<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, 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
August 10, 2000 was 4,028,285.
i
<PAGE>
Table of Contents
<TABLE> 2
PART I
Page
<S> <C>
Item 1 Financial Statements
Condensed Consolidated Statements of Financial Condition - 1
June 30, 2000 and December 31, 1999 (unaudited)
Condensed Consolidated Statements of Income - 2
Three and Six Months Ended June 30, 2000 and 1999 (unaudited)
Condensed Consolidated Statements of Shareholders' Equity - 3
Six Months Ended June 30, 2000 (unaudited)
Condensed Consolidated Statements of Comprehensive Income -
Three and Six Months Ended June 30, 2000 and 1999 (unaudited)
Condensed Consolidated Statements of Cash Flows - 4
Six Months Ended June 30, 2000 and 1999 (unaudited)
Notes to Condensed Consolidated Financial Statements - 5
Six Months Ended June 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 16
PART II
Item 4 Submission of Matters to a Vote of Security Holders 17
Item 6 Exhibits and Reports on Form 8-K 17
Signatures 18
</TABLE>
<PAGE> 3
PART I
Item 1. Financial Statements
WASHINGTON BANKING COMPANY
AND SUBSIDIARY
Condensed Consolidated Statements of Financial Condition
June 30, 2000 and December 31, 1999 (unaudited)
(Dollars in thousands, except per share data)
<TABLE>
June 30, December 31,
Assets 2000 1999
--------------- ----------------
<S> <C> <C>
Cash and due from banks $ 15,911 $ 10,651
Interest-bearing deposits 1,973 5,842
Federal funds sold -- 4,300
--------------- ----------------
Total cash and cash equivalents 17,884 20,793
Federal Home Loan Bank stock 817 791
Investment securities, available-for-sale 4,872 6,373
Investment securities, held-to-maturity 22,460 24,090
--------------- ----------------
Total investment securities 28,149 31,254
Loans receivable, net 261,699 220,222
Premises and equipment, net 11,253 11,177
Other real estate owned 170 170
Deferred tax asset 434 434
Other assets 2,400 1,920
--------------- ----------------
Total assets $ 321,989 $ 285,970
=============== ================
Liabilities and Shareholders' Equity
Liabilities:
Deposits:
Noninterest-bearing $ 39,885 $ 35,388
Interest-bearing 228,813 219,087
--------------- ----------------
Total deposits 268,698 254,475
Federal funds purchased 5,000 --
Other borrowed funds 16,080 --
Other liabilities 1,758 1,697
--------------- ----------------
Total liabilities 291,536 256,172
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 4,028,285 and 4,061,785
shares at June 30, 2000 and December 31, 1999, respectively 16,025 16,413
Retained earnings 14,536 13,493
Accumulated other comprehensive income (loss), net (108) (108)
--------------- ----------------
Total shareholders' equity 30,453 29,798
--------------- ----------------
Total liabilities and shareholders' equity $ 321,989 $ 285,970
=============== ================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
1
<PAGE> 4
WASHINGTON BANKING COMPANY
AND SUBSIDIARY
Condensed Consolidated Statements of Income
Three and six months ended June 30, 2000 and 1999 (unaudited)
(Dollars in thousands, except per share data)
<TABLE>
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $ 6,064 $ 3,926 $ 11,549 $ 7,453
Interest on taxable investment securities 164 278 350 573
Interest on tax-exempt investment securities 203 206 404 404
Other 45 68 125 170
------------ ------------ ------------ ------------
Total interest income 6,476 4,478 12,428 8,600
Interest expense 2,665 1,588 4,970 3,034
------------ ------------ ------------ ------------
Net interest income 3,811 2,890 7,458 5,566
Provision for loan losses 400 255 726 510
------------ ------------ ------------ ------------
Net interest income after provision
for loan losses 3,411 2,635 6,732 5,056
------------ ------------ ------------ ------------
Noninterest income:
Service charges on deposits 454 344 857 695
Other 271 319 449 596
------------ ------------ ------------ ------------
Total noninterest income 725 663 1,306 1,291
------------ ------------ ------------ ------------
Noninterest expense:
Salaries and benefits 1,729 1,328 3,518 2,634
Occupancy expense 563 459 1,138 944
Office supplies and printing 101 96 240 178
Data processing 82 79 163 151
Consulting and professional fees 58 77 99 145
Other 457 452 888 823
------------ ------------ ------------ ------------
Total noninterest expense 2,990 2,491 6,046 4,875
------------ ------------ ------------ ------------
Income before income taxes 1,146 807 1,992 1,472
