UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission File Number 000-15540
FRONTIER FINANCIAL CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Washington 91-1223535
(State or Other Jurisdiction of (IRS Employer Identification
Incorporation of Organization) Number)
332 SW Everett Mall Way
P.O. Box 2215
Everett, Washington 98203
(Address of Principal Administrative Offices) (Zip Code)
(425)-514-0700
(Registrant's Telephone Number, Including Area Code)
(Former name, former address and former fiscal year,
if changed since last report)
------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes (X ) No ( )
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at October 23, 2002
- -------------------------------------- ------------------------------------
Common Stock, no par value 18,863,129
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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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PART I - Financial Information Page
Item 1. Financial Statements.
Consolidated Balance Sheet - September 30, 2002
` and Year End 2001 1
Consolidated Statement of Income - Three and Nine Months
Ended September 30, 2002 and 2001 2
Consolidated Statement of Cash Flows - Nine Months
Ended September 30, 2002 and 2001 3-4
Notes to the Consolidated Financial Statement 5-8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9-19
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 20
Item 4. Controls and Procedures 20
PART 11 - Other Information
Item 1. Legal Proceedings 21
Item 4. Submission of Matters to Vote by Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K. 21
Signatures 22
Certifications 22-24
-i-
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FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
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CONSOLIDATED BALANCE SHEET
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(In thousands, except
shares)
September December
30, 31,
ASSETS 2002 2001
----------- -----------
Cash & due from banks $72,711 $64,062
Federal funds sold 69,395 44,800
Securities:
Available for sale-market value 107,428 48,845
Held to maturity-amortized cost 32,319 32,925
----------- -----------
Total securities 139,747 81,770
Loans, net of unearned income 1,642,817 1,575,031
Less allowance for loan losses (27,545) (26,358)
----------- -----------
Net loans 1,615,272 1,548,673
Premises & equipment, net 26,829 27,695
Other real estate owned 7,307 769
Intangible assets 6,476 6,476
Other assets 31,597 32,495
----------- -----------
TOTAL ASSETS $1,969,334 $1,806,740
=========== ===========
LIABILITIES
Deposits:
Noninterest bearing $252,184 $238,348
Interest bearing 1,341,395 1,260,022
----------- -----------
Total deposits 1,593,579 1,498,370
Federal funds purchased and
securities sold under repurchase agreements 10,336 7,696
Federal Home Loan Bank advances 155,125 105,137
Other liabilities 11,365 12,007
----------- -----------
TOTAL LIABILITIES 1,770,405 1,623,210
----------- -----------
SHAREOWNERS' EQUITY
Common stock, no par value; 100,000,000 shares authorized; 19,035,253 116,476 115,158
and 19,184,879 shares issued and outstanding in 2002 and 2001
Retained earnings 81,207 67,738
Accumulated other comprehensive income (loss),
net of tax effect 1,246 634
----------- -----------
TOTAL SHAREOWNERS' EQUITY 198,929 183,530
----------- -----------
TOTAL LIABILITIES AND SHAREOWNERS' EQUITY $1,969,334 $1,806,740
=========== ===========
The accompanying notes are an integral part of these financial statements
1
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FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
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CONSOLIDATED STATEMENT OF INCOME
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(In Thousands, Except for Per Share Amounts) Three Months Ended Nine Months Ended
---------------------------- ----------------------------
September 30, September 30, September 30, September 30,
2002 2001 2002 2001
-------------- ------------- ------------- --------------
INTEREST INCOME
Interest and fees on loans $33,377 $35,130 $97,455 $104,062
Interest on investments 1,998 2,394 5,426 9,490
-------------- ------------- ------------- --------------
Total interest income 35,375 37,524 102,881 113,552
-------------- ------------- ------------- --------------
INTEREST EXPENSE
Interest on deposits 9,671 14,525 29,455 46,911
Interest on borrowed funds 1,924 1,621 5,113 4,801
-------------- ------------- ------------- --------------
Total interest expense 11,595 16,146 34,568 51,712
-------------- ------------- ------------- --------------
Net interest income 23,780 21,378 68,313 61,840
-------------- ------------- ------------- --------------
PROVISION FOR LOAN LOSSES (1,500) (100) (3,100) (600)
-------------- ------------- ------------- --------------
NONINTEREST INCOME
Gain/(loss) on securities (187) - (187) -
Service charges on deposit accounts 1,086 849 3,045 2,385
Other noninterest income 1,444 1,351 4,756 3,749
-------------- ------------- ------------- --------------
Total noninterest income 2,343 2,200 7,614 6,134
-------------- ------------- ------------- --------------
NONINTEREST EXPENSE
Salaries and employee benefits 6,243 5,981 18,492 17,389
Occupancy expense 1,528 1,463 4,624 4,625
Other noninterest expense 2,537 2,587 7,387 7,925
-------------- ------------- ------------- --------------
Total noninterest expense 10,308 10,031 30,503 29,939
-------------- ------------- ------------- --------------
INCOME BEFORE INCOME TAX 14,315 13,447 42,324 37,435
PROVISION FOR INCOME TAX (4,707) (4,607) (14,377) (12,843)
-------------- ------------- ------------- --------------
NET INCOME $9,608 $8,840 $27,947 $24,592
============== ============= ============= ==============
Weighted average number of
shares outstanding for the period 19,187,846 20,313,402 19,197,166 20,309,675
Basic earnings per share $0.50 $0.44 $1.46 $1.21
============== ============= ============= ==============
Weighted average number of diluted shares
outstanding 19,294,901 20,503,327 19,307,608 20,467,610
Diluted earnings per share $0.50 $0.43 $1.45 $1.20
============== ============= ============= ==============
The accompanying notes are an integral part of these financial statements
2
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FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
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CONSOLIDATED STATEMENT OF CASH FLOWS
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(In thousands)
Nine Months Ended
---------------------------------
Sept 30, 2002 Sept 30, 2001
-------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES
- -------------------------------------------------------------------
Net Income $27,947 $24,592
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 2,477 2,001
Provision for loan losses 3,100 600
FHLB stock dividends (616) (660)
Deferred taxes (111) 343
Increase in income taxes payable 2,340 5,266
Increase in interest receivable (584) (1,467)
Decrease in interest payable (2,135) (1,059)
Gain/(Loss) on sale of ORE (72) 121
Gain on sale of fixed assets 9 12
Loans originated for sale (38,132) (23,720)
Proceeds from sale of loans 37,642 23,229
Other operating activities (1,820) 782
------------- -----------------
Net cash provided by operating activities 30,045 30,040
------------- -----------------
CASH FLOWS FROM INVESTMENT ACTIVITIES
- -------------------------------------------------------------------
Net cash flows from Fed Funds Sold (24,595) 6,825
Proceeds from the sale of AFS securities 1,010 -
Proceeds from maturities of AFS & HTM securities 5,193 85,713
Purchase of AFS securities (62,543) (33,987)
Purchase of HTM securties - (988)
Cash acquired in merger - 6,094
Net cash flows from loan activities (78,097) (219,667)
Purchases of premises and equipment (896) (4,040)
Proceeds from the sale of ORE 2,395 -
Cash invested on ORE 131 -
Other investing activities 1,071 -
------------- -----------------
Net cash used by investing activities (156,331) (160,050)
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CASH FLOWS FROM FINANCING ACTIVITIES
- -------------------------------------------------------------------
Net change in core deposits 191,105 123,095
Net change in certificates of deposit (95,896) 14,465
Proceeds from issuance of stock 873 1,342
Purchase of common shares (5,680) (8,215)
Cash dividends paid (8,643) (11,745)
Advances from FHLB 50,000 10,000
Repayment of FHLB advances (12) (5,019)
Net change in Federal Funds purchased and securities
sold under repurchase agreements 2,640 9,517
Other financing activities 548 (17)
------------- -----------------
Net cash provided by financing activities 134,935 133,423
------------- -----------------
The accompanying notes are an integral part of these financial statements.
(Continued on next page)
3
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FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
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CONSOLIDATED STATEMENT OF CASH FLOWS
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INCREASE (DECREASE) IN CASH AND DUE FROM BANKS $8,649 $3,413
CASH AND DUE FROM BANKS AT BEGINNING
OF YEAR 64,062 69,709
------------- -----------------
CASH AND DUE FROM BANKS AT END
OF PERIOD $72,711 $73,122
============= =================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
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Cash paid during the period for interest $36,728 $52,820
Cash paid during the period for income taxes 12,750 8,246
Real estate taken as settlement for loan obligations 8,879 315
The accompanying notes are an integral part of these financial statements.
4
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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. The
consolidated financial statements have been prepared substantially consistent
with the accounting principles applied in the 2001 Annual Report on Form 10-K
for the year ended December 31, 2001. In the opinion of management, the
consolidated financial statements reflect all adjustments necessary for a fair
statement of the results for the interim periods presented. Operating results
for the nine months ended September 30, 2002 are not necessarily indicative of
the results that may be expected for year-end December 31, 2002.
The bank subsidiary of Frontier Financial Corporation is Frontier Bank.
NOTE 2. 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.
Securities that are classified as AFS, are carried at fair value, adjusted for
amortization of premiums and accretion of discounts which are recognized as
adjustments to income. Unrealized gains and losses are excluded from earnings
and reported as a separate component of equity capital. AFS securities may be
sold at any time.
Gains and losses on both HTM and AFS securities that are disposed of prior to
maturity, are based on the net proceeds and the adjusted carrying amount of the
specific security sold.
5
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FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 2 - (Continued)
The tables below display the characteristics of the AFS and HTM portfolios as of
September 30, 2002:
AGGREGATE FAIR VALUE AND AMORTIZED COST OF INVESTMENTS
------------------------------------------------------------------------------
(In thousands)
Gross Gross
Amortized Unrealized Unrealized Aggregate
Cost Gains Losses Fair Value
------------------------------------------------------
AFS SECURITIES
---------------------------
Equities $17,874 $1,575 $(13) $19,436
U.S. Treasuries 251 70 - 321
U.S. Agencies 1,789 28 - 1,817
Corporate securities 85,547 1,315 (1,058) 85,804
Municipal securities 50 - - 50
------------------------------------------------------
Totals 105,511 2,988 (1,071) 107,428
------------------------------------------------------
HTM SECURITIES
---------------------------
Municipal securities 22,830 1,178 - 24,008
Corporate Securities 1,489 30 - 1,519
Certificates of deposit 8,000 - - 8,000
------------------------------------------------------
Totals 32,319 1,208 - 33,527
------------------------------------------------------
Totals $137,830 $4,196 $(1,071) $140,955
======================================================
MATURITY SCHEDULE OF SECURITIES
------------------------------------------------------
Available for Sale Held to Maturity
Amortized Fair Amortized Fair
MATURITY Cost Value Cost Value
----------------------------------------------------------------------
0-1 Yr $41,512 $43,122 $8,665 $8,677
1-5 Yrs 61,989 62,150 19,567 20,484
5-10 Yrs 127 132 2,598 2,847
Over 10 Yrs 1,883 2,024 1,489 1,519
------------------------------------------------------
$105,511 $107,428 $32,319 $33,527
======================================================
6
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FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 2 - (Continued)
CHANGES IN AFS AND HTM SECURITIES
------------------------------------------------------
For the Quarter Ended September 30, 2002
------------------------------------------------------
AFS SECURITIES
---------------------------
Proceeds From Sales $823
Gross Realized Gains -
Gross Realized Losses (187)
Gross Gains & Losses Included In Earnings
Transfers To the Trading Category -
Net Change In Unrealized Holding Gains Or
Losses Included In The Separate
Components of Shareowners' Equity (428)
HTM SECURITIES
---------------------------
Sale Or Transfers From This Category $0
NOTE 3. LOANS
The following is an analysis of the loan portfolio by major type of
loans:
September 30, 2002 December 31, 2001
------------------------------------------------------
Commercial $277,788 $317,284
Real Estate:
Commercial 758,834 660,890
Construction 432,489 416,545
Residential 134,473 138,854 .
