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| WBCO > SEC Filings for WBCO > Form 10-Q on 6-Nov-2009 | All Recent SEC Filings |
6-Nov-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.
Results of Operations Overview
The Company's net income available to common shareholders decreased to $1.3 million or $0.13 per diluted share, in the third quarter of 2009, compared with $1.9 million or $0.20 per diluted share in the third quarter of 2008. The decrease in net income was principally attributable to a $1.4 million increase in provision for loan losses, from the same period in 2008 and the accrual of $414,000 in preferred dividends on preferred stock issued to the U.S. Treasury under the TARP Capital Purchase Program.
The Company's net income available to common shareholders for the first nine months of 2009 decreased to $3.3 million or $0.35 per diluted share, compared with $6.7 million or $0.70 per diluted share for the same period last year. The decrease in net income was principally attributable to a $4.8 million increase in provision for loan losses, from the same period in 2008, the accrual of $1.2 million in preferred dividends on preferred stock issued to the U.S. Treasury under the TARP Capital Purchase Program and increases in FDIC fees of $742,000.
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
September 30, 2009 September 30, 2008
Average Interest Average Average Interest Average
(Dollars in thousands) balance earned/paid yield balance earned/paid yield
Assets
Loans (1)(2) $ 821,375 $ 13,646 6.59 % $ 820,425 $ 14,542 7.05 %
Federal funds sold 28,407 18 0.25 % 883 4 1.62 %
Interest-bearing cash 254 -- 0.02 % 472 2 1.83 %
Investments
Taxable 24,467 191 3.10 % 8,717 88 4.03 %
Non-taxable (2) 17,572 194 4.38 % 5,207 76 5.78 %
Interest-earning assets 892,075 14,049 6.25 % 835,704 14,712 7.00 %
Noninterest-earning assets 54,649 53,780
Total assets $ 946,724 $ 889,483
Liabilities and
shareholders' equity
Deposits:
Interest demand
and
money market $ 283,805 $ 604 0.84 % $ 260,665 $ 951 1.45 %
Savings 45,901 29 0.25 % 41,355 42 .40 %
Time deposits 364,421 2,568 2.80 % 353,522 3418 3.85 %
Total interest-bearing
deposits 694,127 3,201 1.83 % 655,542 4,411 2.68 %
Federal funds purchased 11 -- 0.51 % 7,338 50 2.69 %
Junior subordinated
debentures 25,774 139 2.14 % 25,774 286 4.42 %
Other interest bearing
liabilities 10,000 94 3.72 % 26,413 226 3.41 %
Total interest
bearing liabilities 729,912 3,434 1.87 % 715,068 4,972 2.77 %
Noninterest-bearing
deposits 105,052 92,832
Other liabilities 2,901 3,499
Total liabilities 837,865 811,399
Total shareholders' equity 108,859 78,084
Total liabilities
and shareholders' equity $ 946,724 $ 889,483
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Net interest income /spread $ 10,615 4.38 % $ 9,739 4.24 % Credit for interest-bearing funds 0.34 % 0.40 % Net interest margin (2) 4.72 % 4.64 % |
(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 $172 and $134 for the three months ended September 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
Nine Months Ended Nine Months Ended
September 30, 2009 September 30, 2008
Average Interest Average Average Interest Average
(Dollars in thousands) balance earned/paid yield balance earned/paid yield
Assets
Loans (1)(2) $ 825,871 $ 40,104 6.49 % $ 818,210 $ 44,430 7.25 %
Federal funds sold 16,135 28 0.23 % 469 7 1.94 %
Interest-bearing cash 290 -- 0.01 % 378 7 2.50 %
Investments
Taxable 18,423 469 3.40 % 9,208 294 4.27 %
Non-taxable (2) 12,099 434 4.80 % 5,245 225 5.73 %
Interest-earning assets 872,818 41,035 6.29 % 833,509 44,963 7.21 %
Non-earning assets 53,929 53,421
Total assets $ 926,747 $ 886,930
Liabilities and
shareholders' equity
Deposits:
Interest demand and
money market $ 270,359 $ 1,738 0.86 % $ 261,923 $ 3,234 1.65 %
Savings 44,048 83 0.25 % 41,652 135 0.43 %
Time deposits 360,357 8,285 3.07 % 346,278 10,878 4.20 %
Total interest-bearing
deposits 674,764 10,106 2.00 % 649,852 14,247 2.93 %
Federal funds purchased 691 4 0.82 % 14,724 340 3.08 %
Junior subordinated
debentures 25,774 543 2.82 % 25,774 975 5.05 %
Other interest-bearing
liabilities 16,960 337 2.66 % 23,978 600 3.34 %
Total
interest-bearing
liabilities 718,189 10,990 2.05 % 714,329 16,162 3.02 %
Noninterest-bearing DDA 99,754 92,850
Other liabilities 2,415 3,561
Total liabilities 820,357 810,739
Total equity 106,389 76,191
Total liabilities
and shareholder's equity $ 926,747 $ 886,930
Net interest income /spread $ 30,045 4.24 % $ 28,801 4.18 %
Credit for interest-bearing
funds 0.36 % 0.43 %
Net interest margin (2) 4.60 % 4.62 %
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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 $464 and $326 for the nine months ended September 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.
