Cascade Financial's Net Income up 12% in 2004; Strong Loan Growth Con

Cascade Financial's Net Income up 12% in 2004; Strong Loan Growth Continues, Credit Quality Remains Outstanding

    Business Editors

    EVERETT, Wash.--(BUSINESS WIRE)--Jan. 25, 2005--Cascade Financial Corporation (Nasdaq:CASB), parent company of Cascade Bank, today reported that profits grew 12.4% in 2004 and 12.9% in the fourth quarter. Loan and core deposit growth remained strong, through both internal generation and the acquisition of Issaquah Bancshares, Inc., the parent company of Issaquah Bank, in June. Net income was $10.8 million in 2004, with diluted earnings per share growing to $1.16, compared to $9.6 million and $1.13 the previous year. Excluding merger-related costs incurred in the second quarter of 2004, earnings per share were $1.20 in the year, compared to $1.13 in 2003. In the quarter ended December 31, 2004, net income increased 12.9% to $2.8 million, or $0.29 per diluted share, compared to $2.5 million, or $0.29 per share in the fourth quarter a year ago. Earnings per share are adjusted to reflect the issuance of 1.26 million shares of common stock as part of the consideration for acquiring Issaquah Bancshares.

    2004 Highlights

--	Net income increased 12.4% over 2003.
--	Net interest income grew 17.3%.
--	Revenues increased 12.8% to $37 million.
--	Return on tangible equity improved to 16.2% and return on equity was 13.2%.
--	Total loans grew 39.8% from a year ago, with a focus on higher-yielding commercial credits.
--	Credit quality remained strong, with nonperforming loans improving to 0.07% of total loans at year-end.
--	The cost of funds decreased, with checking accounts showing strong growth.
--	Checking service fees grew considerably, while gains on the sale of loans and securities dropped substantially.

    "The past year was one of tremendous growth for Cascade, both through organic growth and our acquisition of Issaquah Bancshares," stated Carol K. Nelson, President and CEO. "We have focused on growing higher-yielding business and commercial real estate loans and funding them with lower-cost deposits, and we have maintained our excellent asset quality. As a result, Cascade is a stronger institution than it was a year ago, and we have the tools in place to continue our improvements in 2005."

    Operating Results

    "Our efforts to reduce long-term interest rate risk, combined with additional Sarbanes-Oxley expenses, the suspension of the Federal Home Loan Bank of Seattle's fourth quarter dividend, and costs associated with our acquisition of Issaquah Bancshares made for a challenging 2004," Nelson said. "The interest rate swaps we entered into in the third quarter will likely continue to mute earnings growth until interest rates move up from current levels. Once rates begin climbing, the strong fundamentals of our business, which include solid loan growth, excellent credit quality and a commitment to efficient operations, should allow us to achieve our long-term goal of 10-15% earnings per share growth in 2005."
    Revenues grew 12.8% to $37.1 million in 2004, from $32.9 million the previous year. In the fourth quarter, revenues rose 20.2% to $9.9 million, compared to $8.2 million in the last quarter of 2003.
    "The two components of revenue, net interest income and non-interest income, both showed considerable gains in the fourth quarter," stated Lars Johnson, EVP and CFO. "Net interest income was also up for the year, but non-interest income declined as our gains on sale of loans and securities were only $738,000 in 2004, compared to $2.6 million in the previous year. In addition, net interest income was hindered in both the three- and twelve-month periods by a couple of issues: our entry into interest rate swaps that limited our exposure to rate movements, and our hesitancy to grow the securities portfolio in anticipation of short-term rate hikes."
    Net interest income grew 17.3% in the year to $32.4 million, compared to $27.6 million in 2003, reflecting a higher asset base and a shift in the mix of both loans and deposits. Other income was $4.7 million in 2004, compared to $5.3 million in 2003, as a 46.3% increase in checking and service fees only partially offset the dramatic decline in gains on sales of loans and securities. Other expense grew 14.6% to $20.3 million in 2004, from $17.8 million last year, reflecting the merger expenses, internal growth, and increased costs associated with regulatory compliance.
    In the quarter ended December 31, 2004, net interest income was up 18.8% to $8.7 million, from $7.3 million last year. Other income totaled $1.2 million in the fourth quarter of 2004, compared to $887,000 a year earlier, reflecting a 35.3% improvement in checking and service fees, offsetting the decline in gain on sale of loans and securities. Other expenses were up 25.8% to $5.5 million in the quarter, from $4.4 million in the fourth quarter of last year, due to costs associated with operating the two Issaquah Bank branches.

