Washington Banking Company 2012 Profits Increase 13% to $16.8 Million; Fueled by Solid Loan Growth and Improving Asset Quality

OAK HARBOR, Wash., Jan. 31, 2013 (GLOBE NEWSWIRE) -- Washington Banking Company (Nasdaq:WBCO), the holding company for Whidbey Island Bank, today reported 2012 earnings increased13% to $16.8 million, or $1.09 per diluted share, compared to $14.9 million, or $0.97 per diluted share in 2011, which included $1.1 million for its final preferred dividend payment. Accelerating loan growth, strong mortgage banking income, and improving credit quality contributed to 2012 profitability. For the fourth quarter of 2012, Washington Banking's net income was $4.6 million, or $0.30 per diluted share, nearly even with the preceding quarter and up 8% compared to $4.2 million, or $0.28 per diluted share, in the fourth quarter of 2011.

"Profits continue to grow as loan demand from both commercial and residential borrowers is coming back," said Jack Wagner, President and Chief Executive Officer. "Our fourth quarter loan production was one of the best periods we have seen for a number of years, with the loan portfolio growing 3.5% in the quarter and 5% year-over-year. Mortgage banking revenues more than doubled in 2012, reflecting historically low interest rates and accelerating new home sales."

"Our new Woodinville branch opened on schedule in December and the early response is encouraging," said Bryan McDonald, Whidbey Island Bank's President and CEO. "Located in the northeast quadrant of King County, this location serves the technology corridor, aviation suppliers and a large number of professional service businesses to support the growing population. The demographics of this market are a natural fit for Whidbey Island Bank's style and we are eager to develop relationships with new clientele."

2012 Financial Highlights (as of, or for the periods ended December 31, 2012)

• Return on average assets was 1.01% and return on average common equity was 9.56% in 2012.
• On a consolidated basis, Total Risk-Based Capital to risk-adjusted assets was 19.39% compared to 19.73% in 2011. 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 1.10%, compared to 1.29% in the preceding quarter and 1.44% a year ago. Classified loans declined to $77.3 million at December 31, 2012, from $78.2 million at September 30, 2012.
• The $2.2 million provision for covered loan losses in the fourth quarter was more than offset by the reduction in expenses for the change in the FDIC indemnification asset. While the cash flows associated with several acquired hospitality loans have deteriorated, the Bank remains fully covered by the FDIC loss-share agreement for these assets.
• Tangible book value per common share increased to $11.41, compared to $10.67 a year ago.
• Low-cost demand, money market, savings and NOW accounts were $1.02 billion, or 69% of total deposits.
• Loan loss reserves were 2.01% of non-covered loans, and 2.22% a year ago.
• The interest income generated from the loan portfolios in the FDIC-assisted acquisitions contributed $8.2 million to fourth quarter revenues, and $36.4 million to full year revenues.
• Net interest margin (NIM) expanded 7 basis points to 5.54% in 2012 from 5.47% in 2011. In the fourth quarter, NIM fell 25 basis points to 5.23% compared to 5.48% in the preceding quarter, and fell 40 basis points from 5.63% in the year ago quarter, reflecting the anticipated reduction in higher yielding loans from the FDIC acquisitions made in 2010.

Regional and Acquisitions Update

"The regional economy is finally showing some sustainable signs of life," said Wagner. "During 2012, area employment grew at twice the national pace and in response to the new job opportunities, population growth and new households accelerated." "Our market area continues to improve, particularly in King and Snohomish counties," stated Rick Shields, Chief Financial Officer. "Our franchise is growing again, in terms of both loans and deposits and we continue to benefit from the two FDIC assisted acquisitions we made in 2010.

"Due to some stress in the covered hospitality portfolio, we booked a $2.2 million provision for covered loans in the fourth quarter, which is the largest such provision we have taken since the acquisitions," Shields explained. "This provision, however, was offset by a significantly lower change in the FDIC Indemnification Asset line included in noninterest income, which was a cost of $228,000 in the fourth quarter compared to $2.8 million in the third quarter and $3.6 million in the fourth quarter a year ago. For the full year, the provision for covered loan losses was $2.6 million, compared to a benefit of $450,000 in 2011. The change in the FDIC indemnification asset in 2012 totaled $9.1 million compared to $9.2 million a year ago."

The FDIC indemnification asset carried on the balance sheet declined 23% in the quarter to $34.6 million, and is down 72% from its peak of $124.7 million in the third quarter of 2010. In addition, the clawback adjustment in 2012 was $1.7 million of which $1.1 million was recorded in the second quarter of 2012, compared to $1.6 million in 2011.

Covered loans, which are loans that are subject to a loss-share arrangement as a result of the two FDIC-assisted acquisitions, are shown as a separate line item on 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 8% for the quarter, 20% year-over-year and 54% since acquired.

Credit Quality

"Overall asset quality improved during the fourth quarter and for the year as well," said Dan Kuenzi, Chief Credit Officer. "Residential construction projects continue to make up the majority of nonperforming loans, particularly in the smaller markets we serve."

