<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 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 November 10, 2000 was 4,032,750.
<PAGE>
Table of Contents
<TABLE>
PART I
Page
<S> <C>
Item 1 Financial Statements
Condensed Consolidated Statements of Financial Condition - 1
September 30, 2000 and December 31, 1999 (unaudited)
Condensed Consolidated Statements of Income - 2
Three and Nine Months Ended September 30, 2000 and 1999 (unaudited)
Condensed Consolidated Statements of Shareholders' Equity - 3
Nine Months Ended September 30, 2000 (unaudited)
Condensed Consolidated Statements of Comprehensive Income - 3
Three and Nine Months Ended September 30, 2000 and 1999 (unaudited)
Condensed Consolidated Statements of Cash Flows - 4
Nine Months Ended September 30, 2000 and 1999 (unaudited)
Notes to Condensed Consolidated Financial Statements - 5
Nine Months Ended September 30, 2000 and 1999 (unaudited)
Item 2 Management's Discussion and Analysis of Financial Condition 8
and Results of Operations
Item 3 Quantitative and Qualitative Disclosures about Market Risk 17
PART II
Item 6 Exhibits and Reports on Form 8-K 17
Signatures 17
</TABLE>
<PAGE>
PART I
Item 1. Financial Statements
WASHINGTON BANKING COMPANY
AND SUBSIDIARY
Condensed Consolidated Statements of Financial Condition
September 30, 2000 and December 31, 1999 (unaudited)
(Dollars in thousands, except per share data)
<TABLE>
September 30, December 31,
Assets 2000 1999
---------------- ----------------
<S> <C> <C>
Cash and due from banks $ 15,896 $ 10,651
Interest-bearing deposits 1,611 5,842
Federal funds sold -- 4,300
---------------- ----------------
Total cash and cash equivalents 17,507 20,793
Federal Home Loan Bank stock 830 791
Investment securities, available-for-sale 4,927 6,373
Investment securities, held-to-maturity 21,852 24,090
---------------- ----------------
Total investment securities 27,609 31,254
Loans receivable, net 283,549 220,222
Premises and equipment, net 11,977 11,177
Other real estate owned 170 170
Deferred tax asset 415 434
Other assets 2,601 1,920
---------------- ----------------
Total assets $ 343,828 $ 285,970
================ ================
Liabilities and Shareholders' Equity
Liabilities:
Noninterest-bearing deposits $ 43,742 $ 35,388
Interest-bearing deposits 251,661 219,087
---------------- ----------------
Total deposits 295,403 254,475
Federal funds purchased 5,600 --
Federal Home Loan Bank advances 10,000 --
Other liabilities 1,811 1,697
---------------- ----------------
Total liabilities 312,814 256,172
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 4,032,750 and 4,061,785
shares at September 30, 2000 and December 31, 1999, respectively 15,979 16,413
Retained earnings 15,107 13,493
Accumulated other comprehensive income (loss), net (72) (108)
---------------- ----------------
Total shareholders' equity 31,014 29,798
---------------- ----------------
Total liabilities and shareholders' equity $ 343,828 $ 285,970
================ ================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
1
<PAGE>
WASHINGTON BANKING COMPANY
AND SUBSIDIARY
Condensed Consolidated Statements of Income
Three and nine months ended September 30, 2000 and 1999 (unaudited)
(Dollars in thousands, except per share data)
<TABLE>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $ 6,699 $ 4,439 $ 18,248 $ 11,892
Interest on taxable investment securities 150 257 500 831
Interest on tax-exempt investment securities 200 206 604 610
Other 49 69 174 237
------------ ------------ ------------ ------------
Total interest income 7,098 4,971 19,526 13,570
Interest expense 3,221 1,814 8,191 4,847
------------ ------------ ------------ ------------
Net interest income 3,877 3,157 11,335 8,723
Provision for loan losses 300 255 1,026 765
------------ ------------ ------------ ------------
Net interest income after provision
for loan losses 3,577 2,902 10,309 7,958
------------ ------------ ------------ ------------
Noninterest income:
Service charges on deposits 448 359 1,305 1,053
Other 219 198 668 782
------------ ------------ ------------ ------------
Total noninterest income 667 557 1,973 1,835
------------ ------------ ------------ ------------
Noninterest expense:
Salaries and benefits 1,830 1,421 5,348 4,046
Occupancy expense 608 582 1,746 1,526
Office supplies and printing 107 148 347 326
Data processing 79 79 242 230
Consulting and professional fees 59 22 158 167
Other 522 454 1,410 1,273
------------ ------------ ------------ ------------
Total noninterest expense 3,205 2,706 9,251 7,568
------------ ------------ ------------ ------------
Income before income taxes 1,039 753 3,031 2,225
Provision for income taxes 268 209 811 572
------------ ------------ ------------ ------------
Net income $ 771 $ 544 $ 2,220 $ 1,653
============ ============ ============ ============
Net income per share, basic $ 0.19 $ 0.13 $ 0.55 $ 0.40
============ ============ ============ ============
Net income per share, diluted $ 0.18 $ 0.12 $ 0.52 $ 0.37
============ ============ ============ ============
Average number of shares outstanding, basic 4,031,538 4,108,932 4,046,623 4,161,733
Average number of shares outstanding, diluted 4,226,884 4,361,093 4,241,146 4,408,329
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE>
WASHINGTON BANKING COMPANY
AND SUBSIDIARY
Condensed Consolidated Statements of Shareholders' Equity
Nine months ended September 30, 2000 (unaudited)
(Dollars and shares in thousands)
<TABLE>
Accumulated
other Total
Common stock Retained comprehensive shareholders'
Shares Amount earnings income (loss), net equity
----------- ------------ ------------ ---------------- ---------------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1999 4,062 $ 16,413 $ 13,493 $ (108) $ 29,798
Cash dividend, $0.15 per share -- -- (606) -- (606)
Net income -- -- 2,220 -- 2,220
Net change in unrealized gain (loss)
on securities available-for-sale -- -- -- 36 36
Repurchase of common stock (68) (550) -- -- (550)
Stock options exercised 39 116 -- -- 116
----------- ------------ ------------ ---------------- ---------------
Balances at September 30, 2000 4,033 $ 15,979 $ 15,107 $ (72) $ 31,014
=========== ============ ============ ================ ===============
</TABLE>
Condensed Consolidated Statements of Comprehensive Income
Three and nine months ended September 30, 2000 and 1999 (unaudited)
(Dollars and shares in thousands)
<TABLE>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Net income $ 771 $ 544 $ 2,220 $ 1,653
Increase in unrealized gain (loss) on securities
available-for-sale, net of tax of
$19, $9, $19 and $66, respectively 36 (18) 36 (128)
------------- ------------ ------------- ------------
Comprehensive income $ 807 $ 526 $ 2,256 $ 1,525
============= ============ ============= ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
WASHINGTON BANKING COMPANY
AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows
Nine months ended September 30, 2000 and 1999 (unaudited)
(Dollars in thousands, except per share data)
<TABLE>
Nine Months Ended September 30,
2000 1999
------------------ -----------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,220 $ 1,653
Adjustments to reconcile net income to net cash
provided by operating activities:
Federal Home Loan Bank stock dividends (39) (41)
Amortization of investment premiums, net 29 48
Provision for loan losses 1,026 765
Depreciation of premises and equipment 781 466
Net increase in other assets (681) (529)
Net decrease in other liabilities 114 154
------------------ -----------------
Net cash provided by operating activities 3,450 2,516
------------------ -----------------
Cash flows from investing activities:
Purchases of investment securities, available-for-sale -- (1,033)
Maturities of investment securities, available-for-sale 1,500 3,000
Purchases of investment securities, held-to-maturity -- (1,790)
Maturities of investment securities, held-to-maturity 2,210 2,145
Net increase in loans (64,353) (53,974)
Purchases of premises and equipment (1,581) (3,429)
------------------ -----------------
Net cash used in investing activities (62,224) (55,081)
------------------ -----------------
Cash flows from financing activities:
Net increase in deposits 40,928 38,465
Net increase in Federal Home Loan Bank advances 10,000 --
Net increase in federal funds purchased 5,600 5,000
Dividends paid on common stock (606) (500)
Proceeds from stock options exercised 116 46
Repurchase of common stock (550) (1,043)
------------------ -----------------
Net cash provided by financing activities 55,488 41,968
------------------ -----------------
Net decrease in cash and cash equivalents (3,286) (10,597)
Cash and cash equivalents at beginning of period 20,793 24,252
------------------ -----------------
Cash and cash equivalents at end of period $ 17,507 $ 13,655
================== =================
Supplemental information:
Loans foreclosed and transferred to real estate owned $ -- $ --
Cash paid for interest 7,928 4,739
Cash paid for taxes 850 632
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Nine months ended September 30, 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 presence.