Provision for income taxes 314 201 543 363
------------ ------------ ------------ ------------
Net income $ 832 $ 606 $ 1,449 $ 1,109
============ ============ ============ ============
Net income per share, basic $ 0.21 $ 0.15 $ 0.36 $ 0.26
============ ============ ============ ============
Net income per share, diluted $ 0.20 $ 0.14 $ 0.34 $ 0.25
============ ============ ============ ============
Average number of shares outstanding, basic 4,046,691 4,182,754 4,054,252 4,189,028
Average number of shares outstanding, diluted 4,249,886 4,444,995 4,258,502 4,447,809
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE> 5
WASHINGTON BANKING COMPANY
AND SUBSIDIARY
Condensed Consolidated Statements of Shareholders' Equity
Six months ended June 30, 2000 (unaudited)
Condensed Consolidated Statements of Comprehensive Income
Three and six months ended June 30, 2000 and 1999 (unaudited)
(Dollars and shares in thousands)
<TABLE>
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, $0.10 per share -- -- (406) -- (406)
Net income -- -- 1,449 -- 1,449
Net change in unrealized gain (loss)
on securities available-for-sale -- -- -- -- --
Repurchase of common stock (56) (454) -- -- (454)
Stock options exercised 22 66 -- -- 66
----------- ------------ -------------- -------------- ---------------
Balances at June 30, 2000 4,028 $ 16,025 $ 14,536 $ (108) $ 30,453
=========== ============ ============== ============== ===============
Three Months Ended June 30, Six Months Ended June 30,
Comprehensive Income: 2000 1999 2000 1999
------------- ------------ ------------- ------------
Net income $ 832 $ 606 $ 1,449 $ 1,109
Increase in unrealized gain (loss) on securities
available-for-sale, net of tax of
$5, $33, $0 and $57, respectively 9 (63) -- (110)
------------- ------------ ------------- ------------
Comprehensive income $ 841 $ 543 $ 1,449 $ 999
============= ============ ============= ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 6
WASHINGTON BANKING COMPANY
AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows
Six months ended June 30, 2000 and 1999 (unaudited)
(Dollars in thousands, except per share data)
<TABLE>
Six Months Ended June 30,
2000 1999
--------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,449 $ 1,109
Adjustments to reconcile net income to net cash
provided by operating activities:
Federal Home Loan Bank stock dividends (26) (27)
Amortization of investment premiums, net 21 34
Provision for loan losses 726 510
Depreciation of premises and equipment 520 253
Net increase in other assets (480) (165)
Net decrease in other liabilities 61 (215)
--------------- --------------
Net cash provided by operating activities 2,271 1,499
--------------- --------------
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 1,610 1,645
Net increase in loans (42,203) (35,255)
Purchases of premises and equipment (596) (2,104)
--------------- --------------
Net cash used in investing activities (39,689) (35,537)
--------------- --------------
Cash flows from financing activities:
Net increase in deposits 14,223 20,093
Net increase in other borrowed funds 16,080 --
Net increase in federal funds purchased 5,000 6,200
Dividends paid on common stock (406) (336)
Proceeds from stock options exercised 66 34
Repurchase of common stock (454) (995)
--------------- --------------
Net cash provided by financing activities 34,509 24,996
--------------- --------------
Net decrease in cash and cash equivalents (2,909) (9,042)
Cash and cash equivalents at beginning of period 20,793 24,252
--------------- --------------
Cash and cash equivalents at end of period $ 17,884 $ 15,210
=============== ==============
Supplemental information:
Loans foreclosed and transferred to real estate owned $ -- $ 145
Cash paid for interest 4,882 3,079
Cash paid for taxes 400 430
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Six months ended June 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 six months ended June 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> 8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Six months ended June 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 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>
Three Months Ended June 30, 2000
----------------------------------------------------------------
Income Weighted average Per share amount
shares
---------------- ----------------------- ------------------
<S> <C> <C> <C>
Basic EPS
Income available to common shareholders $ 832 4,046,691 $ 0.21