Nonperforming, non-covered loans (NPLs) decreased during the fourth quarter to $15.6 million from $17.6 million in the third quarter and from $22.1million 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 improved to 1.82% at 2012 year-end from 2.14% at the end of the third quarter and 2.72% a year ago. Nonperforming, non-covered assets (NPA)/total assets improved to 1.10% compared to 1.29% in the preceding quarter and 1.44% a year ago. Non-covered other real estate owned (OREO) was $3.0 million, compared to $4.1 million in the preceding quarter and $2.0 million a year ago. Distribution of nonperforming, non-covered assets is shown in the following table:

The provision for non-covered loan losses was $1.5 million in the fourth quarter, compared to $1.3 million in the third quarter of 2012 and $2.0 million in the fourth quarter a year ago. The allowance for non-covered loan losses totaled $17.1 million, or 2.01% of non-covered loans. Total net charge-offs in the fourth quarter were $923,000, or 0.44% of average total loans on an annualized basis, compared to $2.2 million, or 1.09% of average loans in the preceding quarter and $2.9 million, or 1.41% of average loans, in the fourth quarter a year ago. For the full year, net charge-offs totaled $8.0 million or 0.97% of average loans compared to $11.3 million, or 1.37% of average loans a year ago.

Balance Sheet

Total assets were $1.69 billion at December 31, 2012, up slightly from $1.68 billion in the preceding quarter and $1.67 billion a year ago. Total non-covered loans increased 3.5% to $853.1 million compared to $824.6 million at September 30, 2012, and were up 5% from $812.8 million at December 31, 2011. "Our commercial lending division continues to establish and maintain strong relationships with business owners in our communities," said McDonald. "Commercial teams closed $27.1 million in new loans and renewed $34.8 million in commitments in the fourth quarter, bringing total new and renewed commercial group production to $451.2 million, up 15% for the year."

The non-covered loan portfolio is well diversified with commercial and industrial loans making up 19% and residential mortgages accounting for 4% 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 24% of loans. Indirect consumer loans account for 9% 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.

As resolution of the covered portfolio progresses, net covered loans totaled $214.1 million and covered OREO totaled $13.5 million at December 31, 2012, compared to $231.5 million and $44.7 million, respectively, three months earlier.

The mix of total deposits continued to improve while the level of total deposits was relatively stable at $1.46 billion at December 31, 2012. Noninterest-bearing demand deposits increased 3% in the quarter and 19% year-over-year, representing 18% of total deposits. Year-over-year, money market accounts were down 10% at $295.4 million, comprising 20% of total deposits; time deposits declined 18% to $447.9 million and accounted for 31% of total deposits. Core deposits, excluding time deposits over $100,000, represented 87% of all deposits.

Shareholders' equity increased 1% in the quarter and 7% year-over-year, due to the strong earnings generated during the past twelve months. Tangible shareholder equity totaled $176.6 million, or $11.41 per share at December 31, 2012, compared to $10.67 a year ago. 

Operating Results

In the fourth quarter of 2012, net interest income decreased 3% to $19.9 million from the linked quarter of $20.6 million, and declined 5% from $20.9 million a year ago. In the full year of 2012, net interest income increased 4% to $82.6 million from $79.7 million in 2011.

"After you work through the complexities of the FDIC assisted accounting items on the income statement, the major driver of noninterest income was gain from the sale of mortgage loans, which contributed $1.2 million to fourth quarter revenues and $3.8 million to 2012 revenues," said Shields. "As discussed above, the increase in the provision for covered loan losses resulted in a substantially reduced change in the FDIC indemnification asset in the fourth quarter of 2012. Consequently, fourth quarter noninterest income was $4.6 million compared to $1.4 million in the previous quarter and also in the year ago quarter. Collections on the covered asset portfolio generated $567,000 in gains on disposition of those assets, compared to $125,000 in the linked quarter and $2.2 million in the fourth quarter a year ago. For the full year in 2012, noninterest income was $8.2 million compared to $9.2 million in 2011, with higher income from sale of loans and gains on sale of investment securities helping to offset lower gains on disposition of covered assets."

Gains on sale of investment securities contributed $244,000 in the fourth quarter and $345,000 in the third quarter of 2012 and no gains in the fourth quarter of 2011. For the year 2012, gain on sale of investment securities contributed $931,000 compared to no gains in 2011. 

Washington Banking's net interest margin decreased 25 basis points from the preceding quarter to 5.23% from 5.48% and fell 40 basis points from 5.63% in the year ago quarter. In 2012, net interest margin improved 7 basis points to 5.54% compared to 5.47% in 2011. "With the balance of acquired loans declining, and the above average yields on those loans being replaced with loans carrying current market rates, our net interest margin will continue to fall in 2013," Shields noted.

Operating expense was relatively flat during 2012 at $56.4 million and $14.0 million in the fourth quarter, reflecting higher compensation expenses throughout the year offset by lower consulting fees and lower FDIC premiums. 

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, February 1, 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. PT for conference ID #4588072. 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 31 full-service branches located in six counties in Northwestern Washington.  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. 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, net interest margin, benefits from prior FDIC-assisted acquisitions 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

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:

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: