EMPLOYMENT AGREEMENT

        THIS AGREEMENT (the “Agreement”) is made and entered into this 6th day
of May, 2005 (the “Effective Date”), by and between the WASHINGTON BANKING
COMPANY and WHIDBEY ISLAND BANK (together, “the Employer”) with its principal
office in Oak Harbor, Washington, and MICHAL CANN (the “Executive”).

        In consideration of the mutual promises made in this Agreement, the
parties agree as follows:

      1.      Employment.

        Employer employs Executive and Executive accepts employment with
Employer as its President and Chief Executive Officer.

      2.      Term.

        The term of this Agreement (the “Term”) shall commence on the Effective
Date and shall continue through May 6, 2008; provided, however, that on May 7,
2008 and each succeeding May 7, the Term shall automatically be extended for one
additional year unless, not later than ninety (90) days prior to any such May 7,
either party shall have given written notice to the other that it does not wish
to extend the Term. In the event the Term is not extended, Executive shall have
no rights to any of the severance payments or benefits continuation except as
described in Section 5(a).

      3.      Duties.

        Executive will serve as Employer’s President and Chief Executive
Officer. Executive shall render such executive, management and administrative
services and perform such tasks in connection with the affairs and overall
operation of the Employer as is customary for his position, subject to the
direction of Employer’s Board of Directors. Executive shall devote necessary
time, attention and effort to Employer’s business in order to properly discharge
his responsibilities under this Agreement. Executive is permitted to engage in
activities outside the scope of his duties, provided they do not conflict with
the interests of the Employer, and do not unreasonably infringe on his otherwise
full-time dedication to the Employer’s business.

      4.      Compensation, Benefits, Reimbursement and Bonus.

          a.               In consideration for all services rendered by
Executive during the term of this Agreement, Employer shall pay Executive an
annual base salary (before all customary and proper payroll deductions) of
$239,000.00, as adjusted from time to time (“Base Salary”). The Board of
Directors of the Employer shall review Executive’s salary at the end of each
year, in a manner consistent with that used for all management employees of the
Employer, and in its sole discretion may adjust such salary commensurate with
the Executive’s performance under this Agreement.

          b.        Under the Employer’s Annual Incentive Plan, Executive shall
be eligible to receive an annual bonus based on performance as defined by the
Board of Directors, in accordance with the Employer’s incentive plan.

          c.        Executive shall be eligible for restricted stock and stock
option grants under the Employer’s Stock Option Plan. The timing and size of
awards will be at the discretion of the Board of Directors.

          d.        Executive may also participate in the Employer’s Deferred
Compensation Plan.

          e.        Throughout the term of this Agreement, Employer shall
provide Executive with a vehicle, reasonable health insurance, disability and
other employee benefits. Executive shall participate in all employee benefit
plans and programs of Employer available to its executives and key management
employees, subject to and on a basis consistent with the terms, conditions, and
overall administration of such plans and programs. Employer shall reimburse
Executive for his reasonable expenses (including, without limitation, travel,
entertainment, and similar expenses) incurred in performing and promoting the
business of Employer. Executive shall present itemized accounts of any such
expenses as required by Company policy and the rules and regulations of the
Internal Revenue Service

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      5.      Termination of Agreement.

          a.       Termination Due to a Change of Control. If Employer is
subjected to a Change of Control (as defined in Section 5(g)(i)), and either
Employer or its assigns terminates Executive’s employment without Cause or
Executive terminates his employment for Good Reason within two (2) years of such
Change of Control, then Employer shall pay Executive upon the effective date of
such termination all Base Salary earned and all reimbursable expenses incurred
under this Agreement through such termination date.

          (i)        In addition, Employer shall pay Executive an amount equal
to two (2) times Executive’s highest Base Salary over the prior three (3) years,
plus an amount equal to two (2) times the annual bonus last paid hereunder or
two (2) times the average bonus paid over the prior three (3) years, whichever
is greater (“Severance Benefit”). Provided, also, that the payment and benefits
described in this Section 5(a) will only be paid conditioned upon Executive
signing an agreement, in a form acceptable to Employer, that releases and holds
Employer harmless from all known and unknown claims and liabilities arising out
of Executive’s employment with Employer or the performance of this Agreement
(“Release Agreement”). The Employer’s obligation to pay the Severance Benefit
under this section continues for up to two (2) years after the Agreement
terminates provided that the Change of Control (as defined in Section 5(g)(i))
occurs during the Term of the Agreement, and the Executive is terminated without
Cause or terminates his employment for Good Reason within two (2) years of such
Change of Control. The provisions of this paragraph will survive termination of
the Agreement.

          (ii)        Executive shall also be entitled to Severance Benefit if
Employer terminates Agreement without Cause prior to a Change of Control if such
termination occurs at any time from and after ninety days prior to the public
announcement by the Employer or any other party of a transaction which will
result in a Change of Control; provided that the effective date of the Change of
Control occurs within eighteen (18) months of Executive’s termination.