Effect of dilutive securities: stock options -- 203,195 --
---------------- ----------------------- ------------------
Diluted EPS $ 832 4,249,886 $ 0.20
================ ======================= ==================
Three Months Ended June 30, 1999
----------------------------------------------------------------
Income Weighted average Per share amount
shares
---------------- ----------------------- ------------------
Basic EPS
Income available to common shareholders $ 606 4,182,754 $ 0.15
Effect of dilutive securities: stock options -- 262,241 --
---------------- ----------------------- ------------------
Diluted EPS $ 606 4,444,995 $ 0.14
================ ======================= ==================
</TABLE>
6
<PAGE> 9
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Six months ended June 30, 2000 and 1999 (unaudited)
(Dollars in thousands, except per share data)
<TABLE>
Six Months Ended June 30, 2000
----------------------------------------------------------------
Income Weighted average Per share amount
shares
---------------- ----------------------- ------------------
<S> <C> <C> <C>
Basic EPS
Income available to common shareholders $ 1,449 4,054,252 $ 0.36
Effect of dilutive securities: stock options -- 204,250 --
---------------- ----------------------- ------------------
Diluted EPS $ 1,449 4,258,502 $ 0.34
================ ======================= ==================
Six Months Ended June 30, 1999
----------------------------------------------------------------
Income Weighted average Per share amount
shares
---------------- ----------------------- ------------------
Basic EPS
Income available to common shareholders $ 1,109 4,189,028 $ 0.26
Effect of dilutive securities: stock options -- 258,781 --
---------------- ----------------------- ------------------
Diluted EPS $ 1,109 4,447,809 $ 0.25
================ ======================= ==================
</TABLE>
For the three-month periods ended June 30, 2000 and 1999, there were options to
purchase 123,950 and 41,000 shares of common stock outstanding, respectively,
which were antidilutive and therefore not included in the computation of diluted
net income per share. For each of the six-month periods ended June 30, 2000 and
1999 there were options to purchase 123,950 shares 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,
which allows the Company to repurchase up to 210,000 shares of the Company's
common stock. As of June 30, 2000, the Company had repurchased 198,265 shares of
the Company's common stock.
(3) Subsequent Event
On July 20, 2000, the Board of Directors declared a cash dividend of $0.05 per
share to shareholders of record as of August 10, 2000.
7
<PAGE> 10
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.
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.
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 13
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. The loan production office in Port Townsend
(Jefferson County) was recently closed due to lower-than-anticipated loan
demand. By this fall, the Company plans to open a full-service office in the
Bakerview neighborhood of Bellingham (Whatcom County), which is expected to
engage its people and resources more productively and place the Company in a
more favorable growth position.
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, reducing dependence on leased office
space. We believe the new location will enhance customer service by providing
easier branch access and more convenient availability of expanded financial
8
<PAGE> 11
services. Once the new building is occupied, the Company expects to be able to
reduce or eliminate the use of some properties presently owned or leased.
Management believes the consolidation will assist in streamlining operations and
improving efficiencies.
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
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 $322.0 million at June 30, 2000 from $286.0 million at
December 31, 1999, an increase of 12.6%. Net loans increased 18.8% to $261.7
million at June 30, 2000 from $220.2 million at December 31, 1999. Deposits
increased 5.6% to $268.7 million at June 30, 2000 from $254.5 million at
December 31, 1999.
The Company's shareholders' equity increased to $30.5 million at June 30, 2000
from $29.8 million at December 31, 1999. The increase reflects earnings offset
by the repurchase of 56,000 shares of common stock for approximately $454,000
and the payment of cash dividends of $406,000 during the first six months of
2000.
