<PAGE>   1
                                                                      EXHIBIT 13

INDEPENDENT AUDITORS' REPORT

The Board of Directors and Shareholders 
Washington Banking Company:

We have audited the accompanying consolidated statements of financial condition
of Washington Banking Company and subsidiary as of December 31, 1998 and 1997,
and related consolidated statements of income, sahreholders' equity and
comprehensive income and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the Company's 
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing 
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the 1998 and 1997 consolidated financial statements referred 
to above, present fairly, in all material respects, the financial position of
Washington Banking Company and subsidiary as of December 31, 1998 and 1997, and
the results of their operations and their cash flows for the years then ended
in conformity with generally accepted accounting principles.


/s/ KPMG LLP

Seattle, Washington
February 5, 1999


[KPMG logo]


                                      2
<PAGE>   2

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Shareholders of
Washington Banking Company:

  We have audited the accompanying consolidated statements of income,
stockholders' equity, and cash flows of Washington Banking Company and
subsidiaries for the year ended December 31, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on the financial statements based on our audit.

  We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and the significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

  In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and the cash
flows of Washington Banking Company and subsidiaries for the year ended December
31, 1996 in conformity with generally accepted accounting principles.

/s/  DAVID O. CHRISTENSEN
----------------------------------------
David O. Christensen

Vancouver, Washington
January 31, 1997


                                       3

<PAGE>   3
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION - 
December 31, 1998 and 1997
(Dollars in thousands, except per share data)

<TABLE>
<CAPTION>
                                                                      1998            1997
                                                                    --------        --------
<S>                                                                 <C>             <C>  
ASSETS
Cash and due from banks                                             $ 12,063           6,263
Interest bearing deposits                                              8,089              --
Federal funds sold                                                     4,100           1,750
                                                                    --------        --------
                  Total cash and cash equivalents                     24,252           8,013
                                                                    --------        --------

Federal Home Loan Bank stock                                             736             682
Investment securities, available for sale                             12,591           5,521
Investment securities, held to maturity                               24,875          23,508
                                                                    --------        --------
                  Total investment securities                         38,202          29,711
                                                                    --------        --------

Loans receivable, net                                                147,872         116,239
Premises and equipment, net                                            8,046           4,287
Other real estate owned                                                   --              30
Deferred tax asset                                                       419             370
Other assets                                                           1,702           1,418
                                                                    --------        --------
                  Total assets                                      $220,493         160,068
                                                                    ========        ========

LIABILITIES AND SHAREHOLDERS' EQUITY

Liabilities:
   Deposits                                                         $189,698         146,394
   Other liabilities                                                   1,104             639
                                                                    --------        --------
                  Total liabilities                                  190,802         147,033
                                                                    --------        --------
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 4,189,050 and
      2,809,050 shares in 1998 and 1997, respectively                 17,836           2,943
    Retained earnings                                                 11,805          10,075
    Accumulated other comprehensive income, net                           50              17
                                                                    --------        --------
                  Total shareholders' equity                          29,691          13,035
                                                                    --------        --------
                  Total liabilities and shareholders' equity        $220,493         160,068
                                                                    ========        ========
</TABLE>

See accompanying notes to consolidated financial statements.



                                       4
<PAGE>   4
CONSOLIDATED STATEMENTS OF INCOME - 
Years ended December 31, 1998, 1997, and 1996 
(Dollars in thousands, except per share data)


<TABLE>
<CAPTION>
                                                                1998              1997              1996
                                                             ----------        ----------        ----------
<S>                                                          <C>               <C>               <C>  
Income:
         Interest and fees on loans                          $   12,910            10,207             7,334
         Interest on taxable investment securities                1,097             1,082             1,055
         Interest on tax-exempt investment securities               634               460               318
         Dividends on FHLB stock                                     54                36                25
         Interest on Federal funds sold                             298               116               126
         Interest on interest bearing deposits                      243                --                --
                                                             ----------        ----------        ----------
                 Total interest income                           15,236            11,901             8,858
Interest expense                                                  5,765             4,358             2,946
                                                             ----------        ----------        ----------
                 Net interest income                              9,471             7,543             5,912
Provision for loan losses                                           735               647               350
                                                             ----------        ----------        ----------
                  Net interest income after provision
                     for loan losses                              8,736             6,896             5,562
                                                             ----------        ----------        ----------
Noninterest income:
         Service charges on deposits                              1,172             1,116             1,024
         Other                                                      763               550               400
                                                             ----------        ----------        ----------
                 Total noninterest income                         1,935             1,666             1,424
                                                             ----------        ----------        ----------
Noninterest expense:
         Salaries and benefits                                    3,189             2,434             2,019
         Occupancy expense                                        1,455             1,033               745
         Office supplies and printing                               365               275               220
         Insurance expense                                          373               271               251
         Data processing                                            260               219               125
         Consulting and professional fees                           175               202               165
         Other                                                    1,718             1,406             1,159
                                                             ----------        ----------        ----------
                 Total noninterest expense                        7,535             5,840             4,684
                                                             ----------        ----------        ----------
                 Income before income taxes                       3,136             2,722             2,302
Provision for income taxes                                          924               818               738
                                                             ----------        ----------        ----------
                 Net income                                  $    2,212             1,904             1,564
                                                             ==========        ==========        ==========
Net income per share, basic                                  $     0.63              0.68              0.56
                                                             ==========        ==========        ==========
Net income per share, diluted                                $     0.59              0.65              0.55
                                                             ==========        ==========        ==========
Average number of shares outstanding, basic                   3,525,883         2,810,881         2,796,000
                                                             ==========        ==========        ==========
Average number of shares outstanding, diluted                 3,769,244         2,935,972         2,858,100
                                                             ==========        ==========        ==========
</TABLE>

See accompanying notes to consolidated financial statements.



                                       5
<PAGE>   5

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME 
Years ended December 31, 1998, 1997, and 1996 
(Dollars and shares in thousands, except per share data)

<TABLE>
<CAPTION>
                                                    COMMON STOCK                                ACCUMULATED OTHER        TOTAL
                                               ----------------------           RETAINED      COMPREHENSIVE INCOME,   SHAREHOLDERS'
                                               SHARES          AMOUNT           EARNINGS            NET OF TAX           EQUITY
                                               ------          ------           --------            ----------           ------
<S>                                            <C>            <C>               <C>           <C>                     <C>   
Balances at December 31, 1995                   2,796         $  3,032            7,299                  26              10,357
Cash dividend at $0.12 per share                   --               --             (336)                 --                (336)
Net change in unrealized gain (loss)                                                                                   
     on securities available for sale              --               --               --                 (15)                (15)
Net income                                         --               --            1,564                  --               1,564
                                                -----         --------           ------                 ---              ------
Balances at December 31, 1996                   2,796            3,032            8,527                  11              11,570
Cash dividend at $0.13 per share                   --               --             (356)                 --                (356)
Net change in unrealized gain (loss)                                                                                   
     on securities available for sale              --               --               --                   6                   6
Net income                                         --               --            1,904                  --               1,904
Repurchased and retired stock                     (23)            (200)              --                  --                (200)
Stock options exercised                            36              111               --                  --                 111
                                                -----         --------           ------                 ---              ------
Balances at December 31, 1997                   2,809            2,943           10,075                  17              13,035
Cash dividend at $0.14 per share                   --               --             (482)                 --                (482)
Net change in unrealized gain (loss)                                                                                   
     on securities available for sale              --               --               --                  33                  33
Net income                                         --               --            2,212                  --               2,212
Net offering proceeds                           1,380           14,893               --                  --              14,893
                                                -----         --------           ------                 ---              ------
Balances at December 31, 1998                   4,189         $ 17,836           11,805                  50              29,691
                                                =====         ========           ======                 ===              ======
</TABLE>

Comprehensive Income:

<TABLE>
<CAPTION>
                                                   FOR THE YEARS ENDED DECEMBER 31
                                                 ----------------------------------
                                                  1998          1997          1996
                                                 ------        ------        ------
<S>                                              <C>           <C>           <C>  
Net income                                       $2,212         1,904         1,564
Increase in unrealized gain on securities
     available for sale, net of tax                  33             6           (15)
                                                 ------        ------        ------
Comprehensive income                             $2,245         1,910         1,549
                                                 ======        ======        ======
</TABLE>


See accompanying notes to consolidated financial statements.