          (iii)        Payment of the Severance Benefit under this section is
subject to and conditioned on compliance with subsection 5(b).

          b.       Commitment of Executive. In the event that any person extends
any proposal or offer which is intended or may result in a Change of Control,
Executive shall, at the Employer’s request, assist the Company in evaluating
such proposal or offer. Further, subject to the additional terms and conditions
of this Agreement, in order to receive the Severance Benefit, Executive cannot
resign from the Company during any period from the receipt of a specific Change
of Control proposal through the consummation or abandonment of the transaction
contemplated by such proposal.

          c.       Termination by Employer Without Cause or by Executive for
Good Reason. If Employer terminates Executive’s employment without Cause, or if
Executive terminates his employment for Good Reason, Employer shall pay
Executive upon the effective date of such termination all Base Salary earned and
all reimbursable expenses incurred under this Agreement through such termination
date. In addition, Employer shall pay Executive an amount equal to two (2) times
Executive’s highest Base Salary over the prior three (3) years, plus an amount
equal to two (2) times the annual bonus last paid hereunder or two (2) times the
average bonus paid over the prior three (3) years, whichever is greater.
Provided, however, that the payment and benefits described in this section will
only be made conditioned upon Executive signing a Release Agreement.

          (i)       Benefits Continuation. In addition, the Executive shall be
entitled to health and dental insurance benefits for a period of eighteen (18)
months following the termination of this Agreement. These benefits will be
provided at Employer’s expense, but such period shall count towards the
Employer’s continuation of coverage obligation under Section 4980B of the
Internal Revenue Code (“COBRA”). The foregoing notwithstanding, in the event
that the Executive becomes eligible for comparable group insurance coverage in
connection with new employment, the coverage provided by the Company under this
Section shall terminate immediately.

          d.       Termination by Employer for Cause or by Executive Without
Good Reason. If Employer terminates Executive’s employment for Cause or if
Executive terminates his employment without Good Reason, Employer shall pay
Executive upon the effective date of such termination only such Base Salary
earned and expenses reimbursable under this Agreement incurred through such
termination date. In such case, Executive shall have no right to receive
compensation or other benefits for any period after termination under this
Agreement.

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          e.       Termination Due to Disability or Upon Death. If Employer
terminates Executive’s employment on account of any mental or physical
Disability that prevents Executive from discharging his duties under this
Agreement, Executive shall be entitled to all Base Salary earned and
reimbursement for expenses incurred under this Agreement through the termination
date, plus a pro rata portion of any annual bonus for the year of termination.
Executive’s employment under this Agreement shall be terminated upon the death
of Executive. In such case, the Employer shall be obligated to pay to the
surviving spouse of Executive, or if there is none, to the Executive’s estate:
(A) that portion of Executive’s Base Salary that would otherwise have been paid
to him for the month in which his death occurred, and (B) any amounts due him
pursuant to the Employer’s pension plan, any supplemental deferred compensation
plan, and any other death, insurance, employee benefit plan or stock benefit
plan provided to Executive by the Employer.

          g.       Termination Definitions.

          (i)       “Change of Control.” For purposes of this Agreement, the
term “Change of Control” shall mean the occurrence of one or more of the
following events: (A) One person or entity acquiring or otherwise becoming the
owner of twenty-five percent or more of Employer’s outstanding common stock;
(B) Replacement of a majority of the incumbent directors of Washington Banking
Company or Whidbey Island Bank by directors whose elections have not been
supported by a majority of the Board of either company, as appropriate;
(C) Dissolution or sale of fifty percent or more in value of the assets, of
either Washington Banking Company or Whidbey Island Bank; or (D) A change “in
the ownership or effective control” or “in the ownership of a substantial
portion of the assets” of Employer, within the meaning of Section 280G of the
Internal Revenue Code. Notwithstanding the foregoing provisions of this section,
a Change of Control will not be deemed to have occurred solely because of an
internal corporate reorganization or similar transaction.

          (ii)       “Cause.” For purposes of this Agreement, termination for
“Cause” shall include termination because Executive: (A) materially breaches
this Agreement; (B) willfully breached or habitually neglected or breached the
duties which he was required to perform under the terms of this Agreement or the
policies of the Company; (C) commits act(s) of dishonesty, theft, embezzlement,
fraud, misrepresentation, or other act(s) of moral turpitude against Employer,
its subsidiaries or affiliates, its shareholders, or its employees or which
adversely impact the interest of Employer; (D) willfully and continually failed
to comply with any law, rule, or regulation (other than traffic violations or
similar offenses) or final cease and desist order of a regulatory agency having
jurisdiction over Employer; (E) fails to follow the directions of Employer’s
Board of Directors, which failure is not corrected within thirty (30) days after
receipt by Executive of written notice outlining the corrective action required;
or (F) knowingly provides misleading or false information to shareholders, the
Board of Directors, auditors, accountants, or regulatory authorities.

