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 March 31, 2003
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 by a check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act) [X]
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 April 16, 2003
-------- -------------------------------------
Common Stock, no par value 18,487,942
FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
INDEX TO QUARTERLY REPORT ON FORM 10-Q
PART I - Financial Information Page
- ------------------------------
Item 1. Financial Statements.
Consolidated Balance Sheet - March 31, 2003
and Year End 2002 1
Consolidated Statement of Income - Three months
Ended March 31, 2003 and 2002. 2
Consolidated Statement of Cash Flows - Three months
Ended March 31, 2003 and 2002. 3-4
Notes to the Consolidated Financial Statement 5-7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8-18
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 19
Item 4. Controls and Procedures 19-20
PART II - Other Information
- ---------------------------
Item 1. Legal Proceedings 21
Item 4. Submission of Matters to a 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-
FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In thousands, except shares)
March 31, December 31,
ASSETS 2003 2002
---------------- ---------------
Cash & due from banks $70,167 $88,647
Federal funds sold 98,869 13,528
Securities:
Available for sale-market value 106,605 109,429
Held to maturity-amortized cost 30,552 30,608
---------------- ---------------
Total securities 137,157 140,037
Loans, net of unearned income 1,654,635 1,658,684
Less allowance for loan losses (28,910) (28,175)
---------------- ---------------
Net loans 1,625,725 1,630,509
Premises & equipment, net 26,531 26,697
Other real estate owned 7,263 6,532
Goodwill 6,476 6,476
Other assets 31,792 31,301
---------------- ---------------
TOTAL ASSETS $2,003,980 $1,943,727
================ ===============
LIABILITIES
Deposits:
Noninterest bearing $241,180 $237,972
Interest bearing 1,377,454 1,322,904
---------------- ---------------
Total deposits 1,618,634 1,560,876
Federal funds purchased and
securities sold under repurchase agreements 12,549 11,809
Federal Home Loan Bank advances 160,116 160,121
Other liabilities 14,819 12,058
---------------- ---------------
TOTAL LIABILITIES 1,806,118 1,744,864
---------------- ---------------
SHAREOWNERS' EQUITY
Common stock, no par value; 100,000,000 shares authorized;
18,502,734 117,475 116,925
and 18,817,684 shares issued and outstanding in 2003 and 2002
Retained earnings 77,645 79,841
Accumulated other comprehensive income (loss),
net of tax effect 2,742 2,097
---------------- ---------------
TOTAL SHAREOWNERS' EQUITY 197,862 198,863
---------------- ---------------
TOTAL LIABILITIES AND SHAREOWNERS' EQUITY $2,003,980 $1,943,727
================ ===============
The accompanying notes are an integral part of these financial statements.
-1-
FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(In Thousands, Except for Per Share Amounts) Three Months Ended
--------------------------------
March 31, March 31,
2003 2002
-------------- --------------
INTEREST INCOME
Interest and fees on loans $32,048 $32,386
Interest on investments 2,023 1,502
-------------- --------------
Total interest income 34,071 33,888
-------------- --------------
INTEREST EXPENSE
Interest on deposits 8,273 10,148
Interest on borrowed funds 1,956 1,549
-------------- --------------
Total interest expense 10,229 11,697
-------------- --------------
Net interest income 23,842 22,191
-------------- --------------
PROVISION FOR LOAN LOSSES (850) (500)
-------------- --------------
NONINTEREST INCOME
Gain/loss on securities 91 -
Service charges on deposit accounts 1,064 898
Other noninterest income 1,899 1,693
-------------- --------------
Total noninterest income 3,054 2,591
-------------- --------------
NONINTEREST EXPENSE
Salaries and employee benefits 6,966 6,244
Occupancy expense 1,616 1,574
Other noninterest expense 2,578 2,207
-------------- --------------
Total noninterest expense 11,160 10,025
-------------- --------------
INCOME BEFORE INCOME TAX 14,886 14,257
PROVISION FOR INCOME TAX (5,225) (4,984)
-------------- --------------
NET INCOME $9,661 $9,273
============== ==============
Weighted average number of
shares outstanding for the period 18,688,364 19,199,935
Basic earnings per share $0.52 $0.48
============== ==============
Weighted average number of diluted shares
outstanding for period 18,749,355 19,298,594
Diluted earnings per share $0.52 $0.48
============== ==============
The accompanying notes are an integral part of these financial statements.
