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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 March 31, 2003
[ ] 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 registrant 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 [ ]
Indicate by check mark if the registrant is an accelerated filer within the
meaning of Rule 12b-2 under the Securities Exchange Act of 1934, as amended.
Yes [ ] No [ X ]
The number of shares of the issuer's Common Stock outstanding at
May 8, 2003 was 4,656,378.
Table of Contents
PART I
Page
Item 1. Financial Statements
Condensed Consolidated Statements of Financial Condition -
March 31, 2003 and December 31, 2002 1
Condensed Consolidated Statements of Income -
Three Months Ended March 31, 2003 and 2002 2
Condensed Consolidated Statements of Shareholders' Equity and Comprehensive Income -
Three Months Ended March 31, 2003 and 2002 3
Condensed Consolidated Statements of Cash Flows -
Three Months Ended March 31, 2003 and 2002 4
Notes to Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures about Market Risk 19
Item 4. Controls and Procedures 19
PART II
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
Certification of Chief Executive Officer 21
Certification of Chief Financial Officer 22
PART I
Item 1. Financial Statements
WASHINGTON BANKING COMPANY
AND SUBSIDIARIES
Condensed Consolidated Statements of Financial Condition
March 31, 2003 and December 31, 2002
(Dollars in thousands, except per share data)
March 31, December 31,
Assets 2003 2002
--------------- ----------------
(unaudited)
Cash and due from banks $ 21,007 $ 20,882
($2,641 and $1,316, respectively, are restricted)
Interest-earning deposits 11,895 12,005
Federal funds sold 32,000 23,000
--------------- ----------------
Total cash, restricted cash and cash equivalents 64,902 55,887
--------------- ----------------
Investment securities available for sale 7,578 9,102
Investment securities held to maturity 14,946 15,073
--------------- ----------------
Total investment securities 22,524 24,175
--------------- ----------------
Federal Home Loan Bank stock 2,194 2,158
Loans held for sale 4,209 6,629
Loans receivable 448,148 430,074
Allowance for loan losses (5,875) (5,514)
--------------- ----------------
Total loans, net 446,482 431,189
--------------- ----------------
Premises and equipment, net 17,300 16,750
Other real estate owned 595 592
Deferred tax assets 1,205 1,207
Other assets 3,979 3,454
--------------- ----------------
Total assets $ 559,181 $ 535,412
=============== ================
Liabilities and Shareholders' Equity
Liabilities:
Deposits
Noninterest-bearing $ 63,293 $ 61,647
Interest-bearing 422,336 401,348
--------------- ----------------
Total deposits 485,629 462,995
--------------- ----------------
Other borrowed funds 15,000 15,000
Trust preferred securities 15,000 15,000
Other liabilities 2,885 2,985
--------------- ----------------
Total liabilities 518,514 495,980
--------------- ----------------
Commitments and contingencies -- --
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 4,656,378 and 4,541,123
shares at March 31, 2003 and December 31, 2002, respectively 21,342 21,025
Retained earnings 19,278 18,363
Accumulated other comprehensive income, net 47 44
--------------- ----------------
Total shareholders' equity 40,667 39,432
--------------- ----------------
Total liabilities and shareholders' equity $ 559,181 $ 535,412
=============== ================
See accompanying notes to condensed consolidated financial statements.
1
WASHINGTON BANKING COMPANY
AND SUBSIDIARIES
Condensed Consolidated Statements of Income
Three months ended March 31, 2003 and 2002 (unaudited)
(Dollars in thousands, except per share data)
Three Months Ended March 31
2003 2002
--------------- ----------------
Interest income:
Interest and fees on loans $ 8,502 $ 8,129
Interest on taxable investment securities 76 82
Interest on tax-exempt investment securities 169 192
Other 119 34
--------------- ----------------
Total interest income 8,866 8,437
Interest expense:
Interest on deposits 1,995 2,413
Interest on other borrowings 156 169
Interest on trust preferred securities 189 --
--------------- ----------------
Total interest expense 2,340 2,582
--------------- ----------------
Net interest income 6,526 5,855
Provision for loan losses (763) (989)
--------------- ----------------
Net interest income after
provision for loan losses 5,763 4,866
Noninterest income:
Service charges and fees 477 429
Gain on sale of loans 458 271
Secondary market fees 69 23
Gain on sale of assets -- 188
Other 266 346
--------------- ----------------
Total noninterest income 1,270 1,257
Noninterest expense:
Salaries and benefits 3,085 2,319
Occupancy 850 711
Office supplies and printing 171 120
Data processing 115 88
Consulting and professional fees 63 56
Other 864 632
--------------- ----------------
Total noninterest expense 5,148 3,926
--------------- ----------------
Income before income taxes 1,885 2,197
Provision for income taxes (645) (760)
--------------- ----------------
Net income $ 1,240 $ 1,437
=============== ================
Net income per share, basic $ 0.27 $ 0.32
=============== ================
Net income per share, diluted $ 0.26 $ 0.30
=============== ================
Average number of shares outstanding, basic 4,608,933 4,460,775
Average number of shares outstanding, diluted 4,760,690 4,726,069
See accompanying notes to condensed consolidated financial statements.
