Net interest income is the difference between total interest income and total
interest expense. Several factors contribute to changes in net interest income.
These include the effects of changes in average balances, changes in rates on
earning assets and rates paid for interest bearing liabilities, the level of
noninterest bearing deposits, stockholder's equity, and the level of nonaccrual
loans.
The earnings from certain assets are exempt from federal income tax, and it is
customary in the financial services industry to analyze changes in net interest
income on a "tax equivalent" or fully taxable basis. Under this method,
nontaxable income from loans and investments is adjusted to an amount which
would have been earned if such income were subject to federal income tax. The
discussion below presents an analysis based on "taxable equivalent" amounts at a
35% tax rate. (However, there are no tax equivalent additions to interest
expense or noninterest income and expense amounts discussed below.) Abbreviated
quarterly average balance sheets and net interest income data for the periods
are shown below:
(In thousands)
<TABLE>
<CAPTION>
Quarter ended September 30, 1996 1995 $ Change % Change
- --------------------------- ---- ---- -------- --------
<S> <C> <C> <C> <C>
Loans $578,439 $485,364 $ 93,075 19.2%
Investments * 142,136 136,229 5,907 4.3%
Federal Funds Sold 4,417 60,023 (55,606) NM
Total Earning Assets 724,992 681,616 43,376 6.4%
-------- -------- --------- -----
Total Assets 756,701 714,641 42,060 5.9%
Noninterest bearing deposits 79,926 75,447 4,479 5.9%
Interest bearing deposits 542,511 554,810 (12,299) -2.2%
-------- -------- --------- -----
Total deposits 622,437 630,257 (7,820) -1.2%
Fed Funds purchased
and repurchase agreements 12,065 1,903 10,162 534.0%
Long-term Debt 39,943 15,338 24,605 160.4%
Capital 75,195 59,893 15,302 25.5%
Total interest income 17,445 16,521 924 5.6%
Total interest expense 7,429 7,895 (466) -5.9%
-------- -------- --------- -----
Net Interest Income $ 10,016 $ 8,626 $ 1,390 16.1%
</TABLE>
* Shown at amortized cost.
Earning Assets
In 1996, average earning assets as a percent of total average assets were 95.8%,
and 95.4% in 1995. This ratio indicates how efficiently assets are being
utilized. Average loans were 76.4% and 67.9% respectively, indicating a solid
increase in 1996. Investments as a percent of average assets for the same
periods were 18.8% as compared to 19.1%. Average federal funds sold decreased to
$4.4 million from $60.0 million due to increased loan demand in 1996.
Total average deposits decreased $7.8 million, or 1.2%. Not indicated in the
table above are the components of interest bearing deposits which, in total,
decreased $12.3 million, or 2.2%. Average
-11-
<PAGE> 14
FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Net Interest Income - (Continued)
NOW and Money Market accounts increased $2.1 million, or 3.0%; savings accounts
increased $2.6 million, or 1.8%, and time cd's decreased $16.9 million, or 5.0%.
The yield on earning assets in 1996 decreased .07%, from 9.62% in 1995 to 9.55%
in 1996. The cost of interest bearing liabilities decreased .52%, from a 5.48%
in 1995 to a 4.96% in 1996.
On a tax equivalent basis, net interest income was $10.0 million in 1996, versus
$8.6 million in 1995, for an increase in net interest income of $1.4 million.
For the third quarter, interest income increased $.9 million, and interest
expense decreased $.5 million, for a net change in net interest income of $1.4
million.
The increase in the average balance of earning assets increased interest income
by $1.8 million, and a decrease in interest rates decreased interest income by
$.9 million, for a net increase of $.9 million.
The yield on total loans decreased from 10.81% in 1995 to 10.21% in 1996. Real
estate commercial loans decreased in yield from 10.66% to 10.23%. Real estate
construction loans declined in yield from 13.08% to 11.72%. Business loans
decreased from 10.73% to 10.41%, and installment loans decreased from 10.01% to
9.93%. Real estate mortgage loans declined from 9.99% in 1995 to 9.82% in the
current year. The yield on investments decreased from 7.08% in 1995 to 6.99% in
1996, and the yield on Fed Funds sold decreased from 5.72% in 1995 to 5.08% in
1996.