(b) Basis of Presentation
The accompanying interim condensed consolidated financial statements include the
accounts of Washington Banking Company and its wholly-owned subsidiary, Whidbey
Island Bank (together, "the Company"). The accompanying 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 management, all adjustments (consisting
of normal recurring adjustments) considered necessary for a fair presentation
have been included. Operating results for the nine months ended September 30,
2000 are not necessarily indicative of the results that may be expected for the
year ending December 31, 2000.
Certain amounts in 1999 have been reclassified to conform with the 2000
financial statement presentation.
(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. In June 2000, the FASB issued
SFAS Statement No. 138 ("SFAS 138"), Accounting for Certain Derivative
Instruments and Certain Hedging Activities, an amendment of FASB Statement No.
133, which makes minor modifications to SFAS 133. Management does not expect
SFAS 133 or 138 to have a material impact on the Company's financial position or
results of operations.
5
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Nine months ended September 30, 2000 and 1999 (unaudited)
(Dollars in thousands, except per share data)
The SEC issued Staff Accounting Bulletin No. 101B ("SAB 101B"). SAB 101B delays
the effective date of Staff Accounting Bulletin No. 101 ("SAB 101") "Revenue
Recognition in Financial Statements," to the fourth 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 fourth quarter of 2000 and anticipates
that such adoption will not have an 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 was 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 adoption of Interpretation
No. 44 did not have a material impact on the Company's consolidated financial
statements.
(2) Borrowing Arrangements
At September 30, 2000, the Company had a line of credit with the Federal Home
Loan Bank of Seattle ("FHLB") of $51.3 million of which there was $10.0 million
advanced and lines of credit with correspondent financial institutions in the
amount of $12.1 million of which there were $5.6 million advanced.
