<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR l5(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
Commission File Number 000-24503
WASHINGTON BANKING COMPANY
- --------------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Washington 91-1725825
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1421 S.W. Barlow Street
Oak Harbor, Washington 98277
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(360) 679-3121
- --------------------------------------------------------------------------------
(Issuer's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the issuer: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
The number of shares of the issuer's Common Stock outstanding at
July 31, 1998 was 4,189,050.
<PAGE> 2
TABLE OF CONTENTS
PART I -- FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
----
<S> <C>
Item 1. Financial statements
Consolidated Statements of Financial Condition - June 30, 1998
and December 31, 1997.............................................................. 3
Consolidated Statements of Income - three months and
six months ended June 30, 1998 and 1997............................................ 4
Consolidated Statements of Shareholders' Equity -
six months ended June 30, 1998..................................................... 5
Consolidated Statements of Cash Flows -
six months ended June 30, 1998 and 1997............................................ 6
Notes to Condensed Consolidated financial statements............................... 7
Item 2. Management Discussion and Analysis of Financial Condition
and Results of Operations................................................................... 10
Item 3. Interest Rate Sensitivity.................................................................... 15
PART II -- OTHER INFORMATION
Item 2. Change in Securities and Use of Proceeds..................................................... 16
Item 6. Exhibits and reports on Form 8-K............................................................. 17
Signatures.................................................................................. 17
</TABLE>
2
<PAGE> 3
WASHINGTON BANKING COMPANY
AND SUBSIDIARY
Condensed Consolidated Statements of Financial Condition
June 30, 1998 and December 31, 1997
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
ASSETS 1998 1997
--------------------------
(UNAUDITED)
<S> <C> <C>
Cash and due from banks $ 14,527 6,263
Interest bearing deposits 10,857 --
Federal funds sold 8,900 1,750
-------- --------
Total cash and cash equivalents 34,284 8,013
-------- --------
Federal Home Loan Bank stock 709 682
Investment securities, available-for-sale 7,030 5,521
Investment securities, held-to-maturity 23,299 23,508
-------- --------
Total investment securities 31,038 29,711
-------- --------
Loans receivable, net 130,224 116,239
Premises and equipment, net 6,010 4,287
Other real estate owned 115 30
Deferred tax asset 368 370
Other assets 1,530 1,418
-------- --------
Total assets $203,569 160,068
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits $173,824 146,394
Other liabilities 1,066 639
-------- --------
Total liabilities 174,890 147,033
-------- --------
Shareholders' Equity:
Preferred stock, no par value. Authorized 20,000 shares;
no shares issued or outstanding -- --
Common stock, no par value. Authorized 10,000,000 shares,
issued and outstanding 4,189,050 and 2,809,050 shares
June 30, 1998 and December 31, 1997 17,836 2,943
Retained earnings 10,824 10,075
Accumulated other comprehensive income, net 19 17
-------- --------
Total shareholders' equity 28,679 13,035
-------- --------
Total liabilities and shareholders' equity $203,569 160,068
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 4
WASHINGTON BANKING COMPANY
AND SUBSIDIARY
Condensed Consolidated Statements of Income
Three and six months ended June 30, 1998 and 1997
(unaudited)
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
1988 1997 1998 1997
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $ 3,151 2,445 6,075 $ 4,534
Interest on taxable investment securities 269 272 530 530
Interest on tax-exempt investment securities 129 101 266 201
Dividends on FHLB stock 14 7 27 13
Interest on Federal funds sold 40 19 72 40
---------- ---------- ---------- ----------
Total interest income 3,603 2,844 6,970 5,318
Interest expense 1,415 1,021 2,730 1,891
---------- ---------- ---------- ----------
Net interest income 2,188 1,823 4,240 3,427
Provision for loan losses 150 105 345 210
---------- ---------- ---------- ----------
Net interest income after provision
for loan losses 2,038 1,718 3,895 3,217
---------- ---------- ---------- ----------
Non-interest income:
Service charges on deposits 255 276 566 549
Other 175 109 344 198
---------- ---------- ---------- ----------
Total non-interest income 430 385 910 747
---------- ---------- ---------- ----------
Non-interest expense:
