Market Overview

Washington Banking Company 3Q12 Profits Increase 28% to $4.6 Million; EPS Up 25% to $0.30 from $0.24 in 3Q11

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OAK HARBOR, Wash.--(BUSINESS WIRE)--

Washington Banking Company (NASDAQ: WBCO), the holding company for Whidbey Island Bank, today reported earnings in the third quarter of 2012 increased to $4.6 million, or $0.30 per diluted share, compared to $2.8 million, or $0.18 per diluted share, in the second quarter of 2012, and $3.6 million, or $0.24 per diluted share in the third quarter of 2011. Good loan growth, strong mortgage banking income, and declining expenses related to the 2010 FDIC-assisted acquisitions contributed to the solid financial results produced in both the third quarter and first nine months of 2012. In the first nine months of 2012, Washington Banking's net income increased 15% to $12.3 million, or $0.79 per diluted share, compared to $10.6 million, or $0.69 per diluted share, which included its last $1.1 million preferred dividend payment in the first nine months a year ago.

“Our third quarter profits show the improving market conditions in the Pacific Northwest, and we remain guardedly optimistic about the economic recovery in the area,” said Jack Wagner, President and Chief Executive Officer. “Demand for commercial loans continues to grow, and residential mortgage refinancing activity remains robust.”

“We are still on track to open our new branch in Woodinville before the end of the year, and we see this market as an attractive addition to our franchise,” said Bryan McDonald, Whidbey Island Bank's President and CEO. “The expanded workforce in the aerospace industry, fueled by Boeing's strength, along with strong in-migrations and a rebound in our housing markets, are all contributing to an improving regional economy.”

Third quarter 2012 Financial Highlights (as of, or for the period ended September 30, 2012)

  • Net interest margin (NIM) compressed 19 basis points to 5.48% from 5.67% in the preceding quarter, but increased 5 basis points from 5.43% in the year ago quarter.
  • On a consolidated basis, Total Risk-Based Capital to risk-adjusted assets was 19.65% compared to 19.43% a year ago. The FDIC requires a minimum of 10% Total Risk-Based Capital ratio to be considered well-capitalized.
  • Nonperforming non-covered assets/total assets improved to 1.29%, compared to 1.30% in the preceding quarter and 1.75% a year ago. Classified loans declined to $78.2 million at September 30, 2012, from $84.8 million at June 30, 2012.
  • Tangible book value per common share increased to $11.31, compared to $10.33 a year ago.
  • Low cost demand, money market, savings and NOW accounts totaled $986.5 million and make up 68% of total deposits.
  • Loan loss reserves were 2.01% of non-covered loans, and 2.30% a year ago.
  • The interest income generated from the loan portfolios in the FDIC-assisted acquisitions contributed $9.0 million to third quarter revenues, up from $8.6 million in the third quarter a year ago.
  • Return on average assets was 1.10% and return on average common equity was 10.43%, annualized.
  • The Seattle Times' ranked Washington Banking Company as the top financial institution in the region for the third consecutive year in their 21st annual “Best of the Northwest” listing.

Regional and Acquisitions Update

“Our acquisitions made in 2010 expanded our branch footprint, particularly in North King County, which is one of the best performing localities in the region,” stated Rick Shields, Chief Financial Officer. “While the costs associated with accounting for the FDIC guarantees are high and contribute to volatility in our quarterly results, the benefits of these acquisitions are clearly visible in our financial results.

The FDIC indemnification asset declined 19% in the quarter, 43% year-over-year and is down 64% from its peak in the third quarter of 2010,” Shields continued. “In addition, the clawback adjustment year-to-date was $1.4 million of which $1.1 million was recorded in the second quarter of 2012. The FDIC indemnification asset was written down by $2.8 million in the third quarter of 2012, $3.1 million in the second quarter of 2012 and $2.6 million in the third quarter a year ago.”

Covered loans, which are loans that are subject to a loss share arrangement with the FDIC as a result of the two assisted transactions, are shown as a separate line item of the balance sheet and are not included in the net loan totals. Covered loans are also not included in any of the reported credit quality metrics, as they are accounted for separately under generally accepted accounting principles (GAAP). Both the FDIC indemnification asset and the covered loan portfolio will decline over time, as the loans mature, pay off, or are otherwise resolved. The resolution of the acquired loan portfolios continues to progress, with net covered loans down 4% for the quarter, 16% year-over-year and 41% since the peak in the third quarter of 2010.

Credit Quality

“Overall asset quality continues to be solid, with a small uptick in nonaccrual loans in the quarter and a significant improvement from a year ago,” said Dan Kuenzi, Chief Credit Officer. “Additions to nonperforming loans totaled $3.6 million in the quarter while reductions totaled $3.2 million, which included balances that moved into OREO or were otherwise resolved.”