-2-
FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
March 31, 2003 March 31, 2002
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES
- ------------------------------------
Net Income $9,661 $9,273
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 973 882
Provision for loan losses 850 500
Deferred taxes 155 (32)
Increase/(decrease) in income taxes payable 5,225 5,484
Increase/(decrease) in interest receivable (184) (542)
Increase/(decrease) in interest payable (341) (1,814)
(Gain)/Loss on sale of ORE 10
Gain/(Loss) on sale of fixed assets (1) 6
Gain/(Loss) on sale of AFS Securities (91) -
Proceeds from sale of mortgage loans 37,479 19,669
Origination of mortgage held for sale (36,250) (19,178)
Dividend income from FHLB (271) (199)
Increase/(decrease) in other operating activities (4,488) (2,481)
------------- ---------------
Net cash provided by operating activities 12,727 11,568
------------- ---------------
CASH FLOWS FROM INVESTMENT ACTIVITIES
- -------------------------------------
Net cash flows from fed funds sold (85,341) 17,130
Proceeds from the sale of AFS securities 2,116 -
Proceeds from maturities of AFS & HTM securities 8,720 9,631
Purchase of AFS securities (9,226) (51,972)
Net cash flows from loan activities 3,515 32,947
Purchases of premises and equipment (277) (373)
Proceeds from the sale of ORE 138 6
Proceeds from sale of property and equipment 3 -
Other investing activities 2,460 1,412
------------- ---------------
Net cash used by investing activities (77,892) 8,781
------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
- ------------------------------------
Net change in core deposits 71,543 37,653
Net change in certificates of deposit (13,785) (73,454)
Stock options exercised 338 524
Purchase of common shares (8,777) (2,785)
Cash dividends paid (3,109) (969)
Advances from FHLB - 10,000
Repayment of FHLB advances (5) (4)
Net change in Federal Funds purchased and securities
sold under repurchase agreements 740 5,246
Other financing activities (260) (393)
------------- ---------------
Net cash provided by financing activities 46,685 (24,182)
------------- ---------------
The accompanying notes are an integral part of these financial statements.
(Continued on next page)
-3-
FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND DUE FROM BANKS $(18,480) $(3,833)
CASH AND DUE FROM BANKS AT BEGINNING
OF YEAR 88,647 64,062
------------- ---------------
CASH AND DUE FROM BANKS AT END
OF PERIOD $70,167 $60,229
============= ===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
- --------------------------------------------------------------------------------
Cash paid during the period for interest $10,569 $13,527
Cash paid during the period for income taxes 5,100 -
Real estate taken as settlement for loan obligations 869 -
The accompanying notes are an integral part of these financial statements.
-4-
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. The
consolidated financial statements have been prepared substantially consistent
with the accounting principles applied in the 2002 Annual Report on Form 10-K
for the year ended December 31, 2002. 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 three months ended March 31, 2003 are not necessarily indicative of the
results that may be expected for year-end December 31, 2003.
The bank subsidiary of Frontier Financial Corporation is Frontier Bank.
At March 31, 2003, the Corporation has a stock-based employee compensation
plan. The Corporation accounts for the plan under recognition and measurement
principles of APB Opinion No.25, Accounting for Stock Issued to Employees, and
related interpretations. No stock based employee compensation costs is reflected
in net income, as all options granted under this plan had an exercise price
equal to the market value of the underlying common stock on the date of grant.
The following table illustrates the effect on net income and earnings per share
if the Corporation had applied the fair value recognition provisions of FASB
Statement No. 123, Accounting for Stock-Based Compensation, to stock-based
employee compensation.
In Thousands
------------
For the quarter ended March 31,
-------------------------------
Proforma disclosures 2003 2002
------------ ------------
Net income as reported $9,661 $9,273
Additional compensation
for fair value of stock
options - -
------------ ------------
Proforma net income $9,661 $9,273
============ ============
Earnings per share
Basic
As reported $0.52 $0.48
Proforma $0.52 $0.48
============ ============
Diluted
As reported $0.52 $0.48
Proforma $0.52 $0.48
============ ============
The Corporation did not issue any options in the March 31, 2003 and 2002
quarter.
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).
-5-
FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - (Continued)
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.