6
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Nine months ended September 30, 2000 and 1999 (unaudited)
(Dollars in thousands, except per share data)
(3) Earnings Per Share and Stockholders' Equity
The following illustrates the reconciliation of the numerators and denominators
of the basic and diluted earnings per share ("EPS") computations:
<TABLE>
Three Months Ended September 30, 2000
----------------------------------------------------------------
Income Weighted average shares Per share amount
---------------- ----------------------- ------------------
<S> <C> <C> <C>
Basic EPS
Income available to common shareholders $ 771 4,031,538 $ 0.19
Effect of dilutive securities: stock options -- 195,346 --
---------------- ----------------------- ------------------
Diluted EPS $ 771 4,226,884 $ 0.18
================ ======================= ==================
Three Months Ended September 30, 1999
----------------------------------------------------------------
Income Weighted average shares Per share amount
---------------- ----------------------- ------------------
Basic EPS
Income available to common shareholders $ 544 4,108,932 $ 0.13
Effect of dilutive securities: stock options -- 252,161 --
---------------- ----------------------- ------------------
Diluted EPS $ 544 4,361,093 $ 0.12
================ ======================= ==================
</TABLE>
<TABLE>
Nine Months Ended September 30, 2000
----------------------------------------------------------------
Income Weighted average shares Per share amount
---------------- ----------------------- ------------------
<S> <C> <C> <C>
Basic EPS
Income available to common shareholders $ 2,220 4,046,623 $ 0.55
Effect of dilutive securities: stock options -- 194,523 --
---------------- ----------------------- ------------------
Diluted EPS $ 2,220 4,241,146 $ 0.52
================ ======================= ==================
Nine Months Ended September 30, 1999
----------------------------------------------------------------
Income Weighted average shares Per share amount
---------------- ----------------------- ------------------
Basic EPS
Income available to common shareholders $ 1,653 4,161,733 $ 0.40
Effect of dilutive securities: stock options -- 246,596 --
---------------- ----------------------- ------------------
Diluted EPS $ 1,653 4,408,329 $ 0.37
================ ======================= ==================
</TABLE>
7
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Nine months ended September 30, 2000 and 1999 (unaudited)
(Dollars in thousands, except per share data)
For the three-month periods ended September 30, 2000 and 1999, there were
options to purchase 113,550 and 41,000 shares, respectively, of common stock
outstanding, which were antidilutive and therefore not included in the
computation of diluted net income per share. For the nine-month periods ended
September 30, 2000 and 1999, there were options to purchase 113,550 and 41,000
shares, respectively, of common stock outstanding, which were antidilutive and
therefore not included in the computation of diluted net income per share.
On April 29, 1999, the Board of Directors approved a stock repurchase plan,
allowing the Company to repurchase up to 210,000 shares of the Company's common
stock. During the third quarter of 2000, the Company repurchased 11,735 shares,
resulting in a total of 210,000 shares repurchased under the plan.
(4) Subsequent Event
On October 19, 2000, the Board of Directors declared a cash dividend of $0.05
per share to shareholders of record as of November 1, 2000.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Warning about Forward-Looking Statements
The following discussion includes "forward-looking statements" as that term is
defined in the Private Securities Litigation Reform Act of 1995. Forward-looking
statements are based on management's beliefs and assumptions based on currently
available information, and we have not undertaken to update these statements
except as required by the Securities Exchange Act of 1934, as amended, and the
rules promulgated thereunder. All statements other than statements of historical
fact regarding our financial position, business strategy and management's plans
and objectives for future operations are forward-looking statements. When used
in this report, the words "anticipate," "believe," "estimate," "expect," and
"intend" and words or phrases of similar meaning, as they relate to the Company
or management, are intended to help identify forward-looking statements.
Although we believe that management's expectations as reflected in
forward-looking statements are reasonable, we cannot assure readers that those
expectations will prove to be correct. Forward-looking statements are subject to
various risks and uncertainties that may cause our actual results to differ
materially and adversely from our expectations as indicated in the
forward-looking statements. These risks and uncertainties include our ability to
maintain or expand our market share or net interest margins, and to implement
our marketing and growth strategies. Further, actual results may be affected by
our ability to compete on price and other factors with other financial
institutions; customer acceptance of new products and services; the regulatory
environment in which we operate; and general trends in the local, regional and
national banking industry as those factors relate to our cost of funds and
return on assets. In addition, there are risks inherent in the banking industry
relating to collectibility of loans and changes in interest rates. Many of these
risks, as well as other risks that may have a material adverse impact on our
operations and business, are identified in our other filings with the SEC.
However, you should be aware that these factors are not an exhaustive list, and
you should not assume these are the only factors that may cause our actual
results to differ from our expectations.
8
<PAGE>
Overview
The Bank began operations in 1961 with its headquarters at Coupeville,
Washington, located on Whidbey Island. Washington Banking Company, headquartered
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.