Installment 47,795 47,741
------------- --------------
1,651,379 1,581,314
Unearned Fee Income (8,562) (6,283)
------------- --------------
Total Loans $1,642,817 $1,575,031
============= ==============
NOTE 4. Please see Item 5, page 21 for dividend information.
7
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FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 5. IMPACT OF NEW ACCOUNTING STANDARD
During the year 2002 the Corporation adopted the following accounting standard:
Statement of Financial Standard (SFAS) No. 145, Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No 13, and Technical Corrections.
This Statement rescinds FASB Statement No. 4, Reporting Gains and Losses from
extinguishments of Debt, and an amendment of that Statement, FASB Statement No
64, Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. This
Statement also rescinds FASB Statement No 44, Accounting for Intangible Assets
of Motor Carriers. This Statement amends FASB Statement No 13, Accounting for
Leases, to eliminate an inconsistency between the required accounting for
sale-leaseback transactions and the required accounting for certain
transactions. This Statement also amends other existing authoritative
pronouncements to make various technical corrections, clarify meanings, or
describe their applicability under changed conditions. The Corporation
implemented this statement effective April 1, 2002. Implementation of this
statement did not result in a material impact on its financial position or
results of operations.
Statement of Financial Accounting Standard (SFAS) No. 146, Accounting for Costs
Associated with Exit or Disposal Activities, addresses financial accounting and
reporting for the treatment of costs associated with exit or disposal
activities. This Statement improves financial reporting by requiring that a
liability for a cost associated with an exit or disposal activity be recognized
and measured initially at fair value only when the liability is incurred. This
Statement replaces EITF Issue No. 94-3, Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity. The
provisions of this Statement are to be applied prospectively to exit or disposal
activities initiated after December 31, 2002. The Corporation does not expect
the Statement will result in a material impact on its financial position or
results of operations.
Statement of Financial Accounting Standard (SFAS) No. 147, Acquisitions of
Certain Financial Institutions - an amendment of FASB Statements No. 72 and 144
and FASB Interpretation No. 9. The provisions of this Statement that relate to
the application of the purchase method of accounting apply to all acquisitions
of financial institutions, except transactions between two or more mutual
enterprises. This Statement removes acquisitions of financial institutions from
the scope of both Statement 72 and Interpretation 9 and requires that those
transactions be accounted for in accordance with FASB Statements No. 141,
Business Combinations, and No. 142, Goodwill and Other Intangible Assets. In
addition, this Statement amends FASB Statement No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, to include in its scope long-term
customer-relationship intangible assets of financial institutions such as
depositor- and borrower-relationship intangible assets and credit cardholder
intangible assets. This Statement is effective for acquisitions for which the
date of acquisition is on or after October 1, 2002. The Corporation does not
expect the Statement will result in a material impact on its financial position
or results of operations.
8
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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.
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HIGHLIGHTS
Consolidated net income of Frontier Financial Corporation ("the Corporation")
for the third quarter of 2002 was $9.6 million versus $8.8 million for the third
quarter of 2001, or up 8.7%. The main reasons for the record quarter was an
increase in net interest income of $2.4 million; or 11.2%, an increase in other
noninterest income and continued expense control. The reasons for the increase
will be discussed in this report. In the discussion below, comparison is with
the third quarter of 2002 and 2001, unless otherwise stated.
Annualized return on average assets (ROA) was 2.03% in 2002, and 1.92% in 2001.
Annualized return on average shareowners' equity (ROE) in 2002 was 19.14%, as
compared to 16.14% in 2001. Diluted earnings per share were $.50 for 2002, and
$.43 for 2001.
FINANCIAL REVIEW
MARKET AREA
Frontier Financial Corporation headquartered in Everett, Washington, is the
parent of Frontier Bank, which operates thirty-nine banking offices in Clallam,
Jefferson, King, Kitsap, Pierce, Snohomish, Skagit and Whatcom counties. The
last merger completed was with Interbancorp, Inc. and was consummated on
February 2, 2001. This added three branch offices, one in Duvall and two in
Kirkland, Washington, to the Corporation's franchise. These eight counties are
considered the market or service area of the Corporation and comprise the area
referred to as the Puget Sound Region. The Puget Sound Region is home to
approximately 78% of the population of Washington State. For decades, state
employment was highly concentrated in defense, aerospace and timber. However, it
is becoming increasingly diversified.
BALANCE SHEET - September 30, 2002/December 31, 2001
In the first nine months of 2002, investment securities increased $58.0 million,
or 70.9%. This is a reversal of prior year's trend. Due to slower loan growth,
management began purchasing securities in the fourth quarter of 2001. During the
remainder of 2002 future growth of the investment portfolio will depend on loan
demand.
Federal funds sold increased since year-end 2001 mainly due to increased
deposits not absorbed by loan growth.
Loans, net of unearned income, increased $67.8 million or 4.3%. The increase in
2002 is short of expectations and is attributable to the Corporation not
competing for renewal of certain large commercial lines of credit, due to spread
concentrations. The loan-to-deposit ratio at the end of the first nine months of
2002 decreased to 103.1% from 105.1% at year-end 2001. Going forward, management
will emphasize stronger loan growth consistent with safe and sound practices.
9
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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
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Balance Sheet - (Continued)
- --------------------------------------------------------------------------------
The table below indicates the changes in the mix of the loan portfolio from last
year-end to the end of the current period, net of deferred loan fees:
(In thousands) September 30, 2002 December 31, 2001
----------------------------- ---------------------------
Amount % of total Amount % of total
------------- -------------- ------------- -------------
Installment $47,817 2.9% $47,833 3.0%
Commercial 277,352 16.9% 316,947 20.1%
Real estate commercial 758,427 46.2% 659,982 41.9%
Real estate construction 425,645 25.9% 412,501 26.3%
Real estate residential 133,576 8.1% 137,768 8.7%
------------- -------------- ------------- -------------
Total $1,642,817 100.0% $1,575,031 100.0%
============= ============== ============= =============
All sections of the loan portfolio declined over the last nine months except for
real estate commercial. During the fourth quarter of 2001 and the first quarter
of 2002, total loans declined possibly due to the shock of 9/11. This lowered
the level of activity in new projects and endeavors which resulted in declining
development, construction and commercial loan activity. However, since the end
of the first quarter, loan activity has been climbing, with consecutive monthly
increases. The demand for real estate commercial loans, which are longer term
loans, have continued to increase mainly due to the lower interest rate
environment.