    Balance Sheet Management

    "Business banking and commercial real estate lending remain a focal point, with strong production throughout 2004 and a solid pipeline as we enter 2005," Nelson said. "While the Issaquah acquisition brought us high-quality commercial loans and low-cost deposits, we continued to grow Cascade Bank's balance sheet organically in the same manner."
    Total loans increased 39.8% to $807 million at year-end, compared to $577 million at the end of 2003. The majority of new loans were internally generated, although $101 million in loans were acquired with Issaquah Bancshares. Total assets increased 23.0% to $1.1 billion at December 31, 2004, compared to $885 million a year ago, again partially due to the additional assets from Issaquah Bank.
    Commercial loans grew 64.7% to $578 million, compared to $351 million a year ago. The three components of the bank's commercial loan portfolio each increased sizably over the past year, with commercial real estate growing by 113.1%, real estate construction loans growing 71.2%, and business loans growing by 42.9%. At year-end, commercial loans represented 71.7% of total loans, up from 60.8% of the portfolio a year ago. Multifamily loans grew by 5.9%, but decreased to 11.5% of total loans, from 15.1% at the end of last year. Residential and other consumer loans declined slightly, dropping to 16.8% of total loans, from 24.0% a year ago.
    Deposits have grown by 27.9% to $722 million, compared to $564 million at the end of last year. Checking balances have grown by 78.9% and savings and money market accounts have grown by 29.8%, reflecting a 45.5% increase in core deposits. Time deposits have grown in dollars, but now represent 60.5% of total deposits, down from 65.3% a year ago.
    "Our focus on adding higher-yielding, commercial credits funded by low-cost deposits has helped us to lower interest rate risk and expand our net interest margin slightly," Johnson said. Securities available for sale have declined by 34.5% from a year ago to $124 million, and total securities have decreased by 22.0% to $216 million. Net interest margin improved to 3.44% in 2004, from 3.35% the previous year. In the fourth quarter, the net interest margin was 3.41%, compared to 3.45% in the final quarter of 2003.
    Primarily due to the issuance of stock associated with the Issaquah Bank acquisition, stockholders' equity grew 50.5% to $96.3 million, from $64.0 million at the end of last year. Book value per share was $10.07 at year-end 2004, compared to $7.76 a year earlier. Due primarily to the creation of intangible assets in connection with the acquisition of Issaquah Bancshares, tangible book value was $7.44, compared to $7.78 at the end of 2003.

    Credit Quality

    "Credit quality remains exceptionally strong, with non-performing loans declining despite our larger loan portfolio, which contains more higher-yielding commercial credits than we had a year ago," Nelson said. "Net charge-offs were actually cut in half from 2003."
    At year-end 2004, nonperforming loans (NPLs) were $532,000, down dramatically from $1.9 million a year ago. NPLs were 0.07% of total loans at December 31, 2004, compared to 0.33% of loans a year ago. Based on management's evaluation of credit quality, the annual provision for loan losses decreased to $675,000 in the year, including $150,000 in the fourth quarter, compared to $1.3 million and $300,000, respectively, in 2003. Cascade's allowance for loan losses was $9.6 million at quarter-end, or 1.19% of total loans and well in excess of nonperforming loans.

