<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For the Quarter ended March 31, 1997
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
Incorporation or Organization) Identification 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 7,316,968 shares
outstanding as of March 31, 1997.
<PAGE> 2
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FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
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INDEX TO QUARTERLY REPORT ON FORM 10-Q
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March 31, 1997
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<TABLE>
<CAPTION>
PART I - Financial Information Page
<S> <C>
Item 1. Financial Statements.
Consolidated Balance Sheet - March 31, 1997
and Year End 1996. 1
Consolidated Statement of Income - Three Months
Ended March 31, 1997 and 1996. 2
Consolidated Statement of Cash Flows - Three Months
Ended March 31, 1997 and 1996. 3-4
Statement of Changes in Stockholder's Equity -
March 31, 1997 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 6. Exhibits and Reports on Form 8-K. 17
Signature 18
</TABLE>
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<PAGE> 3
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FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
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CONSOLIDATED BALANCE SHEET (Note 1)
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(Unaudited)
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<TABLE>
<CAPTION>
(In thousands)
March 31, December 31,
ASSETS 1997 1996
<S> <C> <C>
Cash & Balances Due from Depositary Institutions $ 33,551 $ 35,105
Securities: (Note 3)
Available for Sale-Market Value 90,580 96,628
Held to Maturity-Amortized Cost (Fair Value 12-31-96, 33,277 34,502
---------------------
Total Securities $ 35,574) 123,857 131,130
Federal Funds Sold 45,610 25,050
Loans: (Note 4)
Loans, Net of Unearned Income 616,180 600,059
Less: Allowance for Loan Losses (13,503) (13,268)
---------------------
Net Loans 602,677 586,791
Mortgage Loans Held for Sale 639 335
Premises & Equipment, Net 14,165 14,202
Other Real Estate Owned 444 444
Intangible assets 377 396
Other Assets 11,252 10,166
---------------------
TOTAL ASSETS $ 832,572 $ 803,619
=====================
LIABILITIES
Deposits:
Non-Interest Bearing $ 93,915 $ 82,275
Interest Bearing 603,407 588,241
---------------------
Total Deposits 697,322 670,516
Federal Funds Purchased 4,405 2,533
Securities sold under repurchase agreements 9,128 9,478
Federal Home Loan Bank advances 30,000 35,000
Long-term debt 92 100
Other Liabilities 7,969 5,675
---------------------
TOTAL LIABILITIES 748,916 723,302
---------------------
EQUITY CAPITAL (Note 5)
Common Stock 71,134 57,191
Unrealized Gains/(Losses) on AFS Securities
Net of Tax effect(Note 3) (775) 129
Retained Earnings 13,297 22,997
---------------------
TOTAL CAPITAL 83,656 80,317
---------------------
TOTAL LIABILITIES & CAPITAL $ 832,572 $ 803,619
=====================
</TABLE>
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The accompanying notes are an integral part of these financial statements.
-1-
<PAGE> 4
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FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
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CONSOLIDATED STATEMENT OF INCOME (Note 1)
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(Unaudited)
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(In thousands, Except for Per Share Amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------
March 31, March 31,
1997 1996
----------- -----------
<S> <C> <C>
INTEREST INCOME
Interest & Fees on Loans $ 15,450 $ 13,311
Interest on Investments 2,445 2,984
----------- -----------
Total Interest Income 17,895 16,295
----------- -----------
INTEREST EXPENSE
Interest on Deposits 7,238 7,343
Interest on Borrowed Funds 537 305
----------- -----------
Total Interest Expense 7,775 7,648
----------- -----------
Net Interest Income 10,120 8,647
----------- -----------
PROVISION FOR LOAN LOSSES (100) (200)
NONINTEREST INCOME
Securities Gains/(Losses) 0 0
Service Charges on Deposit Accounts 401 386
Other Noninterest Income 391 428
----------- -----------
Total Noninterest Income 792 814
NONINTEREST EXPENSE
Salaries & Employee Benefits 2,941 2,577
Occupancy Expense 667 443
Other Noninterest Expense 828 758
----------- -----------
Total Noninterest Expense 4,436 3,778
INCOME BEFORE INCOME TAX 6,376 5,483
----------- -----------
APPLICABLE INCOME TAX (2,201) (1,848)
NET INCOME $ 4,175 $ 3,635
=========== ===========
Average Number of Shares Outstanding
for the Period 7,314,902 7,243,488
PER SHARE COMMON STOCK $ 0.57 $ 0.50
=========== ===========
</TABLE>
- --------------------------------------
The accompanying notes are an integral part of these financial statements.