Nonperforming, non-covered loans (NPLs) increased during the third quarter to $17.6 million from $17.2 million in the second quarter and decreased from $26.9 million in the year ago quarter, with residential construction loans accounting for 45% of the nonperforming loan portfolio. The ratio of NPLs/total non-covered loans was 2.14% at the end of the third quarter compared to 2.11% at the end of the second quarter and 3.27% a year ago. Nonperforming, non-covered assets (NPA)/total assets improved to 1.29% compared to 1.30% in the preceding quarter and 1.75% a year ago. Non-covered other real estate owned (OREO) was $4.1 million, compared $4.4 million in the preceding quarter and $2.5 million from a year ago.

Distribution of nonperforming, non-covered assets is shown in the following table:

Non-Covered NPA by Location  

Island

County

 

King

County

 

San Juan

County

 

Skagit

County

 

Snohomish

County

 

Whatcom

County

  Total  

Percent of Total

Non-Covered

NPA by Loan

Type

(dollars in 000s)              
9/30/2012
Commercial $ 26 $ - $ 285 $ 698 $ 561 $ 347 $ 1,917 8.83 %
Real Estate Mortgages
One-to-Four Family Residential 102 - - 308 - 774 1,184 5.45 %
Commercial 315 456 676 1,017 700 414 3,578 16.47 %
Real Estate Construction
One-to-Four Family Residential 1,651 - - 5,389 - 2,686 9,726 44.77 %
Commercial 596 - - - - - 596 2.73 %
Consumer
Direct 180 - 119 217 125 - 641 2.95 %
Other Real Estate Owned   1,120       933       -       1,283       475       269       4,080     18.78 %
Total $ 3,990     $ 1,389     $ 1,080     $ 8,912     $ 1,861     $ 4,490     $ 21,722     100.00 %
 
Percent of Total Non-Covered NPA by Location 18.37 % 6.39 % 4.97 % 41.03 % 8.57 % 20.67 % 100.00 %

The provision for loan losses was $1.3 million in the third quarter, down from $2.4 million in the second quarter of 2012 and $2.5 million in the third quarter a year ago. The allowance for loan losses totaled $16.6 million, or 2.01% of non-covered loans. Total net charge-offs in the third quarter were $2.2 million, or 1.09% of average total loans on an annualized basis, compared to $2.8 million, or 1.37% of average loans in the preceding quarter and $3.0 million, or 1.43% of average loans, in the third quarter a year ago.

Balance Sheet

Total assets were $1.68 billion at September 30, 2012, up slightly from $1.66 billion in the preceding quarter and $1.68 billion a year ago. Total non-covered loans were $824.6 million compared to $814.8 million at June 30, 2012, and $821.6 million at September 30, 2011. “We closed $39.7 million in commercial and commercial real estate loans in the third quarter, bringing total new commercial and CRE loan volumes to $124.2 in the first nine months of the year,” said McDonald. “Despite a $25.2 million decline in construction balances and a decrease of $7.6 million in consumer loans over the past year, our total loan portfolio is up $3 million in the same timeframe, reflecting solid growth in our commercial lending."

The non-covered loan portfolio is well diversified with commercial and industrial loans making up 19% and residential mortgages accounting for 5% of the portfolio. Owner-occupied commercial real estate loans represent approximately 25% of the portfolio and non-owner occupied commercial real estate loans account for approximately 23% of loans. Indirect consumer loans account for 10% of the portfolio and other consumer loans account for 9%. Construction and land development loans for residential properties represent 5% and commercial construction and land development loans represent 4% of the portfolio.

Net covered loans totaled $231.5 million and covered OREO totaled $18.8 million at September 30, 2012, compared to $241.7 million and $23.0 million, respectively, three months earlier, as resolution of the covered portfolio progresses.

The mix of total deposits continued to improve while the level of total deposits was relatively stable at $1.46 billion at September 30, 2012. Noninterest-bearing demand deposits increased 7% in the quarter and 19% year-over-year, representing 17% of total deposits. Year-over-year, money market accounts were down 13% at $292.7 million, comprising 20% of total deposits; time deposits declined 18% to $471.8 million and accounted for 32% of total deposits. Core deposits, excluding time deposits over $100,000, represented 86% of all deposits.

Shareholders' equity increased 3% in the quarter and 8% year-over-year, due to the strong earnings generated during the past twelve months. Tangible shareholder equity totaled $174.8 million, or $11.31 per share at September 30, 2012, compared to $10.33 a year ago.

Operating Results

In the third quarter of 2012, net interest income decreased 2% to $20.6 million from the linked quarter of $20.9 million, but grew 2% from $20.1 million a year ago. Year-to-date, net interest income increased 7% to $62.7 million from $58.9 million in the first nine months of 2011.