    Performance Measures

    Cascade's return on tangible equity (ROTE) improved to 16.2% in the year, compared to 15.8% a year ago. ROTE grew to 16.4% for the fourth quarter of 2004, from 15.8% last year. Management uses ROTE, a non-GAAP performance measure, to eliminate the goodwill created by the merger, and believes that this provides a more consistent comparison with pre-merger performance. Return on GAAP equity (ROE) was 11.9% in the quarter and 13.2% in 2004, compared to 15.8% in both periods a year ago. Return on assets (ROA) was 1.09%, compared to 1.13% in 2003, and ROA was 1.04% in the fourth quarter, compared to 1.14% last year. The efficiency ratio was 54.7% in 2004, versus 53.9% a year ago, and 56.2% in the quarter ended December 31, 2004, compared to 53.7% in the fourth quarter of 2003.

    Conference Call

    Carol Nelson and Lars Johnson will host a conference call on Wednesday, January 26, at 10:00 am PST (1:00 pm EST). Interested investors may listen to the call live or via replay at www.cascadebank.com. Investment professionals are invited to dial 303-262-2140 to participate in the live call. A telephone replay of the call will be available for three weeks at 303-590-3000, using passcode 11018161#.

    About Cascade Financial

    Established in 1916, Cascade Bank, the only operating subsidiary of Cascade Financial Corporation, is a state chartered commercial bank headquartered in Snohomish County, Washington. Cascade Bank operates 16 full service offices, located in Everett, Lynnwood, Marysville, Mukilteo, Smokey Point, Issaquah, Clearview, Woodinville, Lake Stevens, Bellevue and Snohomish. Issaquah Bank, a division of Cascade Bank, operates offices in Issaquah and North Bend.
    In July 2004, US Banker magazine ranked Cascade #39 out of the Top 200 Publicly Traded Community Banks with less than $1 billion in assets, based on three-year average return on equity. In October, the same publication named President and CEO Carol Nelson one of the 25 Most Powerful Women in Banking.

    This press release contains supplemental financial information determined by methods other than in accordance with Accounting Principles Generally Accepted in the United States of America ("GAAP"). These measures include return on tangible equity, tangible book value per share and tangible capital to asset ratio. Cascade's management uses these non-GAAP measures in its analysis of the company's performance. These measures exclude the average and ending balances of acquisition-related goodwill and intangibles in determining average tangible shareholders' equity. Banking and financial institution regulators also exclude goodwill and intangibles from shareholders' equity when assessing the capital adequacy of a financial institution. Management believes the presentation of the financial measure excluding the impact of these items provides useful supplemental information that is essential for a proper understanding of the financial results of Cascade Financial Corporation, as they provide a method to assess management's success in utilizing the company's tangible capital. This disclosure should not be viewed as a substitute for results determined to be in accordance with GAAP, nor is it necessarily comparable to non-GAAP performance measures that may be presented by other companies.

    Safe Harbor Statement

    This document contains forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those projected. Those factors include, but are not limited to: continued strong demand for Cascade's products and services, particularly quality commercial loans, the continued successful integration of Issaquah Bank, loan delinquency rates, the ability to attract low-cost deposits, management's ability to minimize interest rate exposure and the impact of interest rate movements, the ability to attract and retain qualified people, and other factors. For a discussion of factors that could cause actual results to differ, please see the Company's publicly available Securities and Exchange Commission filings, including its Annual Report on Form 10-K for the fiscal year ended December 31, 2003.

CONSOLIDATED FINANCIAL HIGHLIGHTS -------------------------------------- INCOME STATEMENT Three Months Ended (Dollars in thousands except per December 31, Change share amounts) 2004 2003 ---------- ---------- (Unaudited)

Interest income $ 15,093 $ 12,577 20.0% Interest expense 6,395 5,254 21.7% ---------- ---------- Net interest income $ 8,698 $ 7,323 18.8% Provision for loan losses 150 300 -50.0% ---------- ---------- Net interest income after provision 8,548 7,023 21.7% Other income Gain on sale of loans 29 107 -72.9% Gain on sale of securities - 46 NA Checking service fees 555 439 26.4% Other service fees 197 117 68.4% BOLI 165 149 10.7% Gain/(loss) on sale of real estate (17) - NA Other non-interest income 239 29 724.1% ---------- ---------- Total other income 1,168 887 31.7%

Total Income 9,716 7,910 22.8%

Compensation expense 3,094 2,471 25.2% Other operating expenses 2,451 1,938 26.5% Merger expenses - - NA FHLB advance prepayment fees - - NA ---------- ---------- Total other expense 5,545 4,409 25.8% ---------- ---------- Net income before tax 4,171 3,501 19.1% Income tax expense 1,347 999 34.8% ---------- ----------

Net earnings $ 2,824 $ 2,502 12.9% ========== ==========

EARNINGS PER SHARE INFORMATION Earnings per share, basic $ 0.30 $ 0.30 Earnings per share, diluted 0.29 0.29 Weighted average number of shares outstanding: Basic 9,560,593 8,236,650 Diluted 9,869,402 8,561,834

PERFORMANCE MEASURES Return on equity 11.90% 15.77% Return on tangible equity 16.40% 15.77% Return on average assets 1.04% 1.14% Efficiency ratio 56.20% 53.70% Net interest margin 3.41% 3.45%

INCOME STATEMENT Twelve Months Ended (Dollars in thousands except per December 31, Change share amounts) 2004 2003 ---------- ---------- (Unaudited)

Interest income $ 55,316 $ 50,363 9.8% Interest expense 22,919 22,753 0.7% ---------- ---------- Net interest income 32,397 27,610 17.3% Provision for loan losses 675 1,275 -47.1% ---------- ---------- Net interest income after provision 31,722 26,335 20.5% Other income Gain on sale of loans 228 855 -73.3% Gain on sale of securities 510 1,790 -71.5% Checking service fees 2,069 1,415 46.2% Other service fees 704 480 46.7% BOLI 566 598 -5.4% Gain/(loss) on sale of real estate 82 48 70.8% Other non-interest income 588 120 390.0% ---------- ---------- Total other income 4,747 5,306 -10.5%

Total Income 36,469 31,641 15.3%

Compensation expense 11,483 9,617 19.4% Other operating expenses 8,452 7,253 16.5% Merger expenses 356 - NA FHLB advance prepayment fees 26 863 -97.0% ---------- ---------- Total other expense 20,317 17,733 14.6% ---------- ---------- Net income before tax 16,152 13,908 16.1% Income tax expense 5,367 4,309 24.6% ---------- ----------

Net earnings 10,785 9,599 12.4% ========== ==========

EARNINGS PER SHARE INFORMATION Earnings per share, basic 1.20 1.17 Earnings per share, diluted 1.16 1.13 Weighted average number of shares outstanding: Basic 8,952,493 8,184,455 Diluted 9,276,232 8,461,503

PERFORMANCE MEASURES Return on equity 13.22% 15.81% Return on tangible equity 16.24% 15.81% Return on average assets 1.09% 1.13% Efficiency ratio 54.70% 53.87% Net interest margin 3.44% 3.35%

BALANCE SHEET December 31, September 30, December 31, Annual 2004 2004 2003 Change -------------- -------------- -------------- (Unaudited) (Unaudited) (Unaudited)

Cash and due from banks $ 11,692 15,537 $ 13,011 -10.1% Interest bearing deposits 1,337 1,663 1,060 26.1% Securities held to maturity 91,339 95,340 86,719 5.3% Securities available for sale 124,276 129,996 189,747 -34.5% ------------ ------------ ------------ Total securities 215,615 225,336 276,466 -22.0% Loans Business 292,117 271,988 204,446 42.9% Real estate construction 107,431 109,901 62,742 71.2% Commercial real estate 178,704 170,450 83,856 113.1% Multi-family 92,372 92,387 87,212 5.9% Home equity/consumer 30,125 32,239 33,163 -9.2% Residential 105,975 107,769 105,565 0.4% ------------ ------------ ------------ Total Loans 806,724 784,734 576,984 39.8% Deferred loan fees (2,695) (2,870) (2,179) 23.7% Loan loss reserve (9,563) (9,435) (7,711) 24.0% ------------ ------------ ------------ Loans, net 794,466 772,429 567,094 40.1% Premises and equipment, net 12,824 12,923 8,587 49.3% Real estate owned 868 891 474 83.1% Bank owned life insurance 16,650 11,506 11,162 49.2% Other assets 9,251 8,439 7,366 25.6% Goodwill and intangibles 26,252 25,892 - NA ------------ ------------ ------------ Total assets $ 1,088,955 $ 1,074,616 $ 885,220 23.0% ============ ============ ============

Deposits Checking accounts 112,564 113,173 62,927 78.9% Money market and savings accounts 172,584 173,963 132,986 29.8% Certificates of deposit 436,760 423,277 368,401 18.6% ------------ ------------ ------------ Total deposits 721,908 710,413 564,314 27.9% FHLB advances 228,000 230,000 200,000 14.0% Securities sold under repurchase agreement 20,902 20,886 39,911 -47.6% Jr. Subordinated Deb. (TPS) 15,454 10,341 10,212 51.3% Other liabilities 6,441 7,951 6,826 -5.6% ------------ ------------ ------------ Total liabilities 992,705 979,591 821,263 20.9%

Stockholders' equity Common stock and paid in capital 37,422 37,136 12,003 211.8% Retained earnings 59,975 58,817 52,109 15.1% Accumulated comprehensive gain/loss (1,147) (928) (155) 640.0% ------------ ------------ ------------ Total stockholders' equity 96,250 95,025 63,957 50.5%

Total liabilities and equity $ 1,088,955 $ 1,074,616 $ 885,220 23.0% ============ ============ ============

ADDITIONAL INFORMATION December 31, September 30, December 31, 2004 2004 2003 --------------- --------------- ------------- (Unaudited) (Unaudited) (Unaudited)

Book value per common share $ 10.07 $ 9.94 $ 7.76 Common stock outstanding 9,559,822 9,565,502 8,241,288 Capital/asset ratio (Tier 1, inc. Jr. Subordinated Deb.) 10.26% 9.80% 8.37% Average assets $ 1,083,470 $ 1,044,062 $ 876,262 Average earning assets 1,020,513 983,528 850,520 Average equity 94,806 91,668 63,627 Average tangible equity 68,896 65,757 63,627 Cash dividend per share $ 0.08 $ 0.07 $ 0.07

Total equity $ 96,250 $ 95,025 $ 63,957 Less goodwill and intangibles 26,252 25,892 - --------------- --------------- ------------- Tangible equity $ 69,998 $ 69,133 $ 63,957

Tangible book value per share $ 7.32 $ 7.23 $ 7.76 Tangible capital/asset ratio (ex Jr. Subordinated Deb.) 6.59% 6.59% 7.22%

December 31, September 30, December 31, 2004 2004 2003 --------------- --------------- ------------- (Unaudited) (Unaudited) (Unaudited) ASSET QUALITY Non-performing loans $ 532 $ 1,151 $ 1,921 Non-performing loans/total loans 0.07% 0.15% 0.33% Net loan charge-offs (ytd) $ 218 $ 196 $ 436 Net loan charge- offs/total loans (ytd) 0.03% 0.02% 0.08% Allowance for loan losses $ 9,563 $ 9,435 $ 7,711 Allowance for loan losses/NPLs 1798% 820% 401% Allowance for loan losses/total loans 1.19% 1.20% 1.34% Real estate owned $ 868 $ 891 $ 474 Non-performing assets/total assets 0.13% 0.19% 0.27%

--30--CER/se*

CONTACT: Cascade Financial Corporation Carol K. Nelson, CEO Lars Johnson, CFO 425-339-5500 www.cascadebank.com

KEYWORD: WASHINGTON INDUSTRY KEYWORD: BANKING EARNINGS CONFERENCE CALLS SOURCE: Cascade Financial Corporation

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