Washington Banking Company Earnings Increase Over 400% to $4.2 Million, or $0.27 Per Share in 2Q10; Operating Profits Increase More Than 323% to $3.5 Million Before Strong Gain on Acquisition

OAK HARBOR, Wash., July 27, 2010 (GLOBE NEWSWIRE) -- Washington Banking Company (Nasdaq:WBCO), the holding company for Whidbey Island Bank, today reported that its core banking business generated strong operating profits in the second quarter of 2010 augmented by the FDIC-assisted acquisition of City Bank of Lynnwood, which was immediately accretive to earnings. Before preferred dividends, net income increased 130% to $4.6 million, compared to $2.0 million in the preceding quarter and up 272% from $1.2 million for the second quarter a year ago. Net income available to common shareholders totaled $4.2 million, or $0.27 per diluted share in the second quarter, compared to $1.6 million, or $0.10 per diluted common share, in the preceding quarter, and $818,000, or $0.09 per diluted common share, in the second quarter a year ago, when there were fewer shares outstanding.

Year-to-date, Washington Banking earned $6.6 million, compared to $2.8 million for the same period last year. For the first six months of 2010, net income available to common shareholders, after preferred dividend payments increased 183% to $5.7 million, or $0.37 per diluted common share, compared to $2.0 million, or $0.21 per diluted common share, for the first six months of 2009.

"Our FDIC-assisted acquisition of City Bank of Lynnwood, which closed on April 16, is contributing to profitability as planned," said Jack Wagner, President and Chief Executive Officer. "More importantly our core franchise continues to generate strong revenues, solid profits and asset quality that remains amongst the best in the region. With all the noise in the current quarter statements, primarily as a result of the acquisition, we have included certain non-GAAP presentations that illustrate the earnings power of our franchise, which we hope will be useful to investors."

The core operating earnings, which exclude merger related costs and the bargain purchase gain on the FDIC-assisted transaction, increased substantially to $3.5 million, or $0.22 per diluted share, in the second quarter, up from $1.6 million, or $0.10 per diluted share, in the first quarter and $818,000, or $0.09 per diluted share in the second quarter a year ago.  Year-to-date, core operations generated profits of $5.0 million, or $0.32 per diluted share, up 148% from $2.0 million, or $0.21 per diluted share in the first half of 2009. Please refer to the GAAP reconciliation table in this release.

Second Quarter 2010 Financial Highlights (June 30, 2010 compared to June 30, 2009)

• Capital ratios exceed all regulatory requirements for well-capitalized institutions, with Total Risk Based Capital to risk-adjusted assets of 20.17% compared to 16.24%. To be considered well-capitalized, a bank must have over 10% Total Risk-based Capital.
• Tangible book value per common share increased to $8.98 compared to $8.71.
• Deposits, excluding those acquired, increased 8% year over year to $847 million. Deposits totaled $1.4 billion including the $537 million of acquired deposits.
• Low cost demand, money market, savings and NOW accounts totaled $683.6 million and account for almost half of total deposits.
• Loans, excluding acquired assets, were $832 million, up $11.5 million from a year ago.
• Asset quality continues to be strong, with the nonperforming assets (NPAs) at 0.66% of total assets and nonperforming loans (NPLs) at 0.67% of total loans at the end of the quarter.
• The provision for loan losses was $2.6 million in the second quarter, an increase from the linked quarter and down from the $3.0 million provision of a year ago.
• Loan loss reserves increased to 2.04% of loans, and 304% of NPLs, up from 1.80% of loans and 198% of NPLs a year ago.
• A cash dividend of $0.03 per share will be paid August 18 to shareholders of record August 3.