Costs associated with the FDIC-assisted acquisitions declined substantially in the third quarter compared to the second quarter of 2012, and as a result, total third quarter noninterest income was $1.4 million compared to $988,000 in the previous quarter and $1.4 million a year ago. Collections on the covered asset portfolio generated $125,000 in gains on disposition of those assets, which was more than offset by a $2.8 million change in the FDIC indemnification asset in the third quarter of 2012. In the preceding quarter, noninterest income was augmented by $556,000 in the gain on disposition of covered assets and offset by $3.1 million related to the change in the FDIC indemnification asset.

In addition, gain on sale of loans contributed $1.1 million to third quarter revenues, compared to $776,000 in the preceding quarter and $215,000 a year ago. Gains on sale of investment securities contributed $345,000 compared to no gains in either the second quarter of 2012 or third quarter of 2011.

For the first nine months of 2012, noninterest income was down 53% to $3.6 million from $7.8 million in the first nine months of 2011. For the first nine months of 2012, gains on disposition of covered assets contributed $1.3 million compared to $4.1 million in the year ago period. The change in the FDIC indemnification asset reduced first nine months revenues by $8.9 million compared to $5.6 million in the first nine months of 2011. Gains on sale of loans contributed $2.6 million to first nine months revenues compared to $757,000 to the first nine months of 2011. For the first nine months of 2012, electronic banking income increased 16% to $2.7 million from $2.4 million in the year ago period.

Washington Banking's net interest margin decreased 19 basis points from the preceding quarter to 5.48% from 5.67% and increased 5 basis points from 5.43% in the year ago quarter. Year-to-date, net interest margin improved 23 basis points to 5.65% from 5.42% in the first nine months of 2011. “Strong contributions from the acquired loan portfolios over the past two years have benefited our net interest margin; however, we are seeing margin compression and as covered loans pay down and new loans are booked at current market rates, the net interest margin will continue to decline,” Shields noted.

Third quarter operating expense decreased 10% to $13.7 million, reflecting a lower non-cash charge for the FDIC clawback liability and reduced costs for managing both covered and non-covered foreclosed real estate. Total operating expenses were $15.1 million in the second quarter of 2012 and $13.8 million in the third quarter of 2011. For the first nine months of 2012, operating expenses increased 2% to $42.4 million compared to $41.5 million in the nine month period last year.

In a separate release today, Washington Banking announced it will pay a quarterly cash dividend of $0.15 per common share. “In keeping with our two-tiered approach in determining our dividend payouts each quarter, we are paying $0.06 per share in a basic dividend and $0.09 per share in the variable dividend, which results in the total dividend at 50% of earnings,” Wagner noted. “Our board will continue to evaluate dividends each quarter based on capital requirements, market opportunities and other operating considerations.”

Conference Call Information

Management will host a conference call on Friday, October 26, at 10:00 a.m. Pacific time (1:00 p.m. ET) to discuss the results. This call will also be broadcast live via the internet. Investment professionals and all current and prospective shareholders are invited to access the live call by dialing (480) 629-9835 at 10:00 a.m. Pacific Time for conference ID #4566468. To listen to the call online, either live or archived, visit the Investor Relations page of Whidbey Island Bank's website at www.wibank.com.

ABOUT WASHINGTON BANKING COMPANY

Washington Banking Company is a bank holding company based in Oak Harbor, Washington, that operates Whidbey Island Bank, a state-chartered full-service commercial bank. Founded in 1961, Whidbey Island Bank provides various deposit, loan and investment services to meet customers' financial needs. With its two FDIC-assisted acquisitions in 2010, Whidbey Island Bank currently operates 30 full-service branches located in six counties in Northwestern Washington. In 2009, Washington Banking was added to the Russell 2000 Index, a subset of the Russell 3000 Index. Both indices are widely used by professional money managers as benchmarks for investment strategies.

FORWARD-LOOKING STATEMENTS

This news release contains forward-looking statements that are subject to risks and uncertainties. These forward-looking statements describe management's expectations regarding future events and developments such as future operating results, regional economic trends, dividends and dividend payout ratios, covered loan trends, availability of acquisition opportunities, growth in loans and deposits, credit quality and loan losses, opening of new branches 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 “anticipate,” “expect,” “will,” “believe,” 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 above are 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, factors that may cause actual results to differ materially from those contemplated in these 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; (5) the ability to realize the efficiencies expected from investment in personnel and infrastructure; and (6) the ability to open new locations. Washington Banking Company does not undertake to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements were made. Any such statements are made in reliance on the safe harbor protections provided under the Securities Exchange Act of 1934, as amended.

www.wibank.com

CONSOLIDATED STATEMENTS OF INCOME (unaudited)

