<PAGE>
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 March 31, 2000
[ ] 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 May 10, 2000
was 4,038,285.
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Table of Contents
<TABLE>
<CAPTION>
<S> <C>
PART I
Page
Item 1 Financial Statements 1
Condensed Consolidated Statements of Financial Condition - 1
March 31, 2000 and December 31, 1999
Condensed Consolidated Statements of Income - 2
Three Months Ended March 31, 2000 and 1999
Condensed Consolidated Statements of Shareholders' Equity - 3
Three Months Ended March 31, 2000
Condensed Consolidated Statements of Cash Flows - 4
Three Months Ended March 31, 2000 and 1999
Notes to Condensed Consolidated Financial Statements 5
Item 2 Management's Discussion and Analysis of Financial Condition 7
and Results of Operations
Item 3 Quantitative and Qualitative Disclosures about Market Risk 13
PART II
Item 6 Exhibits and Reports on Form 8-K 14
Signatures 14
</TABLE>
i
<PAGE>
PART I
Item 1. Financial Statements
WASHINGTON BANKING COMPANY
AND SUBSIDIARY
Condensed Consolidated Statements of Financial Condition
March 31, 2000 and December 31, 1999
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
March 31, December 31,
Assets 2000 1999
--------------- ----------------
(unaudited)
<S> <C> <C>
Cash and due from banks $ 13,608 $ 10,651
Interest-bearing deposits 2,460 5,842
Federal funds sold -- 4,300
--------------- ----------------
Total cash and cash equivalents 16,068 20,793
--------------- ----------------
Federal Home Loan Bank stock 804 791
Investment securities, available-for-sale 5,859 6,373
Investment securities, held-to-maturity 22,470 24,090
--------------- ----------------
Total investment securities 29,133 31,254
--------------- ----------------
Loans receivable, net 237,711 220,222
Premises and equipment, net 11,249 11,177
Other real estate owned 170 170
Deferred tax asset 439 434
Other assets 2,227 1,920
--------------- ----------------
Total assets $ 296,997 $ 285,970
=============== ================
Liabilities and Shareholders' Equity
Liabilities:
Deposits $ 254,327 $ 254,475
Federal funds purchased 11,200 --
Other liabilities 1,380 1,697
--------------- ----------------
Total liabilities 266,907 256,172
--------------- ----------------
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 4,053,285 and 4,061,785
shares at March 31, 2000 and December 31, 1999, respectively 16,300 16,413
Retained earnings 13,907 13,493
Accumulated other comprehensive income (loss), net (117) (108)
--------------- ----------------
Total shareholders' equity 30,090 29,798
--------------- ----------------
Total liabilities and shareholders' equity $ 296,997 $ 285,970
=============== ================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
1
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WASHINGTON BANKING COMPANY
AND SUBSIDIARY
Condensed Consolidated Statements of Income
Three months ended March 31, 2000 and 1999 (unaudited)
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended March 31,
2000 1999
--------------- ----------------
<S> <C> <C>
Interest income:
Interest and fees on loans $ 5,485 $ 3,528
Interest on taxable investment securities 186 295
Interest on tax-exempt investment securities 201 197
Other 80 102
--------------- ----------------
Total interest income 5,952 4,122
Interest expense 2,305 1,446
--------------- ----------------
Net interest income 3,647 2,676
Provision for loan losses 326 255
--------------- ----------------
Net interest income after provision
for loan losses 3,321 2,421
--------------- ----------------
Noninterest income:
Service charges on deposits 403 350
Other 178 278
--------------- ----------------
Total noninterest income 581 628
--------------- ----------------
Noninterest expense:
Salaries and benefits 1,789 1,306
Occupancy expense 575 486
Office supplies and printing 139 82
Data processing 81 72
Consulting and professional fees 29 20
Other 443 418
--------------- ----------------
Total noninterest expense 3,056 2,384
--------------- ----------------
Income before income taxes 846 665
Provision for income taxes 229 162
--------------- ----------------
Net income $ 617 $ 503
=============== ================
Net income per share, basic $ 0.15 $ 0.12
=============== ================
Net income per share, diluted $ 0.14 $ 0.11
=============== ================
Average number of shares outstanding, basic 4,063,900 4,195,300
Average number of shares outstanding, diluted 4,283,905 4,441,880
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE>
WASHINGTON BANKING COMPANY
AND SUBSIDIARY
Condensed Consolidated Statements of Shareholders' Equity
Three months ended March 31, 2000 (unaudited)
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Accumulated
other Total