The tables below display the characteristics of the AFS and HTM portfolios
as of March 31, 2003:
AGGREGATE FAIR VALUE AND AMORTIZED COST OF INVESTMENTS
- ---------------------------------------------------------------------------------------
(In thousands)
Gross Gross
Amortized Unrealized Unrealized Aggregate
Cost Gains Losses Fair Value
-----------------------------------------------------------
AFS SECURITIES
--------------
Equities $20,927 $2,292 $(8) $23,211
U.S. Treasuries 251 67 - 318
U.S. Agencies 1,620 12 - 1,632
Corporate securities 79,539 1,890 (29) 81,400
Municipal securities 50 - (6) 44
-----------------------------------------------------------
Totals 102,387 4,261 (43) 106,605
-----------------------------------------------------------
HTM SECURITIES
--------------
Municipal securities 21,022 877 - 21,899
Corporate Securities 1,530 - 1,530
Certificates of deposit 8,000 - - 8,000
-----------------------------------------------------------
Totals 30,552 877 - 31,429
-----------------------------------------------------------
Totals $132,939 $5,138 $(43) $138,034
===========================================================
MATURITY SCHEDULE OF SECURITIES
-----------------------------------------------------------
Available for Sale Held to Maturity
Amortized Fair Amortized Fair
MATURITY Cost Value Cost Value
-----------------------------------------------------------------------------
0-1 Yr $50,767 $53,286 $9,225 $9,245
1-5 Yrs 48,729 50,320 17,878 18,564
5-10 Yrs 55 57 1,919 2,090
Over 10 Yrs 2,836 2,942 1,530 1,530
-----------------------------------------------------------
$102,387 $106,605 $30,552 $31,429
===========================================================
-6-
FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - (Continued)
CHANGES IN AFS AND HTM SECURITIES
--------------------------------------------
For the Quarter Ended March 31, 2003
-----------------------------------------
AFS SECURITIES
---------------------------
Proceeds From Sales $2,116
Gross Realized Gains $91
Gross Realized Losses -
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 $645
NOTE 3. LOANS
The following is an analysis of the loan portfolio by major type of
loans:
March 31, 2003 December 31, 2002
--------------------------------------------
Commercial $272,975 $272,787
Real Estate:
Commercial 747,905 759,228
Construction 463,578 450,236
Residential 132,499 137,627
Installment 46,301 47,192
-------------- -----------------
1,663,258 1,667,070
Unearned Fee Income (8,623) (8,386)
-------------- -----------------
Total Loans $1,654,635 $1,658,684
============== =================
NOTE 4. Please see Item 5, page 21 for dividend information.
-7-
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 first quarter of 2003 was $9.7 million versus $9.3 million
for the first quarter of 2002, or up 4.2%. The main reasons for the record
quarter was an increase in net interest income of $1.7 million; or 7.4%, coupled
with an increase in other noninterest income of $.5 million, or 17.9%. The
reasons for the increase will be discussed in this report. In the discussion
below, comparison is with the first quarter of 2003 and 2002, unless otherwise
stated.
Annualized return on average assets (ROA) was 1.98% in 2003, and 2.08% in
2002. Annualized return on average shareowners' equity (ROE) in 2003 was 19.48%,
as compared to 19.47% in 2002. Diluted earnings per share were $.52 for 2003,
and $.48 for 2002.
FINANCIAL REVIEW
- ----------------
MARKET AREA
- -----------
Frontier Financial Corporation headquartered in Everett, Washington, is the
parent of Frontier Bank, which operates thirty-eight banking offices in Clallam,
Jefferson, King, Kitsap, Pierce, Snohomish, Skagit and Whatcom counties. 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 80% of the population of Washington State. The Boeing
airplane manufacturing plant for 747's and 777's is located in the city of
Everett. Microsoft, the world's largest software company, is located in Redmond,
Washington, 25 miles from Everett. The Bank also has a branch office in Redmond.
Over the past decade, state employment has become increasingly diversified,
relying less on aerospace and timber.
BALANCE SHEET - March 31, 2003/December 31, 2002
- ------------------------------------------------
In the first quarter of 2003, investment securities decreased $2.9 million,
or 2.1%. This decline represents the solicited sale back to issuer of one
security and scheduled maturities. During the remainder of 2003, it is uncertain
if investment securities will increase due to the current yield curve and event
risk associated with corporate bonds.
Federal funds sold increased since year-end 2002 by $85.3 million, or
630.8% due to the softening of loan demand and the growth in deposits caused by
one particular type of savings account.
Loans, net of unearned income, declined $4.0 million, or 0.2% to a balance
of $1.65 billion at March 31, 2003 compared to $1.66 billion at December 31,
2002. This first quarter decrease is a reflection of continuing economic
struggles impacted further by the uncertainties of political and military
confrontations. Despite these uncertainties the Bank's loan portfolio grew 7.4%
over the past twelve months from $1.54 billion at March 31, 2002.
-8-
FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations Balance Sheet - (Continued)
The Bank's loan mix has remained relatively unchanged in the principal
areas of lending which include: installment, commercial, real estate commercial,
real estate construction, and residential. At March 31, 2003, 16.5% of our loan
portfolio was in commercial loans, 45.2% was in real estate commercial, 27.6%
was in real estate construction, 8.0% was in residential, and 2.8% installment.