         

($ in thousands, except per share data)

 

 

Quarter Ended

September 30,

2012

 

Quarter Ended

June 30,

2012

 

Three

Month

Change

 

Quarter Ended

September 30,

2011

 

One

Year

Change

Interest Income
Non-Covered Loans $ 11,644 $ 11,613 0 % $ 12,466 -7 %
Covered Loans 8,998 9,382 -4 % 8,614 4 %
Taxable Investment Securities 1,238 1,387 -11 % 1,123 10 %
Tax Exempt Securities 311 276 13 % 220 41 %
Other     71       68     4 %     89     -20 %
Total Interest Income 22,262 22,726 -2 % 22,512 -1 %
 
Interest Expense
Deposits 1,575 1,704 -8 % 2,310 -32 %
Junior Subordinated Debentures     135       133     2 %     120     13 %
Total Interest Expense 1,710 1,837 -7 % 2,430 -30 %
 
Net Interest Income 20,552 20,889 -2 % 20,082 2 %
Provision for Loan Losses, Non-Covered Loans 1,250 2,350 -47 % 2,500 -50 %
Provision for Loan Losses, Covered Loans     -       398     -100 %     -     NA
Net Interest Income after Provision for Loan Losses 19,302 18,141 6 % 17,582 10 %
 
Noninterest Income
Service Charges and Fees 886 921 -4 % 956 -7 %
Electronic Banking Income 820 1,012 -19 % 838 -2 %
Investment Products 335 367 -9 % 230 46 %
Gain on Sale of Investment Securities, Net 345 - NA - NA
Bank Owned Life Insurance Income 43 55 -22 % 84 -49 %
Income from the Sale of Loans 1,146 776 48 % 215 433 %
SBA Premium Income 126 105 20 % 103 22 %
Change in FDIC Indemnification Asset (2,762 ) (3,145 ) -12 % (2,586 ) 7 %
Gain on Disposition of Covered Assets 125 556 -78 % 1,119 -89 %
Other Income     294       341     -14 %     472     -38 %
Total Noninterest Income 1,358 988 37 % 1,431 -5 %
 
Noninterest Expense
Compensation and Employee Benefits 7,741 7,242 7 % 7,310 6 %
Occupancy and Equipment 1,738 1,659 5 % 1,660 5 %
Office Supplies and Printing 378 425 -11 % 385 -2 %
Data Processing 539 536 1 % 446 21 %
Consulting and Professional Fees 194 273 -29 % 202 -4 %
Intangible Amortization 129 128 1 % 160 -19 %
Merger Related Expenses - - NA 70 -100 %
FDIC Premiums 314 317 -1 % 319 -2 %
FDIC Clawback Liability 247 1,098 -78 % - NA
Non-Covered OREO & Repossession Expenses 398 739 -46 % 559 -29 %
Covered OREO & Repossession Expenses 122 578 -79 % 501 -76 %
Other     1,863       2,114     -12 %     2,195     -15 %
Total Noninterest Expense 13,663 15,109 -10 % 13,807 -1 %
 
Income Before Provision for Income Tax 6,997 4,020 74 % 5,206 34 %
Provision for Income Tax     2,359       1,173     101 %     1,581     49 %
Net Income Available to Common Shareholders   $ 4,638     $ 2,847     63 %   $ 3,625     28 %
Earnings per Common Share                    
Net Income per Share, Basic   $ 0.30     $ 0.18     67 %   $ 0.24     25 %
                     
Net Income per Share, Diluted   $ 0.30     $ 0.18     67 %   $ 0.24     25 %
 
Average Number of Common Shares Outstanding 15,413,000 15,411,000 15,343,000
Fully Diluted Average Common and Equivalent Shares Outstanding 15,446,000 15,446,000 15,391,000
 

CONSOLIDATED STATEMENTS OF INCOME (unaudited)

 

($ in thousands, except per share data)

 

 

For the Nine Months Ended

September 30,

One

Year

      2012       2011     Change
Interest Income  
Non-Covered Loans $ 35,010 $ 37,670 -7 %
Covered Loans 28,248 25,422 11 %
Taxable Investment Securities 3,981 2,724 46 %
Tax Exempt Securities 842 649 30 %
Other     190       200     -5 %
Total Interest Income 68,271 66,665 2 %
 
Interest Expense
Deposits 5,124 7,449 -31 %
Junior Subordinated Debentures     404       361     12 %
Total Interest Expense 5,528 7,810 -29 %
 
Net Interest Income 62,743 58,855 7 %
Provision for Loan Losses, Non-Covered Loans 5,600 8,500 -34 %
Provision (Recovery) for Loan Losses, Covered Loans     398       (318 )   -225 %
Net Interest Income after Provision for Loan Losses 56,745 50,673 12 %
 