WBCO's only significant business activity has been to hold the common stock of
the Bank and invest its available funds. The Company currently has 14
full-service bank branches, one loan production office and 18 automated teller
machines ("ATMs") located in Island, Skagit, and Whatcom counties in the
northern area of Western Washington. A full-service office in the Bakerview
neighborhood of Bellingham (Whatcom County) was opened during August 2000.
Construction of a new building in Oak Harbor is expected to be completed by
year-end 2000. The new construction will combine the downtown Oak Harbor branch
and some of the administrative offices. Once the new building is occupied, the
Company is expected to be able to eliminate the use of some properties presently
owned or leased. Management believes that the new location will enhance customer
service by providing easier branch access and more convenient availability of
expanded financial services, and that the consolidation will assist in
streamlining operations and improving efficiencies.
The Company's objective is to continue its strategy of growth, primarily through
increasing its market penetration in the areas it currently serves, and
improving its profitability and operating efficiencies. 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 continues to 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
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. These
branches are 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. The Company has also invested in
technology to facilitate telephone, personal computer and Internet banking,
while its primary commitment is to provide exceptional service.
The Company may also use acquisition of banks or branches as a means of
expansion if appropriate opportunities are presented. Expansion opportunities,
primarily in the geographic areas north and northwest of Seattle to the Canadian
border, may be considered if they meet the Company's criteria. The primary
factors considered include customer demand and availability of experienced
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 any earnings will be
negatively affected as the Company pursues its growth strategy.
9
<PAGE>
Financial Condition
Total assets increased to $343.8 million at September 30, 2000 from $286.0
million at December 31, 1999, an increase of 20.2%. Net loans increased 28.8% to
$283.5 million at September 30, 2000 from $220.2 million at December 31, 1999.
Deposits increased 16.1% to $295.4 million at September 30, 2000 from $254.5
million at December 31, 1999.
The Company's shareholders' equity increased to $31.0 million at September 30,
2000 from $29.8 million at December 31, 1999. The increase reflects earnings
offset by the repurchase of 67,735 shares of common stock for approximately
$550,000 and the payment of cash dividends of $606,000 during the first nine
months of 2000.
The Company's allowance for loan losses was $2.8 million at September 30, 2000
and $2.2 million at December 31, 1999. Nonperforming assets amounted to $2.3
million at September 30, 2000, or 0.68% 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
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 third quarter of 2000 increased 41.7% to $771,000 or $0.18
per diluted share, from $544,000, or $0.12 per diluted share, for the third
quarter of 1999. Net income for the nine months ended September 30, 2000
increased 34.3% to $2.2 million or $0.52 per diluted share, from $1.7 million,
or $0.37 per diluted share, for the nine months ended September 30, 1999. The
increase in net income was primarily due to growth in net interest income.
Net Interest Income
Net interest income for the third quarter of 2000 increased 22.8% to $3.9
million from $3.2 million for the third quarter of 1999. For the first nine
months of 2000, net interest income increased 29.9% to $11.3 million from $8.7
million for the like period in 1999. The increase in net interest income is
largely due to the growth of the Company's loan portfolio resulting from strong
loan demand.
