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| WBCO > SEC Filings for WBCO > Form 10-Q on 10-Aug-2009 | All Recent SEC Filings |
10-Aug-2009
Quarterly Report
Note Regarding Forward-Looking Statements: This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These forward-looking statements describe Washington Banking Company's (the "Company") management's expectations regarding future events and developments such as future operating results, growth in loans and deposits, credit quality and adequacy of the allowance for loan losses, and continued success of the Company's business plan. Readers should not place undue reliance on forward-looking statements, which reflect management's views only as of the date hereof. The words "will," "believe," "expect," "should," "anticipate" and words of similar meaning 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. In addition to discussions about risks and uncertainties set forth from time to time in the Company's filings with the Securities and Exchange Commission (the "SEC"), factors that may cause actual results to differ materially from those contemplated in such forward-looking statements include, among others: (1) local and national general and economic condition; (2) changes in interest rates and their impact on net interest margin; (3) competition among financial institutions; (4) legislation or regulatory requirements; and (5) the ability to realize efficiencies expected from investment in personnel and infrastructure. However, the reader should be aware that these factors are not an exhaustive list, and it should not be assumed that these are the only factors that may cause actual results to differ from expectations. In addition, the reader should note that the Company does not intend to update any of the forward-looking statements or the uncertainties that may adversely impact those statements.
The following discussion and analysis should be read in conjunction with the financial statements and notes thereto presented elsewhere in this report.
Overview
Washington Banking Company (referred to in this report as the "Company") is a registered bank holding company with two wholly-owned subsidiaries: Whidbey Island Bank (the "Bank"), the Company's principal subsidiary and Washington Banking Master Trust (the "Trust"). Headquartered in Oak Harbor, the Company's market area is primarily northwestern Washington. The market area encompasses distinct economies, and none are particularly dependent upon a single industrial or occupational source. The economies within the market areas have evolved from being heavily dependent upon forestry, fishing and farming to a more diverse blend of industries including retail trade, services, manufacturing, tourism and a large military presence.
The Company's strategy is one of value-added growth. Management believes that qualitative and sustainable growth of the Company, coupled with maintaining profitability, is currently the most appropriate path to providing good value for its shareholders. To date, the Company's growth has been achieved organically and it attributes its reputation for focusing on customer service and satisfaction as one of the cornerstones to the Company's success. The Company's primary objectives are to improve profitability and operating efficiencies and increase market penetration in areas currently served.
Summary of Critical Accounting Policies
Significant accounting policies are described in Note (1) of the Notes to Consolidated Financial Statements for the year ended December 31, 2008 as filed in Form 10-K. Not all of these accounting policies require management to make difficult, subjective or complex judgments or estimates. Management believes that the following accounting policies could be considered critical under the SEC's definition.
Allowance for Loan Losses: There have been no material changes in the accounting policy relating to allowance for loan losses as compared to that contained in Note (1) of the Notes to Consolidated Financial Statements for the year ended December 31, 2008 as filed in Form 10-K.
Stock-based Compensation: There have been no material changes in the accounting policy relating to stock-based compensation as compared to that contained in Note (1) of the Notes to Consolidated Financial Statements for the year ended December 31, 2008 as filed in Form 10-K.
The Company's net income available to common shareholders decreased to $818,000 or $0.09 per diluted share, in the second quarter of 2009, compared with $2.4 million or $0.25 per diluted share in the second quarter of 2008. The decrease in net income was principally attributable to a $2.0 million increase in provision for loan losses, from the same period in 2008, the accrual of $413,000 in preferred dividends on preferred stock issued to the U.S. Treasury under the TARP program, and a one time FDIC special assessment of $400,000.
The Company's net income available to common shareholders for the first six months of 2009 decreased to $2.0 million or $0.21 per diluted share, compared with $4.8 million or $0.50 per diluted share for the same period last year. The decrease in net income was principally attributable to a $3.4 million increase in provision for loan losses, from the same period in 2008, the accrual of $772,000 in preferred dividends on preferred stock issued to the U.S. Treasury under the TARP program and a one time FDIC special assessment of $400,000.
Net Interest Income: One of the Company's key sources of earnings is net interest income. To make it easier to compare results among several periods and the yields on various types of earning assets (some of which are taxable and others which are not), net interest income is presented in this discussion on a "taxable-equivalent basis" (i.e., as if it were all taxable at the same rate). There are several factors that affect net interest income including:
º The volume, pricing, mix and maturity of interest-earning assets and interest-bearing liabilities;
º The volume of free funds (consisting of noninterest-bearing deposits and other liabilities and shareholders' equity);
º The volume of noninterest-earning assets;
º Market interest rate fluctuations; and,
º Asset quality.