Interest Bearing Liabilities
The increase in the average balance of interest bearing liabilities increased
interest expense by $.2 million, and the rates paid on interest bearing
liabilities decreased interest expense by $.7 million, for a total decrease
during the period of $.5 million.
The cost of NOW and money market accounts went from 3.29% in 1995, to 2.96% in
1996. Savings accounts cost decreased from 4.18% in 1995 to 4.00% in 1996, and
time cd's decreased in cost from 6.48% in 1995 to 5.76% in 1996. Short term
borrowings decreased from 5.42% to 4.84%, and long term debt cost was 5.30% in
1995 and 5.55% in 1996.
NONINTEREST INCOME AND EXPENSE
Total noninterest income increased at the end of the third quarter by $237
thousand, or 26.6%, due to an increase in loan service fee income of $10
thousand, or 27.8% and an increase in trust department fees of $27 thousand, or
18.1%. Investment and Insurance Services fees increased $23 thousand, or 109.5%.
Service charge income was up only $6 thousand despite an increase of 355
accounts, or 1.9%, during the period. Higher average balances are being
maintained by the customer base.
The market value of trust assets at quarter end 1996 was $112.1 million, as
compared to $101.3 million for the prior year, an increase of $10.8 million, or
10.1%.
Total noninterest expenses increased $359 thousand, or 9.6% in 1996. Salaries
and Employee Benefits increased $289 thousand, to $2.7 million, or 12.0%.
Salaries, alone, increased $209 thousand to $2.1 million, or 11.0% from $1.9
million a year ago. Employee benefits increased $80 thousand to $.6
-12-
<PAGE> 15
FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Noninterest Income and Expense - (Continued)
million, or 16.0% from $.5 million a year ago. The increase in salaries was due
an increase in staff over the year and merit raises. The employee benefits
increase of $80 thousand was attributable to an increase in the profit sharing
reserve of $52 thousand, or 13.9%, and increased social security taxes of $15
thousand, or 10.7%.
Occupancy expense increased $50 thousand, or 8.8% in 1996. 36.7%, or $226
thousand of occupancy expense was depreciation in 1996, and $219 thousand, or
38.7% was depreciation expense in 1995. Excluding depreciation, occupancy
expense increased $43 thousand, or 12.4%, in 1996. The increase was attributable
to increased maintenance and repair costs.
Other expense increased $20 thousand to $797 thousand.
LOANS
IMPAIRED ASSETS (Previously known as non-performing assets)
Non-performing assets are summarized as follows:
<TABLE>
<CAPTION>
(In thousands)
Period Ended September 30, 1996 1995
- -------------------------- ---- ----
<S> <C> <C>
Non-accruing loans $ 4,148 $ 1,997
Loans past due 90 days or more and
still accruing 0 124
Restructured loans 124 136
Other real estate owned 444 687
-------- --------
Total non-performing loans $ 4,716 $ 2,944
======== ========
Total loans at end of period $587,952 $494,748
-------- --------
As a percent of total loans outstanding 0.80% 0.60%
======== ========
</TABLE>
It is the banks practice to discontinue accruing interest on loans that are
delinquent in excess of 90 days. Some problem loans which are less than 90 days
delinquent are also placed into non-accrual status if the success of collecting
full principal and interest is in doubt.
Restructured loans are those loans that had problems in the past, and that have
been restructured in such a way that some forgiveness of debt or other terms has
occurred.
Management works diligently on the collection or liquidation of non-performing
assets. The overall level of non-performing assets to total loans is felt to be
modest. Other real estate owned is comprised of three separate parcels of which
one is a house and the remainder are commercial land parcels. There is an
agreement to purchase contingent on building permits on one parcel, and one
other is sold on terms. As of September 30, 1996, all in-substance foreclosures
are included in other real estate owned, and the carrying values of all parcels
are below their market value.
