10-Q 1 wbco2q2001.txt FORM 10-Q FOR THE PERIOD ENDED JUNE 30,2001 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, 2001 [ ] 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) 450 SW Bayshore Drive 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, 2001 was 4,055,250. Table of Contents PART I Page ---- Item 1 Financial Statements Condensed Consolidated Statements of Financial Condition - June 30, 2001(unaudited) and December 31, 2000 1 Condensed Consolidated Statements of Income - Three and Six Months Ended June 30, 2001 and 2000 (unaudited) 2 Condensed Consolidated Statements of Shareholders' Equity - Six Months Ended June 30, 2001 (unaudited) 3 Condensed Consolidated Statements of Comprehensive Income - Three and Six Months Ended June 30, 2001 and 2000 (unaudited) 3 Condensed Consolidated Statements of Cash Flows - Six Months Ended June 30, 2001 and 2000 (unaudited) 4 Notes to Condensed Consolidated Financial Statements 5 Six Months Ended June 30, 2001 and 2000 (unaudited) Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Item 3 Quantitative and Qualitative Disclosures about Market Risk 17 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
PART I Item 1. Financial Statements WASHINGTON BANKING COMPANY AND SUBSIDIARY Condensed Consolidated Statements of Financial Condition June 30, 2001 and December 31, 2000 (Dollars in thousands, except per share data) June 30, December 31, Assets 2001 2000 --------------- ---------------- (unaudited) Cash and due from banks $ 17,061 $ 15,001 ($1,569 and $1,158, respectively, are restricted) Interest-earning deposits 994 1,428 Federal funds sold -- 750 --------------- ---------------- Total cash and cash equivalents 18,055 17,179 --------------- ---------------- Federal Home Loan Bank stock 872 844 Investment securities available for sale 4,621 4,995 Investment securities held to maturity 19,673 21,491 --------------- ---------------- Total investment securities 25,166 27,330 --------------- ---------------- Loans receivable, net 345,772 299,998 Premises and equipment, net 13,769 13,730 Other real estate owned 124 124 Deferred tax asset 336 378 Other assets 2,884 2,906 --------------- ---------------- Total assets $ 406,106 $ 361,645 =============== ================ Liabilities and Shareholders' Equity Liabilities: Deposits $ 345,075 $ 317,776 Federal funds purchased 16,000 -- Federal Home Loan Bank advances 10,000 10,000 Other liabilities 1,982 2,368 --------------- ---------------- Total liabilities 373,057 330,144 --------------- ---------------- 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 4,055,250 and 4,032,750 shares at June 30, 2001 and December 31, 2000, respectively 16,124 16,058 Retained earnings 16,870 15,470 Accumulated other comprehensive income (loss), net 55 (27) --------------- ---------------- Total shareholders' equity 33,049 31,501 Commitments and contingencies --------------- ---------------- Total liabilities and shareholders' equity $ 406,106 $ 361,645 =============== ================
See accompanying notes to condensed consolidated financial statements. 1 WASHINGTON BANKING COMPANY AND SUBSIDIARY Condensed Consolidated Statements of Income Three and six months ended June 30, 2001 and 2000 (unaudited) (Dollars in thousands, except per share data) Three Months Ended Six Months Ended June 30, June 30, 2001 2000 2001 2000 ----------- ----------- ----------- ----------- Interest income: Interest and fees on loans $ 7,900 $ 6,064 $ 15,340 $ 11,549 Interest on taxable investment securities 115 164 245 350 Interest on tax-exempt investment securities 198 203 398 404 Other 49 45 113 125 ----------- ----------- ----------- ----------- Total interest income 8,262 6,476 16,096 12,428 Interest expense 3,593 2,665 7,351 4,970 ----------- ----------- ----------- ----------- Net interest income 4,669 3,811 8,745 7,458 Provision for loan losses (655) (400) (1,060) (726) ----------- ----------- ----------- ----------- Net interest income after provision for loan losses 4,014 3,411 7,685 6,732 Noninterest income: Service charges and fees 437 454 841 857 Other 648 271 1,174 449 ----------- ----------- ----------- ----------- Total noninterest income 1,085 725 2,015 1,306 Noninterest expense: Salaries and benefits 2,104 1,729 4,224 3,518 Occupancy 678 563 1,335 1,138 Office supplies and printing 138 101 263 240 Data processing 81 82 163 163 Consulting and professional fees 67 58 122 99 Other 547 457 1,011 888 ----------- ----------- ----------- ----------- Total noninterest expense 3,615 2,990 7,118 6,046 ----------- ----------- ----------- ----------- Income before income taxes 1,484 1,146 2,582 1,992 Provision for income taxes (400) (314) (697) (543) ----------- ----------- ----------- ----------- Net income $ 1,084 $ 832 $ 1,885 $ 1,449 =========== =========== =========== =========== Net income per share, basic $ 0.27 $ 0.21 $ 0.47 $ 0.36 =========== =========== =========== =========== Net income per share, diluted $ 0.26 $ 0.20 $ 0.45 $ 0.34 =========== =========== =========== =========== Average number of shares outstanding, basic 4,047,097 4,046,691 4,040,043 4,054,252 Average number of shares outstanding, diluted 4,233,794 4,249,886 4,223,131 4,258,502
