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| FTBK > SEC Filings for FTBK > Form 10-K on 12-Mar-2009 | All Recent SEC Filings |
12-Mar-2009
Annual Report
The information contained in this section should be read in conjunction with the Consolidated Financial Statements and accompanying Notes to the Consolidated Financial Statements.
Frontier Financial Corporation (the "Corporation"), a Washington corporation, is a bank holding company owning all of the equity of its wholly owned subsidiary, Frontier Bank (the "Bank").
Financial Overview
For the year ended December 31, 2008, we had a net loss of $89.7 million, or ($1.91) per diluted share, compared to net income of $73.9 million, or $1.62 per diluted share, for the year ended December 31, 2007, and net income of $68.9 million, or $1.52 per diluted share, for the year ended December 31, 2006. The 2008 net loss is primarily attributable to the increase in the provision for loan losses as compared to 2007 and 2006, and a $77.1 million non-cash goodwill impairment charge.
For the year ended December 31, 2008, the provision for loan losses totaled $120.0 million, compared to $11.4 million for the year ended December 31, 2007, and $7.5 million for the year ended December 31, 2006. The increase in the provision for loan losses is largely attributable to the deterioration in the credit quality of our loan portfolio due to the downturn in the economy and the adverse effects on the housing market. At December 31, 2008, nonperforming assets were 10.87% of total assets, compared to 0.53% at December 31, 2007, and 0.27% at December 31, 2006. Net charge-offs totaled $63.0 million, $920 thousand and $2.9 million for the three years ended December 31, 2008, 2007 and 2006, respectively.
At December 31, 2008, assets totaled $4.10 billion, compared to $4.00 billion at December 31, 2007. The increase of $108.8 million, or 2.7%, is attributable to an increase in net loans during the period. At December 31, 2008, net loans totaled $3.67 billion, compared to $3.56 billion at December 31, 2007.
At December 31, 2008, capital totaled $352.0 million, compared to $459.6 million at December 31, 2007. Total tangible capital at December 31, 2008, was $351.2 million, compared to $381.5 million at December 31, 2007. For the year ended December 31, 2008, we paid cash dividends totaling $22.4 million, compared to $29.0 million for the year ended December 31, 2007. For the third and fourth quarters of 2008, the Board of Directors declared a $0.06 per share quarterly cash dividend. This compares to quarterly cash dividends of $0.165 and $0.17 per share for the third and fourth quarters of 2007, respectively. The decision to reduce the quarterly cash dividend came as a result of our concern over the continuing deterioration in the economy and housing market and the need to preserve capital. Beginning in the first quarter of 2009, the Board of Directors decided to suspend payment of a quarterly cash dividend to further preserve capital.
Recent Developments
Change in Management
On December 8, 2008, we announced that Robert J. Dickson, founder, long-time Chief Executive Officer ("CEO") and Chairman of the Board of Directors, was retiring from his position as Chairman and would retire from the Board of Directors on December 31, 2008. Mr. Dickson was the President and CEO of Frontier Bank since its founding in 1978 until 2003, and President and CEO of Frontier Financial Corporation from 1983 until 2003.
Director Patrick M. Fahey replaced Mr. Dickson as Chairman of the Board of Directors of Frontier Financial Corporation and Frontier Bank. Mr. Fahey joined the Board in 2006 after retiring as Chairman of Regional Banking at Wells Fargo Bank. Prior to that, Mr. Fahey was Founder, President and CEO of Pacific Northwest Bank for 16 years.
Additionally, we also announced two important changes to the executive management team. Mr. Fahey was named CEO of Frontier Financial Corporation and Director Michael J. Clementz was named President of Frontier Financial Corporation and CEO of Frontier Bank. Mr. Fahey brings significant experience to his role as CEO and is charged with implementing a revised business plan focused on growing a business banking franchise, rebalancing the loan portfolio and cultivating business banking and consumer deposits.
John J. Dickson transitioned from his role as President and CEO of Frontier Financial Corporation to become President of Frontier Bank charged primarily with the ongoing operation of Frontier's core business. Mr. Dickson will continue in his role as a Director of Frontier Financial Corporation and Frontier Bank.
Having previously served as President and CEO of Frontier Financial Corporation for three years, Mr. Clementz will assist Mr. Fahey and Mr. Dickson in the ongoing operations of the business and the implementation of the new business banking operations. Mr. Clementz will continue to serve as a Director of Frontier Financial Corporation and Frontier Bank.
Merger of FFP into Frontier Bank
Effective December 30, 2008, Frontier Financial Corporation merged its wholly-owned subsidiary, FFP, Inc. ("FFP") into Frontier Bank in a non-cash transaction. FFP owned certain real property leased to Frontier Bank for use in its operations. At December 30, 2008, FFP had assets totaling approximately $40.9 million and total equity of approximately $17.6 million. On a consolidated basis, this transaction had no effect on the financial statements of the Corporation for the year ended December 31, 2008.