Common stock Retained comprehensive shareholders'
-------------------------
Shares Amount earnings income equity
(loss), net
----------- ------------ -------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1999 4,062 $ 16,413 $ 13,493 $ (108) $ 29,798
Cash dividend, $0.05 per share -- -- (203) -- (203)
Net income -- -- 617 -- 617
Net change in unrealized gain (loss)
on securities available-for-sale -- -- -- (9) (9)
Repurchase of common stock (16) (135) -- -- (135)
Stock options exercised 7 22 -- -- 22
----------- ------------ -------------- -------------- ---------------
Balances at March 31, 2000 4,053 $ 16,300 $ 13,907 $ (117) $ 30,090
=========== ============ ============== ============== ===============
Three Months Ended March 31,
Comprehensive Income: 2000 1999
-------------- ---------------
Net income $ 617 $ 503
Increase in unrealized gain (loss) on securities available-for-sale,
net of tax of $5 and $24, respectively (9) (47)
-------------- ---------------
Comprehensive income $ 608 $ 456
============== ===============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
WASHINGTON BANKING COMPANY
AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows
Three months ended March 31, 2000 and 1999 (unaudited)
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended March 31,
2000 1999
--------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 617 $ 503
Adjustments to reconcile net income to net cash
provided by operating activities:
Federal Home Loan Bank stock dividends (13) (14)
Amortization of investment premiums, net 10 17
Provision for loan losses 326 255
Depreciation of premises and equipment 259 118
Net increase in other assets (307) (426)
Net decrease in other liabilities (317) (83)
--------------- --------------
Net cash provided by operating activities 575 370
--------------- --------------
Cash flows from investing activities:
Purchases of investment securities, available-for-sale -- (1,033)
Maturities of investment securities, available-for-sale 500 2,500
Purchases of investment securities, held-to-maturity -- (1,151)
Maturities of investment securities, held-to-maturity 1,610 645
Net increase in loans (17,815) (13,933)
Purchases of premises and equipment (331) (1,375)
--------------- --------------
Net cash used in investing activities (16,036) (14,347)
--------------- --------------
Cash flows from financing activities:
Net increase in deposits (148) 8,753
Net increase in federal funds purchased 11,200 --
Dividends paid on common stock (203) (168)
Proceeds from stock options exercised 22 34
Repurchase of common stock (135) --
--------------- --------------
Net cash (used in) provided by financing activities 10,736 8,619
--------------- --------------
Net decrease in cash and cash equivalents (4,725) (5,358)
Cash and cash equivalents at beginning of period 20,793 24,252
--------------- --------------
Cash and cash equivalents at end of period $ 16,068 $ 18,894
=============== ==============
Supplemental information:
Loans foreclosed and transferred to real estate owned $ -- $ 145
Cash paid for interest 2,422 1,473
Cash paid for taxes 200 200
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three months ended March 31, 2000 and 1999 (unaudited)
(Dollars in thousands, except per share data)
(1) Description of Business and Summary of Significant Accounting Policies
(a)Description of Business
Washington Banking Company ("WBCO"), a Washington state bank holding company
was formed on April 30, 1996. Whidbey Island Bank ("WIB" or "Bank"), the
principal subsidiary of WBCO, is a Washington state-chartered 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.
Effective June 23, 1998, WBCO sold 1,380,000 shares of its common stock at a
price of $12 per share, resulting in net proceeds to the Company of $14,893.
(b) Basis of Presentation
The accompanying consolidated interim financial statements include the accounts
of Washington Banking Company and its wholly-owned subsidiary, Whidbey Island
Bank (together, "the Company"). The accompanying condensed consolidated interim
financial statements have been prepared, without audit, pursuant to generally
accepted accounting principles and instructions to Form 10-Q for interim
financial information. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. These condensed consolidated financial statements should
be read in conjunction with the Company's December 1999 audited consolidated
financial statements and notes thereto included in the Company's Form 10-K
filed with the Securities and Exchange Commission. In the opinion of manage-
ment, all adjustments (consisting of normal recurring adjustments) considered
necessary for a fair presentation have been included. Operating results for the
three months ended March 31, 2000 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2000.