See accompanying notes to condensed consolidated financial statements. 2 WASHINGTON BANKING COMPANY AND SUBSIDIARY Condensed Consolidated Statements of Shareholders' Equity Six months ended June 30, 2001 (unaudited) (Dollars and shares in thousands, except per share data) Common stock Accumulated other Total -------------------------- Retained comprehensive shareholders' Shares Amount earnings income (loss), net equity ------------- ----------- ------------ ------------------ ---------------- Balances at December 31, 2000 4,033 $ 16,058 $ 15,470 $ (27) $ 31,501 Net income -- -- 1,885 -- 1,885 Net change in unrealized gain on securities available for sale -- -- -- 82 82 Cash dividend, $0.12 per share -- -- (485) -- (485) Stock options exercised 22 66 -- -- 66 ------------- ----------- ------------ ------------------ ---------------- Balances at June 30, 2001 4,055 $ 16,124 $ 16,870 $ 55 $ 33,049 ============= =========== ============ ================== ================
See accompanying notes to condensed consolidated financial statements. WASHINGTON BANKING COMPANY AND SUBSIDIARY Condensed Consolidated Statements of Comprehensive Income Three and six months ended June 30, 2001 and 2000 (unaudited) (Dollars in thousands, except per share data) Three Months Ended Six Months Ended June 30, June 30, 2001 2000 2001 2000 ------------ ------------ ------------ ------------ Net income $ 1,084 $ 832 $ 1,885 $ 1,449 Increase in unrealized gain on securities available for sale, net of tax $7, $5, $42 and $0, respectively 13 9 82 -- ------------ ------------ ------------ ------------ Comprehensive income $ 1,097 $ 841 $ 1,967 $ 1,449 ============ ============ ============ ============
See accompanying notes to condensed consolidated financial statements. 3 WASHINGTON BANKING COMPANY AND SUBSIDIARY Condensed Consolidated Statements of Cash Flows Six months ended June 30, 2001 and 2000 (unaudited) (Dollars in thousands, except per share data) Six Months Ended June 30, 2001 2000 --------------- -------------- Cash flows from operating activities: Net income $ 1,885 $ 1,449 Adjustments to reconcile net income to net cash provided by operating activities: Federal Home Loan Bank stock dividends (28) (26) Amortization of investment premiums, net 16 21 Provision for loan losses 1,060 726 Depreciation of premises and equipment 600 520 Net gains on sale of premises and equipment and real estate (32) -- Net (increase) decrease in other assets 22 (480) Net increase (decrease) in other liabilities (386) 61 --------------- -------------- Net cash provided by operating activities 3,137 2,271 --------------- -------------- Cash flows from investing activities: Maturities of investment securities available for sale 1,500 1,500 Maturities of investment securities held to maturity 800 1,610 Net increase in loans (46,834) (42,203) Purchases of premises and equipment (704) (596) Proceeds from the sale of premises and equipment and real estate 97 -- --------------- -------------- Net cash used in investing activities (45,141) (39,689) --------------- -------------- Cash flows from financing activities: Net increase in deposits 27,299 14,223 Net increase in Federal Home Loan Bank advances -- 16,080 Net increase in federal funds purchased 16,000 5,000 Dividends paid on common stock (485) (406) Proceeds from stock options exercised 66 66 Repurchase of common stock -- (454) --------------- -------------- Net cash provided by financing activities 42,880 34,509 --------------- -------------- Net increase (decrease) in cash and cash equivalents 876 (2,909) Cash and cash equivalents at beginning of period 17,179 20,793 --------------- -------------- Cash and cash equivalents at end of period $ 18,055 $ 17,884 =============== ============== Supplemental information: Cash paid for interest $ 8,949 $ 4,882 Cash paid for taxes 925 400
