Business & Finance
Business and Finance
Business and Finance
Thu, January 29, 2009 Frontier Financial Corporation: Frontier Financial Corporation Announces Fourth Quarter and Year End December 31, 2008 Results
EVERETT, WA--(Marketwire - January 29, 2009) - Frontier Financial Corporation (
For the year ended December 31, 2008, net loss totaled $89.7 million, compared to net income of $73.9 million for the year ended December 31, 2007. The decrease in net income for the period is primarily attributable to the $108.6 million increase in the provision for loan losses and a $77.1 million noncash goodwill impairment charge. On a diluted per share basis, net loss for the year ended December 31, 2008, was ($1.91) per share, compared to net income of $1.62 per share for the year ended December 31, 2007.
The Corporation's net operating loss was $16.7 million, or ($0.35) per diluted share, for the fourth quarter 2008, which excludes the $77.1 million noncash goodwill impairment charge and the $3.1 million gain on sale of securities. This compared to a $7.7 million net operating loss, or ($0.16) per diluted share, for the third quarter 2008, excluding provision for loss on securities and loss on sale of securities totaling $7.5 million; and net operating income of $18.0 million, or $0.40 per diluted share, for the fourth quarter 2007.
The increase in the provision for loan losses for the three months and year ended December 31, 2008, is largely attributable to deteriorating credit quality in our real estate construction and land development portfolios. During the fourth quarter of 2008, nonperforming real estate construction and land development loans increased $183.0 million, to $359.0 million, compared to $176.0 million for the third quarter 2008. Management continues to recognize loan quality deterioration on a timely basis and aggressively address work out strategies. Net charge-offs related to these two portfolios also increased $25.6 million during the period. For the year ended December 31, 2008, nonperforming real estate construction and land development loans increased $339.2 million and net charge-offs related to these portfolios increased $43.8 million, compared to the prior year ended.
During the fourth quarter, we recorded a noncash charge of $77.1 million, or ($1.64) per diluted share, related to the impairment of goodwill. This write down resulted from goodwill impairment testing that was performed at the end of the fourth quarter due to the quarterly decline in the stock price and the resulting difference between the market capitalization and book value of the Corporation. The results of the goodwill impairment testing demonstrated that the estimated fair value of the Corporation, or reporting unit, was less than the book value, resulting in full impairment.
Patrick M. Fahey, Chairman and CEO of Frontier Financial Corporation said, "The Board of Directors, in responding to these challenging and unprecedented times, has taken a number of corrective actions. The leadership of the Corporation was restructured to enhance the effort to rebalance the Bank to a portfolio with a much smaller concentration in real estate lending and an increase in commercial and industrial business and consumer loans."
In the third quarter, we announced strategies to improve asset quality, preserve capital, reduce expenses and grow core deposits. Our newly expanded special assets group continues to focus on reducing nonperforming assets. Management was successful in reducing construction and land development loans by $107.7 million in the fourth quarter of 2008 compared to third quarter. However, given the current economic conditions and the effects on the housing market, this process is going to take time. At December 31, 2008, nonperforming assets totaled $446.0 million, or 10.9% of total assets. This compares to nonperforming assets of $208.9 million, or 4.9% of total assets, at September 30, 2008, and $21.3 million, or 0.53% of total assets, at December 31, 2007.
In an effort to further preserve capital, in December of 2008 the Board of Directors voted to suspend the payment of the quarterly cash dividend, beginning in the first quarter 2009. Previously in July 2008, the Board of Directors decided to reduce the quarterly cash dividend to $0.06 per share, down from $0.18 in the previous quarter.
As part of our strategy to reduce noninterest expense, there were no performance bonuses paid or discretionary profit sharing contributions made to the Employee Benefit Plan for the year ended December 31, 2008. This cost reduction measure is in addition to the previously announced reduction in executive management compensation and elimination of Bank Board meeting fees. On an ongoing basis, additional cost saving measures will be put into place.
Deposit growth continues to be a strong focus for the Corporation. Even though our total deposit balances declined on a linked quarter basis, total noninterest bearing deposits increased $18.2 million, or 4.8%. We are anticipating further deposit growth in 2009, as we recently formed our Business Banking team consisting of 38 experienced business bankers, which are existing employees of the Bank, to focus on generating loans and deposits with small to medium sized businesses. In addition, management has introduced a new incentive program based on deposit growth.
Capital
Management constantly monitors the level of capital, considering, among other things, our present and anticipated needs, current market conditions and other relevant factors, which may necessitate changes in the level of capital. Total capital at December 31, 2008, was $352.0 million, compared to $443.7 million at September 30, 2008 and $459.6 million at December 31, 2007. Total tangible capital at December 31, 2008, was $351.2 million, compared to $365.8 million at September 30, 2008 and $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 housing market and the need to preserve capital. Beginning in the first quarter of 2009, the Board of Directors decided to suspend the payment of the quarterly cash dividend to further preserve capital.
Consolidated regulatory capital ratios as of December 31, 2008, were as follows:
Tier I Tier 2 Leverage (Core) Capital (Total) Capital Capital -------------- --------------- -------- Actual as of December 31, 2008 9.64% 10.91% 8.62% ============== =============== ======== Regulatory minimum for "well capitalized" purposes 6.00% 10.00% 5.00% ============== =============== ========
Review of Financial Condition
General
At December 31, 2008, total assets were $4.10 billion and deposits totaled $3.28 billion. This compares to total assets of $4.24 billion and deposits of $3.40 billion at September 30, 2008, and total assets of $4.00 billion and deposits of $2.94 billion at December 31, 2007. Net loans of $3.67 billion at December 31, 2008, reflect a decrease of 1.6% from September 30, 2008, and an increase of 3.0% from December 31, 2007.