Noninterest Income
Service Charges and Fees 2,700 2,884 -6 %
Electronic Banking Income 2,728 2,355 16 %
Investment Products 1,064 835 27 %
Gain on Sale of Investment Securities, Net 687 - NA
Bank Owned Life Insurance Income 158 245 -36 %
Income from the Sale of Loans 2,627 757 247 %
SBA Premium Income 318 375 -15 %
Change in FDIC Indemnification Asset (8,898 ) (5,630 ) 58 %
Gain on Disposition of Covered Assets 1,310 4,104 -68 %
Other Income     949       1,860     -49 %
Total Noninterest Income 3,643 7,785 -53 %
 
Noninterest Expense
Compensation and Employee Benefits 22,317 21,038 6 %
Occupancy and Equipment 5,126 4,898 5 %
Office Supplies and Printing 1,216 1,287 -6 %
Data Processing 1,603 1,418 13 %
Consulting and Professional Fees 710 847 -16 %
Intangible Amortization 383 475 -19 %
Merger Related Expenses - 324 -100 %
FDIC Premiums 967 1,469 -34 %
FDIC Clawback Liability 1,385 - NA
Non-Covered OREO & Repossession Expenses 1,511 1,199 26 %
Covered OREO & Repossession Expenses 1,274 1,620 -21 %
Other     5,935       6,957     -15 %
Total Noninterest Expense 42,427 41,532 2 %
 
Income Before Provision for Income Tax 17,961 16,926 6 %
Provision for Income Tax     5,703       5,213     9 %
Net Income 12,258 11,713 5 %
Preferred Dividends     -       1,084     -100 %
Net Income Available to Common Shareholders   $ 12,258     $ 10,629     15 %
Earnings per Common Share            
Net Income per Share, Basic   $ 0.80     $ 0.69     16 %
             
Net Income per Share, Diluted   $ 0.79     $ 0.69     14 %
 
Average Number of Common Shares Outstanding 15,418,000 15,339,000
Fully Diluted Average Common and Equivalent Shares Outstanding 15,453,000 15,421,000
 

CONSOLIDATED BALANCE SHEETS (unaudited)

         

($ in thousands except per share data)

 

 

September 30,

2012

 

June 30,

2012

 

Three

Month

Change

 

September 30,

2011

 

One

Year

Change

Assets
Cash and Due from Banks $ 30,885 $ 22,871 35 % $ 25,051 23 %
Interest-Bearing Deposits with Banks 84,570 95,111 -11 % 90,787 -7 %
Federal Funds Sold     670       -     NA     -     NA
Total Cash and Cash Equivalents 116,125 117,982 -2 % 115,838 0 %
Investment Securities Available for Sale 353,881 322,677 10 % 276,741 28 %
FHLB Stock 7,509 7,576 -1 % 7,576 -1 %
Loans Held for Sale 15,139 12,521 21 % 10,338 46 %
Loans Receivable 824,610 814,826 1 % 821,635 0 %
Less: Allowance for Loan Losses     (16,570 )     (17,565 )   -6 %     (18,936 )   -12 %
Non-Covered Loans, Net 808,040 797,261 1 % 802,699 1 %
Covered Loans, Net Allowance for Loan Losses 231,517 241,717 -4 % 276,448 -16 %
Premises and Equipment, Net 36,896 37,106 -1 % 37,207 -1 %
Bank Owned Life Insurance 17,671 17,628 0 % 17,447 1 %
Goodwill and Other Intangible Assets, Net 6,156 6,285 -2 % 8,391 -27 %
Other Real Estate Owned 4,080 4,414 -8 % 2,470 65 %
Covered Other Real Estate Owned 18,811 23,000 -18 % 25,773 -27 %
FDIC Indemnification Asset 44,713 54,867 -19 % 78,298 -43 %
Other Assets     19,588       20,846     -6 %     19,851     -1 %
Total Assets   $ 1,680,126     $ 1,663,880     1 %   $ 1,679,077     0 %
 
Liabilities and Shareholders' Equity
Deposits:
Noninterest-Bearing Demand $ 252,484 $ 235,486 7 % $ 211,403 19 %
NOW Accounts 332,116 311,856 6 % 257,506 29 %
Money Market 292,745 297,345 -2 % 336,680 -13 %
Savings 109,107 102,803 6 % 98,974 10 %
Time Deposits     471,778       502,420     -6 %     575,585     -18 %
Total Deposits 1,458,230 1,449,910 1 % 1,480,148 -1 %
 