Please see Page 17 of this report for a discussion regarding credit
concentrations.
The liability side of the balance sheet reflects an increase in deposits for the
period of $95.2 million, or 6.4%. Noninterest bearing deposits increased $13.8
million, or 5.8% and interest bearing deposits increased $81.4 million, or 6.5%.
During the first nine months of 2002, NOW and Money Market accounts increased
$6.4 million, or 2.2%; savings accounts increased $170.8 million, or 64.7% and
cd's decreased $95.9 million, or 13.7%. The shift in the mix, which favored
savings accounts, was due to the decline in cd rates to a point where rates
being paid on savings type deposits became more attractive considering the
increased liquidity of the those type of deposits. Management estimates that a
substantial portion of the decline in cd's over the period was transferred to
savings accounts.
FHLB advances increased $50.0 million, or 47.5%, during the period as management
took advantage of lower long-term rates. Asset and liability yields and costs
were the lowest they have been in several years. Please see "Net Interest
Income" on page 12.
10
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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
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Balance Sheet - (Continued)
- --------------------------------------------------------------------------------
BALANCE SHEET - September 30, 2002/September 30, 2001
Below are abbreviated balance sheets at the end of the respective quarters which
indicates the changes that have occurred in the major portfolios of the
Corporation over the past year:
(In Thousands)
At September 30, 2002 2001 $Change % Change
- --------------------------------------------------- -------------- ------------- -------------
Loans $1,642,817 $1,598,851 $43,966 2.7%
Investments 139,747 96,631 43,116 44.6%
Federal Funds Sold 69,395 69,780 (385) -0.6%
------------- -------------- ------------- -------------
Total Earning Assets $1,851,959 $1,765,262 $86,697 4.9%
============= ============== ============= =============
Total Assets $1,969,334 $1,868,228 $101,106 5.4%
============= ============== ============= =============
Noninterest bearing deposits $252,184 $219,369 $32,815 15.0%
Interest bearing deposits 1,341,395 1,292,819 48,576 3.8%
------------- -------------- ------------- -------------
Total deposits $1,593,579 $1,512,188 $81,391 5.4%
============= ============== ============= =============
Federal Funds purchased and Securities
Sold under Repurchase Agreements 10,336 19,727 (9,391) -47.6%
FHLB advances 155,125 105,143 49,982 47.5%
Shareowners' equity $198,929 $211,818 $(12,889) -6.1%
At quarter end 2002, loans were up $44.0 million, or 2.7% over the previous
year. Since the fourth quarter of 2001, loans had been on the decline,
decreasing $24 million in the fourth quarter of 2001 and $34 million in the
first quarter of 2002. However, in the second quarter 2002, loans increased
$49.1 million, or 3.2% from the same quarter in 2001, which, management
estimates, is a reversal of the fourth quarter 2001 and first quarter 2002
trend. Management is optimistic regarding future growth, but remains diligent
regarding credit quality.
Investments increased $43.1 million, or 44.6% for the period. For several years
prior to the fourth quarter 2001, this trend in runoff has been planned by
management to use maturity cash flows from the investment portfolio to fund loan
portfolio growth. This plan to change the mix of assets was due to the higher
yields available in loans rather than investments. However, the investment
portfolio has increased since the beginning of the year due to slowing loan
demand.
Noninterest bearing deposits increased $32.8 million, or 15.0%. Growth was
attributable to an increase in business checking account balances and the low
earning credit paid on demand accounts since the beginning of the year which
would influence higher account balances to offset service charges. Interest
bearing deposits increased $48.6 million, or 3.8%, with all of the increase
centered in savings deposits.
At September 30, 2002, NOW, Money Market and Sweep accounts made up 22.5% of
total interest bearing deposits. At September 30, 2001 those deposits made up
23.5%. In 2002, savings deposits made up 32.4% of total interest bearing
deposits versus 16.2 % in 2001, and time deposits made up 45.1% in 2002 versus
60.3% in 2001.
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
- --------------------------------------------------------------------------------
Balance Sheet - (continued)
- --------------------------------------------------------------------------------
Over the last year, NOW, Money Market and Sweep deposits decreased $10.3
million, or 3.6%; savings deposits increased $205.5 million, or 102.1%, and time
deposits decreased $175.2 million or 22.5%. The reason for the significant
change in the mix over the last year was due mainly to much lower rates being
paid on cd's as compared to savings accounts.
FHLB borrowings increased $50.0 million, or 47.5% over the year to take
advantage of the low interest rate environment and extending liability
maturities.
Capital has declined $12.9 million over the past year, or 6.1%. Between the
period September 30, 2001 to September 30, 2002, the Corporation repurchased
$31.3 million in stock in the open market, representing 1,179,200 shares. Also
during the same period, the Corporation paid $11.3 million in cash dividends.
During the third quarter 2002, the Corporation repurchased 206,000 shares in the
open market.
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, shareowners' 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" ("TE") 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 TE 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)
For quarter ended September 30, 2002 2001 $Change % Change
- --------------------------------------------------- -------------- ------------- -------------
Loans $1,630,220 $1,576,721 $53,499 3.4%
Investments* 138,259 121,446 16,813 13.8%
Federal funds sold 21,214 57,073 (35,859) -62.8%
------------- -------------- ------------- -------------
Total earning assets 1,789,693 1,755,240 34,453 2.0%
============= ============== ============= =============
Total assets $1,893,709 $1,841,399 $52,310 2.8%
============= ============== ============= =============
Noninterest bearing deposits $233,783 $218,623 $15,160 6.9%
Interest bearing deposits 1,288,949 1,268,966 19,983 1.6%
------------- -------------- ------------- -------------
Total deposits $1,522,732 $1,487,589 $35,143 2.4%
============= ============== ============= =============
Federal funds purchased
and repurchase agreements $9,965 $14,470 $(4,505) -31.1%
FHLB advances 148,061 105,146 42,915 40.8%
Shareowners' equity* $200,768 $219,059 $(18,291) -8.3%
============= ============== ============= =============
Total interest income (TE) $35,644 $37,837 $(2,193) -5.8%
Total interest expense 11,595 16,146 (4,551) -28.2%
------------- -------------- ------------- -------------
Net interest income $24,049 $21,691 $2,358 10.9%
============= ============== ============= =============
*Shown at amortized cost, or adjusted for unrealized gain/(loss).
