<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 June 30, 1998
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)
(425) 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 7,885,541 shares
outstanding as of June 30, 1998.
<PAGE> 2
FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
INDEX TO QUARTERLY REPORT ON FORM 10-Q
June 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PART I - Financial Information Page
- ------------------------------ ----
<S> <C>
Item 1. Financial Statements.
Consolidated Balance Sheet - June 30, 1998
and Year End 1997. 1
Consolidated Statement of Income - Three and Six Months
Ended June 30, 1998 and 1997. 2
Consolidated Statement of Cash Flows - Six Months
Ended June 30, 1998 and 1997. 3-4
Statement of Changes in Stockholder's Equity -
June 30, 1998 5
Notes 6-8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operation. 9-17
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 16
PART II - Other Information
Item 1. Legal Proceedings. 18
Item 4. Submission of Matters to a Vote of Security Holders. 18-19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K. 19-20
Signature 21
</TABLE>
-i-
<PAGE> 3
FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (Note 1)
(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(In thousands)
June 30, December 31,
ASSETS 1998 1997
--------- ---------
<S> <C> <C>
Cash & Balances Due from Depositary Institutions $ 37,807 $ 30,496
Securities: (Note 3)
Available for Sale-Market Value 85,832 83,019
Held to Maturity-Amortized Cost (Fair Value 12-31-97,
$33,590) 30,950 32,081
---------------------------
Total Securities 116,782 115,100
Federal Funds Sold 47,235 61,350
Loans: (Note 4)
Loans, Net of Unearned Income 731,216 665,330
Less: Allowance for Loan Losses (15,646) (14,845)
---------------------------
Net Loans 715,570 650,485
Premises & Equipment, Net 14,447 13,787
Other Real Estate Owned 909 1,000
Intangible assets 281 319
Other Assets 10,880 10,343
---------------------------
TOTAL ASSETS $ 943,911 $ 882,880
===========================
LIABILITIES
Deposits:
Non-Interest Bearing $ 112,749 $ 101,278
Interest Bearing 660,778 629,653
---------------------------
Total Deposits 773,527 730,931
Federal Funds Purchased 8,388 4,796
Securities sold under repurchase agreements 15,641 13,166
Federal Home Loan Bank advances 30,000 30,000
Long-term debt 40 56
Other Liabilities 8,026 6,092
---------------------------
TOTAL LIABILITIES 835,622 785,041
---------------------------
EQUITY CAPITAL (Note 5)
Common Stock 89,394 71,363
Accumulated other comprehensive income,
Net of Tax effect(Note 3) 1,153 453
Retained Earnings 17,742 26,023
---------------------------
TOTAL CAPITAL 108,289 97,839
---------------------------
TOTAL LIABILITIES & CAPITAL $ 943,911 $ 882,880
===========================
</TABLE>
The accompanying notes are an integral part of these financial statements.
-1-
<PAGE> 4
FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME (Note 1)
(Unaudited)
(In thousands, Except for Per Share Amounts)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
June 30, June 30, June 30, June 30,
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest & Fees on Loans 18,092 16,433 35,536 $ 31,883
Interest on Investments 2,561 2,404 5,272 4,849
------------------------------- -------------------------------
Total Interest Income 20,653 18,837 40,808 36,732
------------------------------- -------------------------------
INTEREST EXPENSE
Interest on Deposits 7,824 7,281 15,642 14,520
Interest on Borrowed Funds 689 585 1,336 1,121
------------------------------- -------------------------------
Total Interest Expense 8,513 7,866 16,978 15,641
------------------------------- -------------------------------
Net Interest Income 12,140 10,971 23,830 21,091
------------------------------- -------------------------------
PROVISION FOR LOAN LOSSES (100) (250) (350) (350)
NONINTEREST INCOME
Securities Gains/(Losses) 0 0 0 0
Service Charges on Deposit Accounts 427 426 832 827
Other Noninterest Income 811 740 1,428 1,131
------------------------------- -------------------------------
Total Noninterest Income 1,238 1,166 2,260 1,958
NONINTEREST EXPENSE
Salaries & Employee Benefits 3,444 3,128 6,824 6,069
Occupancy Expense 764 727 1,448 1,394
Other Noninterest Expense 1,856 1,673 2,982 2,501
------------------------------- -------------------------------
Total Noninterest Expense 6,064 5,528 11,254 9,964
INCOME BEFORE INCOME TAX 7,214 6,359 14,486 12,735
------------------------------- -------------------------------
APPLICABLE INCOME TAX (2,359) (2,158) (4,958) (4,359)
NET INCOME $ 4,855 $ 4,201 $ 9,528 $ 8,376
=============================== ===============================
Average Number of Shares Outstanding
for the Period 7,878,067 7,829,921 7,878,067 7,829,921
Basic earnings per share $ 0.62 $ 0.54 $ 1.21 $ 1.07
=============================== ===============================
Diluted shares 7,956,043 7,907,733 7,956,043 7,907,733
Fully diluted earnings per share $ 0.61 $ 0.53 $ 1.20 $ 1.06
=============================== ===============================
</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
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(In thousands)
(Unaudited) SIX MONTHS ENDED
CASH FLOWS FROM OPERATING ACTIVITIES June 30, 1998 June 30, 1997
------------- -------------
<S> <C> <C>
Net Income $ 9,528 $ 8,376
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization 725 752
Provision for loan losses 350 350
FHLB stock dividends (347) (306)
Deferred taxes (342)
Increase in income taxes payable 751 (391)
Decrease in interest receivable (726) (32)
Increase(Decrease) in interest payable (49) 131
Loss on sale of HTM or AFS securities 0 0
Loss on sale of ORE (80) 0
Loans originated for sale (19,422) (8,216)
Proceeds from sale of loans 19,371 8,046
Other operating activities 1,494 939
-------- --------
Net cash provided by operating activities 11,253 9,649
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Net cash flows from Fed Funds Sold 14,115 (3,545)
Proceeds from maturities of AFS & HTM securities 27,307 21,281
Purchase of AFS securities (21,966) (2,999)
Purchase of HTM securities (5,600) (7,373)
Net cash flows from loan activities (65,812) (41,574)
Purchases of premises and equipment (936) (566)
Proceeds from the sale of other real estate 171 199
Cash invested in other real estate 0 0
Other investing activities 124 0
-------- --------
Net cash used by investing activities (52,597) (34,577)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in core deposits 29,034 25,028
Net change in certificates of deposit 12,940 (2,025)
Proceeds from issuance of stock 222 102
Principal payments on long term debt (84) (99)
Advances from FHLB 0 40,000
Repayment of FHLB advances 0 (45,000)
Net change in Federal Funds purchased 6,067 3,637
Pre-paid expenses (140) (126)
Other financing activities 616 380
-------- --------
Net cash provided by financing activities 48,655 21,897
-------- --------
</TABLE>
(Continued on next page)
-3-
<PAGE> 6
FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN CASH FLOWS-(Continued)
(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(In thousands)
SIX MONTHS ENDED
June 30, 1998 June 30, 1997
------------- -------------
<S> <C> <C>
INCREASE IN CASH AND DUE FROM BANKS $ 7,311 ($ 3,031)
CASH & DUE FROM BANKS AT BEGINNING
OF YEAR 30,496 35,105
-------- --------
CASH AND DUE FROM BANKS AT END
OF PERIOD $ 37,807 $ 32,074
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 17,031 $ 15,510
Cash paid during the year for income taxes 4,550 4,750
Real estate taken as settlement for loan
obligations 0 0
Real estate taken as settlement for loan
obligations - financed by bank $ 155 $ 0
</TABLE>
The accompanying notes are an integral part of these financial statements.