Termination of Washington Banking Company Merger
On September 27, 2007, we announced that we had entered into an Agreement and Plan of Merger, dated September 26, 2007, with Washington Banking Company ("WBCO"), the parent company of Whidbey Island Bank, pursuant to which WBCO would merge with and into our organization. Both Boards of Directors approved the merger agreement on September 26, 2007, and the shareholders of WBCO approved the principal terms of the merger agreement at a special meeting of shareholders held on March 27, 2008.
Pursuant to the terms of the merger agreement, either party was entitled to terminate the merger agreement if the proposed merger was not consummated by June 30, 2008. We received a notice from WBCO on May 29, 2008, purporting to terminate the merger agreement, because in their opinion, the required regulatory approvals by federal banking authorities, which was a condition precedent to the merger, could not be obtained by June 30, 2008, and they were unwilling to extend the merger agreement.
In connection with the termination of the merger agreement, each party asserted they were entitled to a $5.0 million termination fee from the other party. On November 25, 2008, we announced that we had entered into an agreement providing for the settlement and mutual release of all claims against each other related to the termination of the merger agreement. The terms of the settlement have not been disclosed; however, neither party was required to make any payment to the other party.
Business Combinations
On November 30, 2007, we completed our merger with Bank of Salem. The year-over-year growth comparison includes the Bank of Salem impact. At closing, the Bank of Salem additions to our balance sheet included $199.8 million in loans, $8.6 million in securities, $169.5 million in deposits and $27.0 million in capital.
Branch Expansion
During 2007, we opened branches in Lacey, Bremerton, Gig Harbor and a loan production office in Vancouver, Washington. In addition, we acquired branches in Portland, Salem and Tigard, Oregon as a result of our merger with Bank of Salem. These activities resulted in 51 offices throughout Washington and Oregon.
During the third quarter of 2008, we closed a loan production office in Vancouver, Washington, due to the decline in new loan originations and our unsuccessful efforts to locate a suitable permanent location. No new branches were opened during 2008 and we do not anticipating opening any in the near term.
Critical Accounting Policies and Estimates
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect amounts reported in the consolidated financial statements and the accompanying notes. Changes in these estimates and assumptions are considered reasonably possible and may have a material impact on the consolidated financial statements and thus actual results could differ from the amounts reported and disclosed herein. We consider the allowance for loan loss a critical accounting policy subject to estimate. For additional information regarding the allowance for loan losses, see Allowance for Loan Losses in this Management's Discussion and Analysis and Allowance for Loan Losses in Note 1 in the Notes to the Consolidated Financial Statements.
Our financial statements are based on the selection and application of significant accounting policies which require management to make significant estimates and assumptions (see Note 1 to the Consolidated Financial Statements). We believe that the allowance for loan losses is one of the more critical judgment areas in the application of our accounting policies that affect financial condition and results of operations.
Material estimates particularly susceptible to significant change relate to the determination of the allowance for loan losses, the assessment of impaired loans, deferred income taxes, fair value measurements, the valuation of stock options and valuation of real estate acquired in connection with foreclosures or in satisfaction of loans. In connection with the determination of the allowance for loan losses and the valuation of foreclosed assets held for sale, management obtains independent appraisals for significant properties.
Review of Financial Condition
Securities
At December 31, 2008, securities totaled $93.7 million, compared to $135.1 million at December 31, 2007, a decrease of $41.4 million, or 30.7%. The decrease is primarily attributable to the sale and maturity of securities, the write-down of securities deemed other-than-temporarily impaired and decreases in the fair value of available for sale securities. During 2008, security sales and maturities totaled $334.4 million, which was partially offset by purchases totaling $306.1 million. Also during 2008, we wrote-off $6.4 million related to the other-than-temporary impairment of our investments in Fannie Mae, Freddie Mac and Lehman Brothers. For the year ended December 31, 2008, net unrealized losses on available for sale securities totaled $3.6 million, compared to net unrealized gains of $7.5 million for the year ended December 31, 2007. Because we have the ability and intent to hold these securities until a market price recovery or until maturity, none of the remaining securities are considered other-than-temporarily impaired at December 31, 2008. Additional information about the securities portfolio is provided in Note 4 of the Consolidated Financial Statements.
The aggregate amortized costs and fair values of securities at December 31 are as follows (in thousands):
2008 2007 2006
Amortized Amortized
Amortized Cost Fair Value Cost Fair Value Cost Fair Value
Equities $ 6,107 $ 1,930 $ 27,606 $ 34,575 $ 29,052 $ 39,507
U.S. Treasuries 6,304 6,457 6,223 6,311 4,204 4,248
U.S. Agencies 51,594 52,055 71,385 72,167 50,004 49,207
Corporate securities 6,052 6,192 17,062 16,704 18,198 18,002
Mortgage-backed securities 22,791 22,791 - - - -
Municipal securities 4,416 4,521 5,352 5,387 3,753 3,771
$ 97,264 $ 93,946 $ 127,628 $ 135,144 $ 105,211 $ 114,735
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The following table sets forth the maturities of securities at amortized cost (in thousands) at December 31, 2008. Tax equivalent values are used in calculating weighted average yields, assuming a 35% tax rate.
After 1 Yr After 5 Yrs Total &
Within But Within But Within After Weighted
1 Year/ 5 Years/ 10 Years/ 10 Years/ Average
Yield Yield Yield Yield Yield
Equities $ - $ - $ - $ 6,107 $ 6,107
- - - 5.58 % 5.58 %
U.S. Treasury 6,053 - 251 - 6,304
2.06 % - 7.20 % - 2.27 %
U.S. Agencies 5,000 46,594 - - 51,594
1.65 % 3.43 % - - 3.26 %
Corporate securities - 2,011 - 4,041 6,052
- 3.64 % - 9.69 % 7.68 %
Mortgage-backed securities - - - 22,791 22,791
- - - 5.30 % 5.30 %
Municipal securities 744 1,322 1,374 976 4,416
5.09 % 6.19 % 5.02 % 6.67 % 5.76 %
$ 11,797 $ 49,927 $ 1,625 $ 33,915 $ 97,264
2.08 % 3.51 % 5.36 % 5.91 % 4.21 %
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Loans
The major classifications of loans, excluding loans held for resale and net of
deferred loan fees, at December 31 are as follows (in thousands):
2008 2007 2006 2005 2004
Commercial and industrial $ 457,215 $ 402,569 $ 380,939 $ 321,303 $ 301,961
Real Estate:
Commercial 1,044,833 1,003,916 897,714 859,251 848,737
Construction 949,909 1,062,662 735,926 554,021 342,287
Land development 580,453 537,410 399,950 269,662 182,032
Completed lots 249,685 249,573 188,032 143,652 84,102
Residential 1-4 family 424,492 282,344 235,169 188,772 165,063
Installment and other loans 65,468 67,421 63,050 46,852 50,057
Total loans $ 3,772,055 $ 3,605,895 $ 2,900,780 $ 2,383,513 $ 1,974,239
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At December 31, 2008, loans, excluding loans held for resale, totaled $3.77 billion, compared to $3.61 billion at December 31, 2007, an increase of $166.2 million, or 4.6%. The increase in total loans is primarily attributable to the decrease in undisbursed commitments as opposed to new loan originations. At December 31, 2008, total undisbursed commitments to lend were $484.4 million, compared to $873.2 million at December 31, 2007, a decrease of $388.8 million, or 44.5%. With few exceptions, we have suspended the origination of new real estate construction, land development and completed lot loans. New loan originations for the year ended December 31, 2008, totaled $833.5 million, down from $1.75 billion for the year ended December 31, 2007.
Contractual maturities of loans, excluding loans held for resale and net of deferred fees, at December 31, 2008, are shown below (in thousands). Expected maturities may differ from contractual maturities because borrowers may have the right to prepay loans with or without prepayment penalties.
Within 1 Year 1 -5 Years After 5 Years Total
Commercial and industrial $ 272,955 $ 154,565 $ 29,695 $ 457,215
Real Estate:
Commercial 124,502 630,986 289,345 1,044,833
Construction 861,079 84,970 3,860 949,909
Land development 544,019 36,434 - 580,453
Completed lots 207,124 40,819 1,742 249,685
Residential 1-4 family 164,406 203,399 56,687 424,492
Installment and other loans 15,883 15,384 34,201 65,468
Total loans $ 2,189,968 $ 1,166,557 $ 415,530 $ 3,772,055
1 -5 Years After 5 Years
Fixed rates $ 818,792 $ 79,270
Variable rates 347,765 336,260
$ 1,166,557 $ 415,530
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Allowance for Loan Losses
The allowance for loan losses is the amount which, in the opinion of management, is necessary to absorb future probable loan losses. Management's determination of the level of the provision for loan losses is based on various judgments and assumptions, including general economic conditions, loan portfolio composition, prior loan loss experience, the evaluation of credit risk related to specific credits and market segments and monitoring results from our ongoing internal credit review staff. Management also reviews the growth and terms of loans so that the allowance can be adjusted for probable losses. The allowance methodology takes into account that the loan loss reserve will change at different points in time based on economic conditions, credit performance, loan mix and collateral values.
Management and the Board review policies and procedures at least annually, 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 grades of loans are 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. This quarterly analysis is then reviewed by the Board of Directors.