Taxable-equivalent net interest income totaled $10.6 million in the third quarter of 2009 compared with $9.7 million during the third quarter of 2008. Changes in net interest income during the third quarter 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 (net interest income as a percentage of average interest-earning assets) on a taxable-equivalent basis was 4.72% for the third quarter of 2009, compared to 4.64% for the same period in 2008. The increase in net interest margin in the third quarter of 2009 primarily resulted from the decrease in the Company's interest expense from the lower costs of interest-bearing deposits, junior subordinated debentures that are indexed to the three month LIBOR, and a reduction in other borrowings outstanding. The increase in the net margin was partially offset by the decreased yield on interest-earning assets of 75 basis points primarily resulting from reductions in the prime rate and holding higher balances in federal funds sold (at 25 basis points). The increased balance of federal funds sold resulted from a significant increase in deposits during the third quarter of 2009. Additionally, the Company did not redeploy these funds into short term investments due to historically low yields available in the bond markets; these low yields did not present an attractive long-term investment alternative.
Taxable-equivalent net interest income totaled $30.1 million in the first nine months of 2009 compared with $28.8 million during the same period in 2008. Changes in net interest income during the first nine 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 4.60% for first nine months of 2009, compared to 4.62% for the same period in 2008. The decrease in net interest margin primarily resulted from the decreased yield on interest-earning assets of 92 basis points primarily resulting from reductions in the prime rate and holding higher balances in federal funds sold (at 25 basis points). The decrease in the net interest margin was offset by the decreased yield on interest-bearing liabilities of 97 basis points, resulting from the lower costs of interest expense on interest bearing deposits, junior subordinated debentures that are indexed to the three month LIBOR, and a reduction in other borrowings outstanding.
The following table sets forth the changes in yields or rates and average balances which affected net interest income:
Three Months Ended Nine Months Ended
September 30, September 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) $ 16 $ (913 ) $ (897 ) $ 425 $ (4,751 ) $ (4,326 )
Federal funds sold 15 -- 15 22 (1 ) 21
Interest-bearing cash (1 ) (1 ) (2 ) (1 ) (6 ) (7 )
Investments (1)
Taxable 117 (15 ) 102 219 (44 ) 175
Non-taxable (2) 132 (13 ) 119 239 (30 ) 209
Interest- earning assets $ 279 $ (942 ) $ (663 ) $ 904 $ (4,832 ) $ (3,928 )
Liabilities:
Deposits:
Interest demand and money
market $ 94 $ (441 ) $ (347 ) $ 108 $ (1,604 ) $ (1,496 )
Savings 6 (18 ) (12 ) 8 (60 ) (52 )
Time deposits 109 (958 ) (849 ) 465 (3,058 ) (2,593 )
Total interest-bearing
deposits 209 (1,417 ) (1,208 ) 581 (4,722 ) (4,141 )
Fed funds purchased (28 ) (22 ) (50 ) (191 ) (146 ) (336 )
Junior subordinated
debentures -- (147 ) (147 ) -- (432 ) (432 )
Other interest-bearing
liabilities (156 ) 23 (133 ) (155 ) (108 ) (263 )
Total interest-bearing
liabilities $ 25 $ (1,563 ) $ (1,538 ) $ 235 $ (5,408 ) $ (5,172 )
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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.