12
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FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
- --------------------------------------------------------------------------------
Net Interest Income
- --------------------------------------------------------------------------------
In 2002, average total earning assets as a percent of average total assets were
94.5%, and 95.3% in 2001. This ratio indicates how efficiently assets are being
utilized. Average loans were 86.1% and 85.6%, respectively and investments were
7.3% and 6.6%, for the same periods. Average federal funds sold were 1.1% and
3.1% over the period. Average total loan-to-deposits were 107.1% and 106.0%. Not
shown in the table are the components of interest bearing deposits. Average NOW
and Money Market accounts decreased $10.3 million or 3.6%; savings accounts
increased $205.5 million, or 102.1%, and time cd's decreased $175.2 million, or
22.5%. Average FHLB borrowings increased $10.8 million, or 10.3%. Tax equivalent
net interest income increased $2.4 million, or 10.9%.
Earning Assets
Using a 365-day base, the yield on total earning assets decreased .65% in the
third quarter of 2002 to 7.90% compared to 8.55% in 2001. This was due to a
decrease in interest rates as the result of three rate decreases over the period
by the FRB. These decreases have made it difficult to manage the net interest
margin (NIM) as approximately 43% of the Corporation's loan portfolio is tied to
the Base rate. Additionally, lower yields resulted from maturing or renegotiated
fixed rate loans. However, the Corporation's NIM for the first three quarters of
2002 was 5.34%, 5.30% and 5.38% respectively, as compared to 4.79%, 4.80% and
4.94% in 2001. This may indicate that the NIM has somewhat stabilized or has a
positive bias in the third quarter.
On a TE basis, net interest income was $24.0 million in 2002, versus $21.7
million in 2001, for an increase in net interest income of $2.4 million. Total
interest income decreased $2.2 million, and total interest expense decreased
$4.6 million, for an increase in net interest income of $2.4 million.
The increase of $34.5 million in the average balance of earning assets increased
interest income by $1.2 million and a decrease in interest rates decreased
interest income by $3.4 million, for a net decrease of $2.2 million.
The annualized yield on total loans decreased from 8.87% in 2001 to 8.15% in
2002. Commercial loans decreased from 8.17% to 7.43%; real estate commercial
loans decreased in yield from 8.82% to 8.14%; real estate construction loans
decreased in yield from 9.18% to 8.44%; real estate residential loans decreased
from 9.72% to 8.48%, and installment loans decreased from 9.47% to 9.21%.
The yield on investments decreased from 6.79% in 2001 to 5.95% in 2002 and the
yield on federal funds sold decreased from 3.46% in 2001 to 1.65% in 2002.
Interest Bearing Liabilities
The cost of total interest bearing liabilities decreased 1.43% from 4.61% in
2001 to 3.18% in 2002.
The increase in the average balance of interest bearing deposits of $20.0
million decreased interest expense by $.8 million, (the increase in the volume
decreased interest income due to a change in the mix of deposits), and the rate
paid on interest bearing deposits decreased interest expense by $4.0 million,
for a net decrease of $4.8 million.
13
- --------------------------------------------------------------------------------
FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
- --------------------------------------------------------------------------------
Interest Bearing Liabilities (continued)
- --------------------------------------------------------------------------------
The cost of NOW, Money Market and Sweep accounts decreased from 2.48% in 2001,
to 1.56% in 2002. Savings account costs were 3.31% in 2001, and 2.69% in 2002.
Time cd's decreased in cost from 5.62% in 2001 to 3.82% in 2002. Short-term
borrowings decreased from 3.26% to 1.27%, and FHLB borrowings decreased from
5.67% in 2001 to 5.07% in 2002.
The increase in the average balance of other borrowings increased interest
expense by $576 thousand, and the rates paid on these borrowings decreased
interest expense by $273 thousand.
NONINTEREST INCOME AND EXPENSE - September 30, 2002/September 30, 2001
- ----------------------------------------------------------------------
Total noninterest income increased $143 thousand in the third quarter of 2002,
or 6.5% from a year ago. For the first time since 1998, the Corporation sold a
security prior to maturity for a loss of $187 thousand. This loss was prompted
due to a corporate bond whose rating was on the edge of falling below investment
grade. Service charges increased from $849 thousand to $1.1 million, or 27.9%.
The increase in service charges was due to increased NSF/OD charges of $206
thousand. This increase was due in part to a new account feature introduced in
the first quarter. Also, a lower earning credit on business DDA accounts
increased service charge income $32 thousand in 2002.
Other noninterest income increased $93 thousand, or 6.9% in the quarter. The
increase was due to dividends on BOLI (Bank Owned Life Insurance) of $211
thousand which was not in place during the same period last year. These
increases were partially offset by decreases in other activities. (Please see
Note 12 of the December 31, 2001 financial statements.)
The market value of trust assets at quarter-end September 2002 was $219.3
million, as compared to $239.9 million in 2001, a decrease of $20.6 million, or
8.6%. This decline is due to falling stock market prices. Trust department
revenue for the third quarter of 2002 was $268 thousand, down $40 thousand, or
13.0%.
Total noninterest expenses increased $277 thousand, or 2.8% for the period.
Salaries and benefits increased $262 thousand, or 4.4% mainly due to a 5%
increase, or $255 thousand in merit raises. There were 562 FTE employees at
September 30, 2002.
Total occupancy expense increased $65 thousand, or 4.4%. Depreciation expense
was $591 thousand, $14 thousand higher than last year, and the remaining
increase was due to increased software and maintenance agreement expense.