(c) Recently Issued Accounting Pronouncements
In June 1998, FASB issued SFAS Statement No. 133 ("SFAS 133"), Accounting for
Derivative Instruments and Hedging Activities, which requires all derivatives to
be recorded on the balance sheet at fair value and establishes accounting
standards for different types of hedging activities,including fair value
hedges, cash flow hedges and hedges of foreign currency exposures. In May 1999,
the FASB delayed the effective date of SFAS 133 to fiscal years beginning after
June 15, 2000 with interim reporting required. Management does not expect SFAS
133 to have a material impact on the Company's financial position or results of
operations.
5
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In March 2000 the SEC issued Staff Accounting Bulletin No. 101A ("SAB 101A").
SAB 101A delays the effective date of Staff Accounting Bulletin No. 101 ("SAB
101") "Revenue Recognition in Financial Statements," to the second quarter for
fiscal years beginning between December 15, 1999 and March 16, 2000. SAB 101
provides guidance on revenue recognition and the SEC staff's views on the
application of accounting principles to selected revenue recognition issues.
The Company will adopt the provisions of SAB 101 in the second quarter of 2000
and anticipates that such adoptions will not have a material impact on the
Company's consolidated financial statements.
In March 2000, the Financial Accounting Standards Board issued Interpretation
No. 44, "Accounting for Certain Transactions involving Stock Compensation."
Interpretation No. 44 clarifies the application of Accounting Principles Board
Opinion No. 25 ("APB 25") and is effective July 1, 2000. Interpretation No. 44
clarifies the definition of "employee" for purposes of applying APB 25, the
criteria for determining whether a plan qualifies as a noncompensatory plan,
the accounting consequence of various modifications to the terms of a
previously fixed stock option or award, and the accounting for an exchange of
stock compensation awards in a business combination. The Company does not expect
the adoption of Interpretation No. 44 to have a material impact on its
consolidated financial statements.
(2) Earnings Per Share
The following illustrates the reconciliation of the numerators and denominators
of the basic and diluted earnings per share ("EPS") computations:
<TABLE>
<CAPTION>
Three Months Ended March 31, 2000
----------------------------------------------------------------
Income Weighted average Per share amount
shares
---------------- ----------------------- ------------------
<S> <C> <C> <C>
Basic EPS
Income available to common shareholders $ 617 4,063,900 $ 0.15
Effect of dilutive securities: stock options -- 220,005 --
---------------- ----------------------- ------------------
Diluted EPS $ 617 4,283,905 $ 0.14
================ ======================= ==================
Three Months Ended March 31, 1999
----------------------------------------------------------------
Income Weighted average Per share amount
shares
---------------- ----------------------- ------------------
Basic EPS
Income available to common shareholders $ 503 4,195,300 $ 0.12
Effect of dilutive securities: stock options -- 246,580 --
---------------- ----------------------- ------------------
Diluted EPS $ 503 4,441,880 $ 0.11
================ ======================= ==================
</TABLE>
6
<PAGE>
There were 123,950 antidilutive shares outstanding for the three month periods
ended March 31, 2000 and 1999. Shares are antidilutive when the option price
exceeds the current market price.
On April 29, 1999, the Board of Directors approved a stock repurchase plan,
which allows the Company to repurchase up to 210,000 shares of the Company's
common stock. As of March 31, 2000, the Company had repurchased 158,265 shares
of the Company's common stock.
(3) SubsequentEvent
On April 20, 2000, the Board of Directors declared a cash dividend of
$0.05 per share to shareholders of record as of May 10, 2000.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Note: This discussion is intended to assist in understanding the financial
condition and results of operations of the Company. The information contained in
this section should be read in conjunction with the Company's consolidated
financial statements and notes thereto contained elsewhere in this report. 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. Specific factors include, among others, the impact of
interest rate changes, risks of acquiring or opening new branches, controlling
expenses, and general economic conditions.
Overview
The Bank began operations in 1961, with its headquarters at Coupeville,
Washington, located on Whidbey Island. Washington Banking Company, head-
quartered in Oak Harbor Washington, 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. The Company's only significant business activity has been to
hold the common stock of the Bank and invest its available funds. The Company
currently has thirteen full-service bank branches and two loan production
offices located in Island, Skagit, Jefferson and Whatcom counties in the
northern area of Western Washington.