On the liability side of the balance sheet, noninterest bearing deposits
increased $3.2 million, or 1.3% and interest bearing deposits increased $54.6
million, or 4.1%. NOW, Money Market, and sweep accounts declined $3.5 million,
or 1.2%.; savings accounts increased $71.9 million, or 15.2% and Time Deposits,
(cd's) declined $13.8 million, or 2.5%. The reason for the increase in savings
accounts is growth in the Corporation's, "premium" savings account whose rate is
higher than that of cd's or other transaction accounts.
BALANCE SHEET - March 31, 2003/March 31, 2002
- ---------------------------------------------
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 March 31, 2003 2002 $Change % Change
- --------------------------------------------------- ------------- -------------- -----------
Loans $1,654,635 $1,541,220 $113,415 7.4%
Investments 137,157 125,013 12,144 9.7%
Federal Funds Sold 98,869 27,670 71,199 257.3%
------------- ------------- -------------- -----------
Total Earning Assets $1,890,661 $1,693,903 $196,758 11.6%
============= ============= ============== ===========
Total Assets $2,003,980 $1,793,815 $210,165 11.7%
============= ============= ============== ===========
Noninterest bearing deposits $241,180 $227,639 $13,541 5.9%
Interest bearing deposits 1,377,454 1,234,476 142,978 11.6%
------------- ------------- -------------- -----------
Total deposits $1,618,634 $1,462,115 $156,519 10.7%
============= ============= ============== ===========
Federal Funds purchased and Securities
Sold under Repurchase Agreements 12,549 11,307 1,242 11.0%
FHLB advances 160,116 115,133 44,983 39.1%
Shareowners' equity $197,862 $190,581 $7,281 3.8%
Loans, investments, and fed funds sold are the components of earning
assets. One of the challenges of management is to allocate liquidity from the
liability side of the balance sheet to those earning assets which maximize yield
in concert with degree of risk.
At quarter end 2003, loans were up $113.4 million, or 7.4% over the
previous year. Loans produce the highest return of the earning assets, but
contain some risk due to the uncertainties inherent in lending money. The
increase in loans over the last year was due, for the most part, to continued
emphasis on loan development.
Investments increased $12.1 million, or 9.7% for the period and fed funds
sold increased $71.2 million, or 257.3%. Investments carry the second highest
return of the earning assets over that of fed funds sold. While the Corporation
would like to have increased loans and investments more than fed funds sold,
investments are not as liquid as fed funds sold and carry with them rates which
may not adequately compensate for the reduced liquidity, interest rate
movements, and event risks which may occur during the life of the investment.
Fed funds sold yields are similar to money market yields, but their liquidity
allows for overnight relocation to other earning assets.
-9-
FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations Balance Sheet - (Continued)
Noninterest bearing deposits increased $13.5 million, or 5.9% to $241.2
million. Since the number of accounts grew at a 3.4% rate, the increase in
dollars is representative of normal core growth. Interest bearing deposits
increased $143.0 million, or 11.6%, with all of the increase attributable to
premium savings accounts.
At March 31, 2003, NOW, Money Market and Sweep accounts made up 21% of
total interest bearing deposits. At March 31, 2002 those deposits made up 24%.
In 2003, savings deposits made up 40% of total interest bearing deposits versus
25% in 2002 and time deposits made up 39% in 2003 versus 51% in 2002.
Over the last year, NOW, Money Market and Sweep deposits decreased $1.6
million, or .5%; savings deposits increased $232.8 million, or 74.4%, and time
deposits decreased $88.2 million or 14.1%. The reason for the significant change
in the mix over the last year was due mainly to maturing certificates of deposit
moving into competitively priced premium savings accounts.
FHLB borrowings increased $45.0 million or 39.1% over the year due to low,
long-term rates available.
Capital has increased $7.3 million over the past year, or 3.8%. Due to
previously approved capital management plans, over the past year, the
Corporation repurchased $19.9 million in stock in the open market, representing
782,300 shares. Also during the same period, the Corporation paid $12.0 million
in cash dividends. This was offset by the income of the Corporation for the same
time period.
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.)