-13-
<PAGE> 16
FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Impaired Assets - (Continued)
CREDIT CONCENTRATIONS
There is some concentration of credit in the real estate construction and land
development industry. These loans totaled $108.4 million in 1996, or 18.4% of
total loans, and $82.9 million in 1995, or 16.5% of total loans. Many years ago,
management established a real estate loan committee which meets quarterly to
review the economic conditions and building industry trends. As a result of
these and other efforts, there have been very limited losses on these types of
loans. The bank's trade area has enjoyed a stable real estate market. Lower
interest rates in the spring of 1996 helped facilitate a strong level of sales
and real estate activity in general. Recently, interest rates have edged up,
however, no significant slowdowns are noted at this time, and management is
cautiously optimistic as to the real estate markets prospects in the months
ahead.
At September 30, 1996 and 1995, the Corporation had an immaterial amount of
foreign loans and no loans related to highly leveraged transactions.
ALLOWANCE FOR POSSIBLE LOAN LOSSES
For the quarter ended September 30, 1996, the allowance for possible loan losses
decreased to $13.0 million, or 2.18% of total loans, from $13.2 million, or
2.66% of total loans in 1995. The current decline is primarily the result of
recent loan portfolio growth. Net loan losses for 1996 are $87 thousand.
Management closely monitors the adequacy of the loan loss reserve, and an
analysis is performed regularly.
In determining the adequacy of the allowance, management considers numerous
factors, including the continuing level of non-performing loans, credit
concentrations, and economic conditions. Real estate values continue to be
stable and show modest rates of appreciation, but a worsening of the economy in
Frontier's market area could negatively affect loan performance and underlying
collateral values. The current level of reserves is deemed to be adequate for
the present conditions, the type of lending undertaken, and provides for some
unforeseen contingencies as well.
LIQUIDITY AND INTEREST RATE SENSITIVITY
LIQUIDITY
The primary function of asset/liability management is to ensure adequate
liquidity and maintain an appropriate balance between interest sensitive earning
assets and liabilities. Liquidity management involves the ability to meet the
cash flow requirements of customers who may be either depositors wanting to
withdraw funds, or depositors who have credit needs.
The statement of cash flows on page 3 and 4 of this report provides information
on the sources and uses of cash for the respective year-to-date periods ending
September 30, 1996 and 1995. This discussion addresses those periods of time.
Net cash provided by operating activities in 1996 totaled $13.5 million as
compared to $12.9 million in 1995. The largest component providing net cash was
income of $11.2 million in 1996 and $9.5 million in 1995.
-14-
<PAGE> 17
FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
Liquidity - (Continued)
Real estate secondary market loans originated for sale in 1996 were up $3.2
million, or 24.2%, from the same period in 1995. This is a change in the trend
from last year when secondary market loans were declining substantially due to
increasing long-term interest rates. The 1996 year-to-date cash flows from this
function look favorable for increased fee income.
Investing activities for 1996 were heavily concentrated in the loan portfolio
which required $84.3 million in funding. Net cash flows of $48.1 million from
federal funds sold were used to help fund the growth in the loan portfolio,
while amounts from maturities of investments were reinvested, mainly in the
first quarter of 1996.
In 1996, a change in the trend of financing activities has occurred. Prior to
1996, the growth in assets has been funded by core deposits and cd's were
declining. This is evidenced by the large cash flows from cd's in the 1995
period of $145.4 million. Note, however, that in 1996, cd's required cash flows,
while core deposits provided cashflows. Management is responsible for the change
in this trend by reducing the rates paid on cd's in 1995 several times. In the
second quarter of 1996, however, management began increasing cd rates to fund
loan growth.
Management has many sources of liquidity, such as the sale of AFS securities,
additional borrowings from the FHLB, participation in the Treasury department's
short-term note program, borrowings from the Federal Reserve Bank, or additional
borrowings at correspondent banks. In addition to AFS securities, treasury and
agency securities in the HTM securities portfolio are also subject to sale under
repurchase agreements. The Corporation has a policy that liquidity of 12.5% of
total assets be maintained as a minimum and has done so.
INTEREST RATE SENSITIVITY
Interest rate sensitivity is closely related to liquidity because each is
directly affected by maturity, or repricing, of assets and liabilities.