Other noninterest expense decreased $50 thousand, or 1.9%. This decrease was
mainly due to elimination of goodwill amortization expense of $150 thousand per
quarter, beginning January 1, 2002. During the quarter there was also a loss on
ORE of $55 thousand, and an operational loss of $37 thousand.
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 calculated by dividing total noninterest expense, less intangible
amortization expense and other nonrecurring charges, by the sum of net interest
income on a taxable equivalent basis, and other noninterest income, less any
non-recurring items. The lower the number, the more efficient the organization.
The Corporation's efficiency ratio for the third quarter was 38% for 2002 and
42% for 2001. The Corporation's ratio places it among the performance leaders in
the industry.
14
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FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
- --------------------------------------------------------------------------------
Impaired Assets
- --------------------------------------------------------------------------------
LOANS
- ------------------------------------------------
IMPAIRED ASSETS
- ------------------------------------------------
Nonperforming loans and impaired assets
are summarized as follows: (In thousands)
Ending September 30, 2002 2001
- ------------------------------------------------ ------------- -------------
Nonaccruing loans:
Commercial $519 $1,652
Agriculture 731 554
Real Estate 12,241 5,826
Installment and other 566 112
------------- -------------
Total nonaccruing loans 14,057 8,144
Other real estate 7,307 572
------------- -------------
Total nonperforming assets $21,364 $8,716
============= =============
Restructured and/or otherwise impaired $6,178 $-
------------- -------------
Total loans at end of period $1,642,817 $1,598,851
============= =============
Total assets at end of period $1,969,334 $1,868,228
============= =============
Total nonperforming assets to total assets 1.08% 0.47%
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 Bank's practice to discontinue accruing interest on virtually all
loans that are delinquent in excess of 90 days regardless of risk of loss,
collateral, etc. Some problem loans which are less than 90 days delinquent are
also placed into nonaccrual status if the success of collecting full principal
and interest in a timely manner is in doubt and some loans will remain in
nonaccrual even after improved performance until a consistent timely payment
pattern is exhibited and/or timely performance is considered to be reliable.
Nonperforming loans totaled $14.0 million on September 30, 2002. This amount
consists of 43 loans ranging in size from $4.2 million to nominal amounts.
Efforts are continuing to collect these loans with many involving some measure
of legal action. Ninety percent of these loans are secured by real estate and,
while there is always some risk of loss present, management feels it is not
substantial as a proportion of the amount of such loans. Nonetheless, some are
subject to bankruptcy and other forms of legal processes that protract
resolution. During this time repayment performance is unlikely. While most of
these loans appear to be nearing favorable resolutions, other loans may
deteriorate at a future date.
15
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FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
- --------------------------------------------------------------------------------
Impaired Assets
- --------------------------------------------------------------------------------
The Bank has experienced an increase in nonperforming assets from .68% at
year-end 2001 to 1.11% at quarter-end June 2002, to the current level of 1.08%.
The number of loans in such status has not increased as much as the dollar
amounts. There are six assets that exceed $1.0 million and represent some $13.0
million or 61% of the total nonperforming assets. We have foreclosed on two of
the six. There are two real estate loans with foreclosure sales scheduled during
the fourth quarter of this year and the first quarter of 2003. The remaining two
are in bankruptcy with legal negotiations moving forward to resolution.
The Bank's loan loss reserve is 196% of nonperforming loans and 1.68% of total
loans at September 30, 2002, compared to 230% and 1.67% at December 31, 2001.
Restructured and impaired loans are those that had problems in the past, and
that have been restructured in such a way that some modification of debt such as
a lower interest rate in order to ease debt service burdens prior to a scheduled
maturity date, or other terms have occurred. Such loans are not included in
nonaccrual or nonperforming assets unless they are nonperforming.
OTHER REAL ESTATE OWNED
The amount of Other Real Estate Owned (OREO) has increased from a very nominal
..04% on March 31, 2002 to .37% of total assets on September 30, 2002. While the
current level is felt to be relatively modest, the increase does reflect the
transition of troubled loans through the legal collection process and to that
extent it is viewed as progress to have them arrive in this status. The total
currently consists of eleven locations which comprise 15 residential lots, 3
newly completed single-family residences, 4 existing single-family residences,
and a 3-unit condominium project. Twelve of the residential lots, one of the
newly completed residences and one of the existing residences are under
agreement to sell with closing expected during the fourth quarter of 2002.
Other loans in nonaccrual are in the process of foreclosure and there is a
likelihood these foreclosures will be completed and the loans will then become
OREO. This is viewed as an ordinary part of the collection process and efforts
are constantly under way to reduce and minimize such nonperforming assets.
OREO is carried at the lesser of book value or market value. The costs related
to completion, repair, maintenance, or other costs of such properties, are
generally expensed with any gains or inadvertent shortfalls from the ultimate
sale of OREO being shown as other income or expense.
16
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FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
- --------------------------------------------------------------------------------
Credit Concentrations
- --------------------------------------------------------------------------------
CREDIT CONCENTRATIONS
There is a concentration of credit in the loan portfolio comprised of real
estate commercial loans. These loans totaled $758.4 million, or 46.2% of the
portfolio at September 30, 2002, and $674.7 million, or 42.2% of the portfolio
at September 30, 2001. However, the loan portfolio does not contain any Class A
type properties. That is, secured by properties which could have high vacancy
rates. This category of loans is centered primarily in credit collateralized by
a cross section of smaller, owner-occupied, commercial and industrial
properties. Many years ago, management established a real estate loan committee
which meets periodically to review the economic conditions and building industry
trends. As a result of these and other efforts, there have been very limited
losses on these types of loans. The Bank's trade area has generally enjoyed a
consistent real estate market, and while cognizant of the impacts of slowing
levels of activity, management is cautiously optimistic as to the stability of
the real estate market in the months ahead. The main strength of the real estate
market has been centered in residential houses and land with the office building
market now appearing to be the weakest segment in the area. Washington State has
a Growth Management Act which significantly narrows the areas in which
development is possible, that in turn serves to limit and help control the
volume of development.