Junior Subordinated Debentures 25,774 25,774 0 % 25,774 0 %
Other Liabilities     15,155       12,443     22 %     6,141     147 %
Total Liabilities 1,499,159 1,488,127 1 % 1,512,063 -1 %
Shareholders' Equity
Common Stock (no par value)
Authorized 35,000,000 Shares:
Issued and Outstanding 15,451,307 at 9/30/12,
15,446,221 at 6/30/12 and 15,357,466 at 9/30/11 85,381 85,101 0 % 84,209 1 %
Retained Earnings 89,966 86,718 4 % 79,636 13 %
Accumulated Other Comprehensive Income     5,620       3,934     43 %     3,169     77 %
Total Shareholders' Equity     180,967       175,753     3 %     167,014     8 %
Total Liabilities and Shareholders' Equity   $ 1,680,126     $ 1,663,880     1 %   $ 1,679,077     0 %
 

FINANCIAL STATISTICS (unaudited)

($ in thousands, except per share data)

 

  Quarter Ended   Quarter Ended   Quarter Ended   Quarter Ended   Nine Month Ended

 

September 30, June 30, March 31, September 30, September 30,
    2012   2012   2012   2011   2012   2011
 

Averages

Total Assets $ 1,672,663 $ 1,671,825 $ 1,665,597 $ 1,687,418 $ 1,670,035 $ 1,684,854
Non-Covered Loans and Loans Held for Sale 831,256 825,779 826,528 828,367 827,867 832,495
Covered Loans 236,355 248,079 262,580 287,232 248,958 319,082
Interest Earning Assets 1,513,891 1,501,373 1,493,322 1,485,875 1,502,903 1,471,508
Deposits 1,457,014 1,460,266 1,459,296 1,491,112 1,458,851 1,492,233
Common Shareholders' Equity 176,934 174,565 171,975 163,486 174,498 160,424
 

Financial Ratios

Return on Average Assets, Annualized 1.10 % 0.68 % 1.15 % 0.85 % 0.98 % 0.93 %
Return on Average Common Equity, Annualized(1) 10.43 % 6.56 % 11.16 % 8.80 % 9.38 % 8.86 %
Efficiency Ratio (2) 61.53 % 68.20 % 59.72 % 63.44 % 63.11 % 61.62 %
Yield on Earning Assets (2) 5.93 % 6.16 % 6.34 % 6.08 % 6.14 % 6.13 %
Cost of Interest Bearing Liabilities 0.55 % 0.60 % 0.63 % 0.74 % 0.59 % 0.79 %
Net Interest Spread 5.38 % 5.56 % 5.71 % 5.34 % 5.55 % 5.34 %
Net Interest Margin (2) 5.48 % 5.67 % 5.81 % 5.43 % 5.65 % 5.42 %
 
Tangible Book Value Per Share (3) $ 11.31 $ 10.97 $ 10.85 $ 10.33 $ 11.31 $ 10.33
Tangible Common Equity (3) 10.44 % 10.22 % 9.90 % 9.49 % 10.44 % 9.49 %
 
September 30, June 30, March 31, September 30, Regulatory Requirements
    2012   2012   2012   2011

Adequately-

capitalized

 

Well-

capitalized

Period End
Total Risk-Based Capital Ratio - Consolidated (4) 19.65 % 19.79 % 19.94 % 19.43 % 8.00 % NA
Tier 1 Risk-Based Capital Ratio - Consolidated (4) 18.40 % 18.53 % 18.69 % 18.17 % 4.00 % NA
Tier 1 Leverage Ratio - Consolidated (4)     11.67 %     11.44 %     11.49 %     10.82 % 4.00 % NA
Total Risk-Based Capital Ratio - Whidbey Island Bank (4) 19.02 % 19.16 % 19.32 % 18.82 % 8.00 % 10.00 %
Tier 1 Risk-Based Capital Ratio - Whidbey Island Bank (4) 17.77 % 17.91 % 18.07 % 17.56 % 4.00 % 6.00 %
Tier 1 Leverage Ratio - Whidbey Island Bank (4)     11.25 %     11.04 %     11.10 %     10.46 % 4.00 % 5.00 %
 
(1) Return on average common equity is adjusted for preferred stock dividends.

(2) Fully tax-equivalent is a non-GAAP performance measurement that management believes provides investors with a more accurate picture of the net interest margin, revenue and efficiency ratio for comparative purposes. The calculation involves grossing up interest income on tax-exempt loans and investments by an amount that makes it comparable to taxable income. Please see reconciliation to GAAP measure that appears elsewhere in this release.

(3) Please see the reconciliations of shareholders' equity to tangible common equity and total assets to tangible assets, and the related measures that appear elsewhere in this release.
(4) Capital ratios for the most recent period are an estimate pending filing of the Company's regulatory reports.
 