Salaries and benefits 648 444 1,312 993
Occupancy expense 373 296 631 513
Merchant credit card expense 113 76 187 140
Office supplies and printing 101 72 166 154
Insurance expense 92 73 172 114
Data processing 65 50 128 103
Consulting and professional fees 15 11 61 22
Other 381 310 847 564
---------- ---------- ---------- ----------
Total non-interest expense 1,788 1,332 3,504 2,603
---------- ---------- ---------- ----------
Income before income taxes 680 771 1,301 1,361
Provision for income taxes 160 261 365 523
---------- ---------- ---------- ----------
Net income $ 520 510 936 $ 838
========== ========== ========== ==========
Net income per share, basic $ 0.16 0.18 0.31 $ 0.30
========== ========== ========== ==========
Net income per share, diluted $ 0.15 0.17 0.30 $ 0.28
========== ========== ========== ==========
Average number of shares outstanding, basic 3,158,138 2,812,840 2,983,594 2,809,169
Average number of shares outstanding, diluted 3,354,850 2,977,220 3,171,836 2,973,549
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 5
WASHINGTON BANKING COMPANY
AND SUBSIDIARY
Condensed Consolidated Statements of Shareholders' Equity
June 30, 1998
(Dollars in thousands except per share data)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMPREHENSIVE TOTAL
COMMON STOCK RETAINED INCOME SHAREHOLDERS'
SHARES AMOUNT EARNINGS (LOSS), NET EQUITY
-------- -------- -------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1997 2,809 $ 2,943 10,075 17 13,035
Cash dividend, $0.07 per share (187) (187)
Net income for six months ended
June 30, 1998 (unaudited) -- -- 936 -- 936
Unrealized gains/losses for six months
ended June 30, 1998 (unaudited) -- -- -- 2 2
Net offering proceeds 1,380 14,893 -- -- 14,893
------- ------- ------ --------- -------
Balances at June 30, 1998 4,189 $17,836 10,824 19 28,679
======= ======= ====== ========= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE> 6
WASHINGTON BANKING COMPANY
AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows
Six months ended June 30, 1998 and 1997
(unaudited)
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30
1998 1997
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 936 838
Adjustments to reconcile net income to net cash
provided by operating activities:
Federal Home Loan Bank stock dividends (27) (13)
Amortization/accretion of investment premiums/discounts, net (6) 29
Provision for loan losses 345 210
Depreciation of premises and equipment 186 135
Net increase in other assets (112) (274)
Net increase in other liabilities 427 171
------- -------
Net cash provided by operating activities 1,749 1,096
------- -------
Cash flows from investing activities:
Purchases of investment securities, available-for-sale (2,500) (500)
Maturities of investment securities, available-for-sale 1,000 1,000
Purchases of investment securities, held-to-maturity (3,290) (4,195)
Maturities of investment securities, held-to-maturity 3,500 2,550
Net increase in loans (14,415) (21,620)
Purchases of premises and equipment (1,909) (624)
Purchases of Federal Home Loan Bank stock -- (29)
------- -------
Net cash used in investing activities (17,614) (23,418)
------- -------
Cash flows from financing activities:
Net increase in deposits 27,430 17,204
Federal funds borrowed -- 6,000
Dividends paid on common stock (187) --
Proceeds from stock options exercised -- 59
Proceeds from stock issued 14,893 --
------- -------
Net cash provided by financing activities 42,136 23,263
------- -------
Net increase in cash and cash equivalents 26,271 941
Cash and cash equivalents at beginning of period 8,013 5,955
------- -------
Cash and cash equivalents at end of period $34,284 6,896
======= =======
Supplemental information:
Loans foreclosed and transferred to real estate owned $ 85
Cash paid for interest $ 2,700 1,856
Cash paid for taxes 445 510
======== =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
<PAGE> 7
WASHINGTON BANKING COMPANY
AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements
Six months ended June 30, 1998 and 1997
(unaudited)
(Dollars in thousands, except for share data)
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Washington Banking Company (WBC), a Washington State bank holding
company, was formed on April 30, 1996, Whidbey Island Bank (WIB or Bank),
the principal subsidiary of WBC, is a Washington State commercial bank.
The business of the Bank, which is focused in the northern area of
Western Washington, consists primarily of attracting deposits from the
general public and originating loans. Although WIB has a diversified loan
portfolio and its market area currently enjoys a stable economic climate,
a substantial portion of its borrowers' ability to repay their loans is
dependent upon the economic conditions affecting this area related to the
agricultural, forestry and manufacturing industries, and the large
military base presence in Oak Harbor, Washington.