-4-
<PAGE> 7
FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF
CHANGES IN STOCKHOLDER'S EQUITY (Note 5)
- --------------------------------------------------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
(In thousands, except for number of shares) Accumulated
other
Common Stock Comprehensive Retained Comprehensive
Shares Amount Income Earnings income/(loss) Total
------ ------ ------ -------- ------------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 6,322,255 $44,084 $20,336 $933 $65,353
========================== =====================================
Net Income for 1996 $14,617 14,617 14,617
Other comprehensive income, net of tax
Unrealized losses on AFS, net of tax effect (804) (804) (804)
-------
Comprehensive income 13,813
=======
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
-------------------------- -------------------------------------
Balance, December 31, 1996 6,830,666 57,191 22,997 129 80,317
========================== =====================================
Net income for 1997 16,902 16,902 16,902
Other comprehensive income, net of tax
Unrealized losses on AFS, net of tax effect 324 324 324
-------
Comprehensive income 17,226
=======
Stock Options Exercised 40,548 270 270
7% Stock Dividend 478,475 13,876 (13,876) 0
Fractional Shares Purchased 872 26 26
-------------------------- -------------------------------------
Balance, December 31, 1997 7,350,561 71,363 26,023 453 97,839
========================== =====================================
Net income for the first
six months of 1998 9,528 9,528 9,528
Other comprehensive income, net of tax
Unrealized losses on AFS, net of tax effect 700 700 700
-------
Comprehensive income $10,228
=======
Stock Options Exercised 18,945 186 186
7% Stock Dividend 514,999 17,809 (17,809) 0
Fractional Shares Purchased 1,036 36 36
-------------------------- -------------------------------------
Balance, June 30, 1998 7,885,541 $89,394 $17,742 $1,153 $108,289
========================== =====================================
</TABLE>
-5-
<PAGE> 8
FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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, 1997 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 six months ended June 30, 1998 are not
necessarily indicative of the results that may be expected for
year-end December 31, 1998.
Certain reclassifications of 1997 amounts were made in order to
conform to the 1998 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, 1998, the Corporation adopted two recently
issued Statements of Financial Accounting Standards (SFAS).
SFAS No. 130, "Reporting Comprehensive Income" establishes
standards for reporting and display of comprehensive, or all
inclusive income. In the Corporation's case, based on current
operations, it includes as an addition or deduction to reported
net income, the net change in unrealized gains or losses on
securities. This statement has no effect on net income of the
Corporation. All prior periods shown on the financial statements
have been restated to conform with the statement.
SFAS No. 131, "Disclosure about Segments of an Enterprise and
Related Information" establishes standards for the way that
public business enterprises report information about operating
segments in annual financial statements. Management believes that
the provisions of the statement will not have a material effect
on its financial condition or reported results of operations.
NOTE 3. INVESTMENT SECURITIES
The investment portfolio of the Corporation is classified in one
of two groups: 1) securities Held-To-Maturity (HTM), and 2)
securities Available-For-Sale (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
FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
June 30, 1998:
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
----------------------------------------------------------------
<S> <C> <C> <C> <C>
AFS SECURITIES:
Equities $10,274 $979 $11,253
U.S. Treasuries 252 41 293
U.S. Agencies 47,108 163 (65) 47,206
Corporate securities 26,424 660 (4) 27,080
----------------------------------------------------------------
Totals 84,058 1,843 (69) 85,832
----------------------------------------------------------------
HTM SECURITIES:
Municipal securities 28,150 1,342 (2) 29,490
Certificates of deposit 2,800 2,800
----------------------------------------------------------------
Totals $30,950 $1,342 ($2) $32,290
----------------------------------------------------------------
Totals $115,008 $3,185 ($71) $118,122
================================================================
</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 $20,128 $21,102 $2,995 $2,998
1-5 Yrs 24,808 25,409 2,046 2,166
5-10 Yrs 35,742 35,914 24,066 25,187
Over 10 Yrs 3,380 3,407 1,843 1,939
------------------------------------------------------------
$84,058 $85,832 $30,950 $32,290
============================================================
</TABLE>
-7-
<PAGE> 10
FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - (Continued)
- --------------------------------------------------------------------------------
CHANGES IN AFS AND HTM SECURITIES
<TABLE>
<CAPTION>
For the Quarter Ended June 30, 1998:
<S> <C>
AFS SECURITIES
Proceeds From Sales $0
Gross Realized Gains --
Gross Realized Losses --
Gross Gains & Losses Included In Earnings From
Transfers To The Trading Category --
Net Change In Unrealized Holding Gains Or
Losses Included In The Separate
Component of Equity Capital $760
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>
June 30, 1998 Dec 31, 1997
------------- ------------
<S> <C> <C>
Commercial $ 161,161 $ 123,904
Real Estate:
Commercial 309,907 272,218
Construction 135,294 147,232
Residential 103,975 102,117
Installment 25,735 24,457
--------- ---------
736,072 669,928
Unearned Fee Income (4,856) (4,598)
--------- ---------
Total Loans $ 731,216 $ 665,330
========= =========
</TABLE>
NOTE 5. The Board of Directors declared 7% stock dividends which were paid
March 17, 1997 and March 16, 1998 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 Frontier Financial Corporation ("the Corporation")
for the second quarter of 1998 was $4.9 million versus $4.2 million for the
second quarter of 1997, or up 15.6%. The reason for the increase in net income
in 1998 was due to an increase in net interest income of $1.2 million, or 10.7%.