The Company's objective is to continue its strategy of growth, enhance its
market penetration in the areas it currently serves, and improve its
profitability and operating efficiencies. The Company looks for expansion
opportunities that meet its criteria primarily in the geographic areas north
and northwest of Seattle to the Canadian border. The primary factors considered
in determining the areas of geographic expansion are customer demand and
availability of experienced managers, lending officers and branch personnel
with a longstanding community presence and extensive banking relationships.
Growth can be expected to require the expenditure of substantial sums to
purchase or lease real property and equipment and to hire experienced
personnel. New branch offices are often not profitable for at least the first
eighteen months after opening and management expects that earnings will be
negatively affected as the Company pursues its growth strategy.
Management's strategy is to continue to provide a high level of personal service
to its customers and to expand loan, deposit and other products and services
that it offers its customers. Maintenance of asset quality will be emphasized by
controlling nonperforming assets and adhering to prudent underwriting standards.
In addition, management will strive to improve operating efficiencies to further
manage noninterest expense and will continue to improve internal operating
7
<PAGE>
systems. To deliver the Company's products more effectively and efficiently, the
Company's market strategy is to locate full-service branch offices which provide
all of the Company's products and services in its targeted growth areas
supported by loan production offices, mini-branches, grocery or retail store
branches and/or ATMs in the areas surrounding those central locations in order
to further serve customers. Acquisition of banks or branches may also be used as
a means of expansion if appropriate opportunities are presented. The Company has
also invested in technology to facilitate telephone, personal computer and
internet banking, but with its primary commitment being to provide exceptional
personal service.
Financial Condition
Total assets increased to $297.0 million at March 31, 2000 from $286.0 million
at December 31, 1999, an increase of 3.9%. Net loans totaled $237.7 million at
March 31, 2000, an increase of 7.9% from December 31, 1999. Deposits decreased
slightly to $254.3 million at March 31, 2000 from $254.5 million at December
31, 1999.
The Company's shareholders' equity increased to $30.1 million at March 31, 2000
from $29.8 million at December 31, 1999. The small increase reflects earnings
offset by the repurchase of 16,000 shares of common stock for approximately
$135,000 and the payment of cash dividends of $203,000 during the first three
months of 2000.
The Company's allowance for loan losses was $2.4 million at March 31, 2000 and
$2.2 million at December 31, 1999, both representing 0.98% of total loans.
Nonperforming assets amounted to $1.4 million at March 31, 2000, or 0.48% of
total assets, compared to $1.1 million or 0.40% at December 31, 1999.
Results of Operations
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 generates noninterest income primarily through service charges and
fees and other sources. The Company's noninterest expenses consist primarily of
compensation and employee benefit expense, and occupancy expense.
Net income for the first quarter of 2000 increased 22.7% to $617,000 or $0.14
per diluted share, from $503,000, or $0.11 per diluted share, for the first
quarter of 1999. The first quarter net income increase was primarily due to net
interest income.
Net Interest Income
Net interest income for the first quarter of 2000 increased 36.3% to $3.6
million from $2.7 million for the first quarter of 1999. The increase in net
interest income is largely due to the overall growth of the Company.
8
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Average interest-earning assets for the first quarter increased to $264.0
million at March 31, 2000, compared to $198.0 million at March 31, 1999, a
growth of $66.0 million, or 33.4%, while the average yield on interest-earning
assets increased to 9.12% compared with 8.46% in first quarter of the prior
year. The average yield on loans increased to 9.59% for the quarter ended March
31, 2000 from 9.26% for the quarter ended March 31, 1999. The average yield on
interest-bearing liabilities also increased in the first quarter of 2000 to
4.28% from 3.67% for the quarter ended March 31, 1999. Average interest-bearing
liabilities for the quarter increased to $215.2 million at March 31, 2000
compared to $157.4 million at March 31, 1999, a growth of $57.8 million, or
36.8%. The overall result of these changes was an increase in the net interest
spread to 4.84% for the quarter ended March 31, 2000 from 4.79% for the quarter
ended March 31, 1999.
Average shareholders' equity was $29.9 million for the quarters ended March 31,
2000 and 1999. Net interest margin (net interest income divided by average
interest-earning assets) increased to 5.63% in the first quarter of 2000 from
5.54% in the first quarter of 1999.