                                       6
<PAGE>   6
CONSOLIDATED STATEMENTS OF CASH FLOWS -
Years ended December 31, 1998, 1997, and 1996 
(Dollars in thousands)

<TABLE>
<CAPTION>
                                                                          1998             1997             1996
                                                                        --------         --------         --------
<S>                                                                     <C>              <C>              <C>
Cash flows from operating activities:
   Net income                                                           $  2,212            1,904            1,564
         Adjustments to reconcile net income to net cash
            provided by operating activities:
         Federal Home Loan Bank stock dividends                              (54)             (36)             (25)
         Deferred income tax benefit                                         (67)             (99)             (11)
         Amortization/accretion of investment
            premiums/discounts, net                                           90              271               (4)
         Provision for loan losses                                           735              647              350
         Depreciation of premises and equipment                              416              323              248
         Loss (gain) on sale of premises and equipment                       (49)               2               --
         Net increase in other assets                                       (284)            (324)            (132)
         Net increase (decrease) in other liabilities                        465              141              (93)
         Gain on the sale of other real estate owned                          --               --              (30)
                                                                        --------         --------         --------
                   Net cash provided by operating activities               3,464            2,829            1,867
                                                                        --------         --------         --------
Cash flows from investing activities:
         Purchases of investment securities, available for sale           (9,000)          (2,860)          (3,500)
         Maturities of investment securities, available for sale           2,000            2,000            4,000
         Purchases of investment securities, held to maturity             (8,031)          (6,770)          (8,455)
         Maturities of investment securities, held to maturity             6,555            3,980            4,715
         Net increase in loans                                           (32,368)         (36,443)         (18,411)
         Purchases of premises and equipment                              (4,359)          (1,097)            (641)
         Proceeds from sale of premises and equipment                        233                6               --
         Purchases of Federal Home Loan Bank stock                            --             (324)             (22)
         Proceeds from sales of other real estate owned                       30               --              138
                                                                        --------         --------         --------
                   Net cash used in investing activities                 (44,940)         (41,508)         (22,176)
                                                                        --------         --------         --------
Cash flows from financing activities:
         Net increase in deposits                                         43,304           41,182           16,706
         Dividends paid on common stock                                     (482)            (356)            (336)
         Proceeds from stock options exercised                                --              111               --
         Cash paid for common stock retired                                   --             (200)              --
         Net proceeds from stock issued                                   14,893               --               --
                                                                        --------         --------         --------
                   Net cash provided by financing activities              57,715           40,737           16,370
                                                                        --------         --------         --------
                   Net increase (decrease) in cash and
                     cash equivalents                                     16,239            2,058           (3,939)
Cash and cash equivalents at beginning of year                             8,013            5,955            9,894
                                                                        --------         --------         --------
Cash and cash equivalents at end of year                                $ 24,252            8,013            5,955
                                                                        ========         ========         ========
Supplemental information:
         Loans foreclosed and transferred to real estate owned          $     --               30               --
         Cash paid for interest                                            5,689            4,236            2,907
         Cash paid for taxes                                                 945            1,000              736
                                                                        --------         --------         --------
</TABLE>

See accompanying notes to consolidated financial statements.



                                       7
<PAGE>   7

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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), a Washington State bank holding
            company was formed on April 30, 1996. Whidbey Island Bank (WIB or
            Bank), the principal subsidiary of WBCO, is a Washington
            state-chartered commercial bank. 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. Although WIB has a diversified loan portfolio and
            its market area currently enjoys a stable economic climate, a
            substantial portion of its borrowers' ability to repay their loans
            is dependent upon the economic conditions affecting this area
            related to the agricultural, forestry and manufacturing industries,
            and the large military base presence in Oak Harbor, Washington.

            Effective June 23, 1998, the Company sold 1,380,000 shares of its
            common stock at a subscription price of $12 per share, resulting in
            net proceeds to the Company of $14,893.

      (b)   Basis of Presentation

            The accompanying consolidated financial statements include the
            accounts of Washington Banking Company and its wholly-owned
            subsidiary, Whidbey Island Bank (Company). The consolidated
            financial statements of the Company have been prepared in conformity
            with generally accepted accounting principles. In preparing the
            consolidated financial statements, management makes estimates and
            assumptions that affect the reported amounts of assets and
            liabilities and disclosure of contingent assets and liabilities at
            the date of the financial statements and the reported amounts of
            income and expense during the reported periods. Actual results could
            differ from these estimates. All significant intercompany balances
            and transactions have been eliminated in consolidation.

      (c)   Cash and Cash Equivalents

            For purposes of reporting cash flows, cash and cash equivalents
            include cash on hand and due from banks and Federal funds sold,
            having original maturities of three months or less.

      (d)   Investment Securities

            Investment securities available for sale include securities that
            management intends to use as part of its overall asset/liability
            management strategy and that may be sold in response to changes in
            interest rates and resultant prepayment risk and other related
            factors. Securities available for sale are carried at fair value,
            and unrealized gains and losses (net of related tax effects) are
            excluded from net income but are included in comprehensive income.
            Upon realization, such gains and losses will be included in net
            income using the specific identification method.

            Investment securities held to maturity are comprised of debt
            securities for which the Bank has positive intent and ability to
            hold to maturity and are carried at cost, adjusted for amortization
            of premiums and accretion of discounts using the interest method
            over the estimated lives of the securities.

            Management determines the appropriate classification of investment
            securities at the purchase date.

      (e)   Loans Receivable, Net

            Loans receivable, net, are stated at the unpaid principal balance,
            net of premiums, unearned discounts, net deferred loan origination
            fees, and the allowance for loan losses.

            Loans are placed on nonaccrual status when collection of principal
            or interest is considered doubtful (generally loans past due 90 days
            or more).


                                       8
<PAGE>   8

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

            A loan is considered impaired when, based upon currently known
            information, it is deemed probable that the Company will be unable
            to collect all amounts due according to the original terms of the
            agreement. Impaired loans are measured based on the present value of
            expected future cash flows discounted at the loan's effective
            interest rate or, as a practical expedient, based on the loan's
            observable market price or the fair value of collateral, if the loan
            is collateral dependent.

            Interest income previously accrued on nonaccrual and impaired loans,
            but not yet received, is reversed in the current period. Interest
            subsequently recovered is credited to income in the period
            collected.

            Loan fees and certain direct loan origination costs are deferred,
            and the net fee or cost is recognized in interest income using the
            interest method over the estimated life of the individual loans,
            adjusted for actual prepayments. Amortization of deferred loan
            origination fees are suspended during periods in which the related
            loan is in nonaccrual status.

      (f)   Allowance for Loan Losses

            A valuation allowance for loans is based on management's estimate of
            the amount necessary to recognize possible losses inherent in the
            loan portfolio. In determining the level to be maintained,
            management evaluates many factors including the borrowers' ability
            to repay, the value of underlying collateral, historical loss
            experience, delinquency analyses, and economic and market trends and
            conditions. In the opinion of management, the allowance is adequate
            to absorb reasonably foreseeable loan losses.

            While management uses available information to recognize losses on
            these loans, future additions to the allowance may be necessary
            based on changes in economic conditions. In addition, various
            regulatory agencies, as an integral part of their examination
            process, periodically review the Bank's allowance for loan losses.
            Such agencies may require the Bank to make additions to the
            allowance based on their judgments about information available to
            them at the time of their examinations.

      (g)   Other Real Estate Owned

            All real estate acquired in satisfaction of a loan is considered
            held for sale and reported as "real estate owned." Real estate owned
            is carried at the lower of cost or fair value less estimated cost of
            disposal.

      (h)   Premises and Equipment

            Premises and equipment are stated at cost less accumulated
            depreciation. Depreciation and amortization are computed using the
            straight-line method over the estimated useful lives of the assets.
            The estimated useful lives used to compute depreciation include
            buildings and building improvements, 15 to 40 years; land
            improvements, 10 to 25 years; and furniture, fixtures, and
            equipment, 3 to 15 years.

      (i)   Federal Income Taxes

            The Company files a consolidated federal income tax return. Deferred
            tax assets and liabilities are recognized for the future tax
            consequences attributable to differences between the financial
            statement carrying amounts of existing assets and liabilities and
            their respective tax bases. Deferred tax assets and liabilities are
            measured using enacted tax rates expected to apply to taxable income
            in the periods in which those temporary differences are expected to
            be recovered or settled. The effect on the deferred tax assets and
            liabilities of a change in tax rate is recognized in income in the
            period that includes the enactment date.

      (j)   Federal Home Loan Bank Stock

            The Company's investment in Federal Home Loan Bank (FHLB) stock is
            carried at par value, which approximates its fair value. As a member
            of the FHLB system, the Company is required to maintain a minimum
            level of investment in FHLB stock based on specific percentages of
            its outstanding mortgages, total



                                       9
<PAGE>   9

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

            assets or FHLB advances. At December 31, 1998, the Company's minimum
            required investment was approximately $647. The Company may request
            redemption at par value of any stock in excess of the minimum
            required investment. Stock redemptions are at the discretion of the
            FHLB.

      (k)   Stock Based Compensation

            The Company measures its employee stock-based compensation
            arrangements using the provisions outlined in Accounting Principles
            Board (APB) Opinion No.25, Accounting for Stock Issued to Employees,
            which is an intrinsic value-based method of recognizing compensation
            costs. As none of the Company's stock options have any intrinsic
            value at grant date, no compensation cost has been recognized for
            its stock option plans.

      (l)   Comprehensive Income

            Effective January 1, 1998, the Company adopted Statement of
            Financial Accounting Standards (SFAS) No. 130, Reporting
            Comprehensive Income. This SFAS establishes standards for reporting
            and displaying comprehensive income and its components in
            general-purpose financial statements. For the Company comprehensive
            net income includes net income and changes in unrealized gains or
            losses on available for sale investment securities, net of tax.