10
<PAGE>
The following table sets forth at the dates indicated the Company's consolidated
average balance sheet and analysis of net interest income and expense:
<TABLE>
Three Months Ended September 30, 2000 Three Months Ended September 30, 1999
Average Interest Average Average Interest Average
(Dollars in thousands) balance earned/paid yield (1) balance earned/paid yield (1)
----------- ----------- ----------- ------------ ------------ ------------
Assets
<S> <C> <C> <C> <C> <C> <C>
Loans $ 273,539 $ 6,699 9.80% $ 188,944 $ 4,439 9.40%
Federal funds sold 478 8 6.69% 989 13 5.26%
Interest-bearing cash 1,799 28 6.23% 3,613 42 4.65%
Investments:
Taxable 10,789 163 6.04% 18,231 271 5.95%
Non-taxable (2) 17,093 268 6.27% 17,636 276 6.26%
----------- ----------- ----------- ------------ ------------ ------------
Interest-earning assets $ 303,698 $ 7,166 9.44% $ 229,413 $ 5,041 8.79%
Noninterest-earning assets 25,772 24,277
----------- ------------
Total assets $ 329,470 $ 253,690
=========== ============
Liabilities and shareholders' equity
Deposits:
Interest demand and
money market $ 92,077 $ 843 3.66% $ 75,341 $ 534 2.84%
Savings 25,175 179 2.84% 25,635 163 2.54%
Time deposits 123,673 1,938 6.27% 85,039 1,092 5.14%
----------- ----------- ----------- ------------ ------------ ------------
Interest-bearing deposits $ 240,925 $ 2,960 4.91% $ 186,015 $ 1,789 3.85%
Fed Funds purchased 5,363 90 6.71% 1,733 24 5.54%
FHLB advances 10,038 171 6.81% -- -- --
----------- ----------- ----------- ------------ ------------ ------------
Interest-bearing liabilities $ 256,326 $ 3,221 5.03% $ 187,748 $ 1,813 3.86%
Noninterest-bearing deposits 40,626 35,049
Other noninterest-bearing
liabilities 1,785 1,337
----------- ------------
Total liabilities $ 298,737 $ 224,134
Shareholders' equity 30,733 29,556
----------- ------------
Total liabilities and
shareholders' equity $ 329,470 $ 253,690
=========== ============
Net interest income (2) $ 3,945 $ 3,228
=========== ============
Net interest spread (1) 4.41% 4.93%
=========== ============
Net interest margin (1) 5.20% 5.63%
=========== ============
(1) Annualized
(2) Interest income on non-taxable investments is presented on a fully taxable-equivalent basis using the
federal statutory rate of 34%. These adjustments were $68 and $70 for the three months ended September 30, 2000 and 1999.
</TABLE>
11
<PAGE>
Average interest-earning assets for the third quarter increased to $303.7
million at September 30, 2000 compared to $229.4 million at September 30, 1999,
a growth of $74.3 million, or 32.4%, while the average yield on interest-earning
assets increased to 9.44% compared to 8.79% in third quarter of the prior year.
The average yield on loans increased to 9.80% for the quarter ended September
30, 2000 from 9.40% for the quarter ended September 30, 1999. The average yield
on interest-bearing deposits also increased in the third quarter of 2000 to
4.91% from 3.85% for the quarter ended September 30, 1999. Average
interest-bearing deposits for the quarter increased to $240.9 million at
September 30, 2000 compared to $186.0 million at September 30, 1999, a growth of
$54.9 million, or 29.5%. The overall result of these changes was a decrease in
the net interest spread and the net interest margin to 4.41% and 5.20%,
respectively, for the quarter ended September 30, 2000 from 4.93% and 5.63%,
respectively, for the quarter ended September 30, 1999.
Noninterest Income and Expense
Noninterest income increased $110,000, or 19.7%, in the third quarter of 2000
compared to the like period in 1999. For the first nine months of 2000,
noninterest income increased $138,000, or 7.5% compared to the like period in
1999. This additional income is due to an increase in the number of deposit
accounts and service charges.
Noninterest expense was $3.2 million, an increase of $499,000, or 18.4%, in the
third quarter of 2000. Two major components of noninterest expense, employee
compensation and occupancy, increased 28.8% and 4.5%, respectively, for the
quarter compared to the like period in 1999. For the first nine months of 2000,
noninterest expense rose to $9.3 million from $7.6 million one year ago, a 22.2%
increase. Employee compensation and occupancy expense increased 32.2% and 14.4%,
respectively, for the nine months ended September 30, 2000. With the majority of
our hub branches completed, the increase in noninterest expenses mainly reflects
personnel costs associated with additional staffing for those locations. The
efficiency ratio (noninterest expense divided by the sum of net interest income
plus noninterest income less non-recurring gains) improved to 70.53% for the
third quarter 2000 compared to 72.86% for the like period in 1999. For the first
nine months of 2000 and 1999, the efficiency ratio was 69.51% and 71.68%,
respectively.