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<PAGE> 5
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FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
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CONSOLIDATED STATEMENT OF CHANGES IN CASH FLOWS
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(Unaudited)
<TABLE>
<CAPTION>
(In thousands)
THREE MONTHS ENDED
------------------
CASH FLOWS FROM OPERATING ACTIVITIES March 31, 1997 March 31, 1996
-------------- --------------
<S> <C> <C>
Net Income $ 4,175 $ 3,635
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization 374 244
Provision for loan losses 100 200
FHLB stock dividends (148) (136)
Increase in income taxes payable 2,051 1,599
Decrease in interest receivable (383) (323)
Increase(Decrease) in interest payable 204 (285)
Loss on sale of HTM securities 0 0
Loans originated for sale (3,471) (5,752)
Proceeds from sale of loans 3,167 5,435
Other operating activities (85) (128)
-------- --------
Net cash provided by operating activities 5,984 4,489
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Net cash flows from Fed Funds Sold (20,560) 3,505
Proceeds from sales of HTM securities 0 0
Proceeds from maturities of AFS & HTM securities 9,581 13,826
Purchase of AFS securities 0 (11,405)
Purchase of HTM securities (3,550) 0
Net cash flows from loan activities (15,949) (11,173)
Purchases of premises and equipment (246) (124)
Proceeds from the sale of other real estate 0 0
Cash invested in other real estate 0 (245)
Other investing activities 0 486
-------- --------
Net cash used by investing activities (30,724) (5,130)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in demand deposit accounts 22,505 7,940
Net change in certificates of deposit 3,919 (2,109)
Proceeds from issuance of stock 67 46
Principal payments on long term debt (54) (38)
Advances from FHLB 20,000 0
Repayment of FHLB advances (25,000) 0
Net change in Federal Funds purchased 1,522 1,246
Other financing activities 227 (147)
-------- --------
Net cash provided by financing activities 23,186 6,938
-------- --------
</TABLE>
(Continued on next page) -3-
<PAGE> 6
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FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
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CONSOLIDATED STATEMENT OF CHANGES IN CASH FLOWS-(Continued)
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(Unaudited)
<TABLE>
<CAPTION>
(In thousands)
THREE MONTHS ENDED
March 31, 1997 March 31, 1996
<S> <C> <C>
INCREASE IN CASH AND DUE FROM BANKS ($ 1,554) $ 6,297
CASH & DUE FROM BANKS AT BEGINNING
OF YEAR 35,105 19,708
-------- --------
CASH AND DUE FROM BANKS AT END
OF PERIOD $ 33,551 $ 26,005
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 7,570 $ 7,934
Cash paid during the year for income taxes 150 250
Real estate taken as settlement for loan
obligations 0 0
Real estate taken as settlement for loan
obligations - financed by bank $ 0 $ 0
</TABLE>
- -------------------------------------------
The accompanying notes are an integral part of these financial statements.
-4-
<PAGE> 7
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FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
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CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY (Note 4)
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(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, 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 1996 14,617 14,617
Stock Options Exercised 31,283 160 160
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 (804) (804)
----------------------------------------------------------------------
Balance, December 31, 1996 6,830,666 57,191 22,997 129 80,317
- -------------------------- =======================================================================
Net income for first three months
of 1997 4,175 4,175
Stock Options Exercised 6,957 42 42
7% Stock Dividend 478,475 13,875 (13,875) 0
Fractional Shares Purchased 870 26 26
Valuation of Available for Sale
Securities (904) (904)
----------------------------------------------------------------------
Balance, March 31, 1997 7,316,968 $71,134 $ 13,297 $( 775) $83,656
- ----------------------- ======================================================================
</TABLE>
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<PAGE> 8
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FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 1. PRINCIPLES OF CONSOLIDATION - RESULTS OF OPERATIONS
The consolidated financial statements of Frontier Financial
Corporation include the accounts of Frontier Financial Corporation
and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated. These statements are unaudited
and should be read in conjunction with the December 31, 1996
Annual Report on Form 10-K of Frontier Financial Corporation.
Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for
complete financial statements. Operating results for the three
months ended March 31, 1997 are not necessarily indicative of the
results that may be expected for year-end December 31, 1997.
Certain reclassifications of 1996 amounts were made in order to
conform to the 1997 presentation, none of which affect previously
reported net income.
The bank subsidiary of Frontier Financial Corporation is Frontier
Bank.
NOTE 2. ACCOUNTING PRONOUNCEMENTS
Effective January 1, 1997, the Corporation adopted two recently
issued Statements of Financial Accounting Standards (SFAS).
SFAS No. 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities", establishes criteria
for distinguishing between sales and secured borrowings of
financial assets. Management believes that SFAS No. 125 will not
have a material effect on the Corporation's financial condition or
reported results of operations.
SFAS No. 127, "Deferral of the Effective Date of Certain
Provisions of FASB No. 125", defers certain requirements of SFAS
No. 125 until 1998.
NOTE 3. INVESTMENT SECURITIES
The investment portfolio of the Corporation is classified in one
of three groups: 1) Trading securities; 2) securities
Held-To-Maturity (HTM), and 3) securities Available-For-Sale
(AFS).
At March 31, 1997, 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.
-6-
<PAGE> 9
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FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 3 - (Continued)
- --------------------------------------------------------------------------------
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.
The tables below display the characteristics of the AFS and HTM portfolios as
of March 31, 1997:
AGGREGATE FAIR VALUE AND AMORTIZED COST OF INVESTMENTS
------------------------------------------------------
<TABLE>
<CAPTION>
Amortized Gross Unreal- Gross Unreal- Aggregate
Cost ized Gains ized Losses Fair Value
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
AFS SECURITIES:
Equities $ 9,418 $ 9,418
U.S. Treasuries 757 10 767
U.S. Agencies 44,403 88 (873) 43,618
Corporate securities 37,194 236 (653) 36,777
-------------------------------------------------------------------
Totals 91,772 334 (1,526) 90,580
-------------------------------------------------------------------
HTM SECURITIES:
Municipal securities 29,727 702 (113) 30,316
Certificates of deposit 3,550 3,550
-------------------------------------------------------------------
Totals $ 33,277 $ 702 ($ 113) $ 33,866
-------------------------------------------------------------------
Totals $125,049 $ 1,036 ($ 1,639) $124,446
===================================================================
</TABLE>
MATURITY SCHEDULE OF SECURITIES
-------------------------------
<TABLE>
<CAPTION>
Available For Sale Held To Maturity
------------------ ----------------
Amortized Fair Amortized Fair
MATURITY Cost Value Cost Value
- -------- ---- ----- ---- -----
<S> <C> <C> <C> <C>
0-1 Yr $19,317 $19,321 $ 3,675 $ 3,676
1-5 Yrs 22,857 22,923 1,223 1,265
5-10 Yrs 48,095 46,829 25,348 25,842
Over 10 Yrs 1,503 1,507 3,031 3,083
----------------------------------------------
$91,772 $90,580 $33,277 $33,866
==============================================
</TABLE>
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<PAGE> 10
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FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 3 - (Continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CHANGES IN AFS AND HTM SECURITIES
<S> <C>
For the Quarter Ended March 31, 1997:
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 ($904)
HTM SECURITIES
Sales Or Transfers From this Category $0
</TABLE>
NOTE 4. LOANS
The following is an analysis of the loan portfolio by major type of
loans:
<TABLE>
<CAPTION>
March 31, 1997 Dec 31, 1996
-------------- ------------
<S> <C> <C>
Commercial $ 122,551 $ 117,551
Real Estate:
Commercial 249,957 231,379
Construction 122,039 133,582
Residential 103,548 99,099
Instalment 22,966 23,077
--------- ---------
621,061 604,688
Unearned Fee Income (4,242) (4,294)
--------- ---------
Total Loans $ 616,819 $ 600,394
========= =========
</TABLE>
NOTE 5. The Board of Directors declared 7% stock dividends which were paid
March 18, 1996 and March 17, 1997 respectively.