      (m)   Recent Financial Accounting Pronouncements

            In June 1997, the Financial Accounting Standards Board (FASB) issued
            Statement of Financial Accounting Standards (SFAS) No. 131,
            "Disclosures about Segments of and Enterprise and Related
            Information" ("SFAS 131"). SFAS 131 requires public companies to
            report financial and descriptive information about its operating
            segments. Operating segments are components of a business about
            which separate financial information is available that is evaluated
            regularly by the chief operating decision-maker in deciding how to
            allocate resources and in assessing performance. The Company
            implemented SFAS 131 in fiscal year 1998. The adoption of SFAS 131
            did not have a material impact on the financial position or results
            of operations of the Company.

            In June 1998, the FASB issued SFAS Statement No. 133 ("SFAS 133"),
            Accounting for Derivative Instruments and Hedging Activities, which
            is required to be adopted by the Company in the year 2000. SFAS 133
            requires all derivatives to be recorded on the balance sheet at fair
            value and establishes accounting standards for different types of
            hedging activities, including fair value hedges, cash flow hedges
            and hedges of foreign currency exposures. Management does not expect
            SFAS 133 to have a material impact on the Company's financial
            position or results of operations.

            In October 1998, the FASB issued SFAS 134 (which amended SFAS 65,
            Accounting for Certain Mortgagee Banking Activities. This statement
            establishes accounting and reporting standards for securities
            retained after the securitization of mortgage loans. Under this
            statement, any retained mortgage-based securities (after the
            securitization of a mortgage loan held for sale) will need to be
            classified as either "available for sale" or "trading securities."
            However, if the mortgage banking enterprise plans on selling
            mortgage backed securities before or during the securitization
            process, it must be classified as "trading securities." This
            statement is effective for the first quarter beginning after
            December 15, 1998. The Company does not expect that the adoption of
            SFAS 134 will have a material impact on its financial position or
            results of operations.

            Statement of Position No. 98-5 "Reporting on the Costs of Start-Up
            Activities," effective for the Company January 1, 1999, requires
            costs of start-up activities and organization costs to be expensed
            as incurred. It is not expected that the adoption of this statement
            will have a material effect on the Company's operating results of
            financial condition.

      (n)   Reclassifications

            Certain amounts in 1996 and 1997 have been reclassified to conform
            with the 1998 financial statement presentation.

(2)   RESTRICTIONS ON CASH BALANCES

      The Company is required to maintain an average reserve with the Federal
      Reserve Bank or maintain such reserve balance in the form of cash. The
      amount of required reserve balance on December 31, 1998 and 1997 was
      approximately $1,236 and $511, respectively, and was met by holding cash
      and maintaining an average balance with the Federal Reserve Bank.



                                       10
<PAGE>   10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(3)   INVESTMENT SECURITIES

      The amortized costs and estimated market values of investment securities
      at December 31, 1998 and 1997 are summarized as follows:


<TABLE>
<CAPTION>
1998
                                             AMORTIZED     GROSS UNREALIZED   GROSS UNREALIZED   ESTIMATED MARKET
                                               COST             GAINS             LOSSES              VALUE
                                             ---------     ----------------   ----------------   ----------------
<S>                                          <C>           <C>                <C>                <C>
Investments available for sale:
  U.S. Treasury securities                    $ 5,008                60                --              5,068
  U.S. Government agency securities             7,508                18                (3)             7,523
                                              -------           -------           -------            -------
      Total investment securities
        available for sale                    $12,516                78                (3)            12,591
                                              =======           =======           =======            =======

Investments held to maturity:
  U.S. Treasury securities                    $   500                 1                --                501
  U.S. Government agency securities               998                12                --              1,010
  State and political subdivisions             16,502               684                (1)            17,185
  Corporate obligations                         6,875               100                (4)             6,971
                                              -------           -------           -------            -------
      Total investment securities
        held to maturity                      $24,875               797                (5)            25,667
                                              =======           =======           =======            =======
</TABLE>

<TABLE>
<CAPTION>
1997
                                             AMORTIZED     GROSS UNREALIZED   GROSS UNREALIZED   ESTIMATED MARKET
                                               COST             GAINS             LOSSES              VALUE
                                             ---------     ----------------   ----------------   ----------------
<S>                                          <C>           <C>                <C>                <C>
Investments available for sale:
  U.S. Treasury securities                    $ 4,996                26                --              5,022
  U.S. Government agency securities               500                --                (1)               499
                                              -------           -------           -------            -------
      Total investment securities
        available for sale                    $ 5,496                26                (1)             5,521
                                              =======           =======           =======            =======

Investments held to maturity:
  U.S. Treasury securities                    $   997                 2                --                999
  U.S. Government agency securities             4,996                21                (5)             5,012
  State and political subdivisions              9,796               257                (3)            10,050
  Corporate obligations                         7,648                52                (8)             7,692
  Other investments                                71                --                --                 71
                                              -------           -------           -------            -------
      Total investment securities
         held to maturity                     $23,508               332               (16)            23,824
                                              =======           =======           =======            =======
</TABLE>

       The amortized cost and fair value of investment securities by contractual
maturity at December 31, 1998 are as shown below:



                                       11
<PAGE>   11

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                 Dates of maturities
                                          --------------------------------------------------------------
                                          Under 1        1-5        Over 5 to       Over 10
                                           year         years        10 years        years         Total
                                          ------        ------       --------        ------        ------
<S>                                       <C>           <C>         <C>             <C>            <C>
Investments available for sale:
U.S. Treasury securities:
  Amortized cost                          $3,003         2,005            --            --         5,008
  Market value                             3,020         2,048            --            --         5,068
U.S. Government agency securities:            --            --
  Amortized cost                           3,008         4,500            --            --         7,508
  Market value                             3,013         4,510            --            --         7,523
       Total:
                                          ------        ------        ------        ------        ------
           Amortized cost                 $6,011         6,505            --            --        12,516
           Market value                    6,033         6,558            --            --        12,591
                                          ======        ======        ======        ======        ======
</TABLE>

<TABLE>
<CAPTION>
                                                                 Dates of maturities
                                          --------------------------------------------------------------
                                          Under 1        1-5        Over 5 to       Over 10
                                           year         years        10 years        years         Total
                                          ------        ------       --------        ------        ------
<S>                                       <C>           <C>         <C>             <C>            <C>
Investments held to maturity:
U.S. Treasury securities:
  Amortized cost                          $  500            --            --            --           500
  Market value                               501            --            --            --           501
U.S. Government agency securities:
  Amortized cost                             500           498            --            --           998
  Market value                               503           507            --            --         1,010

State and political subdivisions:
  Amortized cost                             525         5,994         8,407         1,576        16,502
  Market value                               530         6,206         8,802         1,647        17,185
Corporate bonds and other:
  Amortized cost                             507         6,368            --            --         6,875
  Market value                               507         6,464            --            --         6,971
                                          ------        ------        ------        ------        ------
      Total:
          Amortized cost                  $2,032        12,860         8,407         1,576        24,875
          Market value                     2,041        13,177         8,802         1,647        25,667
                                          ======        ======        ======        ======        ======
</TABLE>

      Included in other assets is accrued interest on investment securities
      amounting to $385 and $407 as of December 31, 1998 and 1997, respectively.

      At December 31, 1998 and 1997, investment securities with amortized cost
      values of $997 and $997, respectively, were pledged to secure public
      deposits and for other purposes as required or permitted by law.

      There were no sales of investment securities during the years ended
      December 31, 1998, 1997, and 1996.



                                       12
<PAGE>   12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(4)   LOANS AND ALLOWANCE FOR LOAN LOSSES

      The loan-portfolio composition, based upon the purpose and primary source
      of repayment of the loans, is as follows:

<TABLE>
<CAPTION>
                                             DECEMBER 31
                                      ------------------------
                                          1998            1997
                                      --------        --------
<S>                                   <C>               <C>   
Commercial loans                      $ 65,564          48,242
Real estate loans                       29,198          22,969
Real estate construction loans          14,139          12,646
Consumer loans                          40,750          33,721
                                      --------        --------
                                       149,651         117,578
Less:
Allowance for loan losses                1,745           1,296
Net deferred loan fees                      34              43
                                      --------        --------
    Net loans                         $147,872         116,239
                                      ========        ========
</TABLE>

      As of December 31, 1998 and 1997, the Company had loans to persons serving
      as directors and executive officers, and to entities related to such
      individuals aggregating $1,890 and $1,752, respectively. All loans were
      made on essentially the same terms and conditions as comparable
      transactions with other persons, and do not involve more than the normal
      risk of collectibility.

      The Company's legal lending limit was approximately $4,900 and $2,700 as
      of December 31, 1998 and 1997, respectively.

      Included in other assets is accrued interest on loans receivable amounting
      to $960 and $772 as of December 31, 1998 and 1997, respectively.

      The following is an analysis of the changes in the allowance for loan
      losses:

<TABLE>
<CAPTION>
                                                DECEMBER 31
                                 ---------------------------------------
                                  1998            1997            1996
                                 -------         -------         -------
<S>                              <C>             <C>             <C>
Beginning balance                $ 1,296             796             620
Provision for loan losses            735             647             350
Recoveries                            27              13              55
Charge-offs                         (313)           (160)           (229)
                                 -------         -------         -------
         Ending balance          $ 1,745           1,296             796
                                 =======         =======         =======
</TABLE>

      At December 31, 1998 and 1997, the Company had impaired loans of $1,094
      and $1,162, respectively. Of these impaired loans, $215 and $285 have
      related valuation allowances of $261 and $112, while $838 and $877 did not
      require a valuation allowance. Average impaired loans for 1998 and 1997
      totaled $1,128 and $1,350, respectively. The Company has no commitment to
      extend additional credit on loans which are nonaccrual or impaired at
      December 31, 1998.