NON-COVERED ASSET QUALITY (unaudited)

($ in thousands, except per share data)

 

  Quarter Ended   Quarter Ended   Quarter Ended   Nine Months Ended

 

September 30, June 30, September 30, September 30,
    2012   2012   2011   2012   2011
Allowance for Non-Covered Loan Losses Activity:  
Balance at Beginning of Period $ 17,565 $ 17,993 $ 19,407 $ 18,032 $ 18,812
Indirect Loans:
Charge-offs (134 ) (135 ) (260 ) (560 ) (884 )
Recoveries     75       109       91       319       472  
Indirect Net Charge-offs (59 ) (26 ) (169 ) (241 ) (412 )
 
Other Loans:
Charge-offs (2,365 ) (2,820 ) (3,317 ) (7,127 ) (8,861 )
Recoveries     179       68       515       306       897  
Other Net Charge-offs (2,186 ) (2,752 ) (2,802 ) (6,821 ) (7,964 )
 
Total Net Charge-offs (2,245 ) (2,778 ) (2,971 ) (7,062 ) (8,376 )
Provision for Loan Losses, Non-Covered Loans     1,250       2,350       2,500       5,600       8,500  
Balance at End of Period   $ 16,570     $ 17,565     $ 18,936     $ 16,570     $ 18,936  
 
Net Charge-offs to Average Loans:
Indirect Loans Net Charge-Offs, to Avg Indirect Loans, Annualized (1) 0.29 % 0.13 % 0.79 % 0.40 % 0.62 %
Other Loans Net Charge-Offs, to Avg Other Loans, Annualized (1) 1.18 % 1.50 % 1.50 % 1.24 % 1.44 %
Net Charge-offs to Average Total Loans (1) 1.09 % 1.37 % 1.43 % 1.16 % 1.35 %
 
September 30, June 30, September 30,
      2012       2012       2011  

Nonperforming Non-Covered Assets

Nonperforming Non-Covered Loans (2) $ 17,642 $ 17,165 $ 26,850
Non-Covered Other Real Estate Owned     4,080       4,414       2,470  
Total Nonperforming Non-Covered Assets   $ 21,722     $ 21,579     $ 29,320  
Nonperforming Non-Covered Loans to Total Non-Covered Loans (1) 2.14 % 2.11 % 3.27 %
Nonperforming Non-Covered Assets to Total Assets 1.29 % 1.30 % 1.75 %
Allowance for Loan Losses to Nonperforming Non-Covered Loans 93.92 % 102.33 % 70.52 %
Allowance for Loan Losses to Non-Covered Loans 2.01 % 2.16 % 2.30 %
 

Non-Covered Loan Composition

Commercial $ 155,208 $ 158,087 $ 148,525
Real Estate Mortgages
One-to-Four Family Residential 37,262 37,700 42,965
Commercial 394,878 382,502 359,933
Real Estate Construction
One-to-Four Family Residential 44,892 49,678 66,414
Commercial 33,104 29,904 36,743
Consumer
Indirect 79,648 78,699 83,921
Direct 77,759 76,390 81,067
Deferred Costs     1,859       1,866       2,067  
Total Non-Covered Loans   $ 824,610     $ 814,826     $ 821,635  
 

Time Deposit Composition

Time Deposits $100,000 and more $ 200,641 $ 211,726 $ 240,818
All Other Time Deposits 258,301 277,468 326,854
Brokered Deposits
CDARS (Certificate of Deposit Account Registry Service)     12,836       13,226       7,913  
Total Time Deposits   $ 471,778     $ 502,420     $ 575,585  
 
(1) Excludes Loans Held for Sale.
(2) Nonperforming loans includes nonaccrual loans plus accruing loans 90 or more days past due.
 

Non-GAAP Financial Measures

 

In addition to results presented in accordance with generally accepted accounting principles in the United States of America (GAAP) this press release presents certain non-GAAP financial measures. Management believes that certain non-GAAP financial measures provide investors with information useful in understanding the Company's financial performance; however, readers of this report are urged to review these non-GAAP measures in conjunction with the GAAP results as reported.

 

Operating earnings are not a measure of performance calculated in accordance with GAAP. However, management believes that operating earnings are an important indication of our ability to generate earnings through the Company's fundamental banking business. Since operating earnings exclude the effects of certain items that are unusual and/or difficult to predict, management believes that operating earnings provide useful supplemental information to both management and investors in evaluating the Company's financial results.

 

Operating earnings should not be considered in isolation or as a substitute for net income, cash flows from operating activities, or other income or cash flow statement data calculated in accordance with GAAP. Moreover, the manner in which the Company calculates operating earnings may differ from that of other companies reporting measures with similar names.