See accompanying notes to condensed consolidated financial statements. 4 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Six months ended June 30, 2001 and 2000 (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 the Bank 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 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 interim condensed consolidated financial statements have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. These consolidated financial statements should be read in conjunction with our December 31, 2000 audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K. In our opinion, 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, 2001 are not necessarily indicative of the results that may be expected for the year ending December 31, 2001. In preparing the consolidated financial statements, we are required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Actual results could differ from those estimates. (c) Recently Issued Accounting Pronouncements In July 2001 the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") 141, "Business Combinations" and SFAS 142, "Goodwill and Other Intangible Assets." SFAS 141 requires business combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting, and broadens the criteria for recording intangible assets separate from goodwill. Recorded goodwill and intangibles will be evaluated against this new criteria and may result in certain intangibles being subsumed into goodwill, or alternatively, amounts initially recorded as goodwill may be separately identified and recognized apart from goodwill. SFAS 142 requires the use of a nonamortization approach to account for purchased goodwill and certain intangibles. Under a nonamortization approach, goodwill and certain intangibles will not be amortized into results of operations, but instead would be reviewed for impairment and written down and charged to results of operations only in the periods in which the recorded value of goodwill and certain intangibles is more than its fair value. The provisions of SFAS 142 will be adopted by the Company on January 1, 2002. We do not expect that the adoption of this statement will have a material effect on our results of operations or financial position. 5 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Six months ended June 30, 2001 and 2000 (unaudited) (Dollars in thousands, except per share data) In June 1998, the FASB issued 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 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities," an amendment of FASB Statement No. 133, which makes minor modifications to SFAS 133. The adoption of these statements by the Company did not materially affect the results of operations or financial condition of the Company. During the first quarter of 2001, the Company transferred $1.0 million of securities from held to maturity to available for sale. (2) Borrowing Arrangements At June 30, 2001, the Company had a line of credit with the Federal Home Loan Bank of Seattle ("FHLB") of $60.8 million, of which there was $10.0 million advanced in other borrowed funds and $7.0 million in overnight funds. The Company also had lines of credit with correspondent financial institutions in the amount of $13.0 million, of which there were $9.0 million in federal funds purchased advanced. (3) Earnings Per Share The following illustrates the reconciliation of the numerators and denominators of the basic and diluted earnings per share ("EPS") computations: Three Months Ended June 30, 2001 ------------------------------------------------------ Weighted Per share Income average shares amount ------------ -------------------- -------------- Basic EPS Income available to common shareholders $ 1,084 4,047,097 $ 0.27 Effect of dilutive securities: stock options -- 186,697 (0.01) ------------ -------------------- -------------- Diluted EPS $ 1,084 4,233,794 $ 0.26 ============ ==================== ============== Three Months Ended June 30, 2000 ------------------------------------------------------ Weighted Per share Income average shares Amount ------------ -------------------- -------------- Basic EPS Income available to common shareholders $ 832 4,046,691 $ 0.21 Effect of dilutive securities: stock options -- 203,195 (0.01) ------------ -------------------- -------------- Diluted EPS $ 832 4,249,886 $ 0.20 ============ ==================== ==============
6 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Six months ended June 30, 2001 and 2000 (unaudited) (Dollars in thousands, except per share data) Six Months Ended June 30, 2001 ------------------------------------------------------ Weighted Per share Income average shares Amount ------------ -------------------- -------------- Basic EPS Income available to common shareholders $ 1,885 4,040,043 $ 0.47 Effect of dilutive securities: stock options -- 183,088 (0.02) ------------ -------------------- -------------- Diluted EPS $ 1,885 4,223,131 $ 0.45 ============ ==================== ============== Six Months Ended June 30, 2000 ------------------------------------------------------ Weighted Per share Income average shares amount ------------ -------------------- -------------- Basic EPS Income available to common shareholders $ 1,449 4,054,252 $ 0.36 Effect of dilutive securities: stock options -- 204,250 (0.02) ------------ -------------------- -------------- Diluted EPS $ 1,449 4,258,502 $ 0.34 ============ ==================== ==============