In Thousands
- ------------
At March 31, 2003 2002 $Change % Change
----------- ----------- ----------- ---------
Net income as reported $ 34,071 $ 33,888 $183 0.5%
Effect of tax exempt loans and
municipal bonds 250 279 (29) -10.4%
----------- ----------- ----------- ---------
Tax equivalent (TE) net interest
income 34,321 34,167 154 0.5%
Total interest expense 10,229 11,697 (1,468) -12.6%
----------- ----------- ----------- ---------
TE net interest income $ 24,092 $ 22,470 $ 1,622 7.2%
=========== =========== =========== =========
Calculation of TE Net Interest
Margin (annualized)
TE net interest income $ 137,284 $ 136,668 $616 0.5%
Total interest expense 40,916 46,788 (5,872) -12.6%
----------- ----------- ----------- ---------
$ 96,368 $ 89,880 $ 6,488 7.2%
=========== =========== =========== =========
Average Earning Assets $1,841,872 $1,684,061 $ 157,811 9.4%
----------- ----------- ----------- ---------
TE NIM 5.23% 5.34% -0.11%
=========== =========== ===========
-10-
FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Net Interest Income
Abbreviated quarterly average balance sheets and net interest income data
for the periods are shown below:
(In thousands)
For quarter ended March 31, 2003 2002 $Change % Change
- --------------------------- ------------- --------------- -------------- -------------
Loans $1,663,582 $1,552,984 $110,598 7.1%
Investments* 136,913 100,056 36,857 36.8%
Federal funds sold 41,377 31,021 10,356 33.4%
------------- --------------- -------------- -------------
Total earning assets 1,841,872 1,684,061 157,811 9.4%
============= =============== ============== =============
Total assets $1,951,497 $1,783,118 $168,379 9.4%
============= =============== ============== =============
Noninterest bearing deposits $238,617 $226,655 $11,962 5.3%
Interest bearing deposits 1,332,071 1,234,454 97,617 7.9%
------------- --------------- -------------- -------------
Total deposits $1,570,688 $1,461,109 $109,579 7.5%
============= =============== ============== =============
Federal funds purchased
and repurchase agreements $11,856 $11,161 $695 6.2%
FHLB advances 160,118 110,134 49,984 45.4%
Shareowners' equity* $198,415 $190,509 $7,906 4.1%
============= =============== ============== =============
*Shown at amortized cost, or adjusted for unrealized gain/(loss).
In 2003, average total earning assets as a percent of average total assets
were 94.4% and 94.4% in 2002. This ratio indicates how efficiently assets are
being utilized. Average loans were 85.2% and 87.1% of average assets,
respectively and investments were 7.0% and 5.6%, for the same periods. Average
federal funds sold were 2.1% and 1.7% over the period. Average total
loan-to-deposits ratio's were 105.9% and 106.3%. Not shown in the table are the
components of interest bearing deposits. Average NOW and Money Market accounts
decreased $4.1 million or 1.5%; savings accounts increased $218.1 million, or
75.7%, and time cd's decreased $116.4 million, or 17.5%. Average FHLB borrowings
increased $50.0 million, or 45.4%. Tax equivalent net interest income increased
$1.6 million, or 7.2%.
Earning Assets
- --------------
Using a 365-day base, the TE yield on total earning assets decreased .67%
in the first quarter of 2003 to 7.56% compared to 8.23% in 2002. This was due to
a decrease in interest rates as the result of two Base (Prime) lending rate
decreases over the period, in response to Federal Reserve Board action, and a
refinancing of fixed rate loans to a lower rate. The cost of total interest
bearing liabilities decreased from 3.50% in 2002 to 2.76% in 2003. The TE NIM
decreased .11% from the first quarter of 2002 to the first quarter of 2003.
On a TE basis, net interest income was $24.1 million in 2003, versus $22.5
million in 2002, for an increase in net interest income of $1.6 million. This
increase resulted of total interest income increasing $154 thousand, and total
interest expense decreasing $1.5 million.
The increase of $157.8 million in the average balance of earning assets
increased interest income by $2.9 million and a decrease in interest rates
decreased interest income by $2.8 million, for a net decrease of $154 thousand.
-11-
FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Earning Assets (continued)
The annualized yield on total loans decreased from 8.49% in 2002 to 7.84%
in 2003. Commercial loans decreased from 7.98% to 7.20%; real estate commercial
loans decreased in yield from 8.57% to 7.82%; real estate construction loans
decreased in yield from 8.42% to 8.02%; real estate residential loans decreased
from 9.10% to 8.32%, and installment loans decreased from 9.60% to 8.73%.
The yield on investments decreased from 6.25% in 2002 to 6.08% in 2003 and
the yield on federal funds sold decreased from 1.67% in 2002 to 1.17% in 2003.
Interest Bearing Liabilities
- ----------------------------
The increase in the average balance of interest bearing deposits of $97.6
million increased interest expense by $.2 million, and the rate paid on interest
bearing deposits decreased interest expense by $2.1 million.
The increase in the average balance of other borrowings increased interest
expense by $.7 million and the rates paid on these borrowings decreased interest
expense by $.3 million.
The cost of NOW, Money Market and Sweep accounts decreased from 1.66% in
2002, to 1.26% in 2003. Savings account costs were 2.67% in 2002, and 2.24% in
2003. Time cd's decreased in cost from 4.33% in 2002 to 3.41% in 2003.
Short-term borrowings decreased from 1.05% to .82%, and FHLB borrowings
decreased from 5.60% in 2002 to 4.89% in 2003.