Provision for Loan Losses: The provision for loan losses is highly dependent on the Company's ability to manage asset quality and control the level of net charge-offs through prudent underwriting standards. In addition, decline in general economic conditions could increase future provisions for loan loss and materially impact the Company's net income. For further discussion of the Company's asset quality see the Credit Risks and Asset Quality section found in Item 2-Management's Discussion and Analysis of Financial Condition and Results of Operations.
During the third quarter of 2009, the Company recorded a $2.5 million provision for loan losses compared to $1.1 million for the third quarter in 2008. Net charge-offs for third quarter of 2009 were $1.4 million, a $215,000 increase over the third quarter of 2008. Increases in net charge-offs were due to an increase in real estate loan charge-offs. At September 30, 2009, the allowance for loan losses as a percent of total loans was 1.95% as compared to 1.40% for the same period in 2008.
During the first nine months of 2009, the Company recorded an $8.0 million provision for loan losses compared to $3.2 million in the same period in 2008. Changes in the provision were due to higher net charge-offs of $4.3 million in the first nine months of 2009, compared with $2.8 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 following table presents the key components of noninterest income:
Noninterest Income as of:
Three Months Ended Nine Months Ended Three Month Nine Month
September 30, September 30, Change Change
(Dollars in thousands) 2009 2008 2009 2008
Service charges and
fees $ 909 $ 708 $ 2,620 $ 2,145 $ 201 $ 475
Electronic banking
income 376 356 1,034 1,017 20 17
Investment products 38 93 368 260 (55 ) 108
Bank owned life
insurance 106 11 312 233 95 79
Income from sale and
servicing of SBA loans 49 50 83 239 (1 ) (156 )
Income from sale of
mortgage loans 138 36 708 177 102 531
Other income 232 621 800 1,236 (389 ) (436 )
Total noninterest
income $ 1,848 $ 1,875 $ 5,925 $ 5,307 $ (27 ) $ 618
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The changes in noninterest income in the third quarter of 2009 compared to 2008 were related to the following areas:
º Increases in service charges and fees 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 during the third quarter of 2009.
º Income from bank owned life insurance increased due to the Company's decision to change the investment mix during the third quarter of 2008. Due to the deteriorating conditions of the mortgage-backed security market during the third quarter of 2008, the Company renegotiated with the insurance carrier and investment manager to invest in cash assets until suitable alternative investments were found.
º Income from the sale of loans increased due to strong residential mortgage 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.
º Other noninterest income decreased due to one-time loan fee adjustment of $342,000 in the third quarter of 2008.
The changes in noninterest income in the first nine months of 2009 compared to 2008 were related to the following areas:
º Increases in service charges and fees 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 nine 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 nine 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 residential mortgage 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: The Company continues to focus on controlling noninterest expenses and addressing long term operating expenses. The Company continued to successfully manage noninterest expense during the first nine months of 2009 as compared to the same period in 2008.
Noninterest Expense as of:
Three Months Ended Nine Months Ended Three Month Nine Month
September 30, September 30, Change Change
(Dollars in thousands) 2009 2008 2009 2008
Salaries and benefits $ 3,791 $ 4,076 $ 12,237 $ 13,139 $ (285 ) $ (902 )
Less:
loan origination costs (153 ) (136 ) (1,738 ) (1,410 ) (17 ) (328 )
Net salaries and benefits
(as reported) 3,638 3,940 10,499 11,729 (302 ) (1,230 )
Occupancy expense 1,099 944 3,203 2,796 155 407
Consulting and
professional fees 228 107 717 469 121 248
Data processing 141 155 418 469 (14 ) (51 )
Office supplies and
printing 198 162 577 402 36 175
FDIC premiums 283 119 1,106 324 164 782
OREO & repossession
expense 346 137 829 364 209 465
Other 1,445 2,014 3,763 4,235 (569 ) (472 )
Total noninterest expense $ 7,378 $ 7,578 $ 21,112 $ 20,788 $ (200 ) $ 324
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The changes in noninterest expense in the third 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 third quarter of 2008 the bonus accrual was $375,000. During the same period, the average number of full time equivalent employees (FTEs) increased to 279 at September 30, 2009 from 259 at September 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 third quarter of 2009 due to the additional 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 third quarter of 2009. In February 2009, the FDIC adopted final rules which increase the . . .
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