          (iii)       “Disability.” For purposes of this Agreement, “Disability”
is defined as Executive’s inability to perform the essential functions of the
employment duties to the Employer for a period of three (3) consecutive months.
The Employer’s Board of Directors, acting in good faith, shall make the final
determination of whether Executive is suffering under any Disability (as herein
defined) and, for purposes of making such determination, may require Executive
to submit himself to a physical examination by a physician mutually agreed upon
by the Executive and Employer’s Board of Directors at Employer’s expense.

          (iv)       “Good Reason.” For purposes of this Agreement, termination
for “Good Reason” shall mean termination by Executive as a result of any
material breach of this Agreement by Employer. Good Reason shall include, but
not be limited to: (A) a material reduction in Executive’s compensation defined
as a reduction equal to or greater than five percent (5%) of Executive’s then
annual base salary, which reduction is not of general application to
substantially all employees of the Employer, (B) a material reduction in
Executive’s duties, responsibilities, or reporting relationship, but not merely
a change in title, or (C) relocation of Executive’s primary workplace from Oak
Harbor to a location outside Whatcom, Island, Snohomish, or Skagit counties.

          h.       Payment of Severance Benefit. Payment of any Severance
Benefit under this Section shall be paid in a lump sum or with Employer’s
regular salary payment schedule, as determined by Executive.

      6.      Parachute Payment Limitation.

        Notwithstanding anything in this Agreement to the contrary, if it is
determined by legal counsel (or other tax advisor to Executive) that the total
of the Severance Benefit, together with any other payments or benefits paid by
the Employer to Executive, would constitute an “excess parachute payment” within
the meaning of Section 280G of the Internal Revenue Code of 1986, as amended,
and the net after-tax amount that Executive would realize from such
compensation, considering Executive’s federal and state income tax brackets and
the excise tax, would be greater if the compensation payable hereunder were
limited, then the compensation payable hereunder shall be limited in the manner
determined by such counsel or advisor, to maximize Executive’s net after-tax
income.

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      7.      Covenant Not To Compete.

          a.        Executive agrees that for the term of this Agreement and
upon receipt of a Severance Benefit and for a period of two (2) years thereafter
(with the understanding that the two (2) year period will be shortened to one
(1) year upon the completion of a transaction constituting a Change of Control,
as defined in Section 5(g)(i)), Executive will not, within any county in which
Employer has branch offices at the termination of the term of this Agreement,
directly or indirectly be employed by, own, manage, operate, join, or benefit in
any way from any business activity that is competitive with Employer’s business
or reasonably anticipated business of which Executive has knowledge. Employer
and Executive agree that the duration of the covenant may be shortened if the
Executive waives a mutually agreed-upon portion of the Severance Benefit. For
purposes of the foregoing, Executive will be deemed to be directly or indirectly
employed by, own, manage, operate, join, or benefit in any way with such
business if the business is carried on by: (a) a partnership in which Executive
is a general or limited partner; or (b) a corporation of which Executive is a
shareholder (other than a shareholder owning less than 5% of the total
outstanding shares of the corporation), officer, director, employee or
consultant.

          b.        The parties agree that if a trial judge with jurisdiction
over a dispute related to this Agreement should determine that the restrictive
covenant set forth above is unreasonably broad, the parties authorize such trial
judge to narrow the covenant so as to make it reasonable, given all relevant
circumstances, and to enforce such covenant. The provisions of this paragraph
shall survive termination of this Agreement.

      8.      Nondisclosure of Confidential Information.

          a.        During the term of Executive’s employment and thereafter,
Executive agrees to hold Employer’s Confidential Information in strict
confidence, and not disclose or use it at any time except as authorized by
Employer and for Employer’s benefit. If anyone tries to compel Executive to
disclose any Confidential Information, by subpoena or otherwise, Executive
agrees immediately to notify Employer so that Employer may take any actions it
deems necessary to protect its interests. Executive’s agreement to protect
Employer’s Confidential Information applies both during the term of this
Agreement and after employment ends, regardless of the reason it ends.

          b.        “Confidential Information” includes, without limitation, any
information in whatever form that Employer considers to be confidential,
proprietary, information and that is not publicly or generally available
relating to Employer’s: trade secrets (as defined by the Uniform Trade Secrets
Act); know-how; concepts; methods; research and development; product, content
and technology development plans; marketing plans; databases; inventions;
research data and mechanisms; software (including functional specifications,
source code and object code); procedures; engineering; purchasing; accounting;
marketing; sales; customers; advertisers; joint venture partners; suppliers;
financial status; contracts or employees. Confidential Information includes
information developed by Executive, alone or with others, or entrusted to
Employer by its customers or others.