The following tables set forth various components of the balance sheet that affect interest income and expense, and their respective yields or rates:
Average Balance Sheet and Analysis of Net Interest Income and Yields/Rates
Three Months Ended Three Months Ended
June 30, 2009 June 30, 2008
Average Interest Average Average Interest Average
(Dollars in thousands) balance earned/paid yield balance earned/paid yield
Assets
Loans (1)(2) $ 830,591 $ 13,351 6.45 % $ 823,052 $ 14,499 7.09 %
Federal funds sold 16,161 8 0.19 % 252 1 2.05 %
Interest-bearing cash 310 - 0.00 % 378 2 2.46 %
Investments
Taxable 16,763 141 3.37 % 9,195 96 4.19 %
Non-taxable (2) 11,003 141 5.15 % 5,262 76 5.77 %
Interest-earning assets 874,828 13,641 6.26 % 838,139 14,674 7.04 %
Noninterest-earning assets 55,104 52,858
Total assets $ 929,932 $ 890,997
Liabilities and
shareholders' equity
Deposits:
Interest demand
and
money market $ 266,716 $ 568 0.85 % $ 253,850 $ 933 1.48 %
Savings 44,284 28 0.25 % 41,674 42 0.41 %
Time deposits 361,857 2,790 3.09 % 348,276 3,566 4.12 %
Total interest-bearing
deposits 672,857 3,386 2.02 % 643,800 4,541 2.84 %
Federal funds purchased - - - 18,334 115 2.51 %
Junior subordinated
debentures 25,774 180 2.80 % 25,774 284 4.43 %
Other interest bearing
liabilities 19,451 114 2.35 % 30,000 245 3.28 %
Total interest bearing
liabilities 718,082 3,680 2.06 % 717,908 5,185 2.91 %
Noninterest-bearing
deposits 100,179 93,191
Other liabilities 2,992 3,695
Total liabilities 821,253 814,794
Total shareholders' equity 108,679 76,203
Total liabilities
and shareholders' equity $ 929,932 $ 890,997
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-------------------------------------------------------------------------------- Net interest income /Spread $ 9,961 4.20 % $ 9,489 4.14 % Credit for interest bearing funds 0.37 % 0.42 % Net interest margin (2) 4.57 % 4.55 % |
(1) Average balance includes nonaccrual loans.
(2) Interest income on non-taxable investments and loans is presented on a
taxable-equivalent basis using the federal statutory rate of 35%. These
adjustments were $153 and $140 for the three months ended June 30, 2009 and
2008, respectively. Taxable-equivalent is a Non GAAP performance measurement
that management believes provides investors with a more accurate picture of the
net interest margin and efficiency ratio for comparative purposes.
Average Balance Sheet and Analysis of Net Interest Income and Yields/Rates
Six Months Ended Six Months Ended
June 30, 2009 June 30, 2008
Average Interest Average Average Interest Average
(Dollars in thousands) balance earned/paid yield balance earned/paid yield
Assets
Loans (1)(2) $ 828,156 $ 26,459 6.44 % $ 817,090 $ 29,988 7.38 %
Federal funds sold 9,898 10 0.20 % 259 3 2.48 %
Interest-bearing cash 308 - - 330 5 2.99 %
Investments
Taxable 15,350 277 3.64 % 9,456 206 4.39 %
Non-taxable (2) 9,317 241 5.22 % 5,264 150 5.72 %
Interest-earning assets 863,029 26,987 6.31 % 832,399 30,352 7.33 %
Non-earning assets 53,854 53,240
Total assets $ 916,883 $ 885,639
Liabilities and
shareholders' equity
Deposits:
Interest demand and
money market $ 263,525 $ 1,134 0.87 % $ 262,559 $ 2,283 1.75 %
Savings 43,106 54 0.25 % 41,801 93 0.45 %
Time deposits 358,292 5,717 3.22 % 342,615 7,460 4.38 %
Total interest-bearing
deposits 664,923 6,905 2.09 % 646,975 9,837 3.06 %
Federal funds purchased 1,037 4 0.82 % 18,458 290 3.16 %
Junior subordinated
debentures 25,774 404 3.16 % 25,774 689 5.37 %
Other interest-bearing
liabilities 20,497 243 2.39 % 22,747 374 3.30 %
Total interest-bearing
liabilities 712,231 7,556 2.14 % 713,954 11,189 3.15 %
Noninterest-bearing DDA 97,061 92,859
Other liabilities 2,168 3,592
Total liabilities 811,460 810,405
Total equity 105,423 75,234
Total liabilities
and shareholder's equity $ 916,883 $ 885,639
Net interest income /Spread $ 19,431 4.17 % $ 19,163 4.18 %
Credit for interest-bearing
funds 0.37 % 0.45 %
Net interest margin (2) 4.54 % 4.63 %
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(1) Average balance includes nonaccrual loans.