      If interest income on impaired loans had been accrued in accordance with
      their original terms, approximately $60, $40 and $42 of interest income
      would have been recorded for the years ended December 31, 1998, 1997 and
      1996, respectively.



                                       13
<PAGE>   13

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(5)   PREMISES AND EQUIPMENT

      Premises and equipment consisted of the following:

<TABLE>
<CAPTION>
                                           DECEMBER 31
                                     ----------------------
                                       1998           1997
                                     -------        -------
<S>                                  <C>              <C>  
Land and buildings                   $ 5,226          3,063
Furniture and equipment                2,508          2,011
Land improvements                        263            218
Computer software                        512            359
Construction in progress               2,029            898
                                     -------        -------
                                      10,538          6,549
Less accumulated depreciation          2,492          2,262
                                     -------        -------
                                     $ 8,046          4,287
                                     =======        =======
</TABLE>

(6)   DEPOSITS

      Deposits at December 31 are summarized as follows:

<TABLE>
<CAPTION>
                                           DECEMBER 31
                                     ------------------------
                                       1998            1997
                                     --------        --------
<S>                                  <C>             <C>   
Certificates of deposit              $ 64,697          56,148
Passbook and savings accounts          25,517          21,710
Money market accounts                  29,821          20,602
NOW accounts                           36,214          23,917
Non-interest bearing demand            33,449          24,017
                                     --------        --------
                                     $189,698         146,394
                                     ========        ========
</TABLE>

      Certificates of deposit at December 31, 1998 mature as follows:

<TABLE>
<CAPTION>
                                      LESS THAN      1 TO 2      2 TO 3        3 TO 4      4 TO 5
                                        1 YEAR       YEARS        YEARS        YEARS        YEARS        TOTAL
                                       -------      -------      -------      -------      -------      -------
<S>                                   <C>           <C>          <C>          <C>          <C>          <C>   
Time deposits of $100,000 or more      $17,601        1,624          103          201          129       19,658
All other time deposits                 39,205        4,726          293          596          219       45,039
                                       -------      -------      -------      -------      -------      -------
                                       $56,806        6,350          396          797          348       64,697
                                       =======      =======      =======      =======      =======      =======
</TABLE>


(7)   INCOME TAXES

      Federal income tax expense (benefit) at December 31 consists of the
      following:



                                       14
<PAGE>   14

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                             1998          1997          1996
                            -----         -----         -----
<S>                         <C>           <C>           <C>
Current tax expense         $ 991           917           750
Deferred tax benefit          (67)          (99)          (12)
                            -----         -----         -----
                            $ 924           818           738
                            =====         =====         =====
</TABLE>

      The following table presents major components of the net deferred federal
      income tax asset resulting from differences between financial reporting
      and tax bases at December 31:

<TABLE>
<CAPTION>
                                                                             1998        1997
                                                                             ----        ----
<S>                                                                          <C>         <C>
Deferred tax assets:
  Loan loss allowances                                                       $506         374
  Deferred compensation                                                        75          76
  Deferred loan fees                                                           --          15
  Other                                                                        --          --
                                                                             ----        ----
              Total deferred tax assets                                       581         465
                                                                             ----        ----
Deferred tax liabilities:
  Premises and equipment                                                       97          66
  FHLB stock                                                                   39          21
  Market value adjustment of investment securities available for sale          26           8
                                                                             ----        ----
              Total deferred tax liabilities                                  162          95
                                                                             ----        ----
              Deferred tax assets, net                                       $419         370
                                                                             ====        ====
</TABLE>

      A reconciliation between the statutory federal income tax rate and the
      effective tax rate is as follows:

<TABLE>
<CAPTION>
                                                                  DECEMBER 31
                                                    ---------------------------------------
                                                       1998            1997            1996
                                                    -------         -------         -------
<S>                                                 <C>             <C>             <C>
Income tax expense at federal statutory rate        $ 1,066             925             783
Interest income on tax-exempt securities               (216)           (129)            (99)
Other, net                                               74              22              54
                                                    -------         -------         -------
                                                    $   924             818             738
                                                    =======         =======         =======
</TABLE>

      There was no valuation allowance for deferred tax assets as of December
      31, 1998, 1997 and 1996. The Company has determined that it is not
      required to establish a valuation allowance for the deferred tax assets as
      management believes it is more likely than not that the deferred tax asset
      of $581 and $465 at December 31, 1998 and 1997, respectively, will be
      realized principally through carryback to taxable income in prior years,
      future reversals of existing taxable temporary differences and, to a minor
      extent, future taxable income.

(8)   EARNINGS PER SHARE

      The following illustrates the reconciliation of the numerators and
      denominators of the basic and diluted earnings per share (EPS)
      computations:



                                       15
<PAGE>   15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                   YEAR ENDED DECEMBER 31, 1998
                                                         -----------------------------------------------
                                                                             AVERAGE 
                                                                             WEIGHTED          PER SHARE
                                                          INCOME              SHARES            AMOUNT
                                                         ---------           ---------         ---------
<S>                                                      <C>                 <C>               <C>  
BASIC EPS
 Income available to common shareholders                 $   2,212           3,525,883           $ .63
 Effect of dilutive securities:  stock options                  --             243,361              --
                                                         ---------           ---------           -----
DILUTED EPS                                              $   2,212           3,769,244           $ .59
                                                         =========           =========           =====
</TABLE>

<TABLE>
<CAPTION>
                                                                   YEAR ENDED DECEMBER 31, 1997
                                                         -----------------------------------------------
                                                                             AVERAGE 
                                                                             WEIGHTED          PER SHARE
                                                          INCOME              SHARES            AMOUNT
                                                         ---------           ---------         ---------
<S>                                                      <C>                 <C>               <C>  
BASIC EPS
 Income available to common shareholders                 $   1,904           2,810,881           $0.68
 Effect of dilutive securities:  stock options                  --             125,091              --
                                                         ---------           ---------           -----
DILUTED EPS                                              $   1,904           2,935,972           $0.65
                                                         =========           =========           =====
</TABLE>

<TABLE>
<CAPTION>
                                                                   YEAR ENDED DECEMBER 31, 1996
                                                         -----------------------------------------------
                                                                             AVERAGE 
                                                                             WEIGHTED          PER SHARE
                                                          INCOME              SHARES            AMOUNT
                                                         ---------           ---------         ---------
<S>                                                      <C>                 <C>               <C>  
BASIC EPS
 Income available to common shareholders                 $   1,564           2,796,000           $0.56
 Effect of dilutive securities: stock options                   --              62,100              --
                                                         ---------           ---------           -----
DILUTED EPS                                              $   1,564           2,858,100           $0.55
                                                         =========           =========           =====
</TABLE>

      At December 31, 1998 there were options to purchase 123,950 shares of
      common stock outstanding which were antidilutive and therefore not
      included in the computation of diluted net income per share. There were no
      antidiluted securities outstanding for the years ended December 31, 1997
      and 1996.

(9)   EMPLOYEE BENEFIT PLANS

      (a)   Severance Agreements

            The Company has entered into employment contracts with six senior
            officers that provide benefits under certain conditions following a
            termination without cause, following a change of control of the
            Company.

      (b)   401(k) Profit Sharing Plan

            During 1993, the Board of Directors approved a 401(k)/profit sharing
            plan. The plan covers substantially all full-time employees and many
            part-time employees once they meet the age and length of service
            requirements. Employees vest in the plan over a six-year period. The
            401(k) plan allows for a voluntary



                                       16
<PAGE>   16

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

            salary reduction, under which eligible employees are permitted to
            defer a portion of their salaries, with the Company contributing a
            percentage of the employee's contribution to the employee's account.
            In addition, the amount of the profit sharing is discretionary and
            determined each year by the Board of Directors.

            The Company's contributions for the years ended December 31, 1998,
            1997 and 1996 under the employee matching feature of the plan were
            $64, $50 and $37, respectively. This represents a match of the
            participating employees' salary deferral up to 50% of the first 5%
            of the compensation deferred in 1998, 1997 and 1996, respectively.
            The Company also contributed $0, $16 and $24 for the years ended
            December 31, 1998, 1997 and 1996 under the profit sharing feature of
            the plan.

(10)  SHAREHOLDERS' EQUITY

      Stock Option Plans

      In 1992, the WIB shareholders approved the adoption of an employee stock
      option plan, providing for the award of up to 450,000 shares of Company
      common stock pursuant to nonqualified or incentive stock options to
      employees of WIB at the discretion of a committee appointed by the Board
      of Directors. In addition to the employee stock option plan adopted in
      1992, in 1993 the Bank's shareholders approved the adoption of a director
      stock option plan, providing for the award of up to 150,000 shares of
      Company common stock pursuant to nonqualified stock options to directors
      of the Bank at the discretion of the Board of Directors. The 1993 plan
      does not affect any options granted under the 1992 plan. In 1996, the
      shareholders of WIB approved the transfer of both stock option plans to
      WBCO.