Income Taxes
For the third quarter and first nine months of 2000, the Company recorded an
income tax provision of $268,000 and $811,000, respectively. The overall
effective tax rate increased for the nine months ended September 30, 2000
compared to the like period in 1999 due to the decrease of interest income on
tax-exempt investment securities as a percentage of taxable income.
12
<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>
September 30, 2000 December 31, 1999
----------------------------------- -----------------------------------
(Dollars in thousands) Balance % of total Balance % of total
---------------- --------------- ----------------- --------------
<S> <C> <C> <C> <C>
Commercial $ 103,428 36.1% $ 90,014 40.5%
Real estate mortgages:
One-to-four family residential 30,639 10.7% 24,822 11.2%
Five-or-more family residential and
commercial 38,618 13.5% 29,527 13.2%
---------------- --------------- ----------------- --------------
Total real estate mortgages 69,257 24.2% 54,349 24.4%
Real estate construction 21,541 7.5% 14,300 6.4%
Consumer 92,107 32.2% 63,757 28.7%
---------------- --------------- ----------------- --------------
Subtotal 286,333 100.0% 222,420 100.0%
=============== ==============
Less: allowance for loan losses (2,770) (2,182)
Less: deferred loan fees and other (14) (16)
---------------- -----------------
Total loans, net $ 283,549 $ 220,222
================ =================
</TABLE>
Total loans, net, increased to $283.5 million at September 30, 2000,
representing a 28.8% increase from year-end 1999. Total commercial, real estate
mortgage, real estate construction and consumer loans increased 14.9%, 27.4%,
50.6% and 44.5%, respectively, at September 30, 2000 from year-end 1999. These
increases reflect the Company's strategy of growth and increased market
penetration in the areas it currently serves.
13
<PAGE>
Nonperforming Assets
The following table sets forth an analysis of the composition of the Company's
nonperforming assets at the dates indicated:
<TABLE>
(Dollars in thousands) September 30, 2000 December 31, 1999
------------------------- ----------------------
<S> <C> <C>
Nonaccrual loans $ 2,093 $ 920
Restructured loans 77 52
------------------------- ----------------------
Total nonperforming loans 2,170 972
Real estate owned 170 170
------------------------- ----------------------
Total nonperforming assets $ 2,340 $ 1,142
========================= ======================
Accruing loans past due => 90 days $ -- $ --
Potential problem loans -- --
Allowance for loan losses 2,770 2,182
Nonperforming loans to loans 0.76% 0.44%
Allowance for loan losses to loans 0.97% 0.98%
Allowance for loan losses to nonperforming loans 127.65% 224.49%
Nonperforming assets to total assets 0.68% 0.40%
</TABLE>
Nonperforming loans increased to $2.2 million, or 0.76% of total loans, at
September 30, 2000 from $972,000, or 0.44% of total loans, at December 31, 1999
primarily due to a small number of borrowing relationships that were added to
nonaccrual loans. Accordingly, the Company expects to charge off a
higher-than-normal amount of nonperforming loans in the fourth quarter. The
Company will continue to evaluate the adequacy of the loan loss reserve, and
anticipates increasing the provision either in the fourth quarter or next year,
which may have a negative impact on net income.
14
<PAGE>
Provision and Allowance for Loan Losses
The Company recorded a $300,000 provision for loan losses for the third quarter
of 2000, compared to $255,000 for the like period a year ago. There were
$187,000 in net loan charge-offs during the third quarter of 2000, compared to
$114,000 for the like period in 1999. For the nine months ended September 30,
2000, the Company recorded a $1.0 million provision for loan losses compared to
$765,000 for the like period in 1999. Net loan charge-offs during the first nine
months of 2000 were $438,000 compared to $349,000 for the like period in 1999.