(2) Interest income on non-taxable investments and loans is presented on a
taxable-equivalent basis using the federal statutory rate of 35%. These
adjustments were $293 and $292 for the six months ended June 30, 2009 and 2008,
respectively. Taxable-equivalent is a Non-GAAP performance measurement that
management believes provides investors with a more accurate picture of the net
interest margin and efficiency ratio for comparative purposes.
Net interest margin (net interest income as a percentage of average interest-earning assets) on a taxable-equivalent basis was 4.57% for the second quarter of 2009, compared to 4.55% for the same period in 2008. The change in net interest margin in the second quarter of 2009 resulted from a $36.7 million increase in average interest-earning assets, with approximately $15.9 million in minimal yielding federal funds sold and $13.3 million in low yielding investment securities.
Taxable-equivalent net interest income totaled $19.4 million in the first six months of 2009 compared with $19.2 million during the same period in 2008. Changes in net interest income during the first six months of 2009 reflected a continued growth in average earning assets, average noninterest bearing deposits and deposit pricing discipline, offset by a decrease on the yield of loans.
Net interest margin on a taxable-equivalent basis was 4.54% for the second quarter of 2009, compared to 4.63% for the same period in 2008. The change in net interest margin in the second quarter of 2009 resulted from a $30.6 million increase in average interest-earning assets, with approximately $9.6 million in low yielding federal funds sold. Additionally, the margin was impacted by a decrease in the rates charged on new loans and the repricing of variable rate loans. The large majority of the Company's variable rate loans did not have interest rate floors in place during 2008. The Company is currently implementing interest rate floors on its variable rate loans when they renew.
The following table sets forth the changes in yields or rates and average balances affected net interest income:
Three Months Ended Six Months Ended
June 30, June 30,
2009 vs. 2008 2009 vs. 2008
Increase (decrease) due to(2): Increase (decrease) due to(2):
Volume Rate Total Volume Rate Total
Assets:
Loans (1)(3) $ 130 $ (1,279 ) $ (1,149 ) $ 422 $ (3,952 ) $ (3,530 )
Federal funds sold 7 - 7 7 - 7
Interest-bearing cash - (2 ) (2 ) - (5 ) (5 )
Investments (1)
Taxable 59 (14 ) 45 98 (27 ) 71
Non-taxable (2) 73 (7 ) 66 104 (12 ) 92
Interest- earning assets $ 269 $ (1,302 ) $ (1,033 ) $ 631 $ (3,996 ) $ (3,365 )
Liabilities:
Deposits:
Interest demand and money
market $ 49 $ (414 ) $ (365 ) $ 8 $ (1,158 ) $ (1,150 )
Savings 3 (17 ) (14 ) 3 (42 ) (39 )
Time deposits 144 (921 ) (777 ) 364 (2,107 ) (1,743 )
Total interest-bearing
deposits 198 (1,368 ) (1,170 ) 375 (3,307 ) (2,932 )
Fed funds purchased (57 ) (57 ) (114 ) (160 ) (126 ) (286 )
Junior subordinated
debentures - (104 ) (104 ) - (285 ) (285 )
Other interest-bearing
liabilities (72 ) (59 ) (131 ) (34 ) (96 ) (130 )
Total interest-bearing
liabilities $ 67 $ (1,572 ) $ (1,505 ) $ 181 $ (3,814 ) $ (3,633 )
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(1) Interest on loans and investments is presented on a fully tax-equivalent
basis.
(2) The changes attributable to the combined effect of volume and interest rates
have been allocated proportionately.
(3) Interest income previously accrued on nonaccrual loans is reversed in the
period the loan is placed on nonaccrual status.
During the second quarter of 2009, the Company recorded a $3.0 million provision for loan losses compared to $1.1 million for the second quarter in 2008. Net charge-offs for second quarter of 2009 were $1.6 million, a $684,000 increase over the second quarter of 2008. Increases in net charge-offs were due to an increase in real estate loan charge-offs. At June 30, 2009, the allowance for loan losses as a percent of total loans was 1.80% as compared to 1.40% for the same period in 2008.
During the first six months of 2009, the Company recorded a $5.5 million provision for loan losses compared to $2.1 million in the same period in 2008. Changes in the provision were due to higher net charge-offs of $2.9 million in the first six months of 2009, compared with $1.6 million in the same period in 2008 and internal downgrades of loans within the portfolio. Increases in net charge-offs were due to an increase in real estate loan charge-offs.