Acquisition Update

Whidbey Island Bank acquired the eight branch locations and approximately 60% of the assets and all non-brokered deposits of City Bank, located in Lynnwood, Washington, on April 16, 2010, through a purchase and assumption agreement with the Federal Deposit Insurance Corporation (FDIC). Following the acquisition, the company filed a Form 8K outlining the details of the transaction and the fair value accounting adjustments for the transaction. "We encourage investors to carefully review the detailed disclosure for this transaction in our 8-K which can be accessed at the link here, or by looking at the SEC Filings tab of our Investor Relations section on our website at www.wibank.com," said Rick Shields, Chief Financial Officer. http://www.sec.gov/Archives/edgar/data/1058690/000095012310063532/v56252e8vkza.htm

After the fair value adjustments, the acquisition brought $323.8 million in loans which are covered by an 80/20 loss sharing agreement with the FDIC.  The covered loans are shown as a separate line item of the balance sheet and are not included in the net loans totals. Covered loans are also not included in any of the reported credit quality metrics, as they are accounted for separately per generally accepted accounting principles (GAAP) requirements. In addition, the company booked an $84.1 million FDIC indemnification asset. Both indemnification asset and the covered loan portfolio will decline over time, as the loans mature or are otherwise resolved.

Total deposits that were recorded on the acquisition balance sheet at April 16, 2010, were $650.1 million. "We adjusted rates on deposit accounts to reflect current yields being paid at our other Whidbey branches," noted Wagner. "As a result, we saw $113.4 million in deposits run off, of which $108.8 million were time deposits. Customers who chose not to accept the new rates on time deposits did not incur any prepayment penalties.  The employees at our newly acquired branches have done an excellent job of maintaining customer relationships, and we believe the long-term retention rate of the local customer relationships will remain high."

The FDIC provided a 90 day right to purchase or assume the leases of the City Bank properties. On July 14^th Washington Banking exercised their option and acquired the facilities and furnishings of the eight branch locations. "We are in the process of making improvements to these properties with fresh paint, new landscaping, and installing Whidbey signage and flag poles on our newly acquired branches," Wagner noted.

City Bank had 158 employees in April, and approximately 110 of these banking professionals were offered positions with Whidbey Island Bank, which included most branch personnel and most of the operations staff. Employees who were not offered employment were primarily out-of-market real estate lending staff and senior management of the former organization. "In addition to the group of employees from City Bank, we have been fortunate in our ability to attract talented banking professionals for various positions within the bank," said Wagner. "The blending of these backgrounds and skills with the influence of our 'longer-term' employees has provided an atmosphere of high morale and positive teamwork. I am extremely pleased with the progress of integration and we expect system conversions to be completed later this quarter."

Conference Call Information

Management will host a conference call on Wednesday, July 28 at 10:00 a.m. PDT (1:00 p.m. EDT) to discuss the quarterly and year-to-date financial results. The 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) 629-9722 at 10:00 a.m. PDT for conference ID #4314804. 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. Shortly after the call concludes, the replay will also be available at (303) 590-3030, using access code #4314804, where it will be archived for ninety days.

Credit Quality

NPLs increased in the quarter by $1.9 million to $5.6 million, or 0.67% of loans, which brought NPAs to $10.6 million, or 0.66% of total assets at June 30, 2010. Other real estate owned (OREO) totaled $5.0 million, unchanged from the end of March and up from $2.6 million a year ago.

"Despite a small increase in NPAs, our loan portfolio continues to perform better than our peer group of banks around the country," said Joe Niemer, Chief Credit Officer. "We have cautioned, and will continue to caution, that our credit metrics could decline unless we see some improvement in our regional economic numbers. We continued to build reserves in the second quarter, which reflects both the growth in the loan portfolio and continuing caution on the economic outlook. Our provision for loan losses of $2.6 million exceeded net charge-offs of $2.0 million.  The reserve for loan losses increased to 2.04% of total loans and was 304% of nonperforming loans at the end of June."

Net charge-offs in the second quarter were $2.0 million, a slight increase from the preceding quarter at $1.9 million, or 99 basis points of average loans on an annualized basis, compared to $1.6 million, or 75 basis points of average loans for the second quarter a year ago.  Net charge-offs in the indirect lending portfolio were $224,000 in the second quarter, compared to $188,000 in the preceding quarter, and down from $228,000 in the second quarter a year ago.

Covered loans and OREO declined to $302.7 million at June 30, 2010, from $329.6 million at April 16, 2010 and the FDIC indemnification asset increased to $84.9 million at June 30, 2010, from $84.1 million at April 16, 2010.  Covered OREO increased to $14.2 million from $5.8 million.