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts
of Washington Banking Company and its wholly-owned subsidiary, Whidbey
Island Bank (Company). The accompanying consolidated financial statements
have been prepared, without audit, pursuant to the rules and regulations
of the Securities and Exchange Commission. Accordingly, they do not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. These
consolidated financial statements should be read in conjunction with the
Company's December 1997 audited consolidated financial statements and
notes thereto included in the Company's recent Registration Statement on
Form SB-2 filed with the Securities and Exchange Commission. In the
opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been
included. Operating results for the six months ended June 30, 1998 are
not necessarily indicative of the results that may be expected for the
year ended December 31, 1998.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130 "Reporting Comprehensive Income" ("SFAS No. 130"). This statement
provides standards for reporting comprehensive, or all inclusive, income.
In the Company's case, based on current operations, it would include as
an addition or deduction to reported net income, the change in the
unrealized gain on investments. This statement will not affect reported
net income of the Company. The Company adopted SFAS No. 130 effective
January 1, 1998 and has reported comprehensive income for the three and
six months ended June 30, 1998 and 1997.
(2) STOCKHOLDERS' EQUITY
STOCK OFFERING
Effective June 23, 1998, the Company sold 1,380,000 shares of its
common stock at a subscription price of $12 per share resulting in net
proceeds to the Company of approximately $14,893.
7
<PAGE> 8
WASHINGTON BANKING COMPANY
AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements
Six months ended June 30, 1998 and 1997
(unaudited)
(Dollars in thousands, except for share data)
EARNINGS PER SHARE
The following illustrates the reconciliation of the numerators and
denominators of the basic and diluted EPS computations:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, 1998
-----------------------------------------------------
WEIGHTED PER SHARE
INCOME AVERAGE SHARES AMOUNT
--------------- --------------- ---------------
<S> <C> <C> <C>
BASIC EPS
Income available to common shareholders $ 520 3,158,138 0.16
Effect of dilutive securities; stock options 196,712 --
--------------- --------------- ---------------
DILUTED EPS $ 520 3,354,850 0.15
=============== =============== ===============
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, 1997
----------------------------------------------------
WEIGHTED PER SHARE
INCOME AVERAGE SHARES AMOUNT
-------------- -------------- --------------
<S> <C> <C> <C>
BASIC EPS
Income available to common shareholders $ 510 2,812,840 0.18
Effect of dilutive securities; stock options -- 164,380 --
-------------- -------------- --------------
DILUTED EPS $ 510 2,977,220 0.17
============== ============== ==============
</TABLE>
8
<PAGE> 9
WASHINGTON BANKING COMPANY
AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements
Six months ended June 30, 1998 and 1997
(unaudited)
(Dollars in thousands, except for share data)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1998
----------------------------------------------------
WEIGHTED PER SHARE
INCOME AVERAGE SHARES AMOUNT
-------------- -------------- --------------
<S> <C> <C> <C>
BASIC EPS
Income available to common shareholders $ 936 2,983,594 0.31
Effect of dilutive securities; stock options -- 188,242 --
-------------- -------------- --------------
DILUTED EPS $ 936 3,171,836 0.30
============== ============== ==============
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1997
----------------------------------------------------
WEIGHTED PER SHARE
INCOME AVERAGE SHARES AMOUNT
-------------- -------------- --------------
<S> <C> <C> <C>
BASIC EPS
Income available to common shareholders $ 838 2,809,169 0.30
Effect of dilutive securities; stock options -- 164,380 --
-------------- -------------- --------------
DILUTED EPS $ 838 2,973,549 0.28
============== ============== ==============
</TABLE>
(3) COMPREHENSIVE INCOME
Effective January 1, 1998, the Company implemented SFAS No. 130,
Reporting Comprehensive Income. Comprehensive income for the three and
six months ended June 30, 1998 and 1997 was $527 and $938, respectively,
and $515 and $834, respectively. Total comprehensive income for the three
and six months ended June 30, 1998 and 1997 consisted of net income and
the change in the unrealized gain on investments.
(4) SUBSEQUENT EVENT
On August 6, 1998, the Board of Directors declared a cash dividend of
$0.035 per share.
9
<PAGE> 10
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Washington Banking Company
This discussion contains certain forward-looking statements within the
meaning of the federal securities laws. Actual results and the timing of certain
events could differ materially from those projected in the forward-looking
statements due to a number of factors.