NONINTEREST INCOME AND EXPENSE - March 31, 2003/March 31, 2002
- --------------------------------------------------------------
Total noninterest income increased $463 thousand in the first quarter of
2003, or 17.9% from a year ago. The securities gain in the first quarter
represents a sale back to the issuer pursuant to a debt retirement offering.
Service charges increased $166 thousand to $1.1 million, or 18.5%. The increase
in service charges was due to increased NSF/OD fees of $159 thousand.
Other noninterest income increased $206 thousand or 12.2% in the current
quarter. In 2003 there were operational recoveries of $18 thousand and a gain on
the sale of assets and Other Real Estate Owned (OREO) of $10 thousand. The main
reason for the increase in 2003 was increased servicing release fees of $256
thousand due to increased mortgage originations. In 2002, there were operational
recoveries of $120 thousand and a gain on the sale of assets and ORE of $14
thousand
The market value of trust assets at quarter-end March 2003 was $237.3
million, as compared to $229.5 million in 2002, an increase of $7.8 million, or
3.4%. Trust department revenue for the first quarter of 2003 was $303 thousand,
up $7 thousand, or 2.4%.
Total noninterest expenses increased $1.1 million or 11.3% for the period.
Salaries and benefits increased $.7 million or 11.6%. There were 582 FTE
employees at March 31, 2003. Salaries, only, were up $322 thousand; benefits
were up $277 thousand, and deferred loan costs were down by $123 thousand. The
increase in salaries of 4.9% represents merit raises for year. The increase in
benefits was due to increased incentive pay of $93 thousand; increased contract
personnel costs of $56 thousand and increased profit sharing contributions of
$75 thousand.
Occupancy expense increased $42 thousand, or 2.7%. Depreciation expense was
37% of occupancy expense for 2003 and 2002. The remaining increase in 2003 of
$42 thousand was increased office rental expense.
-12-
FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Earning Assets (continued)
Other noninterest expense increased $371 thousand, or 16.8%. This increase
was due to increased collection expenses of $93 thousand; check printing costs
of $46 thousand; postage cost of $42 thousand and $181 thousand which represents
local taxes. Additionally, there were operational losses of $25 thousand in 2003
and $50 thousand in 2002.
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 first quarter was 41%
for 2003 and 40% for 2002. The Corporation's ratio places it among the
performance leaders in the industry.
-13-
FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Asset Quality
ASSET QUALITY
- -------------
The Corporation manages its credit risk through diversification of its loan
portfolio and the application of prudent underwriting policies, procedures, and
monitoring practices. Delinquent and problem loans, however, are a part of any
lending enterprise. When a borrower fails to make payments, the Corporation
implements procedures with an organized practical approach to collection of
delinquent loans.
IMPAIRED ASSETS
- ---------------
Loans are considered impaired, based on current information and events,
when it is probable that the Corporation will be unable to collect all amounts
due according to the contractual terms of the loan agreement, including
scheduled interest payments. For a loan that has been restructured, the
contractual terms of the loan agreement refer to the terms specified by the
original loan agreement, not the contractual terms specified by the
restructuring agreement.
The assessment of impairment occurs when and while such loans are on
nonaccrual, or the loan has been restructured. When a loan with unique
characteristics has been identified as being impaired, the Corporation will
measure the amount of the impairment. If the measurement is less than the
recorded investment in the loan, impairment is recognized by creating or
adjusting an existing allocation of the allowance for loan losses. In cases
where a borrower experiences financial difficulties and the Corporation makes
certain concessionary modifications to the contractual terms, the loan is
classified as a restructured accruing loan. Loans restructured at a rate equal
to or greater than that of a new loan with comparable risk at the time the
contract is modified may be excluded from the impairment assessment and may
cease to be considered impaired.
Nonperforming loans and impaired assets are summarized as follows:
(In thousands)
Period ended March 31, 2003 2002
- ---------------------- -------------- -------------
Nonaccruing loans:
Commercial $717 $757
Agriculture - 730
Real Estate 7,934 15,056
Installment and other 122 161
-------------- -------------
Total nonaccruing loans $8,773 $16,704
Other real estate owned 7,263 769
-------------- -------------
Total nonperforming assets $16,036 $17,473
============== =============
Restructured loans $6,178 $6,178
Total loans at end of period $1,654,635 $1,541,220
Total assets at end of period $2,003,980 $1,793,815
Total nonperforming assets to total loans 0.97% 1.13%
Total nonperforming assets to total assets 0.80% 0.97%
Total impaired assets to total assets 1.11% 1.32%
-14-
FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Impaired Assets (continued)
For nonaccrual loans, it is the Corporation'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.