The Company's allowance for loan losses was $2.7 million at June 30, 2000 and
$2.2 million at December 31, 1999. Nonperforming assets amounted to $2.1 million
at June 30, 2000, or 0.64% of total assets, compared to $1.1 million or 0.40% at
December 31, 1999.
9
<PAGE> 12
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 second quarter of 2000 increased 37.3% to $832,000 or $0.20
per diluted share, from $606,000, or $0.14 per diluted share, for the second
quarter of 1999. Net income for the six months ended June 30, 2000 increased
30.7% to $1,449,000 or $0.34 per diluted share, from $1,109,000, or $0.25 per
diluted share, for the six months ended June 30, 1999. The increase in net
income was primarily due to net interest income.
Net Interest Income
Net interest income for the second quarter of 2000 increased 31.9% to $3.8
million from $2.9 million for the second quarter of 1999. For the first six
months of 2000, net interest income increased 34.0% to $7.5 million from $5.6
million for the same period in 1999. The increase in net interest income is
largely due to the growth of the Company's loan portfolio resulting from the
strong loan demand.
10
<PAGE> 13
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 June 30, 2000 Three Months Ended June 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 $ 248,908 $ 6,064 9.74% $ 171,601 $ 3,926 9.15%
Federal funds sold 46 1 8.70% 231 4 6.93%
Interest-bearing cash 2,215 31 5.60% 4,618 50 4.33%
Investments:
Taxable 11,620 177 6.09% 19,604 292 5.96%
Non-taxable (2) 17,131 272 6.35% 17,641 277 6.28%
----------- ----------- ----------- ------------ ------------ ------------
Interest-earning assets $ 279,920 $ 6,545 9.35% $ 213,695 $ 4,549 8.51%
Noninterest-earning assets 24,861 21,296
----------- ------------
Total assets $ 304,781 $ 234,991
=========== ============
Liabilities and
shareholders' equity
Deposits:
Interest demand and
money market $ 82,225 $ 664 3.23% $ 71,581 $ 478 2.67%
Savings 24,706 158 2.56% 24,782 156 2.52%
Time deposits 113,123 1,613 5.70% 68,733 873 5.08%
----------- ----------- ----------- ------------ ------------ ------------
Interest-bearing deposits $ 220,054 $ 2,435 4.43% $ 165,096 $ 1,507 3.65%
FHLB advances 13,776 230 6.68% 6,471 81 5.01%
Other borrowings (3) 177 -- 0.00% -- -- --
----------- ----------- ----------- ------------ ------------ ------------
Interest-bearing liabilities $ 234,007 $ 2,665 4.56% $ 171,567 $ 1,588 3.70%
Noninterest-bearing deposits 38,852 32,607
Other noninterest-bearing
liabilities 1,650 1,114
----------- ------------
Total liabilities $ 274,509 $ 205,288
Shareholders' equity 30,272 29,703
----------- ------------
Total liabilities and
shareholders' equity $ 304,781 $ 234,991
=========== ============
Net interest income (2) $ 3,880 $ 2,961
=========== ============
Net interest spread (1) 4.80% 4.81%
=========== ============
Net interest margin (1) 5.54% 5.54%
=========== ============
(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 $69 and $71 for the three months ended June 30, 2000 and 1999.
(3) Funds were borrowed on June 30, 2000.
</TABLE>
11
<PAGE> 14
Average interest-earning assets for the second quarter increased to $279.9
million at June 30, 2000 compared to $213.7 million at June 30, 1999, a growth
of $66.2 million, or 31.0%, while the average yield on interest-earning assets
increased to 9.35% compared with 8.51% in second quarter of the prior year. The
average yield on loans increased to 9.74% for the quarter ended June 30, 2000
from 9.15% for the quarter ended June 30, 1999. The average yield on
interest-bearing deposits also increased in the second quarter of 2000 to 4.43%
from 3.65% for the quarter ended June 30, 1999. Average interest-bearing
deposits for the quarter increased to $220.1 million at June 30, 2000 compared
to $165.1 million at June 30, 1999, a growth of $55.0 million, or 33.3%. The
overall result of these changes was a slight decrease in the net interest spread
to 4.80% for the quarter ended June 30, 2000 from 4.81% for the quarter ended
June 30, 1999. Margins have held firm because our lending rates tend to more
closely follow the prevailing rates, while our deposit rates usually adjust more
slowly.