At June 30, 2001 and 2000 there were options to purchase 406,800 and 469,700 shares of common stock outstanding, respectively, of which 98,550 and 122,450 were antidilutive and therefore not included in the computation of diluted net income per share. (4) Subsequent Event On July 19, 2001, the Board of Directors declared a cash dividend of $0.06 per share to shareholders of record as of August 3, 2001, payable on August 20, 2001. 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations -------------------------------------------------------------------------------- Note Regarding Forward-Looking Statements: This Form 10-Q includes forward-looking statements, which management believes are a benefit to shareholders. These forward-looking statements describe the Company's management's expectations regarding future events and developments such as future operating results, growth in loans and deposits, continued success of the Company's style of banking and the strength of the local economy. The words "will," "believe," "expect," "should," "anticipate" and words of similar construction are intended in part to help identify forward-looking statements. Future events are difficult to predict, and the expectations described below are necessarily subject to risk and uncertainty that may cause actual results to differ materially and adversely. In addition to discussions about risks and uncertainties set forth from time to time in the Company's filings with the SEC, factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include, among others, the following possibilities: (1) local and national general and economic conditions are less favorable than expected or have a more direct and pronounced effect on the Company than expected and adversely affect the Company's ability to continue its internal growth at historical rates and maintain the quality of its earning assets; (2) changes in interest rates reduce interest margins more than expected and negatively affect funding sources; (3) projected business increases following strategic expansion or opening or acquiring new branches are lower than expected; (4) costs or difficulties related to the integration of acquisitions are greater than expected; (5) competitive pressure among financial institutions increases significantly; (6) legislation or regulatory requirements or changes adversely affect the businesses in which the Company is engaged. -------------------------------------------------------------------------------- Overview Washington Banking Company is a registered bank holding company whose wholly-owned subsidiary, Whidbey Island Bank, conducts a full-service community commercial banking business. The Bank is a Washington state- chartered bank. Its deposits are insured by the Federal Deposit Insurance Corporation ("FDIC"). Headquartered in Oak Harbor, the Company's primary market area is the fast-growing, increasingly diversified region located between Vancouver, BC, and Seattle in northwestern Washington. WBCO's business includes commercial loan, real estate loan and construction loan portfolios. The Company is active in the consumer banking field and provides personal and consumer-oriented loan programs. WBCO also provides a wide range of deposit services for individuals and businesses including checking and savings accounts as well as money market accounts, certificates of deposit, individual retirement accounts, safe deposit boxes and other consumer and business related financial services. WBCO offers nondeposit investment products for sale through the Bank's subsidiary, WIB Financial Services, Inc. 8 The Company's strategy has been to build a strong geographical presence within its principal market area while inducing growth through market penetration and providing premier personal service. Following the relocations of two Oak Harbor branch offices and recent administrative consolidations, the Company currently has two vacant properties for sale. Construction of a new building in the Bakerview area of Bellingham (Whatcom County) is expected to be completed by fall 2001. Management believes the building, which replaces the temporary branch that was opened in August 2000 at the same site, will enhance the Company's presence and complement the existing Bellingham location. Continuing the strategy of expanding into appropriate market areas, the Company purchased a potential future building site in Stanwood (Snohomish County) and is in the process of evaluating the feasibility of a branch at this location.. Management believes this location will enhance customer service by providing easier branch access and more convenient availability of services. The