Management considers any asset or liability which matures, or is subject to
repricing, within one year to be interest sensitive, although continual
monitoring is also performed for other time intervals. The difference between
interest sensitive assets and liabilities for a defined period of time is known
as the interest sensitive "gap", and may be either positive or negative. If
positive, more assets reprice before liabilities. If negative, the reverse is
true. In theory, if the gap is positive, a decrease in general interest rates
might have an adverse impact on earnings as interest income decreases faster
than interest expense. Conversely, an increase in interest rates would increase
net interest income as interest income increases faster than interest expense.
However, the exact impact of the gap on future income is uncertain both in
timing and amount because interest rates for the Corporation's assets and
liabilities do not necessarily change at the same time, or by the same amount.
Also, the sensitivity of the assets and liabilities can change rapidly as the
result of market conditions and customer patterns.
At the end of the third quarter of 1995, the gap of the Corporation was a
negative (15.7%) of earning assets, with rate sensitive liabilities exceeding
rate sensitive assets. This would suggest that decreasing general interest rates
would increase the NIM. Since that time, the Corporation decreased prime rate
-15-
<PAGE> 18
FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
Interest Rate Sensitivity - (Continued)
two times from 8.75% to 8.25%, and the NIM did, in fact, increase from 4.82% to
5.29% at the end of September 1996. At the end of September 1996, the gap became
more negative and increased to (25.8%) of earning assets. This indicates that
over the past year, the Corporation has become more liability sensitive.
Although the gap acted as defined in this instance, the gap should not be relied
upon as an accurate gauge of what will happen to future earnings if interest
rates move. The gap cannot anticipate management actions with regard to when
rates are actually increased or decreased, and to what degree, but the gap does
indicate the ability management may have to change rates.
THE CORPORATION DOES NOT USE INTEREST RATE RISK MANAGEMENT PRODUCTS SUCH AS
INTEREST RATE SWAPS OR HEDGES, OR OTHER DERIVATIVE SECURITIES.
CAPITAL
In 1994, the Federal Reserve and other regulatory agencies issued final
amendments to its risk-based capital rules. Under these rules, institutions are
directed not to include in Tier I & II capital, the net unrealized holding gains
(losses) on available-for-sale securities. In addition, net unrealized losses on
marketable equity securities should continue to be deducted when computing Tier
I & II capital. This rule has the effect of valuing available-for-sale debt
securities at amortized cost, rather than fair value, for purposes of
calculating the risk-based and leverage capital ratios. Therefore, the
Corporation will now report capital for both financial statement purposes and
regulatory purposes.
Consolidated capital of the Corporation for financial statement purposes at
third quarter end 1996 was $76.1 million. This amount compares to $61.1 million
at September, 1995, an increase of $15.0 million, or 24.5%. Almost all of the
increase was attributable to retained earnings.
Under the regulatory rules referred to above, banks and holding companies are
required to maintain a minimum "leverage" ratio (primary capital ratio) of core
capital (which excludes the allowance for loan losses) to total average assets
for the current quarter. For the most highly rated holding companies, this ratio
must be at least 3 percent, and for others, it must be 4 or 5 percent. At
September 30, 1996, the Corporation's leverage ratio was 10.10%, compared to
8.51% at quarter end 1995. In addition, holding companies are required to meet
minimum risk-based capital guidelines, under which risk percentages are assigned
to various categories of assets and off-balance-sheet items to calculate a
risk-adjusted capital ratio. Tier I capital generally consists of common
stockholder's equity, less goodwill and some intangibles, while Tier II capital
includes the allowance for possible loan losses, subject to 1.25% limitation of
risk-adjusted assets. Regulatory capital requires Tier I capital of 4% of
risk-adjusted assets and total capital (combined Tier I and Tier II) of 8%.
Based on these requirements, the Corporation's Tier I and combined Tier II
capital ratios were 11.82% and 13.08% at September 30, 1996, and 10.27% and
11.53% at September 30, 1995.
Management constantly monitors the level of capital of the Corporation, and
believes that capital is adequate to meet present needs. As an ongoing process,
management considers, among other things, the present and anticipated needs of
the Corporation, current market conditions, and other relevant factors,
including regulatory requirements which may necessitate changes in the level of
capital.