2
WASHINGTON BANKING COMPANY
AND SUBSIDIARIES
Condensed Consolidated Statements of Shareholders' Equity
and Comprehensive Income
Three months ended March 31, 2003 and 2002 (unaudited)
(Dollars and shares in thousands)
Accumulated
other
Common stock comprehensive Total
---------------------- Retained income shareholders'
Shares Amount earnings (loss), net equity
--------- ----------- ----------- ---------------- ----------------
Balances at December 31, 2001 4,055 $ 16,124 $ 18,782 $ 71 $ 34,977
Comprehensive income:
Net income -- -- 1,437 -- 1,437
Net change in unrealized gain (loss)
on securities available for sale,
net of tax of $12 -- -- -- (24) (24)
----------------
Total comprehensive income 1,413
Cash dividend, $0.065 per share -- -- (264) -- (264)
--------- ----------- ----------- ---------------- ----------------
Balances at March 31, 2002 4,055 $ 16,124 $ 19,955 $ 47 $ 36,126
========= =========== =========== ================ ================
Balances at December 31, 2002 4,541 $ 21,025 $ 18,363 $ 44 $ 39,432
Comprehensive income:
Net income -- -- 1,240 -- 1,240
Net change in unrealized gain (loss)
on securities available for sale,
net of tax of $ (1) -- -- -- 3 3
----------------
Total comprehensive income 1,243
Cash dividend, $0.07 per share -- -- (325) -- (325)
Stock option compensation -- 6 -- -- 6
Stock options exercised 115 311 -- -- 311
--------- ----------- ----------- ---------------- ----------------
Balances at March 31, 2003 4,656 $ 21,342 $ 19,278 $ 47 $ 40,667
========= =========== =========== ================ ================
See accompanying notes to condensed consolidated financial statements.
3
WASHINGTON BANKING COMPANY
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
Three months ended March 31, 2003 and 2002 (unaudited)
(Dollars in thousands, except per share data)
Three Months Ended March 31
2003 2002
--------------- --------------
Cash flows from operating activities:
Net income $ 1,240 $ 1,437
Adjustments to reconcile net income to net cash
provided by operating activities:
Federal Home Loan Bank stock dividends (36) (30)
Amortization (accretion) of investment premiums, net 25 (29)
Provision for loan losses 763 989
Net decrease in loans held for sale 2,420 854
Depreciation of premises and equipment 356 318
Net gains on sale of premises and equipment and real estate -- (188)
Net gains on sale of other real estate (8) --
Net increase in other assets (525) (469)
Stock option compensation 6 --
Net decrease in other liabilities (100) (459)
--------------- --------------
Net cash provided by operating activities 4,141 2,423
--------------- --------------
Cash flows from investing activities:
Purchases of investment securities available for sale -- (500)
Maturities/calls of investment securities available for sale 500 --
Principal payments on mortgage-backed securities 1,006 --
Maturities/calls of investment securities held to maturity 125 1,000
Net increase in loans (18,546) (25,236)
Purchases of premises and equipment (906) (339)
Proceeds from the sale of premises and equipment -- 271
Proceeds from the sale of other real estate owned 75 --
--------------- --------------
Net cash used in investing activities (17,746) (24,804)
--------------- --------------
Cash flows from financing activities:
Net increase in deposits 22,634 24,076
Net decrease in other borrowed funds -- (15,000)
Net increase in federal funds purchased -- 12,500
Dividends paid on common stock (325) (264)
Proceeds from stock options exercised 311 --
--------------- --------------
Net cash provided by financing activities 22,620 21,312
--------------- --------------
Net increase (decrease) in cash and cash equivalents 9,015 (1,069)
Cash and cash equivalents at beginning of period 55,887 19,765
--------------- --------------
Cash and cash equivalents at end of period $ 64,902 $ 18,696
=============== ==============
Supplemental information:
Loans foreclosed and transferred to other real estate owned $ 70 $ --
Loans made on bank-owned property sold 34 224
Cash paid for interest 2,448 2,611
Cash paid for taxes -- 425
See accompanying notes to condensed consolidated financial statements.
4
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three months ended March 31, 2003 and 2002 (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") is a registered bank holding company formed
on April 30, 1996. At March 31, 2003, WBCO had three wholly-owned subsidiaries -
Whidbey Island Bank ("WIB" or the "Bank"), the Company's principal subsidiary;
Washington Banking Capital Trust I (the "Trust"); and Washington Funding Group,
Inc. ("WFG"). 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. During the 1990s, the region experienced strong
population growth and economic diversification. The region's economy has evolved
from one that was once heavily dependent upon forestry, fishing and farming to
an economy with a much more diverse blend of industries including retail trade,
services, manufacturing, tourism and a large military base presence. Although
the Bank has a diversified loan portfolio, a substantial portion of its
borrowers' ability to repay their loans is dependent upon the economic
conditions affecting this area.
The Trust, the second subsidiary of WBCO, was formed in June 2002 for the
exclusive purpose of issuing Trust Preferred Securities and common securities
and using the $15,000 in proceeds from the issuance to acquire junior
subordinated debentures issued by WBCO.
WFG, the third subsidiary of WBCO, was formed in January 2003 for the purpose of
expanding the Bank's current wholesale mortgage real estate lending platform. In
addition to an existing office in Burlington, Washington, WFG opened offices in
Bend, Coos Bay and Portland, Oregon during the first quarter of 2003. WFG will
underwrite loans originated by mortgage brokers in the Washington, Oregon and
Idaho markets, and then sell a large majority of them to secondary market
investors, including Freddie Mac and Fannie Mae.
(b) Basis of Presentation
The accompanying interim condensed consolidated financial statements include the
accounts of WBCO and its subsidiaries (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 generally accepted accounting principles for complete
financial statements. These condensed consolidated financial statements should
be read in conjunction with the December 31, 2002 audited consolidated financial
statements and notes thereto included in the Company's Annual Report on Form
10-K filed with the Securities and Exchange Commission on March 20, 2003. In
management's opinion, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been included.
Operating results for the three months ended March 31, 2003 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2003. In preparing the consolidated financial statements, estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses are required. Actual results could differ from those estimates.
Certain amounts in 2002 may have been reclassified to conform with the 2003
financial statement presentation.
(c) Recent Financial Accounting Pronouncements
In November 2002 the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees," ("FIN 45"). FIN 45 requires that a liability be recognized at the
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three months ended March 31, 2003 and 2002 (unaudited)
(Dollars in thousands, except per share data)
inception of certain guarantees for the fair value of the obligation, including
the ongoing obligation to stand ready to perform over the term of the guarantee.