The schedule on page 14 reflects nonaccrual loans decreased by $7.9 million
to $8.8 million as of March 31, 2003. As of quarter end this balance included 24
loans ranging in size from $2.7 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 real estate secured and, while there
is always some risk of loss present, management feels it is not substantial as a
proportion of the overall portfolio.
Other real estate owned (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.
OTHER REAL ESTATE OWNED
- -----------------------
OREO ended the quarter with a portfolio of nine properties totaling $7.3
million representing .36% of total assets. The increase over last years OREO
balance reflects the transition of troubled assets through an orderly collection
process. Since December 31, 2002 activity has included the sale of two
properties and the addition of two properties. Of the nine properties held, four
properties totaling $1.4 million are scheduled to close over the next 90 days.
Balances in the remaining five properties total $5.8 million and is concentrated
in two properties identified as a 3-unit condo project and a completed retail
structure. All properties are being actively managed for timely removal.
Certain other loans, currently 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. Management views this as an ordinary part of
the collection process and efforts are maintained to reduce and minimize such
nonperforming assets.
CREDIT CONCENTRATIONS
- ---------------------
The table below indicates the changes to the loan portfolio mix as of the
dates indicated, net of deferred loan fees:
(In thousands) March 31, 2003 December 31, 2002
---------------------------- ---------------------------
Amount % of total Amount % of total
------------- ------------- -------------- ------------
Installment $46,326 2.7% $47,217 2.8%
Commercial 272,645 16.5% 272,440 16.4%
Real estate commercial 747,489 45.2% 758,826 45.8%
Real estate construction 456,591 27.6% 443,461 26.7%
Real estate residential 131,584 8.0% 136,740 8.3%
------------- ------------- -------------- ------------
Total $1,654,635 100.0% $1,658,684 100.0%
============= ============= ============== ============
-15-
FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Credit Concentrations (continued)
As shown in the table on the previous page, we do emphasize commercial and
commercial real estate related lending. The commercial real estate portfolio
consists of a wide cross-section of retail, small office, warehouse, and
industrial type properties. These loans are secured by first trust deeds with
maturities from 3 to 10 years and original loan to value ratios generally from
65% to 75%. A substantial number of these properties are owner occupied. While
the Bank has significant balances within this lending category, management
believes that its lending policies and underwriting standards are sufficient to
minimize risk even during these uncertain economic times. The Bank's lending
activities have avoided those real estate sectors that have been most impacted
by the economic slump. As an example loans to hotel/motel operations comprise
less then 2.6% of the loan portfolio, and Class A properties are an
insignificant portion. Management devotes considerable attention to the risks
associated with the loan portfolio and continually monitors the effects of
current, and expected market conditions and other factors that may influence the
repayment of these loans.
At March 31, 2003 and 2002, the Bank had an immaterial amount of foreign
loans and no loans related to highly leveraged transactions.
ALLOWANCE FOR POSSIBLE LOAN LOSSES - QUALITATIVE FACTORS
- --------------------------------------------------------
For the three months ending March 31, 2003, the reserve for possible loan
losses increased to $28.9 million, or 1.75% of total loans, from $28.2 million,
or 1.70% of total loans at year-end 2002. Year-to-date net loan losses were $116
thousand.
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.
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.
-16-
FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Conclusion to Qualitative Factors (continued)
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 March 31, 2003 and 2002. This discussion addresses those periods
of time.
When comparing the cash flows from operating activities for the two
quarters, the most prominent items are mortgage loans originated and sold. This
function is dependent on the level of long-term interest rates and represents
refinancing activity. These numbers also reflect the substantial increase that
the Corporation had in servicing release fee income described earlier. That
aside, cash flows from operating activities were substantially the same for both
periods.
Cash flows from investing activities for the two periods were quite
different. The year 2002 reflects the purchase of investment securities of $52.0
million and cash flow from maturing loans of $32.9 million. Whereas in 2003,
only $9.2 million was invested in investment securities while fed funds sold
absorbed funds substantially by $85.3 million. Also noted is a slight cash flow
from maturing loans of $3.5 million. Total loans declined slightly in the 2003
period.
Cash flows from investment activities are also quite different from period
to period. The core deposit increase in 2003 is almost double that of 2002, and
certificates of deposits did not run off as fast in 2003 as 2002. Over the last
few years there has been a significant change in financing sources switching
from certificates of deposits to mainly premium savings accounts, which were
discussed on page 10. With the current interest rate structure and loan demand,
it is anticipated that this trend will continue.
Management has many sources of liquidity, such as the sale of AFS
securities, additional borrowings from the FHLB, increased participation in the
Treasury department's short-term note program, borrowings from the Federal
Reserve Bank, or additional borrowings at correspondent banks. The Corporation
has a policy that liquidity of 12.5% of total assets be maintained as a minimum
and has done so.
-17-
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 under various rate shocks. As of December 31,
2002 the model predicted that net interest income would increase whether rates
went up or down. This behavior is heavily influenced by loans going on and off
floors. If rates declined by 1%, net interest income would increase by 1.4%. If
rates increased by 1%, net interest income would increase by .8% and 2.4% if
rates increased 2%. The actual change in earnings would be dependent upon the
dynamic changes that occur when rates change. Many of these changes are
predictable, but the exact amount is difficult to predict and actual events may
vary substantially from the simulation model results.
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
first quarter end 2003 was $197.9 million. This amount compares to $198.9
million at December 31, 2002, an decrease of $1.1 million, or .5%. During the
first quarter of 2003 the Corporation repurchased 346,800 shares of common stock
in the open market for $8.8 million and also paid the first quarter dividend of
$3.1 million. Please see page 10, paragraph 5, for dividends and stock
repurchases since the end of the first quarter 2002.
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 March 31, 2003, the Corporation's leverage ratio was
9.70%, compared to 9.85% at year-end 2002. 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 10.16% and 11.41% at March 31, 2003, and
10.37% and 11.62% at December 31, 2002.
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 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.
-18-
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 March 31, 2003, 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.
Disclosure Controls and Internal Controls. Disclosure controls are
procedures that are designed with the objective of ensuring that
information required to be disclosed in FFC's reports filed under the
Securities Exchange Act of 1934 (Exchange Act) is recorded, processed,
summarized and reported within the time periods specified in the Securities
and Exchange Commission's (SEC) rules and forms. Disclosure controls are
also designed with the objective of ensuring that such information is
accumulated and communicated to our management, as appropriate to allow
timely decisions regarding required disclosure. Internal Controls are
procedures which are designed with the objective of providing reasonable
assurance that (1) transactions are properly authorized; (2) assets are
safeguarded against unauthorized or improper use; and (3) transactions are
properly recorded and reported, all to permit the preparation of financial
statement in conformity with accounting principles generally accepted in
the United States of America.
-19-
FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
Item 4. Controls and Procedures
Limitations on the Effectiveness of Controls. FFC's management does not
expect that our disclosure controls or our internal controls will prevent
all error and all fraud. A control system, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of control
system must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs. Because of
the inherent limitations in all control systems, no evaluation of controls
can provide absolute assurance that all control issues and instances of
fraud, if any, within FFC have been detected. These inherent limitations
include the realities that judgments in decision-making can be faulty, and
that breakdowns can occur because of simple error or mistake. Additionally,
controls can be circumvented by the individual acts of some persons, by
collusion of two or more people, or by management override of the control.
The design of any system of controls also is based in part upon certain
assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals under
all potential future conditions; over time, controls may become inadequate
because of changes in conditions, or the degree of compliance with the
policies or procedures may deteriorate. Because of the inherent limitations
in a cost-effective control system, misstatements due to error or fraud may
occur and not be detected.
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 current
quarter.
Item 5. Other Information
(a) On December 18, 2002, the Board of Directors of the Corporation
declared a $.165 per share first quarter 2003 cash dividend to
shareowners of record as of January 6, 2003 and payable January
21, 2003.
(b) On March 19, 2003, the Board of Directors of the Corporation
declared a $.17 per share second quarter 2003 cash dividend to
shareowners of record as of April 14, 2003 and payable April 28,
2003.
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 January 17, 2003, Form 8-K was filed reporting that its wholly
owned subsidiary, Frontier Bank, has announced the reorganization
of senior management.
On March 20, 2003, Form 8-K was filed announcing a second quarter
cash dividend detailed above in Item 5(b).
-21-
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: April 16, 2003 /s/ James F. Felicetty
-------------- ------------------------------------
James F. Felicetty
Secretary / Treasurer
CERTIFICATION
To my knowledge, this report on Form 10-Q for the quarter ended March 31,
2003 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: April 16, 2003 /s/ Michael J. Clementz
--------------- -------------------------------------
Michael J. Clementz
President & CEO
Date: April 16, 2003 /s/ James F. Felicetty
--------------- -------------------------------------
James F. Felicetty
Secretary / Treasurer
-22-
FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES
CERTIFICATION
CERTIFICATION
I, Michael J. Clementz, 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.
April 16, 2003 /s/ Michael J. Clementz
- --------------- -----------------------------------------
Date Michael J. Clementz
President & CEO
-23-
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.
April 16, 2003 /s/ James F. Felicetty
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Date James F. Felicetty
Secretary / Treasurer
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