-8-
<PAGE> 11
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FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- --------------------------------------------------------------------------------
AND RESULTS OF OPERATIONS.
- --------------------------------------------------------------------------------
HIGHLIGHTS
Consolidated net income of the Corporation for the first quarter of 1997 was
$4.2 million versus $3.6 million for the first quarter of 1996, or up 14.9%.
The reason for the increase in net income in 1997 was due to an increase in net
interest income of $1.5 million, or 17.0%. This marks the fifty-third
consecutive quarter in which Frontier's earnings exceeded the prior years'
comparable quarter. In the discussion below, comparison is with the first
quarter of 1996, unless otherwise stated.
Annualized return on average assets (ROA) was 2.07% in 1997, and 1.99% in 1996.
Annualized return on average stockholder's equity (ROE) in 1997 was 20.15%, as
compared to 21.82% in 1996. Earnings per share were $.57 for 1997, and $.50
for 1996. Earnings per share have been adjusted for the seven percent stock
dividend paid on March 17, 1997.
FINANCIAL REVIEW - 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
branches located in Bothell and Woodinville, and a third in the Lake City area
of north Seattle. In 1996, the Bank opened a branch in Skagit County, which is
the contiguous county north of Snohomish County. These three counties would be
considered the market or service area of the Corporation. The Boeing airplane
manufacturing plant for 747's and 777's is located in the city of Everett, as
is the headquarters of the Corporation. Microsoft, the worlds largest software
company, is located in Redmond, Washington, 25 miles from Everett. The Bank
opened a branch office in Redmond in the first quarter of 1997.
The financial performance of the Corporation is directly influenced by the
economic conditions in its service area. In recent years leading up to 1996,
Washington's growth moderated due to employment cutbacks in aerospace
manufacturing, however, renewed economic strength and momentum were evident in
the fourth quarter of 1995 and in 1996.
Expanded export markets combined with continued new product development by
Boeing and high technology companies, especially Microsoft, fuel an improving
economy. However, what impact this increased volume will have on the local
economy is somewhat unclear, given that a majority of support companies had
reduced production lines and employment due to the past slowdowns.
The forecast for Snohomish County, and Everett, appears bright. The aircraft
carrier Abraham Lincoln arrived at the Everett Home Port in December 1996, and
will eventually be home for an eleven-ship task force. A study performed on
the impact of this Home Port on the Washington economy, shows that in 1996,
military salaries, direct and indirect multipliers and procurement will total
$387.6 million. That number is estimated to grow to $411.2 million through
1998.
However, while the forecast appears bright for a stable economic environment,
management continues to be cautiously optimistic regarding the level of future
earnings.
BALANCE SHEET
On the next page, 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:
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FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
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Management's Discussion and Analysis of Financial Condition and Results of
- --------------------------------------------------------------------------------
Operations Balance Sheet - (Continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period ended March 31, 1997 1996 $ Change % Change
- ---------------------- ---- ---- -------- --------
<S> <C> <C> <C> <C>
Loans $ 616,819 $ 516,763 $ 100,056 19.4%
Investments * 125,049 141,228 (16,179) -11.5%
Federal Funds Sold 45,610 52,425 (6,815) -13.0%
--------------------------------------------
Total Assets $ 832,572 $ 746,765 $ 85,807 11.5%
Noninterest bearing deposits $ 93,915 $ 83,565 $ 10,350 12.4%
Interest bearing deposits 603,407 563,965 39,442 7.0%
--------------------------------------------
Total deposits 697,322 647,530 49,792 7.7%
Federal Funds purchased
and Repurchase Agreements 13,533 8,842 4,691 53.1%
Long-term debt 30,000 15,144 14,856 98.1%
Capital $ 83,656 $ 68,082 $ 15,574 22.9%
</TABLE>
* Shown at amortized cost.
At quarter end 1997, loans were up $100.1 million, or 19.4% over the previous
year. This substantial increase in loans over the last year, as compared to
the same quarter end in 1996, was due, for the most part, by the economic
growth of the region. At this same time a year ago, loans grew only $39.5
million, or 8.3%.
To fund the increase in loan demand in the first quarter of 1997, both the
asset and liability sides of the balance sheet contributed. On the asset side,
investments declined $17.4 million, or 12.3%, and federal funds sold decreased
$6.8 million, or 13.0%, from the same period ended a year ago.
On the liability side, total deposits increased 7.7% during this period, and
federal funds purchased, repurchase agreements, borrowings from the Federal
Home Loan Bank (FHLB), and retained earnings accounted for $35.1 million in
other increases.
The mix of interest bearing deposits looks very similar to a year ago. At
March 31, 1996, NOW and Money Market accounts made up 13.7% of total deposits.
Whereas, at March 31, 1997, those deposits made up 14.1%. Savings deposits, a
year ago, made up 25.3% of interest bearing deposits, and 25.6% in 1997. Time
deposits were 61.1% of total interest bearing deposits in 1996, and 60.3% in
1997.
Over the last year, NOW and Money Market deposits increased $8.0 million, or
10.3%; savings deposits increased $11.9 million, or 8.3%, and time deposits
increased $19.6 million, or 5.7%. During this past year, it was managements
adjustments of interest rates paid on time deposits (cd's) that caused the
renewed growth in cd's when compared to prior periods.
The increase of $4.7 million, or 53.1% in federal funds purchased and
securities sold under agreements to repurchase (repo's) for the period, was
caused by customer demand for repo's. The increase in long-term debt was due
to a very favorable rate being offered by the FHLB on a block of $20 million.
However, that block has an option whereby the FHLB can request return of the
funds at any time on a quarterly basis. Such a contingency has been planned for
by management.
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<PAGE> 13
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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 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:
<TABLE>
<CAPTION>
(In thousands)
Quarter ended March 31, 1997 1996 $ Change % Change
- ----------------------- ---- ---- -------- --------
<S> <C> <C> <C> <C>
Loans $ 612,649 $ 506,752 $ 105,897 20.9%
Investments * 128,105 141,184 (13,079) -9.3%
Federal Funds Sold 29,649 52,543 (22,894) -43.6%
Total Earning Assets 770,403 700,479 69,924 10.0%
--------------------------------------------
Total Assets 806,314 731,283 75,031 10.3%
Noninterest bearing deposits 82,957 76,613 6,344 8.3%
Interest bearing deposits 590,938 557,518 33,420 6.0%
--------------------------------------------
Total deposits 673,895 634,131 39,764 6.3%
Fed Funds purchased
and repurchase agreements 11,574 8,770 2,804 32.0%
Long-term Debt 31,114 15,015 16,099 107.2%
Capital 82,887 66,643 16,244 24.4%
Total interest income 18,123 16,533 1,590 9.6%
Total interest expense 7,775 7,648 127 1.7%
--------------------------------------------
Net Interest Income $ 10,348 $ 8,885 $ 1,463 16.5%
</TABLE>
* Shown at amortized cost.
In 1997, average total earning assets as a percent of average total assets were
95.5%, and 95.8% in 1996. This ratio indicates how efficiently assets are
being utilized. Average loans were 76.0% and 69.3% respectively, indicating a
solid increase over the last year. Investments as a percent of average assets
for the same periods were 15.9% as compared to 19.3%. Average federal funds
sold were 3.7% versus 7.2% due to increased loan demand in the last year.
Average total deposits increased $39.8 million, or 6.3%. Not indicated in the
table above are the components of interest bearing deposits which, in total,
increased $33.4 million, or 6.0%. Average
-11-
<PAGE> 14
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FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition and Results of
- --------------------------------------------------------------------------------
Operations Net Interest Income - (Continued)
- --------------------------------------------------------------------------------
NOW and Money Market accounts increased $9.7 million, or 14.2%; savings
accounts increased $7.0 million, or 4.9%, and time cd's increased $16.7
million, or 4.8%.