Guarantees, as defined in FIN 45, include contracts that contingently require
the Company to make payments to a guaranteed party based on changes in an
underlying that is related to an asset, liability or equity security of the
guaranteed party, performance guarantees, indemnification agreements or indirect
guarantees of indebtedness of others. This new accounting is effective for
certain guarantees issued or modified after December 31, 2002. In addition, FIN
45 requires certain additional disclosures, for interim and annual periods,
which are located in Note 5. The Company has adopted the provisions of FIN 45
and has properly disclosed their affect in the current period financial
statements.
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). This interpretation explains how to
identify variable interest entities and how an enterprise assesses its interest
in a variable interest entity to decide whether to consolidate that entity. This
interpretation requires existing unconsolidated variable interest entities to be
consolidated by their primary beneficiaries if the entities do not effectively
disperse risks among parties involved. Variable interest entities that
effectively disperse risks will not be consolidated unless a single party holds
an interest or combination of interest that effectively recombines risks that
were previously dispersed. This interpretation applies immediately to variable
interest entities created after January 31, 2003, and to variable interest
entities in which an enterprise obtains an interest after that date. It applies
in the first fiscal year or interim period beginning after June 15, 2003, to
variable interest entities in which an enterprise holds a variable interest that
it acquired before February 1, 2003. The adoption of FIN 46 did not have a
material effect on the Bank's financial position or results of operations.
(2) 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 March 31, 2003
---------------------------------------------------------
Weighted Per share
Income average shares amount
-------------- -------------------- -------------
Basic EPS
Income available to common shareholders $ 1,240 4,608,933 $ 0.27
Effect of dilutive securities: stock options -- 151,757 (0.01)
-------------- -------------------- -------------
Diluted EPS $ 1,240 4,760,690 $ 0.26
============== ==================== =============
Three Months Ended March 31, 2002
---------------------------------------------------------
Weighted Per share
Income average shares amount
-------------- -------------------- -------------
Basic EPS
Income available to common shareholders $ 1,437 4,460,775 $ 0.32
Effect of dilutive securities: stock options -- 265,294 (0.02)
-------------- -------------------- -------------
Diluted EPS $ 1,437 4,726,069 $ 0.30
============== ==================== =============
6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three months ended March 31, 2003 and 2002 (unaudited)
(Dollars in thousands, except per share data)
On October 24, 2002, the Company issued a 10% stock dividend to shareholders of
record as of October 8, 2002. All periods presented have been restated to
reflect the stock dividend. At March 31, 2003 and 2002, there were options to
purchase 364,789 and 498,561 shares of common stock outstanding, respectively,
of which 17,633 and 37,950 shares, respectively, were antidilutive and therefore
not included in the computation of diluted net income per share.
(3) Stock-Based Compensation
The Company recognizes the financial effects of stock-based employee
compensation based on the intrinsic value method of accounting prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25") and Financial Accounting Standards Board ("FASB")
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation" ("FIN 44"). Generally, stock options are issued at a price equal
to the fair value of the Bank's stock as of the grant date. Under APB 25,
options issued in this manner do not result in the recognition of employee
compensation in the Bank's financial statements. The following table illustrates
the effect on net income and earnings per share if the Company had applied the
fair value provisions of FASB Statement 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure," to stock-based employee compensation.
Three Months Ended March 31
2003 2002
---------------- ----------------
Net income, as reported $ 1,240 $ 1,437
Stock compensation recognized 6 --
Additional compensation for
fair value of stock options (22) (15)
---------------- ----------------
Pro forma net income $ 1,224 $ 1,422
================ ================
Basic earnings per share:
As reported $ 0.27 $ 0.32
Pro forma 0.27 0.32
Diluted earnings per share:
As reported 0.26 0.30
Pro forma 0.26 0.30
(4) Subsequent Event
On April 24, 2003, the Board of Directors declared a cash dividend of $0.07 per
share to shareholders of record as of May 5, 2003 and payable on May 20, 2003.
(5) Commitments
Standby letters of credit and financial guarantees written are conditional
commitments issued by the Company to guarantee the performance of a customer to
a third party or payment by a customer to a third party. Those guarantees are
primarily issued in international trade or to support public and private
borrowing arrangements, including commercial paper, bond financing, and similar
transactions. Except for certain long-term guarantees, the majority of
guarantees expire in one year. The credit risk involved in issuing letters of
credit is essentially the same as that involved in extending loan facilities to
customers. Collateral supporting those commitments, for which collateral is
deemed necessary, generally amounts to one hundred percent of the commitment
amount at March 31, 2003. The Company routinely charges a fee for these credit
facilities. Such fees are amortized into income over the life of the agreement,
and unamortized amounts are not significant as of March 31, 2003.
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three months ended March 31, 2003 and 2002 (unaudited)
(Dollars in thousands, except per share data)
As of March 31, 2003, the commitments under these agreements were as follows:
Standby Letters of Credit and Financial Guarantees $623
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
- --------------------------------------------------------------------------------
Note Regarding Forward-Looking Statements: This Form 10-Q may include
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, continued success of the Company's
business plan 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
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, the following possibilities: (1) local and
national general and economic conditions, including the possible impact of
international conflict or further terrorist events, are less favorable than
expected or have a more direct and pronounced effect than expected on the
Company 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 or
negatively affect liquidity; (3) projected business increases following
strategic expansion or opening or acquiring new branches are lower than
expected; (4) greater than expected costs or difficulties related to the
integration of acquisitions; (5) increased competitive pressure among financial
institutions; (6) legislation or regulatory requirements or changes that
adversely affect the banking and financial services sector; and (7) the
Company's ability to realize the efficiencies it expects to derive from its
investment in personnel and infrastructure. However, you should be aware that
these factors are not an exhaustive list, and you should not assume that these
are the only factors that may cause actual results to differ from expectations.
In addition, you should note that we do 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 ("WBCO" or the "Company") is a registered bank
holding company with three wholly-owned direct subsidiaries: Whidbey Island Bank
(the "Bank"), Washington Banking Capital Trust I (the "Trust") and Washington
Funding Group, Inc. ("WFG"). The Company's principal subsidiary, the Bank, is a
Washington state-chartered bank that conducts a full-service community
commercial banking business. Its business includes commercial, real estate and
construction loan portfolios, and is active in the consumer banking field,
providing personal and consumer-oriented loan programs. The Bank also provides a
wide range of deposit services, insured by the Federal Deposit Insurance
8
Corporation (the "FDIC"), 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. The Company also offers nondeposit
investment products, which are not FDIC insured, through the Bank's subsidiary,
WIB Financial Services, Inc.
The Trust was formed in June 2002 for the exclusive purpose of issuing trust
preferred securities to acquire junior subordinated debentures issued by the
Company. Those debentures are the sole assets of the Trust and payments on the
debt will be the sole revenues of the Trust. The Company has fully and
unconditionally guaranteed all obligations of the Trust.
WFG, a wholesale mortgage real estate lending company, is a Washington State
corporation formed in January 2003. The purpose of this subsidiary is to provide
underwriting service to mortgage brokers and others for real estate mortgage
loans. The loans are originated and sold in the name of the Bank. In addition to
an existing office in Burlington, Washington, WFG opened offices in Bend, Coos
Bay and Portland, Oregon during the first quarter of 2003. The Company expects
WFG will underwrite loans originated by mortgage brokers in the Washington,
Oregon and Idaho markets, and then sell a large majority of them to secondary
market investors, including Freddie Mac and Fannie Mae.
Headquartered in Oak Harbor, the Company's primary market area is located in
northwestern Washington State between Seattle and the Canadian border. Its
geographical expansion to date has been concentrated along the I-5 corridor from
Snohomish to Whatcom Counties, however, additional areas will be considered if
they meet the Company's criteria. Acquisition of banks or branches may also be
used as a means of expansion if appropriate opportunities are presented.
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, to increase market penetration in areas currently served, and to
continue an expansion strategy in appropriate market areas.
Management recognizes that growth requires expenditures of substantial sums to
purchase or lease real property and equipment and to hire experienced personnel,
and that earnings may be negatively affected.
The Company's market areas encompass distinct economies. These economies have
evolved from being heavily dependent upon forestry, fishing and farming to
economies with much more diverse blends of industries including retail trade,
services, manufacturing, tourism and a large military presence. While Washington
State's economy, and particularly that of the Puget Sound region, experienced
strong growth during the 1990's, those economies slowed during recent years as
the commercial airline and aerospace industries began to contract in the Puget
Sound region. During 2002, the Company's market area continued to feel the
effects of the country's overall economic slowdown, which appeared to have been
particularly pronounced in the Pacific Northwest, including unemployment levels
above the national average. The recent military build-up appears to have had a
positive economic impact on the region due to the large military bases located
in the area, but timing of an economic recovery for Washington State is
uncertain.
Financial Condition
Total Assets. Total assets increased to $559.2 million at March 31, 2003 from
$535.4 million at December 31, 2002, an increase of 4.4%. This increase resulted
9
from short-term investments in federal funds and growth in the loan portfolio,
which was funded by deposit growth, investment maturities and borrowings.
Total Loans. Total loans were $452.4 million at March 31, 2003, an increase of
3.6% from $436.7 million at December 31, 2002. The Company increased its
allowance for loan losses to $5.9 million at March 31, 2003 representing 1.30%
of total loans, from $5.5 million or 1.26% at December 31, 2002, to keep pace
with loan growth and prospective losses inherent in the loan portfolio, while
remaining conservative and improving coverage.
Total Investment Securities. Total investment securities were $22.5 million and
$24.2 million at March 31, 2003 and December 2002, respectively, a decrease of
6.8% due to the maturity of investments. The continued low interest rate
environment and anticipated increase in loan demand prompted management to
slowly purchase short-term investments, building the portfolio with "laddered"
(staggered maturities) securities that reflect the Company's investment policy
guidelines and help achieve the objectives of the business plan of the Company.
Premises and Equipment. Premises and equipment, net of depreciation, were $17.3
million and $16.8 million at March 31, 2003 and December 31, 2002. The increase
reflects the construction of a new building for the Camano office and related
furniture and fixtures, as well as remodeling improvements to the Burlington
Financial Center completed during the first quarter of 2003.
The increase in premises and equipment is an indication of future expectations
as the Company continues its strategy of value-added growth.
Deposits. Deposits grew 4.9% to $485.6 million at March 31, 2003 from $463.0
million at December 31, 2002. Management's philosophy is to develop long-term
customer relationships. Management believes that the best way to establish
customer loyalty is by placing an emphasis on meeting the customers' financial
needs and providing exceptional service. Management attributes the Company's
successful deposit growth to its continuing deposit promotions, cross-sales
efforts, financial planning and other means. In addition, many customers are
seeking the security of FDIC-insured deposit vehicles given the recent
volatility of the investment market.
Average noninterest-bearing deposits increased 20.0%, at March 31, 2003 from
March 31, 2002, while average interest-bearing deposits increased 20.6%,
compared to the like period a year ago. In addition to this increase, the
Company experienced a shift in the deposit mix. Average interest demand and
money market deposits represented 44.45% of total average interest-bearing
deposits at March 31, 2003 compared to 38.93% for the like period a year ago.