The allowance for loan losses increased to $2.8 million at September 30, 2000
from $2.2 million at December 31, 1999, or 0.97% of total outstanding loans and
127.65% of nonperforming loans at the end of the third 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.
The following table sets forth the changes in the Company's allowance for loan
losses at the dates indicated:
<TABLE>
(Dollars in thousands) Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
--------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Balance at beginning of period $ 2,657 $ 2,020 $ 2,182 $ 1,745
Charge-offs:
Commercial (100) (52) (195) (169)
Real estate - - - (6)
Consumer (109) (69) (305) (195)
--------------- -------------- -------------- --------------
Total charge-offs (209) (121) (500) (370)
Recoveries:
Commercial -- 1 5 8
Real estate -- -- -- --
Consumer 22 6 57 13
--------------- -------------- -------------- --------------
Total recoveries 22 7 62 21
Net charge-offs (187) (114) (438) (349)
Provision for loan losses 300 255 1,026 765
--------------- -------------- -------------- --------------
Balance at end of period $ 2,770 $ 2,161 $ 2,770 $ 2,161
=============== ============== ============== ==============
</TABLE>
15
<PAGE>
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 and
maturing investments, are used to make loans and to fund continuing operations.
In addition, at September 30, 2000, the Company had lines of credit with the
Federal Home Loan Bank of Seattle ("FHLB") of $51.3 million and correspondent
financial institutions in the amount of $12.1 million. As of September 30, 2000,
there were $15.6 million in advances on these lines of credit.
Total deposits increased 16.1% to $295.4 million at September 30, 2000 from
$254.5 million as of 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 upon customer deposits, loan
repayments and current earnings to provide liquidity and continue to use FHLB
advances to supplement funding sources.
Capital
The Company's shareholders' equity increased to $31.0 million at September 30,
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 September 30,
2000 the 210,000 shares had been repurchased, with 67,735 of those shares
repurchased during the nine months ended September 30, 2000 for approximately
$550,000. The Company also paid cash dividends of $606,000 during the nine
months ended September 30, 2000. Net income for the quarter, offset by the cash
dividends and stock repurchases, were the primary reasons for the Company's
increase of $1.2 million in shareholders' equity at September 30, 2000. Total
assets increased to $343.8 million at September 30, 2000 from $286.0 million at
December 31, 1999, an increase of 20.2%. Shareholders' equity to total assets
was 9.0% at September 30, 2000 compared to 10.4% at December 31, 1999.
The Company and the Bank are subject to risk-based capital and leverage
guidelines issued by federal banking agencies for banks and bank holding
companies. These agencies are required by law to take specific prompt corrective
actions with respect to institutions that do not meet minimum capital standards
and have defined five capital tiers, the highest of which is "well-capitalized".
As the following table indicates, the Company and Bank qualified as
"well-capitalized" at September 30, 2000:
<TABLE>
September 30, 2000
------------------------------------------------------------------------
Minimum requirement Well-capitalized Actual ratio
requirement
---------------------- -------------------- ----------------------
<S> <C> <C> <C>
Total risk-based capital ratio 8% 10% 10.73%
Tier 1 risk-based capital ratio 4% 6% 9.80%
Leverage ratio 4% 5% 8.95%
</TABLE>
16
<PAGE>
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 September 30, 2000, based on the measures
used to monitor and manage interest rate risk, there had 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.
Part II
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule - This exhibit is included only
in the electronic EDGAR version of this Form 10-Q. The financial data
schedule is not a separate financial statement, but a schedule that
summarizes certain standard financial information extracted directly
from the financial statements in this filing.
(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 November 13, 2000 By /s/ Michal D. Cann
Michal D. Cann
President and Chief Executive Officer
Date November 13, 2000 By /s/ Phyllis A. Hawkins
Phyllis A. Hawkins
Senior Vice President and
Chief Financial Officer
17