      9.      Nonsolicitation.

        Executive agrees that upon receipt of a Severance Benefit and for a
period of two (2) years thereafter, Executive shall not directly or indirectly
solicit or entice any of the following to cease, terminate or reduce any
relationship with Employer or to divert any business from Employer: (a) any
person who was an employee of Employer during the one- (1) year period
immediately preceding the termination of Executive’s employment; (b) any
customer or client of Employer; or (c) any prospective customer or client of
Employer from whom Executive actively solicited business within the last six (6)
months of Executive’s employment.

      10.      Non-Disparagement.

        Executive will not, during the Term or after the termination or
expiration of this Agreement or Executive’s employment, make disparaging
statements, in any form, about Employer or its officers, directors, agents,
employees, products or services.

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      11.      Mutual Agreement to Arbitrate.

          a.               In the event of a dispute or claim between Executive
and Employer related to Employee’s employment or termination of employment, all
such disputes or claims will be resolved exclusively by confidential arbitration
in accordance with the Employment Arbitration Rules of JAMS (formerly Judicial
Arbitration & Mediation Services). This means that the parties agree to waive
their rights to have such disputes or claims decided in court by a jury.
Instead, such disputes or claims will be resolved by an impartial JAMS
arbitrator whose decision will be final.

          b.               The only disputes or claims that are not subject to
arbitration are any claims by Executive for workers’ compensation or
unemployment benefits, and any claim by Executive for benefits under an employee
benefit plan that provides its own arbitration procedure. Also, Executive and
Employer may seek injunctive relief in court in appropriate circumstances.

          c.               The arbitration procedure will afford Executive and
Employer the full range of statutory remedies. Employer will pay all costs that
are unique to arbitration, except that the party who initiates arbitration will
pay the filing fee charged by JAMS. Executive and Employer shall be entitled to
discovery sufficient to adequately arbitrate their claims, including access to
essential documents and witnesses, as determined by the arbitrator and subject
to limited judicial review. In order for any judicial review of the arbitrator’s
decision to be successfully accomplished, the arbitrator will issue a written
decision that will decide all issues submitted and will reveal the essential
findings and conclusions on which the award is based.

      12.      Miscellaneous.

          a.               Notwithstanding any other provision in this
Agreement, the Employer shall make no payment of any Severance Benefit provided
for herein to the extent that such payment would be prohibited by the provisions
of Part 359 of the regulations of the Federal Deposit Insurance Corporation as
the same may be amended from time to time, and if such payment is so prohibited,
the Employer shall use its best efforts to secure the consent of the FDIC or
other applicable banking agencies to make such payments in the highest amount
permissible, up to the amount provided for in this Agreement.

          b.               This Agreement contains the entire agreement between
the parties with respect to Executive’s employment with Employer, and is subject
to modification or amendment only upon agreement in writing signed by both
parties.

          c.               This Agreement shall bind and inure to the benefit of
the heirs, legal representatives, successors and assigns of the parties, except
that Employer’s rights and obligations may not be assigned without consent of
Executive, and such consent shall not be unreasonably withheld.

          d.               If any provision of this Agreement is invalid or
otherwise unenforceable, all other provisions shall remain unaffected and shall
be enforceable to the fullest extent permitted by law.

          e.               In the event of any claim or dispute arising out of
this Agreement, the party that substantially prevails shall be entitled to
reimbursement of all expenses incurred in connection with such claim or dispute,
including, without limitation, attorneys’ fees and other professional fees. This
paragraph shall apply to expenses incurred with or without suit, and in any
judicial, arbitration or administrative proceedings, including all appeals
therefrom.

          f.               Any notice required to be given under this Agreement
to either party shall be given by personal service or by depositing a copy of
such notice in the United States registered or certified mail, postage prepaid,
addressed to the following address, or such other address as addressee shall
designate in writing:

Employer:     Edward J. Wallgren           Chairman of the Joint Compensation
Committee of           Washington Banking Company and           Whidbey Island
Bank           450 SW Bayshore Drive           P.O. Box 7001           Oak
Harbor WA 98277                 Executive:    Michal Cann          1837 North
Schooner Land           Oak Harbor WA 98277      

          g.               This Agreement shall be governed by and construed in
accordance with the laws of the State of Washington.

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EMPLOYER:     WASHINGTON BANKING COMPANY and           WHIDBEY ISLAND BANK      
                By:    /s/    Edward J. Wallgren                          
       Edward J. Wallgren                  Chairman of the Joint Compensation
Committee of                  Washington Banking Company and Whidbey Island Bank
                            EXECUTIVE:    By:    /s/    Michal D. Cannn        
                             Michal D. Cann    

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