Noninterest Income and Expense
Noninterest income decreased $47,000, or 7.5%, in the first quarter of 2000
compared to the same period in 1999, reflecting the decrease in fees
received on third party originated real estate loans due to a less favorable
2000 mortgage loan market.
Noninterest expense increased $672,000, or 28.2%, in the first quarter of 2000
as the Company pursued its strategy of growth through branching and product
expansion. Two major components of noninterest expense, employee compensation
and occupancy, increased 37.0% and 18.3%, respectively, for the quarter
compared with the same period in 1999. These increases reflect the Company's
geographic growth in Mount Vernon and Sedro Woolley in northwestern Washington,
the addition of new products and services, and the overall growth of the
Company. The efficiency ratio (noninterest expense divided by the sum of net
interest income plus noninterest income less non-recurring gains) was 72.28%
for the first quarter 2000 compared to 72.15% for the same period in 1999.
Income Taxes
For the first quarter of 2000, the Company recorded an income tax provision of
$229. The overall effective tax rate increased for the three months ended March
31, 2000 compared to the same period in 1999 due to the decrease of interest
income on tax-exempt investment securities as a percentage of taxable income.
9
<PAGE>
Lending Activities
The Company originates a wide variety of loans including commercial, real
estate and consumer loans. The following table sets forth the Company's loan
portfolio composition by type of loan at the dates indicated:
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
----------------------------------- -----------------------------------
(Dollars in thousands) Balance % of total Balance % of total
---------------- --------------- ----------------- --------------
<S> <C> <C> <C> <C>
Commercial $ 92,238 38.5% $ 90,014 40.5%
Real estate mortgages:
One-to-four family residential 27,376 11.4% 24,822 11.2%
Five-or-more family residential and
commercial 32,714 13.6% 29,527 13.2%
---------------- --------------- ----------------- --------------
Total real estate mortgages 60,090 25.0% 54,349 24.4%
Real estate construction 16,366 6.8% 14,300 6.4%
Consumer 71,378 29.7% 63,757 28.7%
---------------- --------------- ----------------- --------------
Subtotal 240,072 100.0% 222,420 100.0%
=============== ==============
Less: allowance for loan losses (2,362) (2,182)
Less: deferred loan fees and other 1 (16)
---------------- -----------------
Total loans, net $ 237,711 $ 220,222
================ =================
</TABLE>
Total loans, net, increased to $237.7 million at March 31, 2000, representing a
7.9% increase from year-end 1999. Total commercial, real estate mortgage, real
estate construction and consumer loans increased 2.5%, 10.6%, 14.4% and 12.0%,
respectively, at March 31, 2000 from year-end 1999. These changes reflect
seasonal trends, the Company's geographical expansion and increased average loan
size resulting in solid growth from its various market areas and diversified
customer base.
10
<PAGE>
Nonperforming Assets
The following table sets forth an analysis of the composition of the Company's
nonperforming assets at the dates indicated:
<TABLE>
<CAPTION>
(Dollars in thousands) March 31, 2000 December 31, 1999
------------------------- ----------------------
<S> <C> <C>
Nonaccrual loans $ 1,199 $ 920
Restructured loans 52 52
------------------------- ----------------------
Total nonperforming loans 1,251 972
Real estate owned 170 170
------------------------- ----------------------
Total nonperforming assets $ 1,421 $ 1,142
========================= ======================
Accruing loans past due => 90 days $ 388 $ --
Potential problem loans -- --
Allowance for loan losses 2,362 2,182
Nonperforming loans to loans 0.52% 0.44%
Allowance for loan losses to loans 0.98% 0.98%
Allowance for loan losses to nonperforming loans 188.81% 224.49%
Nonperforming assets to total assets 0.48% 0.40%
</TABLE>
Nonperforming loans increased to $1.3 million, or 0.52% of total loans, at March
31, 2000 from $972,000 at December 31, 1999.
Provision and Allowance for Loan Losses
The Company recorded a $326,000 provision for loan losses for the first
quarter of 2000, compared with $255,000 for the same period a year ago. There
were $146,000 in net loan charge-offs during the first quarter of 2000, compared
to $174,000 in net charge-offs for the same period in 1999.