Average shareholders' equity was $30.3 million and $29.7 million for the
quarters ended June 30, 2000 and 1999. Net interest margin (net interest income
divided by average interest-earning assets) was 5.54% in both the second quarter
of 2000 and 1999.
Noninterest Income and Expense
Noninterest income increased $62,000, or 9.4%, in the second quarter of 2000
compared to the same period in 1999. The slight rise reflects the decrease in
fees received on third party originated real estate loans due to a less
favorable 2000 mortgage loan market
Noninterest expense increased $499,000, or 20.0%, in the second 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 30.2% and 22.7%, respectively, for the quarter compared
with the same period in 1999. These increases reflect the Company's geographic
expansion, 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) improved to
65.92% for the second quarter 2000 compared to 70.11% for the same period in
1999.
Income Taxes
For the second quarter of 2000, the Company recorded an income tax provision of
$314. The overall effective tax rate increased for the six months ended June 30,
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.
12
<PAGE> 15
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>
June 30, 2000 December 31, 1999
----------------------------------- -----------------------------------
(Dollars in thousands) Balance % of total Balance % of total
---------------- --------------- ----------------- --------------
<S> <C> <C> <C> <C>
Commercial $ 99,760 37.7% $ 90,014 40.5%
Real estate mortgages:
One-to-four family residential 29,482 11.2% 24,822 11.2%
Five-or-more family residential and
commercial 36,422 13.8% 29,527 13.2%
---------------- --------------- ----------------- --------------
Total real estate mortgages 65,904 25.0% 54,349 24.4%
Real estate construction 18,052 6.8% 14,300 6.4%
Consumer 80,650 30.5% 63,757 28.7%
---------------- --------------- ----------------- --------------
Subtotal 264,366 100.0% 222,420 100.0%
=============== ==============
Less: allowance for loan losses (2,657) (2,182)
Less: deferred loan fees and other (10) (16)
---------------- -----------------
Total loans, net $ 261,699 $ 220,222
================ =================
</TABLE>
Total loans, net, increased to $261.7 million at June 30, 2000, representing an
18.8% increase from year-end 1999. Total commercial, real estate mortgage, real
estate construction and consumer loans increased 10.8%, 21.3%, 26.2% and 26.5%,
respectively, at June 30, 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.
13
<PAGE> 16
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) June 30, 2000 December 31, 1999
------------------------- ----------------------
<S> <C> <C>
Nonaccrual loans $ 1,830 $ 920
Restructured loans 52 52
------------------------- ----------------------
Total nonperforming loans 1,882 972
Real estate owned 170 170
------------------------- ----------------------
Total nonperforming assets $ 2,052 $ 1,142
========================= ======================
Accruing loans past due => 90 days $ -- $ --
Potential problem loans -- --
Allowance for loan losses 2,657 2,182
Nonperforming loans to loans 0.71% 0.44%
Allowance for loan losses to loans 1.01% 0.98%
Allowance for loan losses to nonperforming loans 141.18% 224.49%
Nonperforming assets to total assets 0.64% 0.40%
</TABLE>
Nonperforming loans increased to $1.9 million, or 0.71% of total loans, at June
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 during the second quarter. Management considers nonperforming lending
relationships adequately reserved.
Provision and Allowance for Loan Losses
The Company recorded a $400,000 provision for loan losses for the second quarter
of 2000, compared with $255,000 for the same period a year ago. There were
$105,000 in net loan charge-offs during the second quarter of 2000, compared to
$61,000 in net charge-offs for the same period in 1999.
The allowance for loan losses increased to $2.7 million at June 30, 2000 from
$2.2 million at December 31, 1999, or 1.01% of total outstanding loans and
141.18% of nonperforming loans at the end of the second 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.