 

The following table provides the reconciliation of the Company's GAAP earnings to operating earnings (non-GAAP) for the periods presented:

 
  Quarter Ended   For the Nine Months Ended
September 30,   June 30,   September 30, September 30,
    2012   2012   2011 2012   2011
 
GAAP Earnings Available to Common Shareholders $ 4,638 $ 2,847 $ 3,625 $ 12,258 $ 10,629
Provision for Income Taxes     2,359       1,173       1,581     5,703       5,213  
GAAP Earnings Available to Common Shareholders before Provision for Income Taxes 6,997 4,020 5,206 17,961 15,842
Adjustments to GAAP Earnings Available to Common Shareholders
Acquisition-Related Costs - - 70 - 324
Accelerated Accretion of Remaining Preferred Stock Discount     -       -       -     -       1,046  
Operating Earnings Before Taxes 6,997 4,020 5,276 17,961 17,212
Provision for Income Taxes     2,359       1,173       1,606     5,703       5,326  
Net Operating Earnings   $ 4,638     $ 2,847     $ 3,670   $ 12,258     $ 11,886  
 
Diluted GAAP Earnings per Common Share $ 0.30 $ 0.18 $ 0.24 $ 0.79 $ 0.69
Diluted Operating Earnings per Common Share $ 0.30 $ 0.18 $ 0.24 $ 0.79 $ 0.77
 

Non-GAAP Financial Measures

 

Fully tax-equivalent net interest income and fully tax-equivalent net interest margin are non-GAAP performance measurements that management believes provides investors with a more accurate picture of the Company's operational performance and is consistent with industry practice. The calculation involves grossing up interest income on tax-exempt  loans and investments by an amount that makes it comparable to taxable income.

 

The following table provides the reconciliation of the Company's net interest income and net interest margin (GAAP) to a fully tax-equivalent net interest income and fully tax-equivalent net interest margin (non-GAAP) for the periods presented:

 

Quarter Ended

For the Nine Months Ended
September 30, June 30, September 30, September 30,
    2012   2012   2011 2012   2011
 
Net Interest Income $ 20,552 $ 20,889 $ 20,082 $ 62,743 $ 58,855
Tax-Equivalent Adjustment (1)     295       277       252     837       761  
Tax-Equivalent Net Interest Income 20,847 21,166 20,334 63,580 59,616
 
Average Interest Earning Assets 1,513,891 1,501,373 1,485,875 1,502,903 1,471,508

 

Net Interest Margin 5.40 % 5.60 % 5.36 % 5.58 % 5.35 %
Tax-Equivalent Net Interest Margin (1) 5.48 % 5.67 % 5.43 % 5.65 % 5.42 %
 

Non-GAAP Financial Measures

 

Tangible common equity, tangible assets and tangible book value per common share are not measures that are calculated in accordance with GAAP. However, management uses these non-GAAP measures in its analysis of the Company's performance. Management believes that these non-GAAP measures are an important indication of the Company's ability to grow both organically and through business combinations, and, with respect to tangible common equity, the Company's ability to pay dividends and to engage in various capital management strategies.

 

Neither tangible common equity, tangible assets or tangible book value per common share should be considered in isolation or as a substitute for common shareholders' equity or book value per common share or any other measure calculated in accordance with GAAP. Moreover, the manner in which the Company calculates tangible common equity, tangible assets and tangible book value per share may differ from that of other companies reporting measures with similar names.

 

The following table provides the reconciliation of the Company's shareholders' equity (GAAP) to tangible common equity (non-GAAP) and total assets (GAAP) to tangible assets (non-GAAP)  for the periods presented:

 
September 30, June 30, September 30,
($ in thousands, except per share data)   2012   2012   2011
 
Total Shareholders' Equity $ 180,967 $ 175,753 $ 167,014
Adjustments to Shareholders' Equity
Goodwill and Other Intangible Assets, Net (2)     (6,156 )     (6,285 )     (8,391 )
Tangible Common Equity 174,811 169,468 158,623
 
Total Assets $ 1,680,126 $ 1,663,880 $ 1,679,077
Adjustments to Total Assets
Goodwill and Other Intangible Assets, Net (2)     (6,156 )     (6,285 )     (8,391 )
Tangible Assets 1,673,970 1,657,595 1,670,686
 
Common Shares Outstanding at Period End 15,451,307 15,446,221 15,357,466
 
Tangible Common Equity 10.44 % 10.22 % 9.49 %
Tangible Book Value per Common Share $ 11.31 $ 10.97 $ 10.33
 
(1) Tax exempt interest has been adjusted to a taxable equivalent basis using a 35% tax rate.
(2) Goodwill and Other Intangible Assets, Net excludes mortgage servicing rights.

Washington Banking Company
Jack Wagner – WBCO President & CEO
Bryan McDonald – WIB President & CEO
Rick Shields – EVP & CFO
360-679-3121

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