Earning Assets
The yield on total earning assets in 1997 decreased .03%, from 9.57% in 1996 to
9.54% in 1997. The cost of total interest bearing liabilities decreased .36%,
from a 5.34% in 1996 to a 4.98% in 1997.
On a tax equivalent basis, net interest income was $10.3 million in 1997,
versus $8.8 million in 1996, for an increase in net interest income of $1.5
million.
Total interest income increased $1.5 million, and there was an offsetting
increase and decrease in the volume and rate of interest bearing liabilities
for a negligible change in interest expense.
The increase in the average balance of earning assets increased interest income
by $2.3 million, and a decrease in interest rates decreased interest income by
$.8 million, for a net increase of $1.5 million.
The yield on total loans decreased from 10.65% in 1996 to 10.23% in 1997. Real
estate commercial loans decreased in yield from 10.14% to 9.68%. Real estate
construction loans declined in yield from 12.49% to 11.67%. Business loans
decreased from 10.51% to 10.04%, and installment loans decreased from 10.19% to
9.70%. Real estate mortgage loans declined from 10.06% in 1996 to 9.98% in the
current year. The yield on investments increased from 7.21% in 1996 to 7.23% in
1997, and the yield on federal funds sold decreased from 5.48% in 1996 to 5.33%
in 1997.
Interest Bearing Liabilities
The increase in the average balance of total interest bearing liabilities
increased interest expense by $.6 million, and the rates paid on interest
bearing liabilities decreased interest expense by $.6 million, for no change
during the period.
The cost of NOW and money market accounts went from 3.07% in 1996, to 2.92% in
1997. Savings accounts cost decreased from 4.11% in 1996 to 4.00% in 1997, and
time cd's decreased in cost from 6.29% in 1996 to 5.80% in 1997. Short term
borrowings decreased from 4.94% to 4.83%, and long-term debt cost was 5.35% in
1996 and 5.22% in 1997.
NONINTEREST INCOME AND EXPENSE
Total noninterest income decreased at the end of the first quarter by $22
thousand, or 2.7%. Service charges increased from $386 thousand to $401
thousand, or 3.9%. This is below the 5.3% growth in the number of accounts
susceptible to service charge during the period. Management believes that the
growth in service charge income falls short of the growth in the number of
susceptible accounts due to higher average balances. Also supporting this
belief is the growth of noninterest bearing deposits during the period from
$83.4 million in 1996, to $93.9 million in 1997.
Other income for the period was down $37 thousand, or 8.6%. For the most part,
this was attributable to a decrease in loan service fee income or $29 thousand,
or 53.7%.
-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)
- --------------------------------------------------------------------------------
Trust department fees were up $18 thousand, or 10.5% for the period. The
market value of trust assets at quarter end 1997 was $123.6 million, as
compared to $105.4 million in 1996, an increase of $18.2 million, or 17.3%.
Investment and Insurance Services fees increased $14 thousand, or 93.3% for the
period, while Broker Loan fees decreased $14 thousand, or 36.8%.
Total noninterest expenses increased $658 thousand, or 17.4% in 1997. Salaries
and Employee Benefits increased $364 thousand, to $2.9 million, or 14.1%.
Salaries, alone, increased $282 thousand to $2.2 million, or 14.8% from $1.9
million a year ago. Employee benefits increased $82 thousand to $.8 million,
or 12.1% from $.7 million a year ago. The increase in salaries was due an
increase in staff over the year of 10.7%, and merit raises of 4.1%. The
employee benefits increase of $82 thousand was attributable to an increase in
the profit sharing reserve of $17 thousand, or 3.9%, and increased social
security taxes of $22 thousand, or 14.5%.
Occupancy expense increased $224 thousand, or 50.6% in 1997. 42.6%, or $284
thousand of occupancy expense was depreciation in 1997, and $224 thousand, or
50.6% was depreciation expense in 1996. Excluding depreciation, occupancy
expense increased $164 thousand, or 74.9%, in 1997. The increase was
attributable to increased maintenance and repair costs, and the purchase of
furniture and equipment for new branches opened during the period.
Other expense increased $71 thousand, or 9.3%, to $828 thousand. This is due
to an increase in advertising, design and printing charges of $74 thousand.