Average savings deposits and average CDs represented 8.02% and 47.53%,
respectively, of total average interest-bearing deposits at March 31, 2003
compared to 8.56% and 52.51%, respectively for the like period a year ago. All
deposit product averages increased during 2003 as management focused on
attracting deposits and establishing customer relationships.
Shareholders' Equity. The Company's shareholders' equity increased 3.1% to $40.7
million at March 31, 2003 from $39.4 million at December 31, 2002. The increase
reflects earnings, proceeds from stock options exercised, stock option
compensation and an increase in unrealized gain on available-for-sale
securities, net of tax, offset by the payment of cash dividends during the first
three months of 2003.
10
Consolidated Average Balance Sheet and Analysis of Net Interest Income and
Expense
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 March 31, 2003 Three Months Ended March 31, 2002
Average Interest Average Average Interest Average
(Dollars in thousands) balance earned/paid yield (1) balance earned/paid yield (1)
----------- ----------- ----------- ------------ ------------ ------------
Assets
Loans (2) $ 441,424 $ 8,502 7.70% $ 389,600 $ 8,129 8.35%
Federal funds sold 18,401 50 1.09% 869 3 1.38%
Interest-earning cash 11,952 33 1.10% 291 1 1.37%
Investments:
Taxable 11,046 112 4.06% 7,908 112 5.67%
Non-taxable (3) 14,447 226 6.26% 16,394 257 6.27%
----------- ----------- ----------- ------------ ------------ ------------
Interest-earning assets 497,270 8,923 7.18% 415,062 8,502 8.19%
Noninterest-earning assets 35,342 31,458
----------- ------------
Total assets $ 532,612 $ 446,520
=========== ============
Liabilities and
Shareholders' equity
Deposits:
Interest demand and
money market $ 177,617 $ 514 1.16% $ 128,933 $ 548 1.70%
Savings 32,028 69 0.86% 28,365 106 1.49%
CDs 189,913 1,412 2.97% 173,921 1,759 4.05%
----------- ----------- ----------- ------------ ------------ ------------
Interest-bearing deposits 399,558 1,995 2.00% 331,219 2,413 2.91%
Federal funds purchased -- -- 0.00% 5,339 25 1.87%
Trust preferred securities 15,000 189 5.04% -- -- 0.00%
Other interest-bearing
liabilites 15,121 156 4.13% 21,853 144 2.64%
----------- ----------- ----------- ------------ ------------ ------------
Interest-bearing liabilities 429,679 2,340 2.18% 358,411 2,582 2.88%
Noninterest-bearing deposits 60,757 50,620
Other noninterest-bearing
liabilities 2,401 2,000
----------- ------------
Total liabilities 492,837 411,031
Shareholders' equity 39,775 35,489
----------- ------------
Total liabilities and
shareholders' equity $ 532,612 $ 446,520
=========== ============
Net interest income (3) $ 6,583 $ 5,920
=========== ============
Net interest spread (1) 5.00% 5.31%
=========== ============
Net interest margin (1) 5.30% 5.71%
=========== ============
(1) Annualized
(2) Includes loan fees of $358 and $280 for the three months ended March 31,2003 and 2002, respectively.
(3) Interest income on non-taxable investments is presented on a fully taxable-equivalent basis using the federal statutory rate
of 34%. These adjustments were $57 and $65 for the three months ended March 30, 2003 and 2002, respectively.
11
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
generates noninterest income generally 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. Net income for the first quarter of 2003 decreased $197,000, or
13.7%, to $1.2 million or $0.26 per diluted share, from $1.4 million or $0.30
per diluted share, for the first quarter of 2002. The decrease was due to a $1.2
million increase in noninterest expense in the first quarter of 2003 coupled
with the $187,000 gain on sale of assets from the sale of the vacated North
Whidbey branch property in the first quarter 2002.
Net Interest Income. Net interest income for the first quarter of 2003 increased
11.5% to $6.5 million from $5.9 million for the first quarter of 2002. The
increase is largely due to interest income from increased average loan volume,
combined with a decrease in the cost of funds. The continued low rate
environment has improved our cost of funds and helped offset the lower
interest-earning asset yield.
Average interest-earning assets for the first quarter increased to $497.3
million at March 31, 2003, compared to $415.1 million at March 31, 2002, a
growth of 19.8%, while the average yield on interest-earning assets decreased to
7.18% compared to 8.19% in first quarter of the prior year. The average yield on
loans decreased to 7.70% for the quarter ended March 31, 2003 from 8.35% for the
quarter ended March 31, 2002.
The average cost of interest-bearing liabilities decreased in the first quarter
of 2003 to 2.18% from 2.88% for the quarter ended March 31, 2002. Average
interest-bearing liabilities for the quarter increased to $429.7 million at
March 31, 2003 compared to $358.4 million at March 31, 2002, a growth of 19.9%.
The overall result of these changes was a decrease in the net interest spread to
5.00% for the quarter ended March 31, 2003 from 5.31% for the quarter ended
March 31, 2002. Net interest margin (net interest income divided by average
interest-earning assets) decreased to 5.30% in the first quarter of 2003 from
5.71% in the first quarter of 2002.
Noninterest Income. Noninterest income increased $13,000, or 1.0%, in the first
quarter of 2003 compared to the same period in 2002. This slight increase was
due to an increase in the gain on sale of loans and secondary market fees from
the sale of real estate loans in the first quarter of 2003, offset by the
$187,000 gain on sale of the vacated North Whidbey branch property in the first
quarter of 2002.
The $23,000 net loss from WIB Financial Services, Inc., the Bank's subsidiary,
which offers nondeposit investment products to customers, also impacted
noninterest income. Management is not satisfied with the performance of the
subsidiary and its product delivery system. The Company is reviewing
alternatives that will provide customers with a means to achieve a balanced,
diversified, managed portfolio while improving noninterest income for the Bank.