Noninterest Income: Noninterest income remains a key focus of the Company. The Company has focused on diversifying the noninterest income mix. The diversification of the noninterest income mix resulted primarily from the introduction of nondeposit investment products consisting primarily of annuity sales and investment service fees. The following table presents the key components of noninterest income:
Noninterest Income as
of:
Three months Ended June Six months Ended June
30, 30, Three Month Six Month
Change Change
(Dollars in
thousands) 2009 2008 2009 2008
Service charges
and fees $ 853 $ 711 $ 1,711 $ 1,437 $ 142 $ 274
Electronic banking
income 348 347 658 661 1 (3 )
Investment
products 161 39 331 167 122 164
Bank owned life
insurance 112 121 205 222 (9 ) (17 )
Income from sale
of SBA loans and
servicing 16 45 33 189 (29 ) (156 )
Income from sale
of mortgage loans 301 51 570 141 250 429
Other income 282 324 568 615 (42 ) (47 )
Total noninterest
income $ 2,073 $ 1,638 $ 4,076 $ 3,432 $ 435 $ 644
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The changes in noninterest income in the second quarter of 2009 compared to 2008 were related to the following areas:
º Service charges and fees increases are principally attributable to a change in service charges instituted in October of 2008. The full impact of this change is reflected in the income in the second quarter of 2009.
º Investment products increases are due to increased customer demand for alternative investment products in the second quarter of 2009.
º Income from the sale of loans increased due to strong refinancing activity in 2009. Additionally, income from the same period in 2008 was negatively impacted by the proposed merger with Frontier Financial Corporation. Under the proposed merger, the department originating real estate loans for sale on the secondary market was to be closed by April 2008.
The changes in noninterest income in the first six months of 2009 compared to 2008 were related to the following areas:
º Service charges and fees increases are principally attributable to a change in service charges instituted in October of 2008. The full impact of this change is reflected in the income in the first six months of 2009.
º Investment products increases are due to increased customer demand for alternative investment products in 2009.
º Income from the sale of SBA loans decreased due to lower volumes of SBA loan originations. Additionally, the Company did not sell SBA loans during the first six months of 2009 due to unfavorable premiums for SBA loans in the secondary financial market.
º Income from the sale of loans increased due to strong refinancing activity in 2009. Additionally, income from the same period in 2008 was negatively impacted by the proposed merger with Frontier Financial Corporation. Under the proposed merger, the department originating real estate loans for sale on the secondary market was to be closed by April 2008.
Noninterest Expense as
of:
Six months Ended June
Three months Ended June 30, 30, Three Month Six Month
Change Change
(Dollars in thousands) 2009 2008 2009 2008
Salaries and benefits $ 4,086 $ 4,249 $ 8,105 $ 8,801 $ (163 ) $ (696 )
Less: loan
origination costs (649 ) (451 ) (1,244 ) (1,012 ) (198 ) (232 )
Net salaries and benefits
(as reported) 3,437 3,798 6,861 7,789 (361 ) (928 )
Occupancy expense 1,071 902 2,104 1,851 169 253
Consulting and
professional fees 211 147 489 362 64 127
Data processing 146 153 277 314 (7 ) (37 )
Office supplies and
printing 207 120 171 119 87 52
FDIC premiums 676 122 823 245 554 578
OREO & Repossession
Expense 267 25 483 187 242 296
Other 1,172 1,061 2,526 2,341 111 185
Total noninterest expense $ 7,187 $ 6,328 $ 13,734 $ 13,208 $ 859 $ 526
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The changes in noninterest expense in the second quarter of 2009 compared to 2008 were related to the following areas:
º Salaries and benefits decreased due to management's decision not to accrue a bonus for 2009 and to implement a salary freeze in 2009 for all exempt positions; in the second quarter of 2008 the bonus accrual was $400,000. During the same period the average number of full time equivalent employees (FTEs) increased to 273 at June 30, 2009 from 250 at June 30, 2008. FTE's increased between the two periods due to restaffing needs following the terminated merger with Frontier Financial Corporation.
º Occupancy expense increased during the second quarter of 2009 due to the additional occupancy expense related to a new branch opened in December of 2008 and the lease on a new administrative center which opened in February of 2009.
º FDIC premiums had a significant increase during the second quarter of 2009. In the second quarter of 2009, the FDIC levied a special one time assessment totaling 5 basis points of deposits on all insured depositories; the assessment totaled $400,000. Additionally, in February 2009, the FDIC adopted final rules which increase the assessment rates paid on deposits. Assessment rates in 2008, for well capitalized banks, ranged from $0.05 to $0.07 per $100 of deposits annually. Assessment rates in 2009 will range from $0.12 to $0.16 per $100 of deposits annually. This assessment increase doubles the Company's FDIC premiums as compared to 2008.
º OREO and repossession expense represents costs the Company incurs in reclaiming, repairing and selling real estate properties and automobiles as . . .
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