Frontier Financial Corporation Announces Record Third Quarter 2004 Earnings on Increased Net Interest Margin

Business Wire, Oct 18, 2004

EVERETT, Wash. -- Frontier Financial Corporation (Nasdaq:FTBK) today announced earnings for the third quarter ended September 30, 2004. Net income for the third quarter 2004 increased 5.0% to $11.0 million compared with net income of $10.5 million in 2003, primarily as a result of an increase in net interest income for 2004 of $2.3 million, or 9.3%. On a diluted per share basis, third quarter net income for 2004 was $.59 per share compared with $.56 per share in 2003, an increase of 5.4%. Return on average assets and return on average equity were 2.0% and 18.51%, compared to 2.05% and 20.13%, for last year.

Michael J. Clementz, President and CEO of Frontier Financial Corporation, said, "Our loan growth goal for 2004 was in the range of 8% to 11%. We are extremely please to announce that we have already obtained this goal as of September 30, 2004, three months early. Year to date our loan growth is $171.7 million or 9.7%. For the third quarter of 2004 loans increased by $57.4 million, the fifth consecutive quarter of loan growth greater than $50.0 million."

John Dickson, CEO of Frontier Bank added, "The economy in the Puget Sound region is continuing to improve which has brought growth in all types of loans, especially in the real estate area. Despite the increase in short-term rates in the third quarter, the demand for residential lots still exceeds the supply. The real estate construction and land development loans continue to be a high growth area of our loan portfolio. In addition, our tax equivalent net interest margin increased for the third consecutive quarter due, in part, to our strong year-to-date noninterest bearing deposit growth of $38.3 million or 14.1% which lowered our cost of funds."

Highlights

For the third quarter 2004:

--Third quarter earnings of $11.0 million, up 5.0% from the third quarter 2003 of $10.5 million.

--Fully diluted third quarter earnings per share increased 5.4% to $.59 from $.56.

--Tax equivalent net interest margin up to 5.15% in the third quarter from 5.02% and 5.05% for the first and second quarters of 2004, respectively.

--Efficiency ratio remains one of the industry's best at 41% for the third quarter.

--Return on average equity of 18.51% for the third quarter, compared to 20.13% for third quarter 2003.

--Return on average assets of 2.0% for the third quarter, compared to 2.05% for third quarter 2003.

--Fifth consecutive quarter of loan growth greater than $50.0 million.

--Noninterest bearing deposits up $35.7 million for the third quarter, compared to $21.8 million for the third quarter 2003.

In addition during the third quarter 2004 we originated $363.5 million in new loans, an increase of $82.5 million, or 29% over third quarter 2003.

Along with outstanding loan growth, we continue to experience impressive deposit growth. Total deposits have increased $111.2 million from $1.67 billion at September 30, 2003, to $1.78 billion at September 30, 2004, a 6.6% increase. The greatest growth was in noninterest bearing deposits which increased from $274.0 million to $309.7 million for the same time period, a 13.0% increase.

Asset Quality

As of September 30, 2004, nonperforming assets were .74% of total assets, down slightly from .75% a year ago, and up from .52% at December 31, 2003. Nonaccruing loans increased to $15.4 million at September 30, 2004, up from $8.0 million at September 30, 2003. This increase was due primarily to one real estate residential loan in the amount of $6.0 million being moved to nonaccrual status. In addition, two nonaccruing loans subsequent to quarter end were paid in full totaling $1.4 million. Continued improvement has been made with reducing other real estate owned from $7.5 million at September 30, 2003, to $1.0 million at September 30, 2004. "We continue to be pleased with our loan quality and ability to work through our nonperforming assets, during this period of strong loan growth," said Lyle Ryan, President of Frontier Bank. Frontier's past due ratio was .70% of total loans at September 30, 2004.

During the third quarter, the Corporation provided $1.0 million for loan losses as compared to $.9 million for the third quarter of 2003. The total allowance for loan losses stood at $31.6 million, or 1.62% of total loans outstanding compared to $28.7 million, or 1.67% of total loans outstanding for the same time period last year. Net loan charge offs year to date amounted to $487.0 thousand as compared to $2.1 million for September 30, 2004 and 2003, respectively.

Third Quarter 2004 Operating Results

Operating Results

Net interest income for the quarter was $26.6 million, an increase of $2.2 million, or 9.3%, compared to $24.4 million for the prior year third quarter. Frontier's tax equivalent net interest margin for the third quarter increased to 5.15% in 2004 compared to 5.10% in 2003. The net interest margin for the first and second quarter 2004 was 5.02% and 5.05%, respectively. "The primarily reason for the increase in the net interest margin is due to the Federal Reserve Bank increasing rates twice during the third quarter, each time 25 basis points. Approximately 40% of the Corporation's loans are variable rate and 15% adjustable rate, which reprice within three months to five years depending on the index. The yield on earning assets increased 9 basis points to 6.79% in the third quarter from 6.70% in the second quarter, and the cost of funds increased 6 basis points to 2.11% in the third quarter from 2.05% in the second quarter," stated Dickson.