ALLOWANCE FOR POSSIBLE LOAN LOSSES - QUALITATIVE FACTORS
For the nine months ending September 30, 2002, the reserve for possible loan
losses increased to $27.5 million, or 1.68% of total loans, from $26.4 million,
or 1.67% of total loans at year-end 2001. Year-to-date net loan losses were $1.9
million or .12% of loans. $.9 million of those loans were assumed in the merger
closed in February 2001. Net loan losses for the first, second and third
quarters were .02%, .05% and .04%, respectively.
Management and the Board review policies and procedures annually, or more often,
and changes are made to reflect the current operating environment integrated
with regulatory requirements. Partly out of these policies has evolved an
internal credit risk review process. During this process the quality grade of
loans is reviewed and loans are assigned a dollar value of the loan loss reserve
by degree of risk. This analysis is performed quarterly and reviewed by senior
management who makes the determination if the risk is reasonable, and if the
reserve is adequate.
Taken into consideration when the analysis is performed is the national and
local economic trends and conditions. The analysis also takes into consideration
the level of, or trends in, delinquencies and nonaccruing loans. Management
monitors delinquencies monthly and reports are prepared for the Board of
Directors to review. Delinquencies for commercial, personal and real estate
loans are charted separately by their types and by portfolio geographic
locations.
Another consideration is the volume and terms of loans. Management reviews the
growth and terms of loans so that the allowance can be adjusted for current and
anticipated future needs.
17
- --------------------------------------------------------------------------------
FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
- --------------------------------------------------------------------------------
Allowance for Possible Loan Losses Qualitative Factors (continued)
- --------------------------------------------------------------------------------
Conclusion of Qualitative Factors
The allowance for loan losses is the amount which, in the opinion of management,
is necessary to absorb loan losses. Management's evaluation of the adequacy of
the allowance is based on the market area served, local and national economic
conditions, the growth and composition of the loan portfolio and the related
risk characteristics, by continual review by management of the quality of the
portfolio.
In addition, regulatory agencies, as an integral part of their examination
process, periodically review the estimated losses on loans. Such agencies may
require the Corporation to change the allowance based on their judgment about
information available to them at the time of their examination. It is the
Corporation's policy to be in compliance with all accounting and regulatory
standards related to loan loss reserves and all accounting policies promulgated
by GAAP.
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
September 30, 2002 and 2001. This discussion addresses those periods of time.
Net cash provided by operating activities through third quarter 2002 and 2001
totaled $30.0 million. The largest component providing net cash was net income
of $27.9 million in 2002 and $24.6 million in 2001.
Loans sold in the real estate secondary market for the first nine months were
$37.6 million, $14.4 million higher than 2001. This trend began in the second
quarter of 2001, mainly attributable to low long-term interest rates which
prompts home buying and refinancing. The level of future activity in this area
will be dependent on interest rates.
Investing activities in 2002 indicate that Fed Funds, AFS securities and loan
growth totaling $165 million required cash from other activities. Besides cash
from operations, investing activities were funded by increases in core deposits
of $192 million and FHLB advances of $50 million.
In 2001, AFS securities and loan growth needed almost all the cash from other
activities. Besides cash from operations, investing activities were funded by
increases in core deposits, cd's and FHLB advances.
Management has many sources of liquidity, such as the sale of AFS securities,
additional borrowings from the FHLB, participations 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.
18
- --------------------------------------------------------------------------------
FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
- --------------------------------------------------------------------------------
Interest Rate Risk
- --------------------------------------------------------------------------------
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 Corporation uses a simulation model to estimate the impact of changing
interest rates on the Corporation's earnings and capital. The model calculates
the change in net interest income and net income under various rate shocks. The
model predicts that net interest income would decline if rates fell, and
increase if rates rise. In 2001, rates fell 4.75% and the NIM declined about 6%.
As of September 30, 2002 the model predicted that net interest income would
increase about 2.5% if rates increased 1%, and decline 1% if rates fell 1%. If
rates increased 2% net interest would increase 6.7% and if rates decreased 2%
net interest income would decline 1.9%. This is considered low interest rate
risk. The actual change in earnings would be dependent upon the dynamic changes
that occur when rates change. Many of these changes are predictable (for
example, if rates fell, loans refinancing would increase), but the exact amount
is difficult to predict. The Corporation manages interest rate risk primarily
with the securities portfolio (for example, if rates are low the Corporation may
increase fed funds sold to increase the benefit if rates rise) and the
prepricing options with borrowings (for example, if rates are falling short-term
rate sensitive borrowings may be increased to reduce the exposure to declining
rates).
It is the policy of the Corporation that capital be maintained above the point
where, for regulatory purposes, it would continue to be classified as "well
capitalized".
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.
CAPITAL
Consolidated capital of the Corporation for financial statement purposes at
third quarter end 2002 was $198.9 million. This amount compares to $183.5
million at December 31, 2001, an increase of $15.4 million, or 8.4%. Almost all
of the increase came from the retained earnings of the Bank.
Under regulatory capital rules, the minimum "leverage" ratio (primary capital
ratio) of core capital that the most highly rated holding companies must
maintain is 4 percent. At September 30, 2002, the Corporation's leverage ratio
was 10.13%, compared to 9.70% at year-end 2001. 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 10.57% and 11.82% at September 30, 2002,
and 10.75% and 12.00% at December 31, 2001.
Management constantly monitors the level of capital of the Corporation,
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.
19
- --------------------------------------------------------------------------------
FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Item 3. Quantitative and Qualitative Disclosures about Market Risk
- --------------------------------------------------------------------------------
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Management considers interest rate risk to be a market risk that could have a
significant effect on the financial condition of the Corporation. There have
been no material changes in the reported market risks faced by the Corporation
since the end of the most recent fiscal year-end that have not been included in
this discussion.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures: An evaluation of the
Registrant's disclosure controls and procedures (as defined in section
13(a) - 14(c) of the Securities Exchange Act of 1934 (the "Act")) was
carried out under the supervision and with the participation of the
Registrant's Chief Executive Officer, Secretary/Treasurer and several other
members of the registrant's senior management within the 90-day period
preceding the filing date of this quarterly report. The Registrant's Chief
Executive Officer and Secretary/Treasurer concluded that the Registrant's
disclosure controls and procedures as currently in effect are effective in
ensuring that the information required to be disclosed by the Registrant in
the reports it files or submits under the Act is (i) accumulated and
communicated to the Registrant's management (including the Chief Executive
Officer and Secretary/Treasurer) in a timely manner, and (ii) recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms.