Balance Sheet

Total assets increased 71% to $1.6 billion at June 30, 2010, compared to $934.7 million a year ago. Total loans increased slightly to $832 million from $821 million at the end of both the first quarter of 2010 and the second quarter 2009. The portfolio is well diversified with commercial and industrial loans making up 17% of total loans and residential mortgages accounting for 6% of the portfolio. Owner-occupied commercial real estate loans represent approximately 22% of the portfolio and non-owner occupied commercial real estate account for approximately 20% of loans. Indirect consumer loans account for 11% of the portfolio and other consumer loans account for 11%. Construction and land development loans for residential properties represent 8% of loans and commercial construction and land development loans represent 5% of the portfolio.

Total deposits grew 64% in the quarter and increased 76% year-over-year to $1.4 billion at June 30, 2010, compared to $846 million at the end of March and $788 million a year ago. As a result of the acquisition, noninterest-bearing demand deposits increased 40% year-over-year, now representing 10% of total deposits.  Year-over-year, money market accounts increased 112% and now comprise 22% of total deposits; time deposits increased 93% in the quarter to $700 million and accounted for 51% of total deposits.  Core deposits, excluding brokered CDs and time deposits over $100,000 represent 79% of all deposits, up from 76% a year ago. "Outside of the CDARS (Certificate of Deposit Account Registry Service) program, which provides additional sources of insurance for local customers, we have no deposits from brokered sources," said Shields.  "Because we only take CDARS from customers in our existing footprint, we consider them as part of our core deposit base."

Shareholders' equity increased 54% to $166 million compared to $108 million a year ago. The increase in shareholders' equity is primarily due to the $49.0 million secondary common stock offering completed in November 2009. Included in shareholders' equity is the $25.2 million from the preferred shares issued to the U.S. Treasury in January of 2009. As a result of the equity offering in November 2009, one half of the warrants issued with the preferred shares were cancelled. Retained earnings increased 18% to $56.1 million, bringing tangible book value per common share to $8.98 at June 30, 2010, compared to $8.71 a year ago.

Operating Results

Revenue for the second quarter of 2010 was $21.3 million, compared to $12.9 million in the preceding quarter and $12.0 million a year ago. Net interest income, before the provision for loan losses, increased 46% to $16.0 million in the second quarter compared to $11.0 million in the linked quarter and grew 63% from $9.8 million in the second quarter a year ago. Interest income from covered loans contributed $4.9 million to 2010 second quarter revenues.

Noninterest income totaled $5.1 million in the second quarter, which included $1.8 million in the bargain purchase gain on acquisition and $785,000 in the change in FDIC indemnification assets.

Washington Banking's net interest margin was 4.39% in the second quarter, a decrease of 27 basis points from the preceding quarter, and down 18 basis points from the year ago quarter. Higher levels of cash and short term securities reduced the margin in the quarter.

Second quarter noninterest expense increased 53% in the quarter and 66% year-over-year primarily due to additional expenses related to the City Bank acquisition. Costs associated with OREO management increased in the second quarter to $465,000 from $193,000 in the prior quarter and $354,000 a year ago. Operating expenses were $11.9 million in the second quarter compared to $7.8 million in the preceding quarter and $7.2 million in the second quarter of 2009.

The efficiency ratio during the second quarter of 2010 was 55.87% compared to 60.12% reported in the linked quarter, and 59.72% in the second quarter a year ago.

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.  Whidbey Island Bank operates 26 full-service branches located in six counties in Northwestern Washington. In June 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.

www.wibank.com

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 available to common shareholders to operating earnings (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 their 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 and 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:

This news release may contain 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 the transition of City Bank operations, employees and customers,  future operating results, BOLI contributions to revenue, availability of acquisition opportunities, growth in loans and deposits, credit quality and loan losses, and continued success of the Company's business plan. Readers should not place undue reliance on forward-looking statements, which reflect management's views only as of the date hereof. The words "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 inability to retain City Bank customers or employees and expenses associated with the integration of acquired City Bank operations. 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.