This review process is near completion and the Company expects to announce its
new program within the next few weeks.
Noninterest Expense. Noninterest expense increased $1.2 million, or 31.1%, in
the first quarter of 2003. Three major components of noninterest expense,
employee compensation, occupancy and other noninterest expense increased 33.0%,
19.5% and 36.7% respectively, for the quarter compared with the like period in
2002.
12
The majority of these expenses reflect costs associated with the Company's newly
formed wholesale mortgage real estate lending company, WFG and the expansion of
Bank branches. The Company moved into Stanwood, Fairhaven and Smokey Point and
relocated its Camano Island branch. In addition to the cost of staffing these
new areas, the Company experienced a cost increase in employee benefits.
The increase in other noninterest expense consisted of increased expenditures in
education, including recent corporate governance education for directors and ATM
expense. Donations also increased as the Company has committed to supporting
additional organizations in its new market areas. The efficiency ratio
(noninterest expense divided by the sum of net interest income plus noninterest
income less non-recurring gains) was 66.03% for the first quarter 2003 compared
to 55.2% for the like period in 2002.
Income Taxes. For the first quarter of 2003, the Company recorded an income tax
provision of $645,000. The overall effective tax rate was approximately 34% for
both the three months ended March 31, 2003 and 2002.
Lending Activities
Loan Portfolio Composition. 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:
March 31, 2003 December 31, 2002
------------------------------- -------------------------------
(Dollars in thousands) Balance % of total Balance % of total
--------------- -------------- --------------- --------------
Commercial $ 90,364 20.0% $ 91,816 21.0%
Real estate mortgages:
One-to-four family residential 41,179 9.1% 46,806 10.7%
Five-or-more family
residential and commercial 107,425 23.8% 94,404 21.6%
--------------- -------------- -------------------------------
Total real estate mortgages 148,604 32.9% 141,210 32.4%
Real estate construction 49,689 11.0% 40,112 9.2%
Consumer 163,428 36.1% 163,368 37.4%
--------------- -------------- -------------------------------
Subtotal 452,085 100.0% 436,506 100.0%
============== ==============
Less: allowance for loan losses (5,875) (5,514)
Deferred loan fees, net 272 197
--------------- ---------------
Loans, net $ 446,482 $ 431,189
=============== ===============
Total loans, net, increased to $446.5 million at March 31, 2003, representing a
3.5% increase from year-end 2002. Real estate mortgage and real estate
construction loans increased 5.2% and 23.9% respectively, while consumer loans
remained flat and total commercial loans decreased 1.6% at March 31, 2003 from
year-end 2002. Indirect dealer loans were $101.7 million, or 62.2% of the
consumer loan portfolio at March 31, 2003, as compared to $94.2 million, or
57.6%, at December 31, 2002. The commercial loan decrease reflects some
weakening in the local economy, with real estate loan growth driven by the
favorable interest rate environment.
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) March 31, 2003 December 31, 2002
---------------------- -----------------------
Nonaccrual loans $ 3,062 $ 3,222
Restructured loans -- --
---------------------- -----------------------
Total nonperforming loans 3,062 3,222
Real estate owned 595 592
---------------------- -----------------------
Total nonperforming assets $ 3,657 $ 3,814
====================== =======================
Accruing loans past due >= 90 days $ -- $ --
Potential problem loans 120 --
Allowance for loan losses 5,875 5,514
Nonperforming loans to loans 0.68% 0.74%
Allowance for loan losses to loans 1.30% 1.26%
Allowance for loan losses to nonperforming loans 191.87% 171.14%
Nonperforming assets to total assets 0.65% 0.71%
Nonperforming loans decreased to $3.1 million, or 0.68% of total loans, at March
31, 2003 from $3.2 million, or 0.74% of total loans, at December 31, 2002. The
current loan loss reserve of $5.9 million represents 191.87% of nonperforming
loans as compared to 171.14% of nonperforming loans at December 31, 2002. The
loan loss reserve is 1.30% of total loans at March 31, 2003 as compared to 1.26%
at December 31, 2002.
Provision and Allowance for Loan Losses. The Company recorded a $763,000
provision for loan losses for the first quarter of 2003, compared with $989,000
for the like period a year ago. Net loan charge-offs were $402,000 during the
first quarter of 2003, compared to $277,000 for the like period last year. In
addition to timing issues, the increase in charge-offs is attributed to an
aggressive stance on consumer delinquencies and a tightening of the Bank's
consumer lending standards.
The Company makes automobile and recreational vehicle loans for new and used
vehicles originated indirectly by selected automobile dealers located in the
Company's market areas. Indirect vehicle loans may involve greater risk than
other consumer loans, including direct automobile loans, due to the nature of
third-party transactions. To mitigate these risks, the Company has limited its
indirect automobile loan purchases primarily to dealerships that are established
and well known in their market areas and to applicants that are not classified
as sub-prime. In addition, the Company has increased its oversight of the
approval process and uses a loan grading system, which limits the risks inherent
in dealer originated loans.
Net loan charge-offs attributed to indirect dealer loans were $196,000,
representing 0.20% of average indirect dealer loans during the first three
months of 2003, compared to $183,000, or 0.24% of average indirect dealer loans
for the like period in 2002. Management has tightened consumer lending standards
over the last year and established additional guidelines and limits on lending
to certain industries in order to mitigate risk.
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. This includes a
14
review of problem loans, general business and economic conditions, seasoning of
the loan portfolio, bank regulatory examination results and findings of internal
credit examiners, loss experience and an overall evaluation of the quality of
the underlying collateral. The allowance is reviewed quarterly by management.
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. The allocation is based on an evaluation of
defined loan problems, historical ratios of loan losses and other factors that
may affect future loan losses in the categories of loans shown:
Three Months Ended March 31
(Dollars in thousands) 2003 2002
----------------- -----------------
Balance at beginning of period $ 5,514 $ 4,308
Charge-offs:
Commercial (71) (28)
Real estate (30) -
Consumer (377) (296)
----------------- -----------------
Total charge-offs $ (478) $ (324)
Recoveries:
Commercial 4 1
Real estate - -
Consumer 72 46
----------------- -----------------
Total recoveries $ 76 $ 47
----------------- -----------------
Net charge-offs (402) (277)
Provision for loan losses 763 989
----------------- -----------------
Balance at end of period $ 5,875 $ 5,020
================= =================
Net charge-offs to average loans 0.09% 0.07%
While management believes that it uses the best information available to
determine the allowance for loan losses, unforeseen market conditions could
result in adjustments to the allowance for loan losses, and net income could be
significantly affected, if circumstances differ substantially from the
assumptions used in making the final determination. Management anticipates that
normal growth of the loan portfolio, coupled with credit weakness that could
occur as a result of a slowdown in the local economy may require increases in
the provisions to the allowance for loan losses during the year 2003.
Deposits
The Company provides a range of deposit services, including noninterest-bearing
checking accounts, interest-bearing checking and savings accounts, money market
accounts and certificates of deposit ("CDs"). These accounts generally earn
interest at rates established by management based on competitive market factors
and management's desire to increase or decrease certain types or maturities of
deposits. The Company does not pay brokerage commissions to attract deposits. It
strives to establish customer relations to attract core deposits in
noninterest-bearing transactional accounts and thus reduce its costs of funds.
15
The following table sets forth the average balances outstanding and average
interest rates for each major category of deposits:
Three Months Ended March 31
----------------------------------------------------
2003 2002
------------------------- --------------------------
Average Average Average Average
(Dollars in thousands) balance rate balance rate
------------------------- --------------------------
Interest-bearing demand and
money market deposits $ 177,617 1.16% $ 128,933 1.70%
Savings deposits 32,028 0.86% 28,365 1.49%
CDs 189,913 2.97% 173,921 4.05%
------------------------- --------------------------
Total interest-bearing deposits 399,558 2.00% 331,219 2.91%
Demand and other
noninterest-bearing deposits 60,757 50,620
----------- ------------
Total average deposits $ 460,315 $ 381,839
=========== ============
Liquidity and Sources of Funds
Sources of Funds. The Company's sources of funds are customer deposits, loan
repayments, current earnings, cash and demand balances due from other banks,
federal funds sold, short-term investments and investment securities available
for sale. These funds are used to fund loan originations and deposit
withdrawals, satisfy other financial commitments and to support continuing
operations. The Bank relies primarily upon customer deposits and investments to
provide liquidity. The Company will mainly use such funds to make loans and to
purchase securities, the majority of which are issued by federal, state and
local governments. Additional funds are available through established Federal
Home Loan Bank ("FHLB") and correspondent bank lines of credit, which the
Company may use to supplement funding sources.
The Company's strategy includes maintaining a "well-capitalized" status for
regulatory purposes, while maintaining a favorable liquidity position and proper
asset/liability mix. With this strategy in mind, management evaluated potential
capital-raising alternatives such as trust preferred securities, issuance of
common stock, and other sources. Management determined that issuing trust
preferred securities would be in the best interest of the Company and on June
27, 2002, the Trust issued $15.0 million of trust preferred securities. Trust
preferred securities are held as debt for tax purposes, while the proceeds of
the offering count as Tier I capital without increasing the shareholder base,
and therefore not diluting earnings per share.
Deposits. Total deposits increased 4.9%, to $485.6 million, at March 31, 2003
from $463.0 million at December 31, 2002. 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.
The Company's deposits are expected to fluctuate according to the level of the
Company's deposit market share, economic conditions and normal seasonal
variations, among other things. Certificates of deposit are the only deposit
group that has stated maturity dates. At March 31, 2003, the Company had $197.5
million in CDs of which approximately $130.8 million, or 66.2%, are scheduled to
mature within one year. Declining interest rate markets and uncertain economic
conditions may cause some customers to choose to move funds into core deposit
accounts or withdraw funds, rather than renew CDs as they mature. That
16
notwithstanding, management anticipates that a substantial portion of
outstanding CDs will renew upon maturity.
Borrowings. At March 31, 2003 the Company had a line of credit with the FHLB of
$83.7 million, of which $15.0 million was advanced in long-term borrowings. The
Company also had unused lines of credit with correspondent banks in the amount
of $14.0 million at March 31, 2003.
Investments. The Company's total portfolio of investment securities decreased
6.8% to $22.5 million at March 31, 2003 from $24.2 million at December 31, 2002.
The investment portfolio consists of government agency securities, pass-through
securities, collateralized mortgaged obligations ("CMO"), municipal securities,
preferred stock and corporate obligations. No investment exceeds 10% of the
shareholders' equity. The following table summarizes the amortized cost and
recorded and market values of securities in the Company's portfolio by
contractual maturity groups:
March 31, 2003
--------------------------------------------------------
(Dollars in thousands) Amortized cost Market value Recorded value
----------------- ----------------- -----------------
Amounts maturing:
Within one year $ 3,665 $ 3,726 $ 3,685
One to five years 12,092 12,707 12,122
Six to ten years 5,698 6,087 5,716
Over ten years 998 1,009 1,001
----------------- ----------------- -----------------
Total $ 22,453 $ 23,529 $ 22,524
================= ================= =================
At March 31, 2003, the Company's investment portfolio consisted of $14.9
million, or 66.36% in held-to-maturity investments at carrying value, as
compared to $15.1 million, or 62.35%, at December 31, 2002, and $7.6 million, or
33.64%, in available-for-sale securities at carrying value, as compared to $9.1
million, or 37.65%, at December 31, 2002. For liquidity purposes, the Company's
future security purchases will primarily be designated as available-for-sale and
will increase as a percent of total investment securities at carrying value.
Capital and Capital Ratios
The Company's shareholders' equity increased to $40.7 million at March 31, 2003
from $39.4 million at December 31, 2002. This increase is due to net income of
$1.2 million, proceeds from stock options exercised in the amount of $311,000,
stock option compensation of $6,000, and an increase in unrealized gain on
available-for-sale securities, net of tax of $3,000, offset by the payment of
cash dividends of $325,000 during the first three months of 2003. Total assets
increased to $559.2 million at March 31, 2003 from $535.4 million at December
31, 2002, an increase of 4.4%. Shareholders' equity to total assets was 7.3% at
March 31, 2003 compared to 7.4% at December 31, 2002.
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.
17
The FDIC established the qualifications necessary to be classified as a
"well-capitalized" bank, primarily for assignment of FDIC insurance premium
rates. As the following table indicates, the Company (on a consolidated basis)
and the Bank qualified as "well capitalized" at March 31, 2003 and December 31,
2002:
FDIC Requirements Actual Ratios
------------------------------------------ --------------------------------
Adequately- Well- March 31, December 31,
capitalized capitalized 2003 2002
------------- ------------------- --------- -----------------
Total risk-based capital ratio
Consolidated 8% 10% 12.54% 12.80%
Whidbey Island Bank 8% 10% 12.31% 12.61%
Tier 1 risk-based capital ratio
Consolidated 4% 6% 11.05% 11.22%
Whidbey Island Bank 4% 6% 11.11% 11.43%
Leverage ratio
Consolidated 4% 5% 10.16% 9.89%
Whidbey Island Bank 4% 5% 10.22% 10.07%
There can be no assurance that additional capital will not be required in the
near future due to greater-than-expected growth, unforeseen expenses or revenue
shortfalls, or otherwise.
Capital Expenditures and Commitments
The Company had no material capital expenditures or commitments for the quarter
ended March 31, 2003.
Significant Accounting Policies
See "Notes to Condensed Consolidated Financial Statements."
2003 Anticipated Financial Performance
In March 2003, the Company announced targets for 2003 including 10% to 15%
earnings growth, 10% to 15% loan growth, 5% to 10% deposit growth. Long-term
targets include ROE in excess of 18%, an efficiency ratio in the mid-50% range,
earnings per share growth rate of at least 10% annually and cash dividend per
share increases of 8% per year. The Company believes that these goals can be
attained through continuing its basic banking strategy of building core deposits
and building a conservative loan portfolio.
Future events are difficult to predict, and the expectations of management are
necessarily subject to uncertainty and risk that may cause actual results to
differ materially from those stated here. One of the areas subject to
uncertainty is economic stability. Although there are concerns regarding a
slowdown in the economy, management expects growth to continue in the
northwestern Washington region and believes that the Company will have
opportunities to participate in that growth. These opportunities will be pursued
while applying rigorous credit discipline and thorough analysis to ensure
quality growth.
Management expects the net interest margin will be squeezed and anticipates some
fluctuation during 2003 as deposit repricing slows. Total loans are expected to
increase in volume and rates are expected to decrease slightly during the year
due to increased competition. However, the above performance goals anticipate
the Company's overall loan and deposit interest rates to have minimal change
throughout 2003. Should rates increase, the Company could be negatively impacted
due to its current slightly liability sensitive position. Other unexpected
18
changes, such as significant declines in the economy or substantial credit
deterioration, could further reduce the anticipated performance of the Company.
Management expects earnings in the first two quarters of 2003 to be negatively
impacted in the range of approximately $300,000 due to start up costs of WFG.
However, management expects WFG to be profitable by year-end 2003.
Readers should not construe these goals as assurances of future performance, and
should note that management does not plan to update these projections as the
year progresses.
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 March 31, 2003, 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, 2002. For additional
information, refer to the Company's Form 10-K for year ended December 31, 2002
filed with the SEC on March 20, 2003.
Item 4. Controls and Procedures
Within 90 days prior to the date of this report, management evaluated the
effectiveness of the design and operation of its disclosure controls and
procedures. The principal executive and financial officers supervised and
participated in this evaluation. Based on this evaluation, the chief executive
and financial officer each concluded that the Company's disclosure controls and
procedures are effective in timely alerting them to material information
required to be included in the periodic reports to the SEC. The design of any
system of controls is based in part upon various assumptions about the
likelihood of future events, and there can be no assurance that any of the
Company's plans, products, services or procedures will succeed in achieving
their intended goals under future conditions. In addition, there have been no
significant changes in the internal controls or in other factors known to
management that could significantly affect the internal controls subsequent to
the most recent evaluation. Management found no facts that would require WBCO to
take any corrective actions with regard to significant deficiencies or material
weaknesses.
PART II
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
99.1 Section 906 Certification of Chief Executive Officer
99.2 Section 906 Certification of Chief Financial Officer
(b) Reports on Form 8-K
None.
19
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: May 12, 2003 By /s/ Michal D. Cann
-------------------
Michal D. Cann
President and
Chief Executive Officer
Date: May 12, 2003 By /s/ Phyllis A. Hawkins
----------------------
Phyllis A. Hawkins
Senior Vice President and
Chief Financial Officer
20
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Michal D. Cann, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Washington Banking
Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures, or caused such
disclosure and controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this report (the "Evaluation Date"); and
c) Presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 12, 2003 By /s/ Michal D. Cann
-------------------
Michal D. Cann
President and
Chief Executive Officer
21
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Phyllis A. Hawkins, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Washington Banking
Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures, or caused such
disclosure and controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this report (the "Evaluation Date"); and
c) Presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 12, 2003 By /s/ Phyllis A. Hawkins
----------------------
Phyllis A. Hawkins
Senior Vice President and
Chief Financial Officer
22