The allowance for loan losses totaled $112.6 million, or 2.98%, of total loans outstanding at December 31, 2008. This compares to the allowance for loan losses of $54.0 million, or 1.49%, of total loans outstanding at December 31, 2007, and $40.6 million, or 1.40%, at December 31, 2006. The increase in the allowance for loan loss for 2008, as compared to 2007 and 2006, is primarily attributable to the downturn in the economy and the negative impact on the local housing market, which significantly affected our real estate construction, land development and completed lot portfolios.
For the year ended December 31, 2008, net charge-offs totaled $63.0 million, compared to $920 thousand for the year ended December 31, 2007, and $2.9 million for the year ended December 31, 2006.
The following table provides an analysis of the allowance for loan losses and the net losses, by loan type, for the years ended December 31 (in thousands):
2008 2007 2006 2005 2004
Balance at beginning of year $ 57,658 $ 44,195 $ 37,075 $ 32,728 $ 29,556
Provision for loan losses 120,000 11,400 7,500 4,200 3,500
Loans charged-off:
Commercial and industrial (3,101 ) (1,183 ) (2,283 ) (342 ) (612 )
Real estate:
Commercial (1,264 ) - - (4 ) -
Construction (31,968 ) (201 ) (855 ) - -
Land development (12,165 ) - - - -
Completed lots (13,839 ) - - - -
Residential 1-4 family (846 ) (300 ) - (116 ) (387 )
Installment and other (343 ) (222 ) (156 ) (244 ) (413 )
Total charged-off loans (63,526 ) (1,906 ) (3,294 ) (706 ) (1,412 )
Recoveries:
Commercial and industrial 308 845 353 623 741
Real estate:
Commercial - - - - 176
Construction 161 - - 142 60
Land development - - - - -
Completed lots 9 - - - -
Residential 1-4 family - - - 27 51
Installment and other 28 141 60 61 56
Total recoveries 506 986 413 853 1,084
Net (charge-offs) recoveries (63,020 ) (920 ) (2,881 ) 147 (328 )
Balance before portion identified
for undisbursed loans 114,638 54,675 41,694 37,075 32,728
Reserve acquired in merger - 2,983 2,501 - -
Portion of reserve identified for
undisbursed loans and
reclassified as a liability (2,082 ) (3,663 ) (3,546 ) (3,270 ) (2,307 )
Balance at end of year $ 112,556 $ 53,995 $ 40,649 $ 33,805 $ 30,421
Total loans at end of period (1) $ 3,778,733 $ 3,612,122 $ 2,908,000 $ 2,389,224 $ 1,978,052
Daily average loans $ 3,774,501 $ 3,185,751 $ 2,731,257 $ 2,200,344 $ 1,887,528
Ratio of net charged-offs
(recoveries) during the period
to average loans outstanding 1.67 % 0.03 % 0.11 % -0.01 % 0.02 %
Loan loss reserve as a
percentage of total loans 2.98 % 1.49 % 1.40 % 1.41 % 1.54 %
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(1) Includes loans held for resale
Based on certain characteristics of the portfolio, potential losses can be anticipated by major loan categories. In the following table, the allowance for loan losses for the years ended December 31, has been allocated among the major loan categories based primarily on their historical net charge-off experience, along with consideration of factors such as quality, volume, anticipated economic conditions and other business considerations (in thousands).
Loan Loan Loan
2008 Category 2007 Category 2006 Category
Reserve Percent Reserve Percent Reserve Percent
Commercial and
industrial $ 15,127 12.1 % $ 9,856 11.2 % $ 9,726 13.1 %
Real estate:
Commercial 11,388 27.7 % 12,373 27.8 % 11,040 30.9 %
Construction 27,636 25.2 % 824 29.5 % 809 25.4 %
Land development 22,701 15.4 % 5,257 14.9 % 4,123 13.8 %
Completed lots 9,054 6.6 % 3,443 6.9 % 1,560 6.5 %
Residential 1-4
family 14,056 11.3 % 16,900 7.8 % 7,168 8.1 %
Installment and other 1,071 1.7 % 1,060 1.9 % 1,012 2.2 %
Unallocated 11,523 4,282 5,211
112,556 53,995 40,649
Portion of reserve
identified for
undisbursed
loans and reclassifed
as a liability 2,082 3,663 3,546
$ 114,638 100.0 % $ 57,658 100.0 % $ 44,195 100.0 %
Loan Loan
2005 Category 2004 Category
Reserve Percent Reserve Percent
Commercial and
industrial $ 11,061 13.5 % $ 9,658 15.3 %
Real estate:
Commercial 12,622 36.0 % 10,843 43.0 %
Construction 504 23.2 % 473 17.3 %
Land development 1,699 11.3 % 1,194 9.2 %
Completed lots 907 6.0 % 1,142 4.3 %
Residential 1-4
family 4,088 7.9 % 3,846 8.4 %
Installment and other 724 2.1 % 461 2.5 %
. . .
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