-16-
<PAGE> 19
FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
No material legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders in
this quarter.
Item 5. Other Information
During the month of April 1996, the Bank received regulatory
approvals to open a branch at 2825 NE 125th St., Seattle (Lake
City), Washington. Lake City is in the northern part of Seattle.
The branch opened for business on August 12, 1996, and is named
the Lake City Office.
At the June 1996 meeting of the Board of Directors, Chairman of
the Board, Mr. Arthur Skotdal and Director Alwyn Nelson resigned
from the boards of the Corporation, Bank and FFP, Inc. Their
resignations were not due to a disagreement on any matter
relating to the Corporation's operations, policies or practices.
The Bank has applied for and received approval to open a banking
office in Skagit County, which is the northern contiguous county
to Snohomish county. The office will be located at 1219 Nevitt,
Burlington, Washington. It is anticipated that the office will
open in early December.
Item 6. Exhibits and Reports on Form 8-K
(a) (11) Computation of earnings per share is attached
as Exhibit 11
(27) Financial Data Schedule - This exhibit is
included only in the electronic EDGAR filing
version of this Form 10Q. 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) No amendments to filed documents or reports on
Form 8-K have been filed in the quarter ended
September 30, 1996.
-17-
<PAGE> 20
FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FRONTIER FINANCIAL CORPORATION
Date: November 4, 1996 /s/ James F. Felicetty
------------------ ---------------------------------
James F. Felicetty
Secretary/Treasurer
-18-
<PAGE> 1
FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES EXHIBIT 11
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
For Nine Months Ended September 30,
1996 1995
----------- ----------
<S> <C> <C>
Net Income $11,217,245 $9,485,428
=========== ==========
Computation of average
shares outstanding
Shares outstanding at
beginning of year 6,322,255 4,196,435
Additional shares deemed
outstanding because of
stock dividends 443,628 441,315
Additional shares deemed
outstanding because of
stock split 0 2,100,650
Shares issued during the
year times average time
outstanding during the year 27,192 7,413
----------- ----------
Average shares outstanding 6,793,075 6,745,813
=========== ==========
Primary earnings per share $ 1.65 $ 1.41
=========== ==========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A)
FRONTIER FINANCIAL CORPORATION
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B) 10Q
</LEGEND>
<CIK> 0000716457
<NAME> FRONTIER FINANCIAL
<MULTIPLIER> 1,000
<CURRENCY> U.S.
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-1-1996
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1
<CASH> 25,602
<INT-BEARING-DEPOSITS> 4,275
<FED-FUNDS-SOLD> 7,795
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 100,985
<INVESTMENTS-CARRYING> 34,610
<INVESTMENTS-MARKET> 39,525
<LOANS> 587,952
<ALLOWANCE> (13,010)
<TOTAL-ASSETS> 772,820
<DEPOSITS> 641,219
<SHORT-TERM> 10,840
<LIABILITIES-OTHER> 7,034
<LONG-TERM> 37,629
0
0
<COMMON> 57,130
<OTHER-SE> 18,968
<TOTAL-LIABILITIES-AND-EQUITY> 772,820
<INTEREST-LOAN> 42,320
<INTEREST-INVEST> 7,826
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 50,146
<INTEREST-DEPOSIT> 20,889
<INTEREST-EXPENSE> 22,285
<INTEREST-INCOME-NET> 27,861
<LOAN-LOSSES> (1,200)
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 12,533
<INCOME-PRETAX> 16,946
<INCOME-PRE-EXTRAORDINARY> 11,217
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,217
<EPS-PRIMARY> 1.65
<EPS-DILUTED> 1.65
<YIELD-ACTUAL> 5.48
<LOANS-NON> 4,148
<LOANS-PAST> 0
<LOANS-TROUBLED> 124
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 11,898
<CHARGE-OFFS> 1,257
<RECOVERIES> 1,169
<ALLOWANCE-CLOSE> 13,010
<ALLOWANCE-DOMESTIC> 13,010
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