      In 1998 the shareholders of WBCO approved the adoption of the 1998 stock
      option and restricted stock award plan, which is generally similar to the
      1992 and 1993 plans and allows for the award of up to 161,000 shares of
      Company common stock plus any shares subject to stock options under the
      1992 and 1993 plans that are forfeited, expire or are cancelled. The 1998
      plan terminated the 1992 and 1993 plans as to further stock option grants.

      Under these stock option plans, on the date of grant, the exercise price
      of nonqualified stock options must at least equal the Company's net book
      value per share issued, and the exercise price of incentive stock options
      must at least equal the market value of the Company's common stock.

      Stock options vest in 20% increments over five years and expire five years
      after they become fully vested.

      The following table summarizes incentive or nonqualified stock option
      activity under the 1992 and 1998 plans for the years ended December 31,
      1998, 1997 and 1996:

<TABLE>
<CAPTION>
                                           1998                          1997                           1996
                               ---------------------------    --------------------------    ---------------------------
                                          WEIGHTED AVERAGE              WEIGHTED AVERAGE               WEIGHTED AVERAGE
                                SHARES      OPTION PRICE      SHARES      OPTION PRICE      SHARES       OPTION PRICE
                               -------    ----------------    -------   ----------------    -------    ----------------
<S>                            <C>        <C>                 <C>       <C>                 <C>        <C>   
Balance at beginning
  of year                      354,000         $ 4.25         302,250         $ 3.39        273,000         $ 3.20
Options granted                 41,000          12.00          51,750           9.25         29,250           5.22
                               -------         ------         -------         ------        -------         ------
Balance at end of year         395,000         $ 5.05         354,000         $ 4.25        302,250         $ 3.39
                               =======         ======         =======         ======        =======         ======
</TABLE>



                                       17
<PAGE>   17

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

      Financial data pertaining to outstanding incentive stock options under the
      1992 and 1998 plans at December 31, 1998 were as follows:

<TABLE>
<CAPTION>
            TOTAL             VESTED          EXERCISE
           SHARES             SHARES            PRICE              EXPIRATION
          -------            -------          ---------            ----------
<S>                          <C>              <C>                  <C>
          165,000            165,000           $ 2.93              February 22, 2003
           22,500             18,000             3.07              March 24, 2004
           40,500             32,400             3.37              December 15, 2004
           45,000             27,000             4.08              December 31, 2005
            3,750              1,500             4.23              April 1, 2006
           25,500             10,200             5.37              December 31, 2006
           51,750             10,350             9.25              December 31, 2007
           41,000                 --            12.00              December 31, 2008
          -------           -------
          395,000           264,450
          =======           =======
</TABLE>

      The following table summarizes stock option activity of the nonqualified
      shares under the 1993 director stock option plan for the years ended
      December 31, 1998, 1997 and 1996:

<TABLE>
<CAPTION>
                                           1998                          1997                           1996
                               ---------------------------    --------------------------    ---------------------------
                                          WEIGHTED AVERAGE              WEIGHTED AVERAGE               WEIGHTED AVERAGE
                                SHARES      OPTION PRICE      SHARES      OPTION PRICE      SHARES       OPTION PRICE
                               -------    ----------------    -------   ----------------    -------    ----------------
<S>                            <C>        <C>                 <C>       <C>                 <C>        <C>   
Balance at beginning
 of year                       113,700        $  4.79         120,750        $ 3.13         120,750          $ 3.13
Options granted                     --             --          31,200          9.25              --              --
Less exercised                      --             --         (35,550)         3.14              --              --
Expired or canceled                 --             --          (2,700)         3.57              --              --
                               -------        -------         -------        ------         -------          ------
Balance at end of year         113,700        $  4.79         113,700        $ 4.79         120,750          $ 3.13
                               =======        =======         =======        ======         =======          ======
</TABLE>

       Financial data pertaining to outstanding nonqualified stock options under
the 1993 plan at December 31, 1998 were as follows:

<TABLE>
<CAPTION>
        Total         Vested           Exercise
       shares         shares            price                  Expiration
       ------         ------            -----                  ----------
<S>                  <C>               <C>                     <C>
       56,250         56,250            $ 3.00                 February 22, 2003
       18,750         15,000              3.07                 March 24, 2004
        7,500          5,400              4.08                 December 31, 2005
       31,200          6,240              9.25                 December 31, 2007
      -------         ------
      113,700         82,890
      =======         ======
</TABLE>



                                       18
<PAGE>   18

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

      The Company applies APB Opinion No.25 in accounting for its plan and,
      accordingly, no compensation cost has been recognized for its stock
      options in the accompanying consolidated financial statements. Had the
      Company determined compensation cost using the fair value method,
      consistent with SFAS No.123, the Company's net income and earnings per
      share would have been reduced to the pro forma amounts indicated below:

<TABLE>
<CAPTION>
                                           YEARS ENDED DECEMBER 31
                                 -------------------------------------------
                                   1998             1997             1996
                                 ---------         --------         --------
<S>                              <C>               <C>              <C>  
Net income, as reported          $   2,212            1,904            1,564
Net income, pro forma                2,167            1,862            1,550
Basic EPS, as reported                 .63             0.68             0.56
Basic EPS, pro forma                   .61             0.66             0.55
Diluted EPS, as reported               .59             0.65             0.55
Diluted EPS, pro forma                 .57             0.64             0.55
</TABLE>

      The fair value of options granted during 1998 is estimated on the date of
      grant using the Black-Scholes pricing model. For grants in 1997 and 1996,
      the fair value of options granted is estimated on the date of grant using
      the minimum value method. The following assumptions were used to calculate
      the fair value of the options granted:

                           EMPLOYEE STOCK OPTION PLAN

<TABLE>
<CAPTION>
YEAR OF GRANT    RISK-FREE INTEREST RATE     EXPECTED LIFE IN YEARS     EXPECTED VOLATILITY     EXPECTED DIVIDEND    FAIR VALUE
-------------    -----------------------     ----------------------     -------------------     -----------------    ----------
<S>              <C>                         <C>                        <C>                     <C>                  <C>  
    1998                 4.63%                         7                        10%                     2%              $0.35
    1997                 5.84%                         9                        N/A                     3%               1.83
    1996                 6.43%                         9                        N/A                     3%               1.05
</TABLE>

                           DIRECTOR STOCK OPTION PLAN

<TABLE>
<CAPTION>
YEAR OF GRANT    RISK-FREE INTEREST RATE     EXPECTED LIFE IN YEARS     EXPECTED VOLATILITY     EXPECTED DIVIDEND    FAIR VALUE
-------------    -----------------------     ----------------------     -------------------     -----------------    ----------
<S>              <C>                         <C>                        <C>                     <C>                  <C>  
    1998                  N/A                         N/A                       N/A                     N/A              $N/A
    1997                 5.79%                         7                        N/A                      3%              1.58
    1996                  N/A                         N/A                       N/A                     N/A               N/A
</TABLE>

(11)  REGULATORY CAPITAL MATTERS

      The Bank is subject to various regulatory capital requirements
      administered by the federal banking agencies. Failure to meet minimum
      capital requirements can initiate certain mandatory and possibly
      additional discretionary actions by regulators that, if undertaken, could
      have a direct material effect on the Bank's financial statements. Under
      capital adequacy guidelines and the regulatory framework for prompt
      corrective action, the Bank must meet specific capital guidelines that
      involve quantitative measures of the Bank's assets, liabilities and
      certain off balance sheet items as calculated under regulatory accounting
      practices. The Bank's capital amounts and classification are also subject
      to qualitative judgments by the regulators about risk components, asset
      risk weighting and other factors.

      Risk based capital guidelines issued by the Federal Deposit Insurance
      Corporation establish a risk adjusted ratio relating capital to different
      categories of assets and off balance sheet exposures for banks. The Bank's
      Tier 1 capital is comprised primarily of common equity, and excludes the
      equity impact of adjusting available for sale securities to fair value.
      Total capital also includes a portion of the allowance for loan losses, as
      defined according to regulatory guidelines.



                                       19
<PAGE>   19

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

      Quantitative measures established by regulation to ensure capital adequacy
      require the Company to maintain minimum amounts and ratios (set forth in
      the table below) of total and Tier1 capital to risk-weighted assets (as
      defined in the regulations), and of Tier1 capital to average assets (as
      defined in the regulations). Management believes, as of December 31, 1998,
      that the Bank meets all capital adequacy requirements to which it is
      subject.