OVERVIEW
The Bank began operations in 1961, with its headquarters at Coupeville,
Washington, located on Whidbey Island. The Company was formed as a bank holding
company in April of 1996 and currently holds all of the issued and outstanding
Common Stock of the Bank. Currently, the Company and the Bank are Headquartered
in Oak Harbor. The Company's only significant business activity has been to hold
the Common Stock of the Bank and invest its available funds in accounts at the
Bank.
The Company's objective is to continue, over the next several years, to
expand its geographical presence outside of Whidbey Island, while solidifying
its market position on the Island. Currently, the geographical expansion is
expected to be concentrated in the Burlington / Mt. Vernon area of the Skagit
Valley, the Anacortes area to the north of Whidbey Island, and in other areas of
Skagit County and in the Bellingham area of Whatcom County. Additional
geographic expansion areas will be considered if experienced managers and
lending officers with a long-standing presence in the area and extensive
relationships are available and requisite customer demand exists. In pursuit of
growth strategy, in the first and second quarter, respectively, of 1998, the
Company opened a full-service branch in Anacortes and a grocery store branch on
Camano Island to complement its existing Camano Island branch. By year end 1998
the Company anticipates opening grocery store and mini branch locations in the
Mount Vernon and Bellingham areas and other areas complementing its existing
branch structure. It also anticipates opening a full-service branch in Freeland,
Washington which is located in the southern part of Whidbey Island. The Company
expects to relocate the Bellingham office to a larger office by the end of the
first quarter of 1999. Such expansion activity can be expected to require the
expenditures of substantial sums to purchase or lease real property and
equipment and hire experienced personnel. New branch offices are often not
profitable for at least the first eighteen months after opening and management
expects that any earnings will be negatively affected as the Company pursues its
growth strategy.
The Company's results of operations are dependent to a large degree on
net interest income. Interest income and cost of funds are affected
significantly by general economic conditions, particularly changes in market
interest rates, and by government policies and the actions of regulatory
authorities. The Company also generated noninterest income primarily through
service charges and fees and other sources including merchant credit card
account fees. The Company's noninterest expenses consist primarily of
compensation and employee expense, and occupancy expense.
FINANCIAL CONDITION
Total assets increased to $203.6 million at June 30, 1998 from $160.1
million at December 31, 1997, an increase of 27.2%. Of the $43.5 million
increase in total assets from December 31, 1997, $14.9 million were funds
related to the recent stock offering, which closed June 26, 1998. Net loans
totaled $130.2 million at June 30, 1998, an increase of 12.0% from December 31,
1997. Deposits were $173.8 million at June 30, 1998, an increase of 18.7% from
December 31, 1997.
The Company's allowance for loan losses at June 30, 1998 was $1.5
million, or 1.16% of total loans, compared to $1.3 million, or 1.10% of total
loans, at December 31, 1997. Nonperforming assets amounted to $1.2 million at
June 30, 1998, or 0.61% of total assets, compared to $1.2 million, or 0.74% of
total assets, at December 31, 1997.
10
<PAGE> 11
RESULTS OF OPERATIONS
Net income for the second quarter of 1998 was $520,000, or $0.15 per
diluted share, compared to $510,000, or $0.17 per diluted share, for the second
quarter of 1997, an increase in net income of 2.0%. Net income for the six
months ended June 30, 1998 was $936,000, $0.30 per diluted share, compared with
$838,000, or $0.28 per diluted share for the same period in 1997, an increase in
net income of 11.7%. The increase in net income was primarily due to increased
net interest income resulting from continued loan growth and noninterest income,
partially offset by increased expenses due principally to expansion.
NET INTEREST INCOME
Net interest income for the second quarter of 1998 increased to $2.2
million, or 20.0%, from $1.8 million in the second quarter of 1997. For the
first six months of 1998, net interest income increased to $4.2 million, or
23.7%, from $3.4 million for the same period in 1997. The increase in net
interest income is largely due to the overall growth of the Company.
Net interest margin (net interest income divided by average interest
earning assets) decreased to 5.28% in the second quarter of 1998 from 6.12% in
the second quarter of 1997. The decrease in net interest margin in the second
quarter of 1998 is primarily due to decreased yields on interest earning assets.
Average interest earning assets increased to $165.8 million at June 30, 1998,
compared to $118.8 million at June 30, 1997, a growth of $47.0 million, or
39.6%, while the average yield on interest earning assets decreased to 8.68%,
compared with 9.56% in second quarter of the prior year. The decrease in yields
on interest earning assets was caused by a general decline in rates applicable
to loans and investments. Average interest bearing liabilities increased to
$145.2 million at June 30, 1998 compared to $97.2 million at June 30, 1997, a
growth of $48.0 million, or 49.4%, while the average cost of interest bearing
liabilities decreased to 3.88% compared with 4.20% for the same period in 1997.
For the six months ended June 30, 1998, net interest margin decreased
to 5.12% from 5.76% for the same period in 1997. This decrease in net interest
margin is also primarily due to decreased yields on interest earning assets. The
average yield on interest earning assets decreased to 8.40%, from 8.94% for the
six months ended June 30, 1997. In comparison, the average cost of interest
bearing liabilities decreased to 3.76% from 3.88% in the same period in 1997.
NONINTEREST INCOME AND EXPENSE
Noninterest income increased $45,000, or 11.7%, in the second quarter
of 1998, and $163,000, or 21.8%, for the first six months of 1998, compared with
the same periods in 1997. The increase in merchant discount income on credit
card transactions contributed significantly to this increase.
Noninterest expense increased $456,000, or 34.2%, in the second quarter
of 1998 and $901,000, or 34.6%, in the first six months of 1998 compared with
the same periods in 1997, as the Company pursued its strategy of aggressive
growth through branching and product expansion. Two major components of
noninterest expense, employee compensation and occupancy, increased 46.0% and
26.0%, respectively, for the quarter compared with 1997 and 32.1% and 23.0%,
respectively, for the first six months of 1998 compared with the same period in
1997. These increases reflect the Company's growth on Whidbey and Camano Islands
and Anacortes, Burlington and Bellingham in Northwestern Washington. Total
noninterest expense was 68.3% and 68.0% of total revenues (the sum of net
interest income plus noninterest income less non recurring gains) for the second
quarter and first six months of 1998, respectively, and 60.3% and 62.4% for the
same periods in 1997, respectively.
11
<PAGE> 12
INCOME TAXES
For the second quarter and first six months of 1998, the Company
recorded income tax provisions of $160,000 and $365,000, respectively. The
overall effective tax rate has decreased in 1998 as compared to 1997 due to the
increase in interest income on tax-exempt investment securities.
LENDING ACTIVITIES
The Company originates a wide variety of loans including commercial
business loans and consumer loans.
Loan Portfolio
The following table sets forth at the dates indicated the Company's loan
portfolio composition by type of loan:
<TABLE>
<CAPTION>
June 30, % of December 31, % of
(in thousands) 1998 Total 1997 Total
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial $ 56,826 43.1% $ 48,242 41.0%
Real estate commercial and 5 or 10,342 7.9 8,711 7.4
more family residential
Real estate construction 13,897 10.6 12,646 10.8
Real estate one to four family 14,429 10.9 14,258 12.1
Consumer 36,293 27.5 33,721 28.7
--------- --------- --------- ---------
Subtotal 131,787 100% 117,578 100%
========= =========
Less: Allowance for loan losses (1,526) (1,296)
Less: deferred loan fees and other (37) (43)
- -----------------------------------------------------------------------------------------------------------------
Net Loans: $ 130,224 $ 116,239
========= =========
</TABLE>
Total loans increased to $131.8 million at June 30, 1998, representing
a 12.1% increase from year-end 1997.
12
<PAGE> 13
NONPERFORMING ASSETS
The following table sets forth at the dates indicated an analysis of
the composition of the Company's nonperforming assets:
<TABLE>
<CAPTION>
June 30, December 31,
(in thousands) 1998 1997
- ------------------------------------------------------------------------------------
<S> <C> <C>
Nonaccrual loans $ 508 $ 498
Restructured Loans 578 653
-----------------------
Total nonperforming loans 1,086 1,151
Real estate owned 115 30
- ---------------------------------------------------------------------------------
Total nonperforming assets 1,201 1,181
=================================================================================
Accruing loans past due 90 days or more $ 209 $ 0
Potential problem loans 48 11
Allowance for loan losses 1,526 1,296
Nonperforming loans to period end loans 0.82% 0.98%
Allowance for loan losses to period-end loans 1.16 1.10
Allowance for loan losses to nonperforming loans 140.52 112.60
Nonperforming assets to total assets 0.61 0.74
</TABLE>
Nonperforming loans decreased to $1.1 million, or 0.82% of total loans,
at June 30,1998 from $1.2 million at December 31,1997.
