Washington Banking Co. announced yesterday that it plans to close Washington Funding Group — a subsidiary created last year to underwrite and fund loans originated by mortgage brokers.

Washington Funding operates in Idaho, Oregon and Washington.

The company sells loans it funded on the secondary market. The parent’s CEO noted in the announcement that while Washington Funding helped the holding company increase its gain on sale of loans, it “has continued to negatively impact earnings in spite of efforts to improve its performance.”

Loans currently in process will be transferred to one of the bank’s Washington offices, according to the announcement.

“A wholesale lending operation is an excellent way to benefit from real estate lending activity outside the bank’s current geographic market area,” a company executive said in a statement when the wholesaler was formed. “We can operate with a much smaller staff than a retail mortgage lending operation, and this low-overhead approach should allow us to prosper, even when the market slows.”

The executive went on to say that they expected the unit to be profitable in 2003.

Timing may have contributed to the company’s demise. When Washington Funding opened in March 2003, the residential mortgage market was in the midst of the biggest refinance wave in U.S. history. However, the market peaked three months later, and mortgage applications and fundings have fallen off significantly since.

Costs associated with the closure will hit earnings in the second quarter, the announcement said.

In its first quarter earnings report, Washington Banking held a loan portfolio of $531 million, of which $45.6 million was 1-4 unit residential mortgages. The company, founded in 1961, reports that it has 17 full-service banking branches.

The effective closing date of Washington Funding is June 30, the company said.