Company has leased real property in Anacortes under a Lease with Option to Purchase agreement since February 1997. The Company recently gave notice that it intends to exercise its option to purchase the land and earnest money has been placed in an escrow account. The sale is expected to close during the third quarter of 2001. With the primary physical locations established, the Company's strategy is to turn the focus toward improving profitability. Emphasis has also been placed on maintaining asset quality, improving internal operating systems, and delivering products and services more efficiently. Financial Condition Total assets increased to $406.1 million at June 30, 2001 from $361.6 million at December 31, 2000, an increase of 12.3%. Net loans totaled $345.8 million at June 30, 2001, an increase of 15.3% from $300.0 million at December 31, 2000. Deposits increased 8.6% to $345.1 million at June 30, 2001 from $317.8 million at December 31, 2000. The Company's shareholders' equity increased to $33.0 million at June 30, 2001 from $31.5 million at December 31, 2000. The increase reflects earnings, an increase in unrealized gain on available-for-sale securities of $82,000 and the excise of stock options of $66,000 offset by the payment of cash dividends of $485,000 during the first six months of 2001. The Company's allowance for loan losses was $3.4 million at June 30, 2001 and $2.7 million at December 31, 2000, representing 0.97% and 0.88% of total loans, respectively. Nonperforming assets were $2.2 million on June 30, 2001, or 0.54% of total assets, compared to $1.4 million or 0.37% of total assets at December 31, 2000. 9 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 2001 increased 30.3% to $1.1 million or $0.26 per diluted share, from $832,000, or $0.20 per diluted share, for the second quarter of 2000. Net income for the six months ended June 30, 2001 increased 30.1% to $1.9 million or $0.45 per diluted share, from $1.4 million, or $0.34 per diluted share, for the six months ended June 30, 2000. The increase in net income was primarily due to continued loan growth and secondary market real estate fees. Net Interest Income Net interest income for the second quarter of 2001 increased 22.5% to $4.7 million from $3.8 million for the second quarter of 2000. For the first six months of 2001, net interest income increased 17.3% to $8.7 million from $7.5 million for the like period in 2000. The increase in net interest income is largely due to the growth of the Company's loan portfolio resulting from strong loan demand. 10 The following table sets forth at the dates indicated the Company's consolidated average balance sheet and analysis of net interest income and expense: Three Months Ended June 30, 2001 Three Months Ended June 30, 2000 Average Interest Average Average Interest Average (Dollars in thousands) balance earned/paid yield (1) balance earned/paid yield (1) ----------- ----------- ----------- ------------ ------------ ------------ Assets Loans $ 337,524 $ 7,900 9.36% $ 248,908 $ 6,064 9.74% Federal funds sold 1,244 17 5.47% 46 1 8.70% Interest-bearing cash 1,618 18 4.45% 2,215 31 5.60% Investments: Taxable 8,637 130 6.02% 11,620 177 6.09% Non-taxable (2) 16,927 265 6.26% 17,131 272 6.35% Deferred comp plan 92 -- 0.00% -- -- 0.00% ----------- ----------- ----------- ------------ ------------ ------------ Interest-earning assets $ 366,042 $ 8,330 9.10% $ 279,920 $ 6,545 9.35% Noninterest-earning assets 30,516 24,861 ----------- ------------ Total assets $ 396,558 $ 304,781 =========== ============ Liabilities and Shareholders' equity Deposits: Interest demand and Money market $ 108,068 $ 741 2.74% $ 82,225 $ 664 3.23% Savings 24,958 123 1.97% 24,706 158 2.56% Time deposits 169,638 2,570 6.06% 113,123 1,613 5.70% ----------- ----------- ----------- ------------ ------------ ------------ Interest-bearing deposits $ 302,664 $ 3,434 4.54% $ 220,054 $ 2,435 4.43% Fed funds purchased 8,131 90 4.43% 13,776 230 6.68% Other borrowings (3) 6,799 69 4.06% 177 -- 0.00% ----------- ----------- ----------- ------------ ------------ ------------ Interest-bearing liabilities $ 317,549 $ 3,593 4.53% $ 234,007 $ 2,665 4.56% Noninterest-bearing deposits 42,788 38,852 Other noninterest-bearing 2,272 1,650 liabilities ----------- ------------ Total liabilities $ 362,654 $ 274,509 Shareholders' equity 33,904 30,272 ----------- ------------ Total liabilities and Shareholders' equity $ 396,558 $ 304,781 =========== ============ Net interest income (2) $ 4,737 $ 3,880 =========== ============ Net interest spread (1) 4.57% 4.79% =========== ============ Net interest margin (1) 5.18% 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 $68 and $69 for the three months ended June 30, 2001 and 2000. (3) Funds were borrowed on June 30, 2000.
11 Average interest-earning assets for the second quarter increased to $366.0 million at June 30, 2001 compared to $279.9 million at June 30, 2000, a growth of $86.1 million, or 30.8%, while the average yield on interest-earning assets decreased to 9.10% compared to 9.35% in second quarter of the prior year. The average yield on loans decreased to 9.36% for the quarter ended June 30, 2001 from 9.74% for the quarter ended June 30, 2000. The average yield on interest-bearing deposits increased in the second quarter of 2001 to 4.54% from 4.43% for the quarter ended June 30, 2000. Average interest-bearing deposits for the quarter increased to $302.7 million at June 30, 2001 compared to $220.1 million at June 30, 2000, a growth of $82.6 million, or 37.5%. The overall result of these changes was a decrease in the net interest spread and the net interest margin to 4.57% and 5.18%, respectively, for the quarter ended June 30, 2001 from 4.79% and 5.54%, respectively, for the quarter ended June 30, 2000. Noninterest Income and Expense Noninterest income increased $360,000, or 49.7%, in the second quarter of 2001 compared to the like period in 2000. For the first six months of 2001, noninterest income increased $709,000, or 54.3% compared to the like period in 2000. The growth is primarily due to increased secondary market fees on loans originated on behalf of third parties. Noninterest expense was $3.6 million, an increase of $625,000, or 20.9%, in the second quarter of 2001. Two major components of noninterest expense, employee compensation and occupancy, increased 21.7% and 20.4%, respectively, for the quarter compared to the like period in 2000. For the first six months of 2001, noninterest expense rose to $7.1 million from $6.0 million one year ago, a 17.7% increase. Employee compensation and occupancy expense increased 20.1% and 17.3%, respectively, for the six months ended June 30, 2001. The increase in noninterest expenses mainly reflects personnel costs associated with growth. The efficiency ratio (noninterest expense divided by the sum of net interest income plus noninterest income less non-recurring gains) improved to 62.83% for the second quarter 2001 compared to 65.92% for the like period in 2000. For the first six months of 2001 and 2000, the efficiency ratio was 66.15% and 68.99%, respectively. Income Taxes For the second quarter and first six months of 2001, the Company recorded an income tax provision of $400,000 and $697,000, respectively. The overall effective tax rate is approximately 27% for the three and six months ended June 30, 2001 and 2000. The difference between the expected federal statutory rate of 34% and the actual effective tax rate of 27% is primarily due to tax-exempt interest income from municipal investments. 12 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: June 30, 2001 December 31, 2000 ------------------------------- ------------------------------- (Dollars in thousands) Balance % of total Balance % of total --------------- -------------- --------------- -------------- Commercial $ 118,686 34.0% $ 105,410 34.8% Real estate mortgage: One-to-four family residential 35,809 10.3% 31,766 10.5% Five-or-more family residential and commercial 45,250 13.0% 39,300 13.0% --------------- -------------- ------------------------------- Total real estate mortgage $ 81,059 23.2% $ 71,066 23.5% Real estate construction 32,420 9.3% 28,036 9.3% Consumer 117,009 33.5% 98,172 32.4% --------------- -------------- ------------------------------- Subtotal $ 349,174 100.0% $ 302,684 100.0% ============== ============== Less: allowance for loan losses (3,394) (2,664) Deferred loan fees (8) (22) --------------- --------------- Loans, net $ 345,772 $ 299,998 =============== ===============
Total loans, net, increased to $345.8 million at June 30, 2001, representing a 15.3% increase from year-end 2000. Total commercial, real estate mortgage, real estate construction and consumer loans increased 12.6%, 14.1%, 15.6% and 19.2%, respectively, at June 30, 2001 from year-end 2000. 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 Nonperforming Assets The following table sets forth an analysis of the composition of the Company's nonperforming assets at the dates indicated: (Dollars in thousands) June 30, 2001 December 31, 2000 ----------------- --------------------- Nonaccrual loans $ 2,074 $ 1,152 Restructured loans -- 77 ----------------- --------------------- Total nonperforming loans 2,074 1,229 Real estate owned 124 124 ----------------- --------------------- Total nonperforming assets 2,198 1,353 ================= ===================== Accruing loans past due > 90 days 18 -- Potential problem loans -- -- Allowance for loan losses 3,394 2,664 Nonperforming loans to loans 0.59% 0.41% Allowance for loan losses to loans 0.97% 0.88% Allowance for loan losses to nonperforming loans 163.65% 216.76% Nonperforming assets to total assets 0.54% 0.37%