<TABLE>
<CAPTION>
                                                                                                            TO BE WELL CAPITALIZED
                                                                                    FOR CAPITAL             UNDER PROMPT CORRECTIVE
                                                    WHIDBEY ISLAND BANK           ADEQUACY PURPOSES           ACTION PROVISIONS
                                                   --------------------         ---------------------       ----------------------
                                                   AMOUNT         RATIO         AMOUNT          RATIO        AMOUNT         RATIO
                                                   ------         -----         ------          -----        ------         -----
                                                        (actual)
<S>                                                <C>            <C>           <C>             <C>          <C>            <C>
As of December 31, 1998:
  Total risk-based capital
  (to risk-weighted assets)                        26,378         15.99%         13,196          >=8%        16,494         >=10%
  Tier 1 capital (to risk-weighted assets)         24,633         14.93%          6,598          >=4%         9,897          >=6%
  Leverage ratio                                   24,633         11.67%          8,443          >=4%        10,554          >=5%
As of December 31, 1997:
  Total risk-based capital
  (to risk-weighted assets)                        14,160         11.63%          9,736          >=8%        12,170         >=10%
  Tier 1 capital (to risk-weighted assets)         12,986         10.67%          4,868          >=4%         7,302          >=6%
  Leverage ratio                                   12,986          8.08%          6,429          >=4%         8,036          >=5%
</TABLE>

      In addition, under Washington State Banking Regulations, the Bank is
      limited as to the ability to declare or pay dividends to the Company up to
      the amount of the Bank's net profits then on hand.

(12)  FAIR VALUE OF FINANCIAL INSTRUMENTS

      Because broadly traded markets do not exist for most of the Company's
      financial instruments, the fair value calculations attempt to incorporate
      the effect of current market conditions at a specific time. Fair
      valuations are management's estimates of values. These calculations are
      subjective in nature, involve uncertainties and matters of significant
      judgment and do not include tax ramifications; therefore, the results
      cannot be determined with precision, substantiated by comparison to
      independent markets and may not be realized in an actual sale or immediate
      settlement of the instruments. There may be inherent weaknesses in any
      calculation technique, and changes in the underlying assumptions used,
      including discount rates and estimates of future cash flows, could
      significantly affect the results. For all of these reasons, the
      aggregation of the fair value calculations presented herein do not
      represent, and should not be construed to represent, the underlying value
      of the Company.

      When possible, quoted market prices are used to determine fair value. In
      cases where a quoted market price is not available, the fair value of
      financial instruments is estimated using the present value of future cash
      flows or other valuation methods.

      (a)   Financial Instruments With Book Value Equal to Fair Value

            The fair value of financial instruments that are short-term or
            reprice frequently and that have little or no risk are considered to
            have a fair value equal to book value.



                                       20
<PAGE>   20

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

      (b)   Investment Securities

            The fair value of all investment securities excluding FHLB stock was
            based upon quoted market prices. FHLB stock is not publicly traded;
            however it may be redeemed on a dollar-for-dollar basis, for any
            amount the Bank is not required to hold. The fair value is therefore
            equal to the book value.

      (c)   Loans

            The loan portfolio is composed of commercial, consumer, real estate
            construction and real estate loans. The book value of variable rate
            loans approximate their fair values. The fair value of fixed rate
            loans is estimated by discounting the estimated future cash flows of
            loans, sorted by type and security, by the weighted average rate of
            such loans, adjusted for credit risk.

      (d)   Deposits

            For deposits with no contractual maturity such as demand accounts,
            checking accounts, money market accounts and passbook savings
            accounts, fair values approximate book values. The fair value of
            certificates of deposit is based on discounted cash flows using the
            difference between the deposit rate and an alternative cost of funds
            rate.

      (e)   Off-Balance Sheet Financial Instruments

            The fair value of off-balance sheet commitments to extend credit is
            considered equal to its notional amount due primarily to the
            short-term nature of these items.

            The table below presents the book value amount of the Company's
            financial instruments and their corresponding fair values at
            December 31, 1998 and 1997:

<TABLE>
<CAPTION>
                                                             1998                               1997
                                                  ---------------------------       ----------------------------
                                                  Book value       Fair value       Book value        Fair value
                                                  ----------       ----------       ----------        ----------
<S>                                               <C>              <C>              <C>               <C>  
Financial assets:
  Cash and due from banks                          $ 12,063           12,063            6,263            6,263
  Interest bearing deposits                           8,089            8,089               --               --
  Federal funds sold                                  4,100            4,100            1,750            1,750
  FHLB stock                                            736              736              682              682
  Investment securities available for sale           12,591           12,591            5,521            5,521
  Investment securities held to maturity             24,875           25,667           23,508           23,824
  Loans                                             149,651          156,965          117,578          116,752
Financial liabilities - deposits                    189,698          189,829          146,394          143,074
Off-balance-sheet items:
  Loan commitments                                   24,889           24,889           20,959           20,959
  Standby letters of credit                             688              688              648              648
</TABLE>



                                       21
<PAGE>   21

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(13)  WASHINGTON BANKING COMPANY INFORMATION

      The summarized condensed financial information for Washington Banking
      Company (parent company only) as of and for the years ended December 31,
      1998 and 1997 are presented below: As of December 31

                            CONDENSED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                          AS OF DECEMBER 31
                                                                      --------------------------
                                                                        1998              1997
                                                                      --------          --------
<S>                                                                   <C>               <C>
Assets:
 Cash and cash equivalents                                            $  4,960               100
 Other assets                                                               54                16
 Investment in subsidiary                                               24,683            12,919
                                                                      --------          --------
             Total assets                                             $ 29,697            13,035
                                                                      ========          ========

Liabilities - other                                                   $      6                --
                                                                      --------          --------
Shareholders' equity:
 Common stock                                                           17,836             2,943
 Retained earnings                                                      11,805            10,075
 Accumulated other comprehensive income, net                                50                17
                                                                      --------          --------
             Total shareholders' equity                                 29,691            13,035
                                                                      --------          --------
             Total liabilities & shareholders' equity                 $ 29,697            13,035
                                                                      ========          ========
</TABLE>

                         CONDENSED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
                                                                        YEAR ENDED DECEMBER 31
                                                                      --------------------------
                                                                        1998              1997
                                                                      --------          --------
<S>                                                                   <C>               <C> 
Noninterest expense                                                   $    (99)              (45)
Income tax (expense) benefit                                                (5)               15
                                                                      --------          --------
             Loss before undistributed earnings of subsidiary             (104)              (30)
Interest income                                                            115                --
Undistributed earnings of subsidiary                                     2,201             1,934
                                                                      --------          --------
             Net income                                               $  2,212             1,904
                                                                      ========          ========
</TABLE>



                                       22
<PAGE>   22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                       CONDENSED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                        YEAR ENDED DECEMBER 31
                                                                      --------------------------
                                                                        1998              1997
                                                                      --------          --------
<S>                                                                   <C>               <C>  
Operating activities:
  Net income                                                          $  2,212             1,904
  Adjustments to reconcile net income to net cash used
     in operating activities:
     Equity in undistributed earnings of subsidiaries                   (2,201)           (1,934)
     Other                                                                 (32)               10
                                                                      --------          --------
           Net cash used in operating activities                           (21)              (20)
                                                                      --------          --------
Investing activities:
  Dividends received from subsidiary                                       470               557
  Cash invested in subsidiary                                          (10,000)               --
                                                                      --------          --------
          Net cash provided by (used in) investing activities           (9,530)              557
                                                                      --------          --------
Financing activities:
  Dividends paid to shareholders                                          (482)             (356)
  Proceeds from exercise of stock options and stock issuances               --               111
  Repurchased and retired stock                                             --              (200)
  Proceeds from stock issued                                            14,893                --
                                                                      --------          --------
         Net cash provided by (used in) financing activities            14,411              (445)
                                                                      --------          --------
         Increase in cash and cash equivalents                           4,860                92

Cash and cash equivalents at beginning of year                             100                 8
                                                                      --------          --------
Cash and cash equivalents at end of year                              $  4,960               100
                                                                      ========          ========
</TABLE>

(14)  COMMITMENTS

      (a)   Leasing Arrangements

            The Company is obligated under a number of noncancelable operating
            leases for land and buildings. The majority of these leases have
            renewal options. In addition, some of the leases contain escalation
            clauses tied to the consumer price index with caps.

            In 1997, the Company entered into a lease for land. The lease
            includes options to purchase the property which may be exercised at
            the end of each fifth year during the term of the lease. The lease
            expires in 2027.

            The Company's future minimum rental payments required under land,
            buildings and equipment operating leases that have initial or
            remaining noncancelable lease terms of one year or more are as
            follows:



                                       23
<PAGE>   23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                YEAR ENDING 
                                                DECEMBER 31
                                                -----------
               <S>                              <C>    
               1999                               $   168
               2000                                   101
               2001                                    90
               2002                                    90
               2003                                    66
               Thereafter                           1,251
                                                 --------
               Total                             $  1,766
                                                 ========
</TABLE>

      Rent expense applicable to operating leases for the years ended
      December 31, 1998, 1997 and 1996 was $178, $87 and $9, respectively.

      (b)   Commitments to Extend Credit

            In the normal course of business, the Company enters into financial
            instruments with off-balance-sheet risk to meet the financing needs
            of its customers. These instruments, which include commitments to
            extend credit and standby letters of credit, involve varying degrees
            of credit and interest rate risk that are not reflected in the
            financial statements. These instruments generally have fixed
            expiration dates and do not necessarily represent future cash
            requirements since they often expire without being drawn upon. The
            Company's criteria for issuing such instruments are the same as
            those for loans made in the normal course of business.

            Commitments to extend credit are as follows:

<TABLE>
<CAPTION>
                                        DECEMBER 31
                                  -----------------------
                                    1998            1997
                                  -------          ------
<S>                               <C>              <C>   
Loan commitments                  $24,889          20,959
Standby letters of credit             688             648
</TABLE>

      (c)   Lines of Credit

            The Company had unused lines of credit with the FHLB of $32,870 at
            December 31, 1998. The Company also had unused lines of credit with
            financial institutions amounting to $11,400 at December 31, 1998.

(15)  CONTINGENCIES

      The Company is currently subject and party to various legal actions
      arising out of the normal course of business. Management believes the
      ultimate liability, if any, arising from such claims or contingencies is
      not likely to have a material adverse effect on the Company's results of
      operations or financial condition.

(16)  SUBSEQUENT EVENTS

      On January 21, 1999, the Board of Directors declared a cash dividend of
      $0.04 per share for the first quarter of 1999.



                                       24
<PAGE>   24

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(17)  SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

      Results of operations on a quarterly basis were as follows (dollars in
      thousands, except per share amounts):

<TABLE>
<CAPTION>
                                                                                  YEAR ENDED DECEMBER 31, 1998
                                                                 -----------------------------------------------------------------
                                                                 FIRST QUARTER    SECOND QUARTER   THIRD QUARTER    FOURTH QUARTER
                                                                 -------------    --------------   -------------    --------------
<S>                                                              <C>              <C>              <C>              <C>  
Interest income                                                      $3,366            3,603            4,126            4,141
Interest expense                                                      1,315            1,415            1,554            1,481
                                                                     ------           ------           ------           ------
       Net interest income                                            2,051            2,188            2,572            2,660

Provision for loan losses                                               195              150              195              195
                                                                     ------           ------           ------           ------
       Net interest income after provision for loan losses            1,856            2,038            2,377            2,465

Noninterest income                                                      480              430              548              477

Noninterest expense                                                   1,716            1,788            2,095            1,937
                                                                     ------           ------           ------           ------
       Income before provision for income taxes                         620              680              830            1,005
                                                                     ------           ------           ------           ------
Provision for income taxes                                              204              160              217              342
                                                                     ------           ------           ------           ------
       Net income                                                    $  416              520              613              663
                                                                     ------           ------           ------           ------
Basic earnings per share                                             $ 0.15             0.16             0.15             0.16
Diluted earnings per share                                             0.14             0.15             0.14             0.15
Cash dividends declared                                                0.07               --            0.035            0.035
                                                                     ------           ------           ------           ------
</TABLE>

<TABLE>
<CAPTION>
                                                                                  YEAR ENDED DECEMBER 31, 1997
                                                                 -----------------------------------------------------------------
                                                                 FIRST QUARTER    SECOND QUARTER   THIRD QUARTER    FOURTH QUARTER
                                                                 -------------    --------------   -------------    --------------
<S>                                                              <C>              <C>              <C>              <C>  
Interest income                                                      $2,473            2,844            3,159            3,424
Interest expense                                                        870            1,021            1,162            1,305
                                                                     ------           ------           ------           ------
       Net interest income                                            1,603            1,823            1,997            2,119

Provision for loan losses                                               105              105              165              272
                                                                     ------           ------           ------           ------
       Net interest income after provision for loan losses            1,498            1,718            1,832            1,847

Noninterest income                                                      362              385              409              510

Noninterest expense                                                   1,271            1,332            1,491            1,746
                                                                     ------           ------           ------           ------
       Income before provision for income taxes                         589              771              750              611
                                                                     ------           ------           ------           ------
Provision for income taxes                                              261              261              195              100
                                                                     ------           ------           ------           ------
       Net income                                                    $  328              510              555              511
                                                                     ------           ------           ------           ------
Basic earnings per share                                             $ 0.12             0.18             0.20             0.18
Diluted earnings per share                                             0.11             0.17             0.18             0.17
Cash dividends declared                                                  --               --               --             0.13
                                                                     ------           ------           ------           ------
</TABLE>



                                       25
<PAGE>   25
MANAGEMENT DISCUSSION AND ANALYSIS
  OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This discussion is intended to assist in understanding the financial condition
and results of operations of the Company. The information contained in this
section should be read in conjunction with the consolidated financial statements
of Washington Banking Company and notes thereto contained elsewhere in this
report. 

This discussion contains certain forward-looking statements within the meaning
of the federal securities laws. Actual results and the timing of certain events
could differ materially from those projected in the forward looking statements
due to a number of factors. Specific factors include, among others, the impact
of interest rates charges, risks of acquiring or opening new branches,
controlling expenses, and general economic conditions.

OVERVIEW

Washington Banking Company (the "Company") is a registered bank holding company
whose wholly-owned subsidiary, Whidbey Island Bank (the "Bank"), conducts a
full-service commercial banking business. Headquartered in Oak Harbor,
Washington, the Company provides a full range of commercial banking services to
small and medium-sized businesses, professionals and other individuals through
twelve branch offices located on Whidbey Island and Camano Island in Island
County, as well as the Burlington, Anacortes (Skagit County) and Bellingham
(Whatcom County) communities in northwestern Washington.

Effective June 23, 1998, the Company sold 1,380,000 shares of its common stock
in an initial public offering at a subscription price of $12 per share resulting
in net proceeds to the Company of $14.9 million. Its stock now trades on the
Nasdaq National Market under the symbol "WBCO".

The Bank began operations in 1961 on Whidbey Island. Until early 1994, the
Company limited its physical presence to Island County (Whidbey Island and
neighboring Camano Island), and particularly to Whidbey Island, a 45-mile long
island that runs parallel to the mainland area of Washington northwest of
Everett and southwest of Bellingham, but had no presence on the mainland. In
view of the threatened closure of NAS Whidbey Island, the Company determined
that it would be prudent to diversify geographically beyond Island County. With
the consolidation of the large regional banks operating in Washington, and the
resulting dislocation of customers, the Company saw an opportunity to expand
onto the mainland along the northern I-5 corridor. In February 1994, the Company
opened a loan production office in Burlington, Washington (Skagit County). Loan
growth in the Burlington office was strong and the Company determined that it
would pursue its growth strategy in and around Skagit County and north into
Whatcom County. In pursuit of that growth strategy, the Company has targeted
areas north of Everett, Washington and areas contiguous to Whidbey Island into
which it would expand.

The primary factors considered in determining the areas of geographic expansion
are customer demand and the availability of experienced managers, lending
officers and branch personnel with a long standing community presence and
extensive banking relationships. The Company also emphasizes the hiring of
experienced personnel with extensive industry knowledge when considering lending
product expansion.

Due to the favorable response in Burlington, the Company converted the
Burlington loan production office into a full service branch in August 1995. In
late 1996, the Company targeted Bellingham for expansion, hired an experienced
manager and lending officer, both with long standing community presence, and in
early 1997 opened a full service branch in downtown Bellingham. During 1998 new
full service branches were constructed and opened in Anacortes and Freeland. In
addition, a grocery store branch was opened in March 1998 on Camano Island.

The Company's objective is to continue, over the next several years, to expand
its geographical presence outside of Whidbey and Camano Islands, while
solidifying its market position on the Islands. To deliver the Company's
products more effectively and efficiently, the Company's market strategy is to
locate full service branch offices which provide all of the Company's products
and services in its targeted growth areas supported by loan production offices,
mini branches, grocery or retail store branches and/or automated teller machines
in the areas surrounding those central locations in order to further service
customers. Acquisition of banks or branches will also be used as a means of
expansion if appropriate opportunities are presented. The Company also expects
to invest in technology to facilitate telephone, personal computer and Internet
banking, but with its primary commitment being to provide exceptional personal
service.

Currently, the Company's geographical expansion is expected to be concentrated
in the Burlington/ Mount Vernon area of the Skagit Valley, and in other areas of
Skagit County and the Bellingham area of Whatcom County. Additional geographic
expansion areas will be considered if they meet the Company's criteria.

In pursuit of its growth strategy, in the first and second quarter,
respectively, of 1998, the Company opened a full service branch in Anacortes and
a grocery store branch on Camano Island to complement its existing Camano Island
branch. It also opened a full-service branch in Freeland, Washington, which is
located in the southern part of



                                       26
<PAGE>   26

Whidbey Island in the fourth quarter of the year. The Company relocated the
Bellingham office to a larger office in the first quarter of 1999 and opened a
residential real estate loan production office in Port Townsend, Washington
(Jefferson County).

While continuing to geographically expand, management's strategy is to continue
to provide a high level of personal service to its customers and to expand loan,
deposit and other products and services that it offers its customers.
Maintenance of asset quality will be emphasized by controlling nonperforming
assets and adhering to prudent underwriting standards. In addition, management
will strive to improve operating efficiencies to further manage noninterest
expense and will continue to improve internal operating systems.

The Company's expansion activity can be expected to require the expenditures of
substantial sums to purchase or lease real property and equipment and hire
experienced personnel. New branch offices are often not profitable for at least
the first eighteen months after opening and management expects that any earnings
will be negatively affected as the Company pursues its growth strategy.