Real estate owned (REO) increased $85,000 to $115,000 at June 30, 1998
from $115,000 at December 31, 1997. During the first six months of 1998, the
Company foreclosed on $121,000 of loans collateralized by real estate and
transferred the real estate to REO.
PROVISIONS AND ALLOWANCE FOR LOAN LOSSES
The Company recorded a $150,000 provision for loan losses for the
second quarter of 1998, compared with $105,000 for the same period a year ago.
There were $113,000 in net loan charge-offs during the second quarter of 1998,
compared to $25,000 in net charge-offs for the same period in 1997. The
Allowance for Loan Losses increased to $1.5 million at June 30, 1998 from
$979,000 at June 30, 1997, or 1.16% of total outstanding loans and 140.52% of
nonperforming loans at the end of the second quarter 1998 as compared to 0.95%
of total loans and 75.37% of nonperforming loans at June 30, 1997.
For the six months ended June 30, 1998, the provision for loan losses
was $345,000 compared to $210,000 for the same period in 1997. Net charge-offs
for the first six months of 1998 totaled $115,000 compared to $27,000 for the
same period of 1997.
All provisions for loan losses and the resulting balance of the
Allowance for Loan Losses were made based on management's assessment of risk and
the quality of the loan portfolio, the objective being to maintain an Allowance
for Loan Losses that is adequate to absorb anticipated loan losses;
consideration also was given to the Allowance for Loan Loss levels maintained by
the Company's national peer group.
13
<PAGE> 14
The following table sets forth at the dates indicated the changes in
the Company's allowance for loan losses:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
(in thousands) 1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at the beginning of period $ 1,489 $ 899 $ 1,296 $ 796
Charge offs:
Commercial (52) 0 (52) 0
Real Estate (0) 0 (0) 0
Consumer (64) (30) (82) (34)
- --------------------------------------------------------------------------------------------------------------------------
Total charge-offs (116) (30) (134) (34)
Recoveries:
Commercial 0 0 1 0
Real Estate 0 0 0 0
Consumer 3 5 18 7
- --------------------------------------------------------------------------------------------------------------------------
Total recoveries 3 5 19 7
- --------------------------------------------------------------------------------------------------------------------------
Net charge-offs (113) (25) (115) (27)
Provisions for loan losses 150 105 345 210
- --------------------------------------------------------------------------------------------------------------------------
Balance at end of Period $ 1,526 $ 979 $ 1,526 $ 979
==========================================================================================================================
</TABLE>
LIQUIDITY AND SOURCES OF FUNDS
The Company's sources of funds are customer deposits, cash and demand
balances due from other banks, federal funds sold, short-term investments and
investment securities available for sale. These funds, together with loan
repayments, are used to make loans and to fund continuing operations. In
addition, at June 30, 1998, the Company had unused lines of credit with the
Federal Home Loan Bank of Seattle (FHLB) of $30.5 million and unused lines of
credit with financial institutions in the amount of $11.0 million, with no
advances on these lines of credit as of June 30, 1998.
Total deposits increased 42.0% to $173.8 million at June 30, 1998 from
$122.4 million at June 30, 1997. The Company, by policy, has not accepted
brokered deposits. It has made a concerted effort to attract deposits in the
market area it serves through competitive pricing and delivery of quality
service. In addition, the Company has been able to retain a significant amount
of its deposits as they mature.
Management anticipates that the Company will rely primarily upon
customer deposits, loan repayments and current earnings to provide liquidity,
and will use such funds primarily to make loans and to purchase securities,
primarily issued by the federal government and state and local governments.
CAPITAL
The Company's shareholders' equity increased to $28.7 million at June
30, 1998 from $13.0 million at December 31, 1997. At June 30, 1998,
shareholders' equity was 14.09% of total assets compared to 8.14% of total
assets at December 31, 1997. The increase in this ratio is a result of
additional earnings and net proceeds of approximately $15 million from the
Company's initial public offering, in June, 1998.
Banking regulations require bank holding companies and banks to
maintain a minimum "leverage" ratio of core capital to adjusted average total
assets of at least 3%. At June 30,1998, the Company's leverage ratio was 16.02%,
compared with 8.08% at December 31,1997. In addition, banking regulators have
adopted risk-based capital guidelines, under which risk percentages are assigned
to various categories of assets and off-balance sheet
14
<PAGE> 15
items to calculate a risk-adjusted capital ratio. Tier I capital generally
consists of common shareholders' equity (which does not include unrealized gains
and losses on securities), less goodwill and certain identifiable intangible
assets, while Tier II capital includes the allowance for loan losses and
subordinated debt both subject to certain limitations. Regulatory minimum
risk-based capital guidelines require Tier I capital of 4% of risk-adjusted
assets and total capital (combined Tier I and Tier II) of 8%. The Company's Tier
I and total capital ratios were 20.76% and 19.71%, respectively, at June
30,1998, compared with 10.67% and 11.63%, respectively, at December 31,1997.