Nonperforming loans increased to $2.1 million, or 0.59% of total loans, at June 30, 2001 from $1.2 million or 0.41% of total loans, at December 31, 2000 due to a small number of borrowing relationships that were added to nonaccrual loans in the first quarter of 2001. The loan loss reserve represents 163.65% of nonperforming loans as compared to 216.76% at December 31, 2000. The loan loss reserve was 0.97% of total loans at June 30, 2001 as compared to 0.88% at December 31, 2000. Provision and Allowance for Loan Losses The Company recorded a $655,000 provision for loan losses for the second quarter of 2001, compared with $400,000 for the same period a year ago. There were $265,000 in net loan charge-offs during the second quarter of 2001, compared to $105,000 in net charge-offs for the same period in 2000. For the six months ended June 30, 2001, the Company recorded a $1.1 million provision for loan losses, compared with $726,000 for the same period a year ago. There were $330,000 in net loan charge-offs during the first six months of 2001, compared to $251,000 in net charge-offs for the same period in 2000. 14 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: (Dollars in thousands) Three Months Ended Six Months Ended June 30, June 30, 2001 2000 2001 2000 -------------- -------------- -------------- -------------- Balance at beginning of period $ 3,004 $ 2,362 $ 2,664 $ 2,182 Charge-offs: Commercial (58) (9) (84) (95) Real estate -- -- (15) -- Consumer (276) (111) (338) (196) -------------- -------------- -------------- -------------- Total charge-offs (334) (120) (437) (291) Recoveries: Commercial 35 3 66 5 Real estate -- -- -- -- Consumer 34 12 41 35 -------------- -------------- -------------- -------------- Total recoveries 69 15 107 40 Net charge-offs (265) (105) (330) (251) Provision for loan losses 655 400 1,060 726 -------------- -------------- -------------- -------------- Balance at end of period $ 3,394 $ 2,657 $ 3,394 $ 2,657 ============== ============== ============== ==============
Liquidity and Sources of Funds The Company's sources of funds are customer deposits, cash and demand balances due from other banks, federal funds sold, short-term investments and investment securities available for sale. These funds, together with loan repayments, are used to make loans and to fund continuing operations. In addition, at June 30, 2001 the Company had a line of credit with the FHLB of $60.7 million and lines of credit with financial institutions in the amount of $13.0 million, with $26.0 million in advances on these lines of credit at June 30, 2001. Total deposits increased 8.6% to $345.1 million at June 30, 2001 from $317.8 million at December 31, 2000. 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. Historically, 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 FHLB advances to supplement funding sources. 15 Capital The Company's shareholders' equity increased to $33.0 million at June 30, 2001 from $31.5 million at December 31, 2000. This increase is due to net income of $1.9 million, an increase in unrealized gain on available-for-sale securities of $82,000, net of tax, and the exercise of stock options of $66,000 offset by the payment of cash dividends of $485,000 during the first six months ended June 30, 2001. Total assets increased to $406.1 million at June 30, 2001 from $361.6 million at December 31, 2000, an increase of 12.3%. Shareholders' equity to total assets was 8.1% at June 30, 2001 compared to 8.7% at December 31, 2000. June 30, 2001 ------------------------------------------------------------------------ Well-capitalized Actual ratio Minimum requirement requirement ---------------------- -------------------- ---------------------- Total risk-based capital ratio 9.73% 8% 10% Tier 1 risk-based capital ratio 8.80% 4% 6% Leverage ratio 8.09% 4% 5% December 31, 2000 ------------------------------------------------------------------------ Well-capitalized Actual ratio Minimum requirement requirement ---------------------- -------------------- ---------------------- Total risk-based capital ratio 10.31% 8% 10% Tier 1 risk-based capital ratio 9.47% 4% 6% Leverage ratio 8.54% 4% 5%
To be "adequately-capitalized," 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%. 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%. Whidbey Island Bank qualified as "adequately-capitalized" at June 30, 2001. 16 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, 2001, 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, 2000. For additional information, refer to the Company's Form 10-K for the year ended December 31, 2000. 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 April 26, 2001 at 3:00 p.m. 3,275,866 shares of common stock were represented in person or by proxy at the meeting. This represented 81% of the 4,032,750 shares held by shareholders as of February 28, 2001 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 2004, or until their successors are duly elected and qualified - three of the nine director positions had expired and were open for election. The nominees for these positions were Michal D. Cann, Jerry C. Chambers and Marlen L. Knutson. All these were elected with the following vote totals: For Against Withheld --------------- ------------- -------------- Michal D. Cann 3,222,756 0 53,110 Jerry C. Chambers 3,224,937 0 50,929 Marlen L. Knutson 3,227,656 0 48,210 The other six directors who continue in office are: Karl C. Krieg, III; Jay T. Lien; Robert B. Olson; Anthony B. Pickering; Alvin J. Sherman and Edward J. Wallgren. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits None (b) Reports on Form 8-K None 17 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 13, 2001 By /s/ Michal D. Cann ------------------- Michal D. Cann President and Chief Executive Officer Date: August 13, 2001 By /s/ Phyllis A. Hawkins ---------------------- Phyllis A. Hawkins Senior Vice President and Chief Financial Officer