LOANS
IMPAIRED ASSETS (Previously known as non-performing assets)
Non-performing assets are summarized as follows:
<TABLE>
<CAPTION>
(In thousands)
Period Ended March 31, 1997 1996
- ---------------------- ---- ----
<S> <C> <C>
Non-accruing loans $ 3,516 $ 3,013
Loans past due 90 days or more and
still accruing 0 0
Restructured loans 118 120
Other real estate owned 444 835
-----------------------
Total non-performing loans $ 4,078 $ 3,968
=======================
Total loans at end of period $616,819 $516,763
-----------------------
As a percent of total loans outstanding 0.66% 0.77%
=======================
</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.
-13-
<PAGE> 16
- --------------------------------------------------------------------------------
FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition and Results of
- --------------------------------------------------------------------------------
Operations Impaired Assets - (Continued)
- --------------------------------------------------------------------------------
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. The home
is sold and awaiting closing, and the two commercial parcels are up for sale.
As of March 31, 1997, all in-substance foreclosures are included in other real
estate owned, and the carrying values of all parcels are below their market
value.
CREDIT CONCENTRATIONS
There is some concentration of credit in the real estate construction and land
development industry. These loans totaled $106.2 million in 1997, or 17.2% of
total loans, and $80.4 million in 1996, or 15.6% of total loans. Many years
ago, management established a real estate loan committee which meets
semi-annually 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 is now enjoying a stable real
estate market. Stable interest rates have helped facilitate a strong level of
sales and real estate activity in general, and management is cautiously
optimistic as to the real estate markets prospects in the months ahead.
At March 31, 1997 and 1996, 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 March 31, 1997, the allowance for possible loan losses
increased to $13.5 million, or 2.19% of total loans, from $12.4 million, or
2.39% of total loans in 1996. The current decline is primarily the result of
recent loan portfolio growth. Net loan losses for 1997 are net recoveries of
$135 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 RISK
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.
-14-
<PAGE> 17
- --------------------------------------------------------------------------------
FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition and Results of
- --------------------------------------------------------------------------------
Operations. Liquidity - (Continued)
- --------------------------------------------------------------------------------
The statement of cash flows on page 3 and 4 of this report provides information
on the sources and uses of cash for the respective year-to-date periods ending
March 31, 1997 and 1996. This discussion addresses those periods of time.
Net cash provided by operating activities in 1997 totaled $6.0 million, as
compared to $4.5 million in 1996. The largest component providing net cash was
income of $4.2 million in 1997 and $3.6 million in 1996.
Real estate secondary market loans originated for sale in 1997 were down $2.3
million, or 39.7%, from the same period in 1996. This is a continuation of a
downward trend which began several quarters ago. Increased volume from this
operation is questionable for the remainder of the year.
Investing activities for 1997 were heavily concentrated in the loan portfolio
which required $15.9 million in funding. However, federal funds sold were also
funded heavily for the period ($20.6 million) indicating excess liquidity from
other sources while awaiting further funding of the loan portfolio. In 1996,
the loan portfolio required funding of $11.2 million, partly funded by proceeds
from maturing investments and federal funds sold.
Financing the investment activities in 1997 was mainly accomplished by
acquisition of demand deposits (including NOW, Money Market and Savings
accounts) of $22.5 million. The net change in cd's of $3.9 million also helped
fund investments, and repayment of FHLB advances. In 1996, the same trend
occurred, with cd's doing the bulk of the funding.
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 RISK
Interest rate risk refers to the exposure of earnings and capital arising from
changes in interest rates. Management's objectives are to control interest
rate risk and to ensure predictable and consistent growth of earnings and
capital. Interest rate risk management focuses on fluctuations in net interest
income identified through computer simulations to evaluate volatility under
varying interest rate, spread and volume assumptions. The risk is quantified
and compared against tolerance levels. The model the Corporation will use for
measuring this risk has been put into place, and should become fully
operational in 1997.
Meanwhile, the Corporation continues to utilize the "gap" theory for
measurement of interest rate sensitivity, the previous method used. 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
-15-
<PAGE> 18
- --------------------------------------------------------------------------------
FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition and Results of
- --------------------------------------------------------------------------------
Operations. Interest Rate Risk - (Continued)
- --------------------------------------------------------------------------------
decreases faster than interest expense. Conversely, an increase in interest
rates would increase net interest income as interest income increases faster
than interest expense. However, the exact impact of the gap on future income
is uncertain both in timing and amount because interest rates for the
Corporation's assets and liabilities do not necessarily change at the same
time, or by the same amount. Also, the sensitivity of the assets and
liabilities can change rapidly as the result of market conditions and customer
patterns.
At the end of the first quarter of 1996, the gap of the Corporation was a
negative (17.1%) 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 NIM has, in fact, increased
from 4.83% to 5.13% at the end of March 1997. At the end of March 1997, the
gap became more negative and increased to (21.8%) 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
Consolidated capital of the Corporation for financial statement purposes at
first quarter end 1997 was $83.7 million. This amount compares to $68.1 million
at March, 1996, an increase of $15.6 million, or 22.9%. Almost all of the
increase was attributable to retained earnings.
Under regulatory capital rules, the minimum "leverage" ratio (primary capital
ratio) of core capital that the most highly rated holding companies must
maintain is 3 percent. At March 31, 1997, the Corporation's leverage ratio was
10.44%, compared to 9.26% at quarter end 1996. In addition, 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 12.50% and 13.76%
at March 31, 1997, and 11.55% and 12.81% at March 31, 1996.
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 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 March 31, 1997.
-17-
<PAGE> 20
- --------------------------------------------------------------------------------
FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
SIGNATURE
- --------------------------------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FRONTIER FINANCIAL CORPORATION
Date: May 1, 1997 /s/ James F. Felicetty
--------------------- --------------------------------
James F. Felicetty
Secretary/Treasurer
-18-
<PAGE> 21
Exhibit Index
(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.
<PAGE> 1
- --------------------------------------------------------------------------------
FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES EXHIBIT 11
- --------------------------------------------------------------------------------
COMPUTATION OF EARNINGS PER SHARE
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For Three Months Ended March 31,
1997 1996
---------- ----------
<C> <C>
Net Income $4,175,208 $3,634,974
========== ==========
Computation of average
shares outstanding
Shares outstanding at
beginning of year 6,830,666 6,322,255
Additional shares deemed
outstanding because of
stock dividends 479,345 917,240
Additional shares deemed
outstanding because of
stock split 0 0
Shares issued during the
year times average time
outstanding during the year 4,891 3,993
---------- ----------
Average shares outstanding 7,314,902 7,243,488
========== ==========
Primary earnings per share $ 0.57 $ 0.50
========== ==========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FRONTIER
FINANCIAL CORPORATION AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH 10Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 33,551
<INT-BEARING-DEPOSITS> 3,550
<FED-FUNDS-SOLD> 45,610
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 90,580
<INVESTMENTS-CARRYING> 33,277
<INVESTMENTS-MARKET> 33,866
<LOANS> 616,819
<ALLOWANCE> (13,503)
<TOTAL-ASSETS> 832,572
<DEPOSITS> 697,322
<SHORT-TERM> 13,533
<LIABILITIES-OTHER> 7,969
<LONG-TERM> 30,092
0
0
<COMMON> 71,134
<OTHER-SE> 12,522
<TOTAL-LIABILITIES-AND-EQUITY> 832,572
<INTEREST-LOAN> 15,450
<INTEREST-INVEST> 2,445
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 17,895
<INTEREST-DEPOSIT> 7,238
<INTEREST-EXPENSE> 7,775
<INTEREST-INCOME-NET> 10,120
<LOAN-LOSSES> (100)
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 4,436
<INCOME-PRETAX> 6,376
<INCOME-PRE-EXTRAORDINARY> 4,175
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,175
<EPS-PRIMARY> .57
<EPS-DILUTED> .57
<YIELD-ACTUAL> 5.37
<LOANS-NON> 3,516
<LOANS-PAST> 0
<LOANS-TROUBLED> 118
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 13,268
<CHARGE-OFFS> 73
<RECOVERIES> 208
<ALLOWANCE-CLOSE> 13,503
<ALLOWANCE-DOMESTIC> 13,503
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