14
<PAGE> 17
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 Six Months Ended
June 30, June 30,
2000 1999 2000 1999
--------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Balance at beginning of period $ 2,362 $ 1,826 $ 2,182 $ 1,745
Charge-offs:
Commercial (9) -- (95) (117)
Real estate -- (6) -- (6)
Consumer (111) (60) (196) (126)
--------------- -------------- -------------- --------------
Total charge-offs (120) (66) (291) (249)
Recoveries:
Commercial 3 -- 5 7
Real estate -- -- -- --
Consumer 12 5 35 7
--------------- -------------- -------------- --------------
Total recoveries 15 5 40 14
Net charge-offs (105) (61) (251) (235)
Provision for loan losses 400 255 726 510
--------------- -------------- -------------- --------------
Balance at end of period $ 2,657 $ 2,020 $ 2,657 $ 2,020
=============== ============== ============== ==============
</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 and
maturing investments, are used to make loans and to fund continuing operations.
In addition, at June 30, 2000, the Company had lines of credit with the Federal
Home Loan Bank of Seattle (FHLB) of $48.0 million, the Federal Reserve Bank of
San Francisco of $500,000 and correspondent financial institutions in the amount
of $12.1 million. As of June 30, 2000, there were $21.1 million in advances on
these lines of credit.
Total deposits increased 5.6% to $268.7 million at June 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 Federal
Home Loan Bank advances to supplement funding sources.
15
<PAGE> 18
Capital
The Company's shareholders' equity increased to $30.5 million at June 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 June 30, 2000 a
total of 198,265 shares had been repurchased, with 56,000 of those shares
repurchased during the six months ended June 30, 2000 for approximately
$454,000. 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 $406,000 during the first six months ended June 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 $655,000 in shareholders'
equity at June 30, 2000. Total assets increased to $322.0 million at June 30,
2000 from $286.0 million at December 31, 1999, an increase of 12.6%.
Shareholders' equity to total assets was 9.5% at June 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 June 30, 2000.
<TABLE>
June 30, 2000
------------------------------------------------------------------------
Minimum requirement Well-capitalized Actual ratio
requirement
---------------------- -------------------- ----------------------
<S> <C> <C> <C>
Total risk-based capital ratio 8% 10% 11.27%
Tier 1 risk-based capital ratio 4% 6% 10.31%
Leverage ratio 4% 5% 9.43%
</TABLE>
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 June 30, 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.
16
<PAGE> 19
PART II
Item 4. Submission Of Matters To A Vote of Security Holders
The annual meeting of shareholders was held at Oak Harbor, Washington on May 25,
2000 at 3:00 p.m. 3,373,440 shares of common stock were represented in person or
by proxy at the meeting. This represented 83.2% of the 4,054,285 shares held by
shareholders as of March 30, 2000 and entitled to vote at the meeting. The
following issue came before the shareholders for vote:
Election of directors to serve on the Board of Directors until the
Annual meeting of shareholders in the year 2003, or until their successors
are duly elected and qualified - three of the ten director positions had
expired and were open for election. The nominees for these positions were
Karl C. Krieg, III, Robert B. Olson and Anthony J. Pickering. All these
were elected with the following vote totals:
<TABLE>
For Against Withheld
-------------------- -------------------- -------------------
<S> <C> <C> <C>
Karl C. Krieg, III 3,253,395 0 120,045
Robert B. Olson 3,331,395 0 42,045
Anthony J. Pickering 3,341,895 0 31,545
</TABLE>
The other five directors who continue in office are: Michal D. Cann, Jay T.
Lien, Marlen L. Knutson, Alvin J. Sherman and Edward J. Wallgren. Orlan D. Dean,
a director of the Bank since 1985, retired on January 1, 2000. There are
currently two vacancies on the board.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 10.1 - Material Contracts
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
17
<PAGE> 20
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 11, 2000 By /s/ Michal D. Cann
Michal D. Cann
President and Chief Executive Officer
Date August 11, 2000 By /s/ Phyllis A. Hawkins
Phyllis A. Hawkins
Senior Vice President and
Chief Financial Officer
18