During 1992, the Federal Deposit Insurance Corporation (the "FDIC")
published the qualifications necessary to be classified as a "well-capitalized"
bank, primarily for assignment of FDIC insurance premium rates beginning in
1993. To qualify as "well-capitalized," banks must have a Tier I risk-adjusted
capital ratio of at least 6%, a total risk-adjusted capital ratio of at least
10%, and a leverage ratio of at least 5%. Whidbey Island Bank qualified as
"well-capitalized" at June 30,1998.
INTEREST RATE SENSITIVITY
A number of measures are used to monitor and manage interest rate risk,
including income simulations and interest sensitivity (gap) analysis. An income
simulation model is the primary tool used to assess the direction and magnitude
of changes in net interest income resulting from changes in interest rates. Key
assumptions in the model include prepayment speeds on mortgage related assets,
cash flows and maturities of other investment securities, loan and deposit
volumes and pricing. These assumptions are inherently uncertain and, as a
result, the model cannot precisely estimate net interest income or precisely
predict the impact of higher or lower interest rates on net interest income.
Actual results will differ from simulated results due to timing, magnitude and
frequency of interest rate changes, changes in market conditions and management
strategies, among other factors. At June 30, 1998, based on the measures used to
monitor and manage interest rate risk, there has not been a material change in
the Company's interest rate risk since December 31, 1997. For additional
information, refer to the Company's Prospectus dated June 23,1998.
YEAR 2000 ISSUE
The Company utilizes various computer software programs to provide
banking products and services to its customers. Many existing computer programs
use only two digits to identify a year in the date field and were not designed
to consider the impact of the upcoming change in the century. If not corrected,
many computer applications could fail or create erroneous results by the Year
2000. The Year 2000 issue affects virtually all companies and organizations.
The Company has identified all computer software programs used in its
business and has established a Year 2000 committee to deal with this issue.
Although the work of the Year 2000 committee has not been completed, management
does not expect any material difficulties. The Company has budgeted $150,000 to
complete its evaluation and implementation of any required changes.
15
<PAGE> 16
PART II - OTHER
PART II - OTHER INFORMATION
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
CHANGES IN SECURITIES
None to report
USE OF PROCEEDS
As discussed in Note 2 of the Notes to Condensed Consolidated Financial
Statements, the Company closed its initial public offering effective June 26,
1998, which resulted in $ 15.5 million in gross proceeds to the Company. In
connection therewith:
(1) The effective date of the Securities Act Registration Statement was
June 22, 1998 and the commission file number assigned to the registration
statement was 333-49925.
(2) The Company completed its stock offering effective June 26, 1998, with all
securities sold pursuant to the registration statement. Ryan, Beck & Co. acted
as the underwriter for the Company's stock offering. The class of securities in
the offering was no par value common stock of which 1,380,000 shares were
registered. In the offering, 1,380,000 shares were sold for $16.6 million in
cash.
(3) Total offering expenses were approximately $1.7 million, including $1.1
million for underwriting discounts and commissions. None of these expenses were
paid directly or indirectly to any of the Company's directors, officers or
affiliates, or any person owning ten (10) percent or more of the Company's
equity securities.
(4) The net offering proceeds of $14.9 million were used as follows:
- $10.0 million was contributed to the Bank to support the anticipated
future growth of the Bank and invested in Federal funds sold.
- $4.9 million has been invested in interest earning deposits.
The actual use of proceeds does not represent a material change from the
suggested use of proceeds as disclosed in the registration statement.
16
<PAGE> 17
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter ended June 30, 1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
WASHINGTON BANKING COMPANY
Date August 14, 1998 By /s/ Michal D. Cann
---------------------- ---------------------------------
Michal D. Cann
President and
Chief Executive Officer
Date August 14, 1998 By /s/ Phyllis Hawkins
---------------------- ---------------------------------
Phyllis Hawkins
Senior Vice President and
Chief Financial Officer
17
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