The allowance for loan losses increased to $2.4 million at March 31, 2000 from
$2.2 million at December 31, 1999, or 0.98% of total outstanding loans and
188.81% of nonperforming loans at the end of the first quarter 2000 as compared
to 0.98% of total loans and 224.49% of nonperforming loans at December 31, 1999.
The allowance for loan losses is maintained at a level considered adequate by
management to provide for anticipated loan losses based on management's
assessment of various factors affecting the loan portfolio, including a review
of problem loans, business conditions and loss experience, and an overall
evaluation of the quality of the underlying collateral. The allowance is
increased by provisions charged to operations and reduced by loans charged off,
net of recoveries.
11
<PAGE>
The following table sets forth the changes in the Company's allowance for loan
losses at the dates indicated:
<TABLE>
<CAPTION>
Three Months Ended
(Dollars in thousands) March 31, 2000 March 31, 1999
------------------------- -------------------------
<S> <C> <C>
Balance at beginning of period $ 2,182 $ 1,745
Charge-offs:
Commercial (86) (117)
Real estate -- --
Consumer (85) (66)
------------------------- -------------------------
Total charge-offs (171) (183)
Recoveries:
Commercial 2 7
Real estate -- --
Consumer 23 2
------------------------- -------------------------
Total recoveries 25 9
Net charge-offs (146) (174)
Provision for loan losses 326 255
------------------------- -------------------------
Balance at end of period $ 2,362 $ 1,826
========================= =========================
</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 March 31,
2000, the Company had lines of credit with the Federal Home Loan Bank of
Seattle (FHLB) of $44.5 million, the Federal Reserve Bank of San Francisco of
$6.2 million and correspondent financial institutions in the amount of $12.1
million. As of March 31, 2000, there were $11.2 million in advances on these
lines of credit.
Total deposits increased 28.2% to $254.3 million at March 31, 2000 from $198.5
million at March 31, 1999 and decreased slightly from $254.5 million as of
December 31, 1999. Historically, first-quarter deposits tend to lag, resulting
in periodic borrowed funds. This historic trend, coupled with anticipated 1999
year-end Y2K provisions and increasing competition, resulted in deposits
decreasing slightly from December 31, 1999. 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. The
Company also expects to continue to use Federal Home Loan Bank advances to
supplement funding sources.
12
<PAGE>
Capital
The Company's shareholders' equity increased to $30.1 million at March 31, 2000
from $29.8 million at December 31, 1999. On April 29, 1999 the Company's Board
of Directors approved the repurchase of up to approximately 5% or 210,000
shares of outstanding Company stock. The Board deemed this action prudent given
the Company's strong capital position and market conditions. At March 31, 2000
a total of 158,265 shares had been repurchased, with 16,000 of those shares
repurchased during the three months ended March 31, 2000 for approximately
$135,000. Management anticipates continued repurchases of Company stock, as it
deems appropriate, up to the approximate 5% level approved. The Company also
paid cash dividends of $203,000 during the first three months ended March 31,
2000. These actions, along with the additional $9,000 in unrealized losses on
available-for-sale securities, were the primary reasons for the Company's
relatively small increase of $300,000 in shareholders' equity at March 31, 2000.
Total assets increased to $297.0 million at March 31, 2000 from $286.0 million
at December 31, 1999, an increase of 3.9%. Shareholders' equity to total assets
was 10.1% at March 31, 2000 compared to 10.4% at December 31, 1999.
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 4%. At March 31, 2000, the Company's leverage ratio was 9.70%, compared
with 9.83% at December 31, 1999. 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 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 10.95% and 11.88%, respectively, at March 31, 2000, compared
with 11.73% and 12.67%, respectively, at December 31, 1999.
The Federal Deposit Insurance Corporation (the "FDIC") established the
qualifications necessary to be classified as a "well-capitalized" bank,
primarily for assignment of FDIC insurance premium rates. 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 March
31, 2000.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
A number of measures are used to monitor and manage interest rate risk,
including income simulations and interest sensitivity (gap) analyses. 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 March 31, 2000, 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, 1999. For additional
information, refer to the Company's Form 10-K for year ended December 31, 1999.
13
<PAGE>
PART II
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
None
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 May 12, 2000 By /s/ Michal D. Cann
Michal D. Cann
President and Chief Executive Officer
Date May 12, 2000 By /s/ Phyllis A. Hawkins
Phyllis A. Hawkins
Senior Vice President and
Chief Financial Officer
14
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