Loans
At December 31, 2008, total loans, including loans held for resale, were $3.78 billion, compared to $3.83 billion at September 30, 2008, and $3.61 billion at December 31, 2007. The decrease in total loans on a linked quarter basis is attributable to a decrease in new loan originations, loan pay downs and an increase in charge-offs for the period. With few exceptions, we have suspended the origination of new real estate construction, land development and completed lot loans. New loan originations for the fourth quarter 2008, totaled $58.6 million, compared to $175.6 million for the third quarter 2008, a decrease of $117.0 million, or 66.6%. For the fourth quarter 2007, new loan originations totaled $209.2 million, which was $150.6 million, or 72.0%, greater than the fourth quarter 2008.
The year over year increase in total loans is primarily attributable to the decrease in undisbursed commitments to lend. 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%. Total undisbursed commitments to lend were $650.8 million at September 30, 2008.
Allowance for Loan Losses
The total allowance for loan losses was $112.6 million, or 2.98%, of total loans outstanding at December 31, 2008, compared to $106.6 million, or 2.78%, at September 30, 2008, and $54.0 million, or 1.49%, at December 31, 2007. The allowance for loan losses, including the reclassified allocation for undisbursed loans of $2.1 million, would amount to a total allowance of $114.6 million, or 3.03%, of total loans outstanding as of December 31, 2008.
For the year ended December 31, 2008, the provision for loan losses increased $108.6 million, to $120.0 million, compared to $11.4 million for the year ended December 31, 2007. Net charge-offs increased $62.1 million, to $63.0 million in 2008, compared to $920 thousand in 2007.
Net charge-offs totaled $39.2 million, or 1.02% of average quarterly loans, for the quarter ended December 31, 2008. This compares to net charge-offs of $14.3 million, or 0.37%, and $594 thousand, or 0.02%, for the quarters ended September 30, 2008, and December 31, 2007, respectively.
Credit Quality
Nonperforming assets are summarized as follows (in thousands):
December September June 30, March 31, December 31, 2008 30, 2008 2008 2008 31, 2007 ---------- ---------- ---------- ---------- ---------- Commercial and industrial $ 12,908 $ 1,256 $ 394 $ 18 $ 159 Real estate: Commercial 10,937 2,986 - - - Construction 181,905 135,419 96,526 24,950 19,842 Land development 177,139 40,602 13,450 10,594 - Completed lots 34,005 17,949 7,872 2,525 804 Residential 1-4 family 17,686 6,985 1,010 666 93 Installment and other 645 - 684 14 10 ---------- ---------- ---------- ---------- ---------- Total nonaccruing loans 435,225 205,197 119,936 38,767 20,908 Other real estate owned 10,803 3,693 3,681 633 367 ---------- ---------- ---------- ---------- ---------- Total nonperforming assets $ 446,028 $ 208,890 $ 123,617 $ 39,400 $ 21,275 ========== ========== ========== ========== ========== Restructured loans - - - - - Total loans at end of period(1) $3,778,733 $3,832,052 $3,807,278 $3,716,950 $3,612,122 Total assets at end of period $4,104,445 $4,244,963 $4,156,721 $4,062,825 $3,995,689 Total nonaccruing loans to total loans 11.52% 5.35% 3.15% 1.04% 0.58% Total nonperforming assets to total assets 10.87% 4.92% 2.97% 0.97% 0.53% (1) Includes loans held for resale.
The ratio of loans past due over 30 days was 14.81% of total loans at December 31, 2008, compared to 9.91% at September 30, 2008, and 0.91% at December 31, 2007.
Results of Operations
Net interest income
Net interest income for the three months ended December 31, 2008, was $33.9 million, compared to $49.5 million for the three months ended December 31, 2007, a decrease of $15.7 million, or 31.6%. Higher average loan balances contributed $3.4 million to net interest income, while changes in interest rates decreased net interest income by $19.1 million. For the quarter, average earning assets increased $459.0 million, or 13.0%, and average interest bearing liabilities increased $426.5 million, or 11.5% from the prior year. The average quarterly yield on earning assets decreased 289 basis points to 6.04% for the fourth quarter 2008, compared to 8.93% for the fourth quarter 2007.
On a linked quarter basis, net interest income decreased $6.9 million, or 16.9%. For the quarter ended December 31, 2008, average earning assets totaled $4.00 billion, compared to $4.06 billion for the quarter ended September 30, 2008. For the same period, the average yield on earning assets decreased 74 basis points to 6.04% from 6.78%. For the quarter ended December 31, 2008, average interest bearing liabilities totaled $3.29 billion with an average cost of 3.21%, compared to average interest bearing liabilities of $3.36 billion, with an average cost of 3.33%, for the quarter ended September 30, 2008.
For the twelve months ended December 31, 2008, net interest income totaled $166.9 million, compared to $186.6 million for twelve months ended December 31, 2007, a decrease of $19.7 million, or 10.6%. Higher average balances contributed $27.6 million to net interest income, whereas rate changes decreased net interest income by $47.3 million. For the period, average earning assets increased $631.9 million, or 19.1%, and average interest bearing liabilities increased $595.2 million, or 22.4%. The average yield on earning assets decreased 197 basis points to 7.10% for the year ended December 31, 2008, compared to 9.07% for the prior year ended.
The annualized tax equivalent net interest margin was 3.42% for the quarter ended December 31, 2008, compared to 4.05% for the quarter ended September 30, 2008, and 5.63% for the quarter ended December 31, 2007. The tax equivalent net interest margin for the year ended December 31, 2008, was 4.26%, compared to 5.67% for the year ended December 31, 2007.
During the fourth quarter of 2008, we had $5.5 million of interest accruals reversed as a result of loans being placed on nonaccrual status, which lowered the tax equivalent net interest margin by 55 basis points. Total interest accruals reversed during the twelve months ended December 31, 2008, were $9.5 million, which lowered the year to date tax equivalent net interest margin by 24 basis points. The remainder of the decrease in net interest margins can be attributed to the decreases in interest rates by the Federal Reserve, and the resulting repricing of loans at lower rates, along with the lower loan fees as a result of reduced loan originations that decreased 72% from fourth quarter 2007 to fourth quarter 2008.
Noninterest income
For the three months ended December 31, 2008, total noninterest income increased $3.7 million, or 97.4%, compared to the three months ended December 31, 2007. The increase in total noninterest income is primarily attributable to the $3.1 million increase in gain on sale of securities. During the fourth quarter of 2008, we sold stock for a pre-tax gain of $2.5 million and certain agency securities for a pre-tax gain of $532 thousand. In addition, we also sold Fannie Mae and Freddie Mac preferred stock that we wrote down in the third quarter of 2008 for a pre-tax gain of $68 thousand.
On a linked quarter basis, total noninterest income increased $10.7 million. During the third quarter of 2008, we recognized a $6.4 million pre-tax loss related to other than temporarily impaired investments in Fannie Mae, Freddie Mac and Lehman Brothers. We also sold one security at a pre-tax loss of $1.0 million.
For the twelve months ended December 31, 2008, total noninterest income was $14.8 million, compared to $13.3 million for the twelve months ended December 31, 2007, an increase of $1.5 million, or 11.4%. Excluding the nonrecurring items other noninterest income increased $2.4 million or 17.2% over the same period.
Noninterest expense
Total noninterest expense was $17.9 million, excluding the $77.1 million noncash charge for goodwill impairment for the three months ended December 31, 2008, compared to $20.2 million for the three months ended December 31, 2007, a decrease of $2.3 million, or 11.7%. For the period, salaries and employee benefits decreased $3.5 million, partially offset by an increase in other noninterest expense of $1.5 million. We reversed approximately $2.7 million in accruals related to annual performance bonuses and discretionary profit sharing contributions due to the net loss for the year. The increase in other noninterest expense primarily relates to increases in FDIC insurance assessments resulting from a one-time credit of approximately $1.2 million in 2007 and premium increases in 2008 and $397 thousand related to foreclosure expense.
On a linked quarter basis, excluding the $77.1 million goodwill impairment charge in the fourth quarter, total noninterest expense decreased $4.2 million, or 19.0%. Salaries and employee benefits decreased $3.0 million, or 24.3%, primarily due to reversal of the accrual for bonuses and profit sharing contributions. In addition, the number of FTEs decreased 3.4% on a linked quarter basis.
Other noninterest expense totaled $21.4 million for the twelve months ended December 31, 2008, compared to $15.2 million for the twelve months ended December 31, 2007, an increase of $6.3 million, or 41.4%. The most significant increase related to the FDIC insurance assessment, which increased $2.3 million for the period. The increase in the FDIC assessment resulted from a one-time credit of approximately $1.2 million in 2007, to offset future assessments as required by the Federal Deposit Insurance Reform Act of 2005, and premium increases in 2008. Consulting fees increased $1.5 million for the twelve months ended December 31, 2008, compared to the same period for the prior year. Additionally, foreclosure expense increased $447 thousand, legal fees increased $367 thousand and collection expense increased $226 thousand. These increases directly correspond to the increase in nonperforming assets over the period. Director expense decreased $143 thousand as the directors elected to forego their monthly meeting fee beginning in the fourth quarter 2008.
Liquidity
We continue to closely monitor and manage our liquidity position understanding that this is of critical importance in today's tight market. Attracting and retaining customer deposits remains our primary source of liquidity. Management has the ability to access additional sources of liquidity, such as the sale of available for sale securities and additional borrowings from the FHLB. At December 31, 2008, we had $1.15 billion of total liquidity available. We have a policy that the minimum liquidity to total assets ratio remain at 12.5%. At December 31, 2008, liquidity to total assets was 28.0%.
Merger Activity
Washington Banking Company
As previously announced, on May 29, 2008, we received a notice from Washington Banking Company ("WBCO") purporting to terminate our merger agreement dated September 26, 2007. For the year ended December 31, 2008, $729 thousand, pre-tax, of costs and expenses incurred in connection with the transaction were expensed.
Bank of Salem
On November 30, 2007, we closed our merger with Bank of Salem. At the time of closing, Bank of Salem had approximately $199.8 million in loans, $169.5 million in deposits and $27.0 million in capital. The annual growth comparisons include the impact of the Bank of Salem merger.
Certain amounts in prior years' financial statements have been reclassified to conform to the 2008 presentation. These classifications have not had an effect on previously reported income or total equity.
Frontier Financial Corporation is a Washington-based financial holding company providing financial services through its commercial bank subsidiary, Frontier Bank. Frontier Bank offers a wide range of financial services to businesses and individuals in its market area, including investment and insurance products.
NONGAAP FINANCIAL MEASURES -- This news release contains certain nonGAAP financial measures in addition to results presented in accordance with Generally Accepted Accounting Principles ("GAAP"). These measures should not be construed as a substitute for GAAP measures; they should be read and used in conjunction with Frontier's GAAP financial information. A reconciliation of the included nonGAAP financial measures to GAAP measures is included elsewhere in this release.
CERTAIN FORWARD-LOOKING INFORMATION -- This press release contains certain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 ("PSLRA"). This statement is included for the express purpose of availing Frontier of the protections of the safe harbor provisions of the PSLRA. The forward-looking statements contained herein are subject to factors, risks and uncertainties that may cause actual results to differ materially from those projected. The following items are among the factors that could cause actual results to differ materially from the forward-looking statements: general economic conditions, including their impact on capital expenditures; business conditions in the banking industry; recent world events and their impact on interest rates, businesses and customers; the regulatory environment; new legislation; vendor quality and efficiency; employee retention factors; rapidly changing technology and evolving banking industry standards; competitive standards; including increased competition with community, regional and national financial institutions; fluctuating interest rate environments; higher than expected loan delinquencies; and similar matters. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only at the date of this release.
Frontier undertakes no obligation to publicly revise or update these forward-looking statements to reflect events or circumstances that arise after the date of this release. Readers should carefully review the risk factors described in this and other documents Frontier files from time to time with the Securities and Exchange Commission, including Frontier's 2007 Form 10-K.
FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS (In thousands, except for shares and per share amounts) (Unaudited) Three Months Ended ---------------------------------------- December 31, September 30, December 31, 2008 2008 2007 ------------ ------------ ------------ INTEREST INCOME Interest and fees on loans $ 59,343 $ 67,161 $ 77,914 Interest on investments 1,049 1,660 1,490 ------------ ------------ ------------ Total interest income 60,392 68,821 79,404 ------------ ------------ ------------ INTEREST EXPENSE Interest on deposits 22,715 24,390 25,601 Interest on borrowed funds 3,822 3,705 4,282 ------------ ------------ ------------ Total interest expense 26,537 28,095 29,883 ------------ ------------ ------------ Net interest income 33,855 40,726 49,521 PROVISION FOR LOAN LOSSES 44,400 42,100 6,000 ------------ ------------ ------------ Net interest income (loss) after provision for loan losses (10,545) (1,374) 43,521 ------------ ------------ ------------ NONINTEREST INCOME Provision for loss on securities - (6,431) - Gain (loss) on sale of securities 3,129 (1,026) - Gain on sale of secondary mortgage loans 247 308 375 Gain on sale of other real estate owned 4 81 - Service charges on deposit accounts 1,291 1,384 1,318 Other noninterest income 2,831 2,511 2,107 ------------ ------------ ------------ Total noninterest income 7,502 (3,173) 3,800 ------------ ------------ ------------ NONINTEREST EXPENSE Salaries and employee benefits 9,398 12,420 12,891 Occupancy expense 2,406 3,161 2,543 State business taxes 370 498 565 Other noninterest expense 5,690 5,978 4,227 ------------ ------------ ------------ 17,864 22,057 20,226 ------------ ------------ ------------ Goodwill impairment 77,073 - - ------------ ------------ ------------ Total noninterest expense 94,937 22,057 20,226 ------------ ------------ ------------ INCOME (LOSS) BEFORE PROVISION (BENEFIT) FOR INCOME TAXES (97,980) (26,604) 27,095 PROVISION (BENEFIT) FOR INCOME TAXES (8,464) (8,808) 9,080 ------------ ------------ ------------ NET INCOME (LOSS) $ (89,516) $ (17,796) $ 18,015 ============ ============ ============ Weighted average number of shares outstanding for the period 47,038,400 47,010,944 44,645,895 Basic earnings (losses) per share $ (1.90) $ (0.38) $ 0.40 ============ ============ ============ Weighted average number of diluted shares outstanding for period 47,038,400 47,010,944 44,871,141 Diluted earnings (losses) per share $ (1.90) $ (0.38) $ 0.40 ============ ============ ============ FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES (In thousands, except for shares and per share amounts) (Unaudited) PRO FORMA DISCLOSURES EXCLUDING THE EFFECTS OF THE (GAIN) LOSS ON SECURITIES AND THE GOODWILL IMPAIRMENT Three Months Ended ---------------------------------- December September December 31, 30, 31, 2008 2008 2007 ---------- ---------- ----------- NET INCOME (LOSS) $ (89,516) $ (17,796) $ 18,015 ADJUSTMENTS Provision for loss on securities - 6,431 - (Gain) loss on sale of securities (3,129) 1,026 - Goodwill impairment 77,073 - - ---------- ---------- ----------- Total adjustments 73,944 7,457 - INCOME (LOSS) BEFORE PROVISION (BENEFIT) FOR INCOME TAXES (15,572) (10,339) 18,015 INCOME TAX PROVISION (BENEFIT) RELATED TO ADJUSTMENTS 1,095 (2,610) - ---------- ---------- ----------- NET INCOME (LOSS) FROM RECURRING OPERATIONS $ (16,667) $ (7,729) $ 18,015 ========== ========== =========== Weighted average number of shares outstanding for the period 47,038,400 47,010,944 44,645,895 Basic earnings (losses) per share EXCLUDING the effects of (gain) loss on securities and goodwill impairment $ (0.35) $ (0.16) $ 0.40 ========== ========== =========== Weighted average number of diluted shares outstanding for period 47,038,400 47,010,944 44,871,141 Diluted earnings (losses) per share EXCLUDING the effects of (gain) loss on securities and goodwill impairment $ (0.35) $ (0.16) $ 0.40 ========== ========== =========== FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS (Continued) (In thousands, except for shares and per share amounts) (Unaudited) Twelve Months Ended ------------------------ December 31, December 31, 2008 2007 ----------- ----------- INTEREST INCOME Interest and fees on loans $ 273,392 $ 294,099 Interest on investments 5,663 5,573 ----------- ----------- Total interest income 279,055 299,672 ----------- ----------- INTEREST EXPENSE Interest on deposits 96,091 97,080 Interest on borrowed funds 16,094 15,961 ----------- ----------- Total interest expense 112,185 113,041 ----------- ----------- Net interest income 166,870 186,631 PROVISION FOR LOAN LOSSES 120,000 11,400 ----------- ----------- Net interest income after provision for loan losses 46,870 175,231 ----------- ----------- NONINTEREST INCOME Provision for loss on securities (6,430) - Gain (loss) on sale of securities 4,570 (937) Gain on sale of secondary mortgage loans 1,321 1,586 Gain on sale of premises and equipment 30 24 Gain on sale of other real estate owned 97 - Service charges on deposit accounts 5,421 4,721 Other noninterest income 9,821 7,915 ----------- ----------- Total noninterest income 14,830 13,309 ----------- ----------- NONINTEREST EXPENSE Salaries and employee benefits 48,403 48,297 Occupancy expense 11,148 9,956 State business taxes 2,013 2,066 FHLB prepayment penalty - 1,534 Other noninterest expense 21,435 15,163 ----------- ----------- 82,999 77,016 ----------- ----------- Goodwill impairment 77,073 - ----------- ----------- Total noninterest expense 160,072 77,016 ----------- ----------- INCOME (LOSS) BEFORE PROVISION (BENEFIT) FOR INCOME TAXES (98,372) 111,524 PROVISION (BENEFIT) FOR INCOME TAXES (8,635) 37,586 ----------- ----------- NET INCOME (LOSS) $ (89,737) $ 73,938 =========== =========== Weighted average number of shares outstanding for the period 46,991,625 45,265,723 Basic earnings (losses) per share $ (1.91) $ 1.63 =========== =========== Weighted average number of diluted shares outstanding for period 46,991,625 45,601,066 Diluted earnings (losses) per share $ (1.91) $ 1.62 =========== =========== FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES (In thousands, except for shares and per share amounts) (Unaudited) PRO FORMA DISCLOSURES EXCLUDING THE EFFECTS OF THE (GAIN) LOSS ON SECURITIES AND THE GOODWILL IMPAIRMENT Twelve Months Ended ------------------------ December 31, December 31, 2008 2007 ----------- ------------ NET INCOME (LOSS) $ (89,737) $ 73,938 ADJUSTMENTS Provision for loss on securities 6,430 - (Gain) loss on sale of securities (4,570) - Goodwill impairment 77,073 - ----------- ------------ Total adjustments 78,933 - INCOME (LOSS) BEFORE PROVISION (BENEFIT) FOR INCOME TAXES (10,804) 73,938 INCOME TAX PROVISION (BENEFIT) RELATED TO ADJUSTMENTS (651) - ----------- ------------ NET INCOME (LOSS) FROM RECURRING OPERATIONS $ (10,153) $ 73,938 =========== ============ Weighted average number of shares outstanding for the period 46,991,625 45,265,723 Basic earnings (losses) per share EXCLUDING the effects of (gain) loss on securities and goodwill impairment $ (0.22) $ 1.63 =========== ============ Weighted average number of diluted shares outstanding for period 46,991,625 45,601,066 Diluted earnings (losses) per share EXCLUDING the effects of (gain) loss on securities and goodwill impairment $ (0.22) $ 1.62 =========== ============ FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (In thousands, except for shares and per share amounts) (Unaudited) December 31, September 30, December 31, 2008 2008 2007 ----------- ----------- ----------- ASSETS Cash and due from banks $ 52,022 $ 56,707 $ 99,102 Federal funds sold 117,740 130,334 5 Securities Available for sale, at fair value 90,606 98,095 131,378 Held to maturity, at amortized cost 3,085 3,737 3,743 ----------- ----------- ----------- Total securities 93,691 101,832 135,121 Loans held for resale 6,678 3,104 6,227 Loans 3,772,055 3,828,948 3,605,895 Allowance for loan losses (112,556) (106,635) (53,995) ----------- ----------- ----------- Net loans 3,666,177 3,725,417 3,558,127 Premises and equipment, net 51,502 51,823 47,293 Intangible assets 794 77,938 78,150 Federal Home Loan Bank (FHLB) stock 19,885 15,622 18,738 Bank owned life insurance 24,321 24,056 23,734 Other real estate owned 10,803 3,693 367 Other assets 67,510 57,541 35,052 ----------- ----------- ----------- Total assets $ 4,104,445 $ 4,244,963 $ 3,995,689 =========== =========== =========== LIABILITIES Deposits Noninterest bearing $ 395,451 $ 377,279 $ 390,526 Interest bearing 2,879,714 3,026,715 2,552,710 ----------- ----------- ----------- Total deposits 3,275,165 3,403,994 2,943,236 Federal funds purchased and securities sold under repurchase agreements 21,616 34,701 258,145 Federal Home Loan Bank advances 429,417 329,833 298,636 Junior subordinated debt 5,156 5,156 5,156 Other liabilities 21,048 27,548 30,904 ----------- ----------- ----------- Total liabilities 3,752,402 3,801,232 3,536,077 ----------- ----------- ----------- SHAREOWNERS' EQUITY Common stock, no par value; 100,000,000 shares authorized 256,137 255,575 252,016 Retained earnings 98,020 187,591 202,729 Accumulated other comprehensive income (loss), net of tax (2,114) 565 4,867 ----------- ----------- ----------- Total shareowners' equity 352,043 443,731 459,612 ----------- ----------- ----------- Total liabilities and shareowners' equity $ 4,104,445 $ 4,244,963 $ 3,995,689 =========== =========== =========== Shares outstanding at end of period 47,095,103 47,023,716 46,950,878 Book value $ 7.48 $ 9.44 $ 9.79 Tangible book value $ 7.46 $ 7.78 $ 8.12 FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES SELECTED OTHER FINANCIAL INFORMATION AND RATIOS (In thousands) (Unaudited) For the Period Ended ---------------------------------------------------------- December 31, September 30, June 30, March 31, December 31, 2008 2008 2008 2008 2007 ---------- ---------- ---------- ---------- ---------- Loans by Type (including loans held for resale) Commercial and industrial $ 457,215 $ 452,286 $ 448,360 $ 416,154 $ 402,569 Real Estate: Commercial 1,044,833 1,049,939 1,048,321 1,025,047 1,003,916 Construction 949,909 1,030,591 1,048,552 1,084,264 1,062,662 Land development 580,453 607,501 598,931 565,690 537,410 Completed lots 249,685 242,234 236,004 245,500 249,573 Residential 1-4 family 431,170 379,485 357,650 312,545 288,571 Installment and other loans 65,468 70,016 69,460 67,750 67,421 ---------- ---------- ---------- ---------- ---------- Total loans $3,778,733 $3,832,052 $3,807,278 $3,716,950 $3,612,122 ========== ========== ========== ========== ========== Allowance for Loan Losses Balance at beginning of period $ 57,658 $ 57,658 $ 57,658 $ 57,658 $ 44,195 ---------- ---------- ---------- ---------- ---------- Provision for loan losses 120,000 75,600 33,500 9,000 11,400 ---------- ---------- ---------- ---------- ---------- Loans charged-off Commercial and industrial (3,101) (1,167) (381) (138) (1,183) Real Estate: Commercial (1,264) - - - - Construction (31,968) (17,316) (9,275) (2,652) (201) Land development (12,165) (1,050) - (250) - Completed lots (13,839) (4,031) - (26) - Residential 1-4 family (846) (250) - - (300) Installment and other loans (343) (246) (106) (24) (222) ---------- ---------- ---------- ---------- ---------- Total charged- off loans (63,526) (24,060) (9,762) (3,090) (1,906) ---------- ---------- ---------- ---------- ---------- Recoveries Commercial and industrial 308 237 226 94 845 Real Estate: Commercial - - - - - Construction 161 9 10 7 - Land development - - - - - Completed lots 9 5 - - - Residential 1-4 family - - - - - Installment and other loans 28 23 11 7 141 ---------- ---------- ---------- ---------- ---------- Total recoveries 506 274 247 108 986 ---------- ---------- ---------- ---------- ---------- Net (charge-offs) recoveries (63,020) (23,786) (9,515) (2,982) (920) ---------- ---------- ---------- ---------- ---------- Balance before portion identified for undisbursed loans 114,638 109,472 81,643 63,676 54,675 Reserve acquired in merger - - - - 2,983 Portion of reserve identified for undisbursed loans (2,082) (2,837) (2,921) (3,399) (3,663) ---------- ---------- ---------- ---------- ---------- Balance at end of period $ 112,556 $ 106,635 $ 78,722 $ 60,277 $ 53,995 ========== ========== ========== ========== ========== Allowance for loan losses as a percentage of total loans, including loans held for resale 2.98% 2.78% 2.07% 1.62% 1.49% ========== ========== ========== ========== ========== For the Period Ended ---------------------------------------------------------- December 31, September 30, June 30, March 31, December 31, 2008 2008 2008 2008 2007 ---------- ---------- ---------- ---------- ---------- Nonperforming Assets Nonaccruing loans $ 435,225 $ 205,197 $ 119,936 $ 38,767 $ 20,908 Other real estate owned 10,803 3,693 3,681 633 367 ---------- ---------- ---------- ---------- ---------- Total nonperforming assets 446,028 208,890 123,617 39,400 21,275 ---------- ---------- ---------- ---------- ---------- Restructured loans - - - - - ---------- ---------- ---------- ---------- ---------- Total impaired assets $ 446,028 $ 208,890 $ 123,617 $ 39,400 $ 21,275 ========== ========== ========== ========== ========== Total nonaccruing loans to total loans 11.52% 5.35% 3.15% 1.04% 0.58% Total NPA to total assets 10.87% 4.92% 2.97% 0.99% 0.53% Interest Bearing Deposits Money market, sweep and NOW $ 325,554 $ 557,323 $ 600,023 $ 733,551 $ 745,780 Savings 365,114 418,535 367,731 305,982 254,722 Time deposits 2,189,046 2,050,857 1,939,297 1,750,346 1,552,208 ---------- ---------- ---------- ---------- ---------- Total interest bearing deposits $2,879,714 $3,026,715 $2,907,051 $2,789,879 $2,552,710 ========== ========== ========== ========== ========== Capital Ratios Tier 1 leverage ratio 8.62% 8.88% 9.69% 9.94% 10.55% Tier 1 risk-based capital ratio 9.64% 9.48% 9.96% 10.13% 10.13% Total risk-based capital ratio 10.91% 10.75% 11.22% 11.38% 11.38% For the Three Months Ended ---------------------------------------------------------- Performance December 31, September 30, June 30, March 31, December 31, Ratios 2008 2008 2008 2008 2007 ---------- ---------- ---------- ---------- ---------- ROA (annualized) -8.68% -1.69% 0.20% 1.55% 1.95% ROE (annualized) -81.58% -15.32% 1.75% 13.36% 17.21% Efficiency ratio 50% 49% 43% 42% 37% Average assets $4,125,319 $4,221,730 $4,087,538 $3,989,829 $3,698,795 Average shareowners' equity $ 438,908 $ 464,500 $ 473,750 $ 464,248 $ 418,696 For the Period Ended ---------------------------------------------------------- December 31, September 30, June 30, March 31, December 31, 2008 2008 2008 2008 2007 ---------- ---------- ---------- ---------- ---------- ROA (annualized) -2.18% -0.01% 0.87% 1.55% 2.13% ROE (annualized) -19.42% -0.06% 7.44% 13.36% 18.76% Efficiency ratio 45% 44% 42% 42% 37% Average assets $4,107,571 $4,102,034 $4,041,808 $3,989,829 $3,470,564 Average shareowners' equity $ 461,981 $ 469,727 $ 472,369 $ 464,248 $ 394,176 FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES SELECTED OTHER FINANCIAL INFORMATION AND RATIOS (Continued) (In thousands) (Unaudited) Quarterly Average Balances December 31, December 31, 2008 2007 $ Change % Change ------------ ------------ --------- --------- Assets Cash and due from banks $ 48,279 $ 52,813 $ (4,534) -8.6% Federal funds sold 44,246 4,133 40,113 970.6% Securities available for sale 97,124 99,893 (2,769) -2.8% Securities held to maturity 3,517 4,270 (753) -17.6% ------------ ------------ --------- --------- Total securities 100,641 104,163 (3,522) -3.4% Loans held for sale 2,414 4,135 (1,721) -41.6% Loans Commercial and industrial 456,594 380,063 76,531 20.1% RE commercial 1,051,625 960,009 91,616 9.5% RE construction 1,022,043 998,104 23,939 2.4% RE land development 602,838 514,209 88,629 17.2% RE completed lots 249,849 215,846 34,003 15.8% RE mortgage 385,218 283,953 101,265 35.7% Installment and other 69,656 64,313 5,343 8.3% ------------ ------------ --------- --------- Total 3,840,237 3,420,632 419,605 12.3% Allowance for credit losses (121,288) (48,245) (73,043) 151.4% ------------ ------------ --------- --------- Net loans 3,718,949 3,372,387 346,562 10.3% Premises and equipment 51,819 43,093 8,726 20.2% Intangible assets 77,905 54,264 23,641 43.6% FHLB Stock 18,084 15,263 2,821 18.5% BOLI 24,185 23,203 982 4.2% Other real estate owned 3,468 1,154 2,314 200.5% Other assets 37,743 28,322 9,421 33.3% ------------ ------------ --------- --------- Total assets $ 4,125,319 $ 3,698,795 $ 426,524 11.5% ============ ============ ========= ========= Liabilities Deposits: Noninterest bearing $ 389,127 $ 402,403 $ (13,276) -3.3% Interest bearing MMA, Sweep and NOW 407,758 740,578 (332,820) -44.9% Savings 392,845 247,535 145,310 58.7% Time deposits 2,065,873 1,480,371 585,502 39.6% ------------ ------------ --------- --------- Total interest bearing 2,866,476 2,468,484 397,992 16.1% Total deposits 3,255,603 2,870,887 384,716 13.4% Fed funds purchased and repurchase agreements 61,487 70,850 (9,363) -13.2% FHLB Advances 359,296 301,868 57,428 19.0% Junior subordinated debt 5,156 5,156 - 0.0% Other liabilities 4,869 31,338 (26,469) -84.5% ------------ ------------ --------- --------- Total liabilities 3,686,411 3,280,099 406,312 12.4% Total stockholders' equity 438,908 418,696 20,212 4.8% ------------ ------------ --------- --------- Total liabilities and stockholders' equity $ 4,125,319 $ 3,698,795 $ 426,524 11.5% ============ ============ ========= ========= FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES SELECTED OTHER FINANCIAL INFORMATION AND RATIOS (Continued) (In thousands) (Unaudited) Quarterly Average Balances December 31, September 30, 2008 2008 $ Change % Change ------------ ------------ --------- --------- Assets Cash and due from banks $ 48,279 $ 53,789 $ (5,510) -10.2% Federal funds sold 44,246 58,168 (13,922) -23.9% Securities available for sale 97,124 137,945 (40,821) -29.6% Securities held to maturity 3,517 3,739 (222) -5.9% ------------ ------------ --------- --------- Total securities 100,641 141,684 (41,043) -29.0% Loans held for sale 2,414 2,822 (408) -14.5% Loans Commercial and industrial 456,594 458,330 (1,736) -0.4% RE commercial 1,051,625 1,055,207 (3,582) -0.3% RE construction 1,022,043 1,051,884 (29,841) -2.8% RE land development 602,838 602,436 402 0.1% RE completed lots 249,849 241,036 8,813 3.7% RE mortgage 385,218 362,543 22,675 6.3% Installment and other 69,656 69,163 493 0.7% ------------ ------------ --------- --------- Total 3,840,237 3,843,421 (3,184) -0.1% Allowance for credit losses (121,288) (87,365) (33,923) 38.8% ------------ ------------ --------- --------- Net loans 3,718,949 3,756,056 (37,107) -1.0% Premises and equipment 51,819 52,581 (762) -1.4% Intangible assets 77,905 77,977 (72) -0.1% FHLB Stock 18,084 17,207 877 5.1% BOLI 24,185 24,321 (136) -0.6% Other real estate owned 3,468 3,179 289 9.1% Other assets 37,743 36,768 975 2.7% ------------ ------------ --------- --------- Total assets $ 4,125,319 $ 4,221,730 $ (96,411) -2.3% ============ ============ ========= ========= Liabilities Deposits: Noninterest bearing $ 389,127 $ 386,896 $ 2,231 0.6% Interest bearing MMA, Sweep and NOW 407,758 586,319 (178,561) -30.5% Savings 392,845 392,552 293 0.1% Time deposits 2,065,873 2,008,838 57,035 2.8% ------------ ------------ --------- --------- Total interest bearing 2,866,476 2,987,709 (121,233) -4.1% Total deposits 3,255,603 3,374,605 (119,002) -3.5% Fed funds purchased and repurchase agreements 61,487 33,631 27,856 82.8% FHLB Advances 359,296 329,985 29,311 8.9% Junior subordinated debt 5,156 5,156 - 0.0% Other liabilities 4,869 13,853 (8,984) -64.9% ------------ ------------ --------- --------- Total liabilities 3,686,411 3,757,230 (70,819) -1.9% Total stockholders' equity 438,908 464,500 (25,592) -5.5% ------------ ------------ --------- --------- Total liabilities and stockholders' equity $ 4,125,319 $ 4,221,730 $ (96,411) -2.3% ============ ============ ========= ========= FRONTIER FINANCIAL CORPORATION AND SUBSIDIARIES SELECTED OTHER FINANCIAL INFORMATION AND RATIOS (Continued) (In thousands) (Unaudited) Year-to-Date Average Balances December 31, December 31, 2008 2007 $ Change % Change ------------ ------------ --------- --------- Assets Cash and due from banks $ 50,410 $ 68,285 $ (17,875) -26.2% Federal funds sold 29,197 18,405 10,792 58.6% Securities available for sale 122,499 93,582 28,917 30.9% Securities held to maturity 3,685 3,751 (66) -1.8% ------------ ------------ --------- --------- Total securities 126,184 97,333 28,851 29.6% Loans held for sale 3,392 4,774 (1,382) -28.9% Loans Commercial and industrial 437,481 383,242 54,239 14.2% RE commercial 1,036,171 919,028 117,143 12.7% RE construction 1,056,159 890,404 165,755 18.6% RE land development 585,508 457,116 128,392 28.1% RE completed lots 244,575 209,916 34,659 16.5% RE mortgage 342,653 258,430 84,223 32.6% Installment and other 68,562 62,841 5,721 9.1% ------------ ------------ --------- --------- Total 3,774,501 3,185,751 588,750 18.5% Allowance for credit losses (82,528) (43,972) (38,556) 87.7% ------------ ------------ --------- --------- Net loans 3,691,973 3,141,779 550,194 17.5% Premises and equipment 51,214 35,944 15,270 42.5% Intangible assets 78,013 41,224 36,789 89.2% FHLB Stock 18,587 15,088 3,499 23.2% BOLI 24,118 22,709 1,409 6.2% Other real estate owned 2,301 395 1,906 482.5% Other assets 35,574 29,402 6,172 21.0% ------------ ------------ --------- --------- Total assets $ 4,107,571 $ 3,470,564 $ 637,007 18.4% ============ ============ ========= ========= Liabilities Deposits: Noninterest bearing $ 379,766 $ 396,293 $ (16,527) -4.2% Interest bearing MMA, Sweep and NOW 586,943 716,777 (129,834) -18.1% Savings 349,318 268,017 81,301 30.3% Time deposits 1,894,455 1,325,777 568,678 42.9% ------------ ------------ --------- --------- Total interest bearing 2,830,716 2,310,571 520,145 22.5% Total deposits 3,210,482 2,706,864 503,618 18.6% Fed funds purchased and repurchase agreements 73,460 42,542 30,918 72.7% FHLB Advances 338,268 294,169 44,099 15.0% Junior subordinated debt 5,156 5,156 - 0.0% Other liabilities 18,224 27,657 (9,433) -34.1% ------------ ------------ --------- --------- Total liabilities 3,645,590 3,076,388 569,202 18.5% Total stockholders' equity 461,981 394,176 67,805 17.2% ------------ ------------ --------- --------- Total liabilities and stockholders' equity $ 4,107,571 $ 3,470,564 $ 637,007 18.4% ============ ============ ========= =========
