Frontier Financial Corp. (FTBK) filed Quarterly Report for the period ended 2009-11-03.
Frontier Financial Corporation is a bank holding company with two subsidiaries Frontier Bank and FFP Inc. Frontier Bank engages in businesses related to banking and general banking business including the acceptance of demand time and savings deposits and the making of loans. FFP Inc. is a nonbank corporation which purchases and leases real property to Frontier Bank. Frontier Financial Corp. has a market cap of $18.4 million; its shares were traded at around $0.39 with and P/S ratio of 0.1. Frontier Financial Corp. had an annual average earning growth of 16.8% over the past 5 years.
Highlight of Business Operations:
We continue to closely monitor and manage our liquidity position, understanding that this continues to be of critical importance in the current economic environment. To further increase our on-balance sheet liquidity, we have been focused on reducing our balance sheet, and in particular, the real estate loan portfolio. For the nine months ended September 30, 2009, total loans decreased $627.7 million, or 16.6% compared to December 31, 2008. Additionally, we have increased our federal funds sold balances to $363.1 million at September 30, 2009, an increase of $245.3 million from December 31, 2008.
As shown in the Consolidated Statements of Cash Flows, net cash provided by operating activities was $37.4 million for the nine months ended September 30, 2009. The primary source of cash provided by operating activities was net income, after excluding non-cash charges such as the provision for loan losses of $275.0 million. Net cash of $56.7 million provided by investing activities consisted primarily of $261.9 million from the net reduction of loan, $57.1 million from the maturity of available for sale securities and $24.5 million from proceeds on the sale of other real estate owned, partially offset by the $245.3 million increase in net federal funds sold and the $47.3 million purchase of available for sale securities. The $109.2 million of cash used in financing activities primarily consisted of the $53.7 million net decrease in FHLB advances and the $49.5 million net decrease deposits.
We use a simulation model to estimate the impact of changing interest rates on earnings and capital. The model calculates the change in net interest income and net income under various rate shocks. As of September 30, 2009, the model predicted that net interest income and net income, over a one-year horizon, would decrease by approximately $6.9 million and $4.5 million, respectively, if rates increased 2%. The model also predicted that if rates decreased 0.25%, over a one-year horizon, net interest income would increase $1.1 million and net income would decrease $699 thousand. The decrease in both net interest income and net income if rates were to increase, over a one-year horizon, is attributable to our balance sheet becoming more liability sensitive during the first nine months of 2009.
As of September 30, 2009, approximately 85.0% of our loan portfolio was comprised of loans secured by real estate. Of this 85.0% of real estate loans, 31.4% are commercial real estate loans, 18.7% are residential and commercial construction loans, 12.9% are land development loans, 13.8% are term 1-4 family residential loans and 8.2% are lot loans. We have been experiencing deterioration in our loan portfolio, centered in our residential construction and land development loans. Many of these loans are maturing and classified as nonperforming assets while we work with the borrowers to maximize our recovery. If loan payments from borrowers are over 90 days past due, or sooner if normal repayment cannot resume, the loans are placed on nonaccrual status, thereby reducing and/or reversing previously accrued interest income. From third quarter 2008 to September 30, 2009, our nonperforming and nonaccrual loans increased significantly, from $205.2 million to $810.5 million, $552.1 million of which were construction and land development loans, which represent 53.8% of our construction and land development loans. The contraction or expansion of our nonaccrual loan portfolio and other real estate owned (“OREO”) properties in future periods will depend upon our ongoing collection efforts and changes in market conditions. We have a dedicated a team of 38 employees focused on the management of problem loans, but there is no guarantee that this team will be able to effectively manage the amount of problem loans we may encounter in the future. Additional information regarding credit risk is included in “Management s Discussion and Analysis of Financial Condition and Results of Operations —Loans.”
An essential element of our business is to make loans. We maintain an allowance for loan losses that we believe is a reasonable estimate of known and inherent losses within the loan portfolio. Our loan portfolio and allowance for loan losses are assessed each quarter by management, and were subject to recent examinations by our federal and state regulators. As of September 30, 2009, our allowance for loan losses increased to $142.2 million or 4.51% of our total loans of $3.1 billion, as a result of significant additional provisions for loan losses and charge-offs in the third quarter of 2009. See “Management s Discussion & Analysis of Financial Condition and Results of Operations — Allowance for Loan Losses.” The determination of the appropriate level of loan loss allowance as well as the appropriate amount of loan charge-offs (net of loan recoveries) is an inherently difficult process and is based on numerous assumptions and there may be a range of potential estimates. The amount of future losses is susceptible to changes in economic, operating and other conditions, including changes in our real estate markets and interest rates that are beyond our control. Our underwriting policies, credit monitoring processes and risk management systems and controls may not prevent unexpected losses. In addition, bank regulators periodically review our allowance for loan losses and may require us to increase our provision for loan losses or recognize further loan charge-offs. Any such additional loan losses, should they occur, would adversely affect our financial condition and profitability.
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