(b) Changes in Internal Controls: In the quarter ended September 30, 2002, the
Registrant did not make any significant changes in, nor take any corrective
actions regarding, its internal controls or other factors that could
significantly affect these controls.
FORWARD-LOOKING INFORMATION
Except for historical financial information contained herein, the matters
discussed in this report of the Corporation may be considered "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1993, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended and
subject to the safe harbor created by the Private Securities Litigation Reform
Act of 1995. Forward-looking statements are subject to risks and uncertainties
that may cause actual future results to differ materially. Sentences containing
words such as "may", "will", "expect", "anticipate", "believe", "estimate",
"should", "projected", or similar words may constitute forward-looking
statements. The Corporation may have used these statements to describe
expectations and estimates in various areas, including, but not limited to:
changes in the economy of the markets in which it operates; interest rate
movements; future acquisition and growth strategies; system conversions and
integration activities; the impact of competitive products, services and
pricing; and legislative, regulatory and accounting changes affecting the
banking and financial service industry. Actual results could vary materially
from the future results covered in forward-looking statements. Factors such as
interest rate trends and loan delinquency rates, as well as the general state of
the economy in Washington state and the United States as a whole, could also
cause actual results to vary materially from the future results anticipated in
such forward-looking statements. These factors should be considered in
evaluating the forward-looking statements and undue reliance should not be
placed on such statements. The Corporation shall not be responsible to update
any such forward-looking statements.
20
- --------------------------------------------------------------------------------
FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
PART II - OTHER INFORMATION
- --------------------------------------------------------------------------------
Item 1. Legal Proceedings
The Corporation is involved in ordinary routine litigation arising
in the normal course of business. In the opinion of management,
liabilities (if any) arising from such claims will not have a
material effect on the business, results of operations or financial
condition of the Corporation.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to security holders in the third
quarter.
Item 5. Other Information
(a) On December 19, 2001, the Board of Directors of the Corporation declared a
$.145 per share first quarter 2002 dividend to shareowners of record as of
January 7, 2002 and payable January 22, 2002.
(b) On March 20, 2002, the Board of Directors of the Corporation declared a
$.15 per share second quarter 2002 dividend to shareowners of record as of
April 15, 2002 and payable April 29, 2002.
(c) On June 1, 2002, the Corporation made available to shareowners a Dividend
Reinvestment Plan. A copy of which was filed with Form 10Q on May 3, 2002.
(d) On June 19, 2002, the Board of Directors of the Corporation declared a
$.155 per share third quarter cash dividend to shareowners of record as of
July 8, 2002 and payable July 22, 2002.
(e) On September 14, 2002, the Board of Directors of the Corporation declared
at $.16 per share fourth quarter 2002 dividend to shareowners of record as
of October 7, 2002 and payable October 21, 2002.
Item 6. Exhibits and Reports on Form 8-K
(a) THE FOLLOWING EXHIBITS ARE FILED AS A PART OF THIS QUARTERLY REPORT ON FORM
10-Q.
(11) Computation of basic and diluted earnings per share is attached as
Exhibit 11.
(b) REPORTS ON FORM 8-K
On October 8, 2002, the Corporation filed Form 8-K announcing that on
October 7, 2002, Frontier Bank, wholly owned subsidiary of Frontier
Financial Corporation, was approved for membership in the Federal Reserve
System.
On October 17, 2002, the Corporation filed an 8-K announcing that the Board
of Directors have adopted a third stock repurchase program to repurchase an
additional 5% of the Common Stock of Frontier Bank.
21
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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: October 24, 2002 /s/ James F. Felicetty
--------------------- ------------------------
James F. Felicetty
Secretary / Treasurer
CERTIFICATION
To my knowledge, this report on Form 10-Q for the quarter ended September
30, 2002 fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934, and the information contained in this report
fairly presents, in all material respects, the financial condition and the
results of operation of Frontier Financial Corporation.
Date: October 24, 2002 /s/ James F. Felicetty
---------------- -------------------------
James F. Felicetty
Secretary / Treasurer
Date: October 24, 2002 /s/ Robert J. Dickson
---------------- ------------------
Robert J. Dickson
President & CEO
22
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FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CERTIFICATION
- --------------------------------------------------------------------------------
CERTIFICATION
I, James F. Felicetty, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Frontier Financial
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the Audit
Committee of registrant's Board of Directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
October 24, 2002 /s/ James F. Felicetty
--------------------- -----------------------
Date James F. Felicetty
Secretary / Treasurer
23
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FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CERTIFICATION
- --------------------------------------------------------------------------------
CERTIFICATION
I, Robert J. Dickson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Frontier Financial
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the Audit
Committee of registrant's Board of Directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
October 24, 2002 /s/ Robert J. Dickson
---------------- ----------------------
Date Robert J. Dickson
President & CEO
24
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FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES EXHIBIT 11
- --------------------------------------------------------------------------------
COMPUTATION OF EARNINGS PER SHARE
- --------------------------------------------------------------------------------
(In Thousands) For Nine Months Ended September 30,
2002 2001
--------------- ----------------
Net Income $27,947 $24,592
=============== ================
Computation of average
shares outstanding
Shares outstanding at
beginning of year 19,185 19,768
Shares issued pursuant
to Interbancorp, Inc. merger - 609
Shares purchased under stock
repurchase program (42) (152)
Shares issued under stock
compensation plans (averaged) 18 18
Shares issued during the
year times average time
outstanding during the year 36 67
--------------- ----------------
Average basic shares outstanding 19,197 20,310
--------------- ----------------
Dilutive shares 111 158
--------------- ----------------
Average diluted shares outstanding 19,308 20,468
--------------- ----------------
Basic earnings per share $1.46 $1.21
=============== ================
Diluted earnings per share $1.45 $1.20
=============== ================
25