This marks the fifty-eighth consecutive quarter in which Frontier's earnings
exceeded the prior years' comparable quarter. In the discussion below,
comparison is with the second quarter of 1997, unless otherwise stated.
Annualized return on average assets (ROA) was 2.11% in 1998, and 2.04% in 1997.
Annualized return on average stockholder's equity (ROE) in 1998 was 18.44%, as
compared to 19.16% in 1997. Fully diluted earnings per share were $.61 for
1998, and $.53 for 1997. Earnings per share have been adjusted for the seven
percent stock dividend paid on March 16, 1998.
FINANCIAL REVIEW - ECONOMIC ENVIRONMENT
The Bank's lending and other activities are concentrated in Snohomish County,
Washington, but also includes the northern and eastern part of King County, to
the south, and Skagit County to the north. 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 also
has a branch office in Redmond.
Since our last report, there has been little, if any, noticeable change in the
local economy. However, the Boeing company has announced that there will be a
reduction in workforce of around 28,000 personnel. Management would estimate
that of that number, about 7,500 personnel in the Everett area will be involved.
On the positive side, however, the Naval Station Everett is solidly in place,
and this stable economic influence should not follow the Boeing ripple effect.
Housing continues on a fast pace. Due to the lack of planning by King county to
provide adequate housing for the job growth, more people are buying in Snohomish
county. This is causing property values to increase as the inventory is reduced.
Residential building permits are up 12% in January 1998, versus December 1997,
and single family home sales are up 9% from February 1997 to February 1998.
(Source: Snohomish County Planning Department) Regardless, management remains
cautiously optimistic regarding the future effect of Boeing on the local
economy.
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:
-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>
At June 30, 1998 1997 $ Change % Change
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Loans $ 731,216 $ 642,803 $ 88,413 13.8%
Investments * 115,008 120,329 (5,321) -4.4%
Federal Funds Sold 47,235 28,595 18,640 65.2%
-------------------------------------------------------------
Total Assets $ 943,911 $ 834,852 $ 109,059 13.1%
Noninterest bearing deposits $ 112,749 $ 98,509 $ 14,240 14.5%
Interest bearing deposits 660,778 595,392 65,386 11.0%
-------------------------------------------------------------
Total deposits 773,527 693,901 79,626 11.5%
Federal Funds purchased
and Repurchase Agreements 24,029 15,648 8,381 53.6%
Long-term debt 30,040 30,085 (45) -0.1%
Capital * $ 107,136 $ 88,667 $ 18,469 20.8%
</TABLE>
* Shown at amortized cost, or adjusted for unrealized gain/(loss)
At quarter end 1998, loans were up $88.4 million, or 13.8% over the previous
year. This increase in loans over the last year, was due, for the most part, to
the economic growth of the region and continued emphasis on loan development.
The growth rate in the first and second quarters of 1998 were $26.9 million, or
4.05%, and $38.9 million, or 5.63% as compared to a growth of $16.4 million, or
2.74% and $26.0 million, or 4.21% in 1997. Consolidating growth rates for the
first six months of 1998, loans have increased $65.8 million, or 9.90% from
year-end 1997, and increased $42.4 million, or 7.06% from year-end 1996.
Net investments declined $5.3 million, or 4.4% for the period. This decline was
planned by management so that proceeds of maturing and called investments can be
placed into the loan portfolio.
Not all maturing and called investments and deposit growth can be uniformly
absorbed by the loan portfolio. Federal Funds Sold increased $18.6 million, or
65.2%, during the period. Due to the present yield curve, the opportunity cost
of liquidity is not substantial at this time.
Continuing to break the trend in little or no growth from year-to-year,
noninterest bearing accounts have increased 14.5%, or $14.2 million over the
last year, with most of the increase occurring in business checking accounts.
Management attributes this increase, for the most part, to the fallout from
major regional bank mergers.
At June 30, 1998, NOW and Money Market accounts made up 15.0% of total interest
bearing deposits. At June 30, 1998 those deposits made up 16.9%. Savings
deposits, a year ago, made up 24.9% of interest bearing deposits, and 24.1% in
1998. Time deposits were 60.1% of total interest bearing deposits in 1997, and
59.0% in 1998.
-10-
<PAGE> 13
FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Balance Sheet - (Continued)
- --------------------------------------------------------------------------------
Over the last year, NOW and Money Market deposits increased $22.7 million, or
25.5%; savings deposits increased $11.0 million, or 7.4%, and time deposits
increased $31.6 million, or 8.8%. During this past year, it was the interest
rates paid and business development efforts that caused the growth in interest
bearing deposits.
The increase of $8.4 million, or 53.6% in federal funds purchased and securities
sold under agreements to repurchase (repo's) for the period, was caused by
strong demand for sweep accounts by local businesses. A block of $20 million of
the FHLB borrowings 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.
Capital has grown $18.5 million over the past year, or 20.8%. Management has
recognized that the capital of the Corporation is excessive, and continues to
review strategies to offset the negative effect that excessive capital has on
the return on equity ratio.