FINANCIAL CONDITION

Total assets increased to $220.5 million at December 31, 1998 from $160.1
million at December 31, 1997, an increase of 37.7%. This increase resulted from
growth in the loan and investment portfolios, which was funded by Company
proceeds received in the IPO and deposit growth. Total loans amounted to $149.6
million, and $117.6 million, December 31, 1998, and 1997, respectively.
Commercial loans grew to $65.6 million at December 31, 1998 from $48.2 million
at December 31, 1997, while consumer loans increased to $40.8 million from $33.7
million during that same period. Commercial loans as a percentage of total loans
increased to 43.8% at December 31, 1998 from 41.0% at December 31, 1997, and
consumer loans decreased to 27.2% of total loans from 28.7% at those dates. Real
estate loans remained consistent at 19.5% of total loans, at December 31, 1998
and 1997, while real estate construction loans decreased to 9.5% from 10.8%.
Total investment securities were $38.2 million, and $29.7 million at December
31, 1998 and 1997, respectively. The increase over 1997 reflects the investment
of excess liquidity, including proceeds from the Company's initial public
offering in June 1998. Premises and equipment, net, were $8.0 million, and $4.3
million at December 31, 1998, and 1997, respectively. The increase over 1997
reflects upgrading computer systems, remodeling of the administrative and other
offices, purchase of land for branch offices and construction of branch offices.
Deposit accounts totaled $189.7 million, and $146.4 million, at December 31,
1998, and 1997, respectively. Management attributes this increase to an increase
in deposits resulting from expanding commercial and other loan relationships and
increasing visibility in its' market areas. Shareholders' equity was $29.7
million, and $13.0 million, at December 31, 1998, and 1997, respectively. These
increases primarily reflect proceeds received from the initial public offering,
and net income less dividends paid to shareholders.

NET INTEREST INCOME Like most financial institutions, the primary component of
earnings for the Company is net interest income. Net interest income is the
difference between interest income, principally from loan and investment
securities portfolios, and interest expense, principally on customer deposits
and Company borrowings. Changes in net interest income result from changes in
volume, spread and margin. For this purpose, volume refers to the average dollar
level of interest earning assets and interest bearing liabilities, spread refers
to the difference between the average yield on interest earning assets and the
average cost of interest bearing liabilities, and margin refers to net interest
income divided by average interest earning assets and is influenced by the level
and relative mix of interest earning assets and interest bearing liabilities as
well as levels of noninterest bearing liabilities. During the fiscal years ended
December 31, 1998, 1997 and 1996, average interest earning assets were $174.4
million, $129.7 million, and $96.0 million, respectively. During these same
periods, the Company's net interest margins were 5.56%, 5.94%, and 6.27%,
respectively.

AVERAGE BALANCES AND AVERAGE RATES EARNED AND PAID The following table sets
forth for the periods indicated information with regard to average balances of
assets and liabilities, as well as the total dollar amounts of interest income
from interest earning assets and interest expense on interest bearing
liabilities, resultant yields or costs, net interest income, net interest
spread, net interest margin and ratio of average interest earning assets to
average interest bearing liabilities.

                                       27
<PAGE>   27

<TABLE>
<CAPTION>
(Dollars in thousands)                                                   DECEMBER 31
                          ---------------------------------------------------------------------------------------------------------
                                        1998                                 1997                               1996
                          --------------------------------     -------------------------------     --------------------------------
                          AVERAGE     INTEREST     AVERAGE     AVERAGE     INTEREST    AVERAGE     AVERAGE     INTEREST     AVERAGE
                          BALANCE    EARNED/PAID    YIELD      BALANCE   EARNED/PAID    YIELD      BALANCE    EARNED/PAID    YIELD
                          -------    -----------    -----      -------   -----------    -----      -------    -----------    -----
<S>                      <C>         <C>           <C>         <C>       <C>           <C>         <C>        <C>           <C>   
Assets
 Loans                   $131,359      $ 12,910     9.83%     $100,243     $ 10,207     10.18%     $ 69,237     $  7,334     10.59%
 Federal funds sold         5,609           298     5.31%        2,187          116      5.30%        2,343          126      5.38%
 Interest bearing 
   cash                     5,066           243     4.80%
 Investments:
    Taxable                19,144         1,151     6.01%       17,986        1,118      6.22%       18,315        1,080      5.90%
    Non-taxable(1)         13,189           850     6.44%        9,241          616      6.67%        6,132          426      6.95%
                         --------      --------     ----      --------     --------     -----      --------     --------     ----- 
 Interest earning
   assets                $174,367      $ 15,452     8.86%     $129,657     $ 12,057      9.30%     $ 96,027     $  8,966      9.34%
 Noninterest 
   earning assets          16,048                               11,775                                8,917
                         --------                             --------                             --------
 Total assets            $190,415                             $141,432                             $104,944
                         ========                             ========                             ========
Liabilities &
  Shareholders' 
  Equity
 Deposits
    Interest demand 
      and money mkt      $ 55,320      $  1,589     2.87%     $ 40,600     $  1,193      2.94%     $ 28,753     $    739      2.57%
    Savings                23,227           726     3.13%       21,789          778      3.57%       20,036          704      3.51%
    Time deposits          61,361         3,450     5.62%       42,220        2,387      5.65%       26,777        1,503      5.61%
                         --------      --------     ----      --------     --------     -----      --------     --------     ----- 
 Interest bearing 
   liabilities           $139,908      $  5,765     4.12%     $104,609     $  4,358      4.17%     $ 75,566     $  2,946      3.90%
 Noninterest 
   bearing
   liabilities             29,045                               24,301                               18,133
                         --------                             --------                             --------
 Total liabilities       $168,953                             $128,910                             $ 93,699
 Shareholders' 
   equity                  21,462                               12,522                               11,245
                         --------                             --------                             --------
 Total liabilities 
    and shareholder's
    equity               $190,415                             $141,432                             $104,944
                         ========                             ========                             ========
Net interest income                    $  9,687                             $ 7,699                             $  6,020
                                       --------                             -------                             --------
Net interest spread                                 4.74%                                5.13%                                5.44%
                                                    ----                                 ----                                 ---- 
Net interest margin(1)                              5.56%                                5.94%                                6.27%
                                                    ----                                 ----                                 ---- 
</TABLE>

(1)   Interest income on non-taxable investments is presented on a fully
      taxable-equivalent basis using the federal statutory rate of 34% in 1998,
      1997, and 1996. These adjustments were $216,000, $156,000, and $108,000,
      for the years ended December 31, 1998, 1997 and 1996, respectively.



                                       28
<PAGE>   28

RATE/VOLUME ANALYSIS The following table sets forth the amounts of the changes
in consolidated net interest income attributable to changes in volume and to
changes in interest rates. Changes attributable to the combined effect of volume
and interest rate have been allocated proportionately to the changes due to
volume and the change due to interest rate.

<TABLE>
<CAPTION>
                                              1998 COMPARED TO 1997                       1997 COMPARED TO 1996
                                       ------------------------------------        -------------------------------------
                                           INCREASE (DECREASE) DUE TO                  INCREASE (DECREASE) DUE TO
                                        VOLUME         RATE          TOTAL          VOLUME          RATE          TOTAL
                                       -------       -------        -------        -------        -------        -------
<S>                                    <C>           <C>            <C>            <C>            <C>            <C>    
Loans:
Total loans                            $ 3,168       ($  465)       $ 2,703        $ 3,284        ($  411)       $ 2,873
Federal funds sold                         182            --            182             (8)            (2)           (10)
Interest bearing cash                      243            --            243             --             --             --
Securities (1)                             325           (58)           267            171             57            228
                                       -------       -------        -------        -------        -------        -------
   Total interest income               $ 3,918       ($  523)       $ 3,395        $ 3,447        ($  356)       $ 3,091
                                       =======       =======        =======        =======        =======        =======

Interest bearing demand deposits           433           (37)           396            304            150            454
Savings accounts                            51          (103)           (52)            62             12             74
Certificates of deposit                  1,082           (19)         1,063            867             17            884
                                       -------       -------        -------        -------        -------        -------
   Total Interest Expense              $ 1,566       ($  159)       $ 1,407        $ 1,233        $   179        $ 1,412
                                       =======       =======        =======        =======        =======        =======
</TABLE>

(1)   Interest income on non-taxable investments is presented on a fully
      taxable-equivalent basis using the federal statutory rate of 34% in 1998,
      1997, and 1996. These adjustments were $216,000, $156,000, and $108,000,
      for the years ended December 31, 1998, 1997 and 1996, respectively.

RESULTS OF OPERATIONS

NET INCOME The Company reported net income of $2.2 million, $1.9 million and
$1.6 million for the years ended December 31, 1998, 1997 and 1996, respectively.
Diluted net income per share was $0.59, $0.65, and $0.55, in each case adjusted
for stock splits, for 1998, 1997 and 1996, respectively. The increase in net
income for each year was primarily attributable to an increase in net interest
income and to a lesser extent increases in noninterest income partially offset
by increases in noninterest expenses and an increase in the provision for loan
losses. The decrease in diluted net income per share from 1997 to 1998 was
primarily attributable to the increased number of outstanding shares as a result
of the initial public offering in June 1998.

NET INTEREST INCOME Net interest income for the years ended December 31, 1998,
1997 and 1996 was $9.5 million, $7.5 million, and $5.9 million, respectively.
The increase in fiscal year 1998 was $2.0 million, or 26.7% and in, 1997 was
$1.6 million, or 27.6%. Net interest income was favorably affected by average
interest earning assets increasing more rapidly than average interest bearing
liabilities, with the difference funded by growth in