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>
For quarter ended June 30, 1998 1997 $ Change % Change
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Loans $711,061 $631,563 $ 79,498 12.6%
Investments * 117,769 123,626 (5,857) -4.7%
Federal Funds Sold 45,920 28,936 16,984 58.7%
Total Earning Assets 874,750 784,125 90,625 11.6%
---------------------------------------------------------
Total Assets 920,220 823,285 96,935 11.8%
Noninterest bearing deposits 111,809 92,627 19,182 20.7%
Interest bearing deposits 642,307 590,919 51,388 8.7%
---------------------------------------------------------
Total deposits 754,116 683,546 70,570 10.3%
Fed Funds purchased
and repurchase agreements 22,016 14,496 7,520 51.9%
Long-term Debt 30,043 30,087 (44) -0.1%
Capital 105,335 87,674 17,661 20.1%
</TABLE>
* Shown at amortized cost, or adjusted for unrealized gain/(loss)
(Continued)
-11-
<PAGE> 14
FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Net Interest Income - (Continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For quarter ended June 30, 1998 1997 $ Change % Change
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Total interest income 20,891 19,066 1,825 9.6%
Total interest expense 8,513 7,866 647 8.2%
--------------------------------------------------------
Net Interest Income $ 12,378 $ 11,200 $ 1,178 10.5%
</TABLE>
In 1998, average total earning assets as a percent of average total assets were
95.1%, and 95.2% in 1997. This ratio indicates how efficiently assets are being
utilized. Average loans were 77.3% and 76.7%, respectively and investments were
12.8% and 15.0%, for the same periods. As previously mentioned, management has
intentionally allowed the investment portfolio to run off to provide liquidity
for growth of the loan portfolio. At the same time, however, management has
recognized that short to medium term yields on investments were not sufficient
to warrant re-investing excess liquidity in those maturities. This is why
average federal funds sold increased from $28.9 million to $45.9 million, or
58.7% over the period. Average total deposits increased $70.6 million, or 10.3%.
Not indicated in the table above are the components of interest bearing deposits
which, in total, increased $51.4 million, or 8.7%. Average NOW and Money Market
accounts increased $17.7 million, or 21.1%; savings accounts increased $9.1
million, or 6.2%, and time cd's increased $24.5 million, or 6.8%.
Earning Assets
The yield on total earning assets declined in the second quarter 1998, from
9.86% to 9.69%. The cost of total interest bearing liabilities decreased .05%,
from a 5.02% in 1997 to a 4.97% in 1998. Management has expected this decline in
the net interest margin which is due to competitive factors.
On a tax equivalent basis, net interest income was $12.4 million in 1998, versus
$11.2 million in 1997, for an increase in net interest income of $1.2 million.
Total interest income increased $1.8 million, and total interest expense
increased $.6 million, for an increase in net interest income of $1.2 million.
The increase in the average balance of earning assets increased interest income
by $2.2 million, and a decrease in interest rates decreased interest income by
$.4 million, for a net increase of $1.8 million.
The yield on total loans decreased from 10.55% in 1997 to 10.33% in 1998.
Business loans decreased from 10.32% to 10.13%; real estate commercial loans
decreased in yield from 10.10% to 9.63%; Real estate construction loans
decreased in yield from 12.27% to 11.87%; real estate mortgage loans increased
from 10.09% to 10.62%, and installment loans increased from 9.85% to 9.91%.
The yield on investments increased from 7.33% in 1997 to 7.39% in 1998, and the
yield on federal funds sold decreased from 5.59% in 1997 to 5.58% in 1998.
Interest Bearing Liabilities
The increase in the average balance of total interest bearing liabilities
increased interest expense by $.7 million, and the rates paid on interest
bearing liabilities decreased $.1 million for a net change of $.6 million.
-12-
<PAGE> 15
FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Interest Bearing Liabilities - (Continued)
- --------------------------------------------------------------------------------
The cost of NOW and money market accounts dropped from 2.95% in 1997, to 2.88%
in 1998. Savings accounts cost stayed the same at 4.04%, and time cd's decreased
in cost from 5.88% in 1997 to 5.86% in 1998. Short term borrowings increased
slightly from 5.08% to 5.09%, and long-term debt cost increased from 5.41% in
1997 to 5.57% in 1998.
NONINTEREST INCOME AND EXPENSE
Total noninterest income increased in 1998 to $1.2 million, up $273 thousand, or
6.2% from a year ago. Service charges increased slightly from $426 thousand to
$427 thousand, or .2%. This is below the 2.3% 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.
Other income for the period was up by $72 thousand, or 9.7%. However, each
period contained gains due to the sale of ORE, $195 thousand in 1997 and $80
thousand in 1998. So if these gains are eliminated, other income was actually
up $187 thousand. The gain was due to increases in several fee generating
sources. Loan servicing fees were up by $69 thousand, or 255.6%. Broker loan
fees increased $21 thousand, or 36.2%, and real estate settlement fees were up
$20.4 thousand, or 77.8%. These are fees generated by the real estate division
of the Bank, and they are having a record year. Management attributes this
growth due to the low interest rate environment, and other interest changes. At
the end of the first quarter of 1998, management expected this activity to
level off, or decrease, and it would appear that a slowing of the activity has
occurred in the second quarter. Other areas of fee income increases were
insurance and financial services fees increased $33 thousand, or 40.7%, and
trust department fees increased $32 thousand, or 14.3%.
The market value of trust assets at quarter end 1998 was $156.8 million, as
compared to $135.0 million in 1997, an increase of $21.8 million, or 16.1%.
Total noninterest expenses increased $537 thousand, or 9.7% for the period.
Salaries and benefits increased $316 thousand, or 10.1%. Salaries themselves,
increased $220 thousand, or 10.7%. 4.6% of the increase was due to an increase
in staff, and 6.1% was attributable to merit raises and bonuses. There were 284
FTE Employees at June 30, 1998. Benefits increased $96 thousand, or 8.9%. $50
thousand, or 52.1% of the increase was attributable to an increase in staff over
the year, and $19 thousand, or 19.8% was attributable to an increase in medical
insurance premiums.
Total occupancy expense increased $37 thousand, or 5.1%. 42.5%, or $325 thousand
of occupancy expense was depreciation in 1998, and $303 thousand, or 41.7% was
depreciation in 1997. Excluding depreciation, occupancy expense increased $15
thousand, or 3.5%, in 1998. The increase was attributable to more maintenance
and repairs.
Other expense increased $183 thousand, or 11.0%, to $1.9 million. This increase
was due to an increase in local taxes of $59 thousand or 12.2%, increased legal
fees of $26 thousand, and increased self insurance premiums of $55
thousand.
Many banks and bank holding companies use a computation called the "efficiency
ratio" to measure overhead. This ratio is then compared to others in the
industry. The ratio is arrived at by dividing total noninterest expense by the
sum of net interest income and other noninterest income. The
-13-
<PAGE> 16
FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Noninterest Income and Expense - (Continued)
- --------------------------------------------------------------------------------
lower the number, the more efficient the organization. The Corporation's
efficiency ratio for the year-to-date 1998 period was 43.1%, and 43.2% for 1997.
The Corporation's ratio is considered excellent for the industry.
LOANS
IMPAIRED ASSETS
<TABLE>
<CAPTION>
Impaired assets are summarized as follows: (In thousands)
Period Ended June 30, 1998 1997
-------- --------
<S> <C> <C>
Non-accruing loans $ 3,452 $ 4,951
Loans past due 90 days or more and still accruing 0 0
Restructured loans 105 115
Other real estate owned 909 245
-------- --------
Total non-performing loans $ 4,466 $ 5,311
======== ========
Total loans at end of period $731,216 $642,803
-------- --------
As a percent of total loans outstanding 0.61% 0.83%
======== ========
</TABLE>
Delinquent and problem loans are a part of any lending enterprise. When a
borrower fails to make payments, the Bank implements collection activities
commencing with simple past due notices. This then progresses to phone calls and
letters, followed by legal activity when and if necessary. At one month past
due, the loan is tracked and reported as a delinquency.
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, in a timely manner, 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 impaired assets to total loans is felt to be
modest. Other real estate owned is comprised of one parcel of commercial land,
which has a signed purchase and sale agreement. Completion of the sale is
expected by year end. 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 loan portfolio comprised of real
estate construction and land development loans. These loans totaled $110.5
million in 1998, or 15.1% of total loans, and $112.3 million in 1997, or 17.5%
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.
-14-
<PAGE> 17
FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
Credit Concentrations - (Continued)
- -------------------------------------------------------------------------------
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 real estate market
that is moving upward due to the employment opportunities in the area. Stable
interest rates have also helped facilitate a strong level of sales and real
estate activity in general, and, absent an abrupt upward movement in interest
rates, management is cautiously optimistic as to the real estate markets
prospects in the months ahead.
At June 30, 1998 and 1997, 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 June 30, 1998, the allowance for possible loan losses
increased to $15.6 million, or 2.14% of total loans, from $14.2 million, or
2.21% of total loans in 1997. Net loan losses for 1998 are actually net
recoveries of $451 thousand for the year-to-date period ended June 30, 1998.
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. Also, the reserve was recently increased to
provide for year 2000 issues contingencies.
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.
The statement of cash flows on pages 3 and 4 of this report provides information
on the sources and uses of cash for the respective year-to-date periods ending
June 30, 1998 and 1997. This discussion addresses those periods of time.
Net cash provided by operating activities in 1998 totaled $11.3 million, as
compared to $9.6 million in 1997. The largest component providing net cash was
income of $9.5 million in 1998 and $8.4 million in 1997.
Loans originated in the real estate secondary market for the second quarter of
1998 were double that of the prior period. As indicated, loan originations in
1998 were $19.4 million, up $11.2 million from the
-15-
<PAGE> 18
FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
Liquidity - (Continued)
- --------------------------------------------------------------------------------
1997 activity, or 136.5%. As explained earlier, the increase in real estate loan
origination activity is due mainly to the lower interest rate environment, and
loan development. Management has noted that activity has began to level off
during the second quarter, and anticipated such.
Investing activities in 1998 were centered in the loan area, which had a net
funding requirement of $65.8 million. Management was anticipating increased loan
volume which fell short of expectations which is why Federal funds accumulated
cash flows of $14.1 million. Maturing investments were rolled over during the
1998 period. In 1997, net investing in loans totaled $41.6 million, and proceeds
of maturing investments exceeded reinvestment by $11.2 million.
Financing the investment activities in 1998 was mainly accomplished by
acquisition of core deposits (including NOW, Money Market and Savings accounts)
of $29.0 million, and $12.9 million of certificates of deposit. In 1997, the
funding of investment activities came from increased core deposits of $25.0
million.
Management has many sources of liquidity, such as the sale of AFS securities,
additional borrowings from the FHLB, participation in the Treasury department's
short-term note program, borrowings from the Federal Reserve Bank, or additional
borrowings at correspondent banks. 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 simulation model used by the Corporation combines the significant factors
that affect interest rate sensitivity into a comprehensive earnings simulation.
Earning assets and interest-bearing liabilities with longer lives may be subject
to more volatility than those with shorter lives. The model accounts for these
differences in its simulations. At June 30, 1998, the simulation modeled the
impact of assumptions that interest rates would increase or decrease 200 basis
points. Results indicated that the Corporation was positioned such that equity
would not drop below that point where the Corporation, for regulatory purposes,
would continue to be classified "well capitalized". It should be emphasized that
the model is static in nature and does not take into consideration possible
management actions to minimize the impact on equity. Management also matches
assets and liabilities on a static "gap" report monthly to assist in interest
rate sensitivity measurements.
Management does not use interest rate risk management products such as interest
rate swaps, options, hedges, or derivatives, nor does management currently have
any intention to use such products in the future.
-16-
<PAGE> 19
FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
Capital
- --------------------------------------------------------------------------------
CAPITAL
Consolidated capital of the Corporation for financial statement purposes at
second quarter end 1998 was $108.3 million (including unrealized gains on
securities). This amount compares to $88.6 million at June 30, 1997, an increase
of $19.7 million, or 22.2%. $1.1 million of the increase came from unrealized
gains on securities, and the remainder 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 June 30, 1998, the Corporation's leverage ratio was
11.62%, compared to 10.74% at quarter end 1997. In addition, Regulatory capital
requires a minimum of Tier I capital of 4% of risk-adjusted assets and total
capital (combined Tier I and Tier II) of 8%. The Corporation's Tier I and
combined Tier II capital ratios were 13.58% and 14.84% at June, 30, 1998, and
12.82% and 14.04% at June 30, 1997.
Management constantly monitors the level of capital of the Corporation, and
believes that capital is excessive to meet present needs, considering, 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.
FORWARD-LOOKING INFORMATION
Except for historical financial information contained herein, the matters
discussed in this quarterly report on Form 10Q may be considered
"forward-looking" statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended and subject to the safe harbor created by the Securities Litigation
Reform Act of 1995. Forward-looking statements are subject to risks and
uncertainties that may cause actual future results to differ materially. Such
risks and uncertainties with respect to Frontier Financial Corporation include
those related to the economic environment, particularly in the areas in which
Frontier operates, competitive products and pricing, fiscal and monetary
policies of the U. S. government, changes in governmental regulations affecting
financial institutions, including regulatory fees and capital requirements,
changes in prevailing interest rates, acquisitions and the integration of
acquired businesses, credit risk management and asset/liability management, the
financial and securities markets, and the availability of and costs associated
with sources of liquidity.
-17-
<PAGE> 20
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
The annual meeting of shareowners was held on April 16, 1998 in
Everett, Washington. The purpose of the meeting was to ask shareowners to vote
on 1) the election of directors; 2) certain amendments to the Corporation's
Articles of Incorporation; and 3) an amendment to the Corporation's Stock Option
Plan. The 1998 Proxy Statement filed March 20, 1998 is incorporated by
reference. Of 7,357,935 shares outstanding and authorized to vote, 5,315,595
were represented in person or by proxy at the meeting.
Proposal No. 1.
At that meeting, the shareowners approved a proposal to create a
classified board of directors. The results for the election of directors are
shown below with the number and percent affirmative votes indicated next to
their name:
<TABLE>
<CAPTION>
Terms Expire in 1999 - Class 1 Terms Expire in 2000 - Class 2
<S> <C> <C> <C> <C> <C>
Robert J. Dickson 5,313,997 72.2% Lucy DeYoung 5,297,664 72.0%
Edward E. Hansen 5,311,104 72.2% J. Donald Regan 5,294,319 72.0%
William H. Lucas 5,292,245 71.9% Roy A. Robinson 5,305,166 72.1%
Edward J. Novack 5,309,820 72.2% William J. Robinson 5,278,744 71.7%
Darrell J. Storkson 5,310,133 72.2% Edward C. Rubatino 5,309,790 72.2%
Terms Expire in 2001 - Class 3
George E. Barber 5,311,104 72.2%
David A. Dujardin 5,310,790 72.2%
James H. Mulligan 7,310,028 72.2%
Roger L. Rice 5,288,682 71.9%
</TABLE>
Proposal No. 2(a)
To restate the objects and purposes of the Corporation and to
eliminate the provision relating to distributions.
Results of the vote:
<TABLE>
<S> <C> <C>
FOR 5,073,865 69.0%
AGAINST 139,822 1.9%
ABSTAIN 101,908 1.4%
</TABLE>
Proposal No. 2(b)
To increase the number of authorized shares of Common Stock from
20,000,000 to 50,000,000 and to create a class of preferred stock,
with 10,000,000 shares authorized.
-18-
<PAGE> 21
FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION - (Continued)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
FOR 4,911,670 66.8%
AGAINST 341,779 4.6%
ABSTAIN 62,146 .8%
</TABLE>
Proposal No. 2(c)
To create a classified board of directors, and to provide that a
director may be removed only for cause.
<TABLE>
<S> <C> <C>
FOR 5,061,939 68.8%
AGAINST 182,668 2.5%
ABSTAIN 70,988 1.0%
</TABLE>
Proposal No. 2(d)
To limit the personal liability of directors of the Corporation to
the full extent allowed under Washington law.
<TABLE>
<S> <C> <C>
FOR 5,090,330 69.2%
AGAINST 180,541 2.5%
ABSTAIN 44,724 .6%
</TABLE>
Proposal No. 3
An amendment to the Corporation's Incentive Stock Option Plan.
<TABLE>
<S> <C> <C>
FOR 4,963,907 67.5%
AGAINST 282,674 3.8%
ABSTAIN 69,014 .9%
</TABLE>
Item 5. Other Information.
(a) Please see Item 6(b)(20) below. The Corporation began trading on
the Nasdaq National Market on April 16, 1998.
(b) On January 21, 1998, the Board of Directors of the Corporation
declared a 7% stock dividend to shareowners of record as of January
21, 1998, and payable on March 16, 1998.
Item 6. Exhibits and Reports on Form 8-K
(b)(3)(i) Amended and Restated Articles of Incorporation is
attached as Exhibit (3)(i).
(b) (11) Computation of basic and diluted earnings per share is
attached as Exhibit 11.
-19-
<PAGE> 22
FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION - (Continued)
- -------------------------------------------------------------------------------
(b)(20) On February 25, 1998, the Corporation filed Form 8-K disclosing
that the Corporatoin has made an application for quotation of
its Common Stock on the Nasdaq National Market under the
trading symbol "FTBK". There were no financial statements filed
with the report.
(b)(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> 23
FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
SIGNATURE
- -------------------------------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FRONTIER FINANCIAL CORPORATION
Date: August 3, 1998 /s/ JAMES F. FELICETTY
-------------------- ------------------------------
James F. Felicetty
Secretary/Treasurer
<PAGE> 1
EXHIBIT (3)(i)
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
FRONTIER FINANCIAL CORPORATION
Frontier Financial Corporation, a Washington corporation, by its
President, hereby submits the following Amended and Restated Articles of
Incorporation of said corporation, pursuant to provisions of RCW 23B.10.070,
and a resolution duly adopted by the Board of Directors on February 23, 1998
and the shareholders on April 16, 1998. These Amended and Restated Articles of
Incorporation supersede the original Articles of Incorporation and all
amendments and prior restatements thereto as of the date of their adoption.
ARTICLE I. NAME
The name of the corporation is Frontier Financial Corporation.
ARTICLE II. PURPOSES AND POWER
This corporation is organized to engage in any business, trade or activity
which may lawfully be conducted by a corporation organized under the Washington
Business Corporation Act. This corporation shall have the authority to engage
in any and all such activities as are incidental or conducive to the attainment
of the foregoing purpose of this corporation and to exercise any and all powers
authorized or permitted under any laws that may now or hereby be applicable or
available to this corporation.
ARTICLE III. EXISTENCE
The existence of this corporation is perpetual.
ARTICLE IV. SHARES
4.1 AUTHORIZED CAPITAL
The total number of shares which the corporation is authorized to issue is
60,000,000, consisting of 50,000,000 shares of Common Stock without par value
and 10,000,000 shares
<PAGE> 2
of Preferred Stock without par value. The Common Stock is subject to the rights
and preferences of the Preferred Stock as hereinafter set forth.
4.2 ISSUANCE OF PREFERRED STOCK IN SERIES
The Preferred Stock may be issued from time to time in one or more series
in any manner permitted by law and the provisions of these Articles of
Incorporation of the corporation, as determined from time to time by the Board
of Directors and stated in the resolution or resolutions providing for the
issuance thereof, prior to the issuance of any shares thereof. The Board of
Directors shall have the authority to fix and determine and to amend, subject
to the provisions hereof, the designation, preferences, limitations and
relative rights of the shares of any series that is wholly unissued or to be
established. Unless otherwise specifically provided in the resolution
establishing any series, the Board of Directors shall further have the
authority, after the issuance of a series whose number it has designated, to
amend the resolution establishing such series to decrease the number of shares
of that series, but not below the number of shares of such series then
outstanding.
4.3 DIVIDENDS
The holders of shares of the Preferred Stock shall be entitled to receive
dividends, out of the funds of the corporation legally available therefor, at
the rate and at the time or times, whether cumulative or noncumulative, as may
be provided by the Board of Directors in designating a particular series of
Preferred Stock. If such dividends on the Preferred Stock shall be cumulative,
then if dividends shall not have been paid, the deficiency shall be fully paid
or the dividends declared and set apart for payment at such rate, but without
interest on cumulative dividends, before any dividends on the Common Stock
shall be paid or declared and set apart for payment. The holders of the
Preferred Stock shall not be entitled to receive any dividends thereon other
than the dividends referred to in this section.
4.4 REDEMPTION
The Preferred Stock may be redeemable at such price, in such amount, and
at such time or times as may be provided by the Board of Directors in
designating a particular series of Preferred Stock. In any event, such
Preferred Stock may be repurchased by the corporation to the extent legally
permissible.
4.5 LIQUIDATION
In the event of any liquidation, dissolution, or winding up of the affairs
of the corporation, whether voluntary or involuntary, then, before any
distribution shall be made to the holders of the Common Stock, the holders of
the Preferred Stock at the time outstanding shall be entitled to be paid the
preferential amount or amounts per share as may be provided by the Board of
Directors in designating a particular series of Preferred Stock and dividends
accrued thereon to the date of such payment. The holders of the Preferred Stock
shall not be entitled to receive any distributive amounts upon the liquidation,
dissolution, or winding up of
-2-
<PAGE> 3
the affairs of the corporation other than the distributive amounts referred to
in this section, unless otherwise provided by the Board of Directors in
designating a particular series of Preferred Stock.
4.6 CONVERSION
Shares of Preferred Stock may be convertible into Common Stock of the
corporation upon such terms and conditions, at such rate and subject to such
adjustments as may be provided by the Board of Directors in designating a
particular series of Preferred Stock.
4.7 VOTING RIGHTS
Holders of Preferred Stock shall have such voting rights as may be
provided by the Board of Directors in designating a particular series of
Preferred Stock.
ARTICLE V. PREEMPTIVE RIGHTS
No shareowners shall have preemptive rights to acquire unissued shares of
the corporation.
ARTICLE VI. CUMULATIVE VOTING
Each share of Common Stock, when issued, shall be entitled to one vote.
Cumulative voting for directors shall not be allowed.
ARTICLE VII. CERTAIN TRANSACTIONS
No contracts or other transactions between the corporation any other
corporation (or partnership) and no act of the corporation shall in any way be
affected or invalidated by the fact that any of the directors of this
corporation are pecuniarily interested in, or are directors or officers of such
other corporation (or partnership): any director individually, or any firm of
which any director may be a member, may be a party to or may be pecuniarily or
otherwise interested in any contracts or transactions of the corporation,
provided that the fact that he or she or such corporation is so interested is
disclosed or known to the Board of Directors or a majority thereof; and any
director of the corporation who is also a director or officer of such other
corporation or who is so interested may be counted in determining the existence
of a quorum at any meeting of the Board of Directors of the corporation which
authorizes any such contracts or transactions with like form and effect as if
he or she were not such director or officer of such other corporation or not so
interested.
-3-
<PAGE> 4
ARTICLE VIII. DIRECTORS
8.1 NUMBER AND TENURE
The directors who shall manage the affairs of the corporation shall not
be less than five (5) nor more than twenty-five (25) in number to be elected
annually by the common shareowners. The exact number shall be determined from
time to time by a resolution of the Board of Directors. In case of vacancies in
the Board of Directors by death, resignation or otherwise a majority of the
remaining directors may elect directors to fill the vacancies. Prior to the
1998 annual election of Directors, unless a Director earlier dies, resigns or
is removed, his or her term of office shall expire at the next annual meeting
of shareowners. At the 1998 annual election of Directors, the Board of
Directors shall be divided into three classes, with said classes to be as equal
in number as may be possible, with any Director or Directors in excess of the
number divisible by three being assigned to Class 1 and Class 2, as the case
may be. At the first election of Directors to such classified Board of
Directors, each Class 1 Director shall be elected to serve until the next
ensuing annual meeting of shareowners, each Class 2 Director shall be elected
to serve until the second ensuing annual meeting of shareowners and each Class
3 Director shall be elected to serve until the third ensuing annual meeting of
shareowners. At each annual meeting of shareowners following the meeting at
which the Board of Directors is initially classified, the number of Directors
equal to the number of Directors in the class whose term expires at the time of
such meeting shall be elected to serve until the third ensuing annual meeting
of shareowners. Notwithstanding any of the foregoing provisions of this
Article, Directors shall serve until their successors are elected and qualified
or until their earlier death, resignation or removal from office, or until
there is a decrease in the number of Directors.
8.2 REMOVAL FOR CAUSE
The Directors of this corporation may be removed only for cause by the
holders of not less than two-thirds of the shares entitled to elect the
Director or Directors whose removal is sought in the manner provided by the
Bylaws.
ARTICLE IX. BY-LAWS
The Board of Directors has the power and authority to make, alter, amend
or repeal By-Laws of this corporation, subject to the power of the shareowners
having voting power to alter, amend or repeal the By-Laws.
ARTICLE X. EXECUTIVE COMMITTEE
The Board of Directors may by resolution passed by a majority of the
entire Board of Directors designate one or more directors to constitute an
executive committee, which shall have and exercise the authority of the Board of
Directors in the management of the business of the corporation to the extent
provided in the resolution.
-4-
<PAGE> 5
ARTICLE XI. LIMITATION OF DIRECTOR LIABILITY
To the full extent that the Washington Business Corporation Act, as it
exists on the date hereof or may hereafter be amended, permits the limitation
or elimination of the liability of Directors, a Director of this corporation
shall not be liable to this corporation or its shareowners for monetary
damages for conduct as a Director. Any amendments to or repeal of this Article
11 shall not adversely affect any right or protection of a Director of this
corporation for or with respect to any acts or omissions of such Director
occurring prior to such amendment or repeal.
DATED: April 16, 1998
FRONTIER FINANCIAL CORPORATION
By: /s/ JAMES F. FELICETTY
--------------------------------
James F. Felicetty,
Secretary and Treasurer
-5-
<PAGE> 6
CERTIFICATE REGARDING
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
FRONTIER FINANCIAL CORPORATION
Pursuant to RCW 23B.10.070, the undersigned hereby certifies that the
foregoing amendment and restatement of the Articles of Incorporation of
Frontier Financial Corporation contains the following amendments to the
existing Articles of Incorporation:
Articles I through VIII are amended in their entirety to read as set
forth in Articles I through XI of the Restated Articles of Incorporation
attached hereto. (See Exhibit A)
The dates of the adoption of the Amended and Restated Articles of
Incorporation containing such amendments by the directors and shareholders of
this corporation are February 23, 1998 and April 16, 1998, respectively. The
amendments were duly approved by the directors and the shareholders of this
corporation in accordance with the provisions of RCW 23B.10.020, RCW 23B.10.030
and RCW 23B.10.040.
Dated: April 16, 1998.
-----------------
FRONTIER FINANCIAL CORPORATION
By: /s/ JAMES F. FELICETTY
---------------------------------
James F. Felicetty,
Secretary and Treasurer
<PAGE> 1
FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES EXHIBIT 11
COMPUTATION OF EARNINGS PER SHARE
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For Six Months Ended June 30,
1998 1997
---------- ----------
<S> <C> <C>
Net Income $9,528,090 $8,375,821
========== ==========
Computation of average
shares outstanding
Shares outstanding at
beginning of year 7,350,561 6,830,666
Additional shares deemed
outstanding because of
stock dividends 516,035 991,720
Additional shares deemed
outstanding because of
stock split 0 0
Shares issued during the
year times average time
outstanding during the year 11,471 7,535
---------- ----------
Average basic shares outstanding 7,878,067 7,829,921
---------- ----------
Dilutive shares 77,976 77,812
---------- ----------
Average fully diluted shares outstanding 7,956,043 7,907,733
---------- ----------
Basic earnings per share $ 1.21 $ 1.07
========== ==========
Fully diluted earnings per share $ 1.20 $ 1.06
========== ==========
</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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 37,807
<INT-BEARING-DEPOSITS> 2,800
<FED-FUNDS-SOLD> 47,235
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 85,832
<INVESTMENTS-CARRYING> 28,150
<INVESTMENTS-MARKET> 29,490
<LOANS> 731,216
<ALLOWANCE> (15,646)
<TOTAL-ASSETS> 943,911
<DEPOSITS> 773,527
<SHORT-TERM> 24,029
<LIABILITIES-OTHER> 8,026
<LONG-TERM> 30,040
0
0
<COMMON> 89,394
<OTHER-SE> 18,895
<TOTAL-LIABILITIES-AND-EQUITY> 943,911
<INTEREST-LOAN> 35,536
<INTEREST-INVEST> 5,272
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 40,808
<INTEREST-DEPOSIT> 15,642
<INTEREST-EXPENSE> 16,978
<INTEREST-INCOME-NET> 23,830
<LOAN-LOSSES> (350)
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 11,254
<INCOME-PRETAX> 14,486
<INCOME-PRE-EXTRAORDINARY> 9,528
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,528
<EPS-PRIMARY> 1.21
<EPS-DILUTED> 1.20
<YIELD-ACTUAL> 5.45
<LOANS-NON> 3,452
<LOANS-PAST> 0
<LOANS-TROUBLED> 105
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 14,845
<CHARGE-OFFS> (853)
<RECOVERIES> 1,304
<ALLOWANCE-CLOSE> 15,646
<ALLOWANCE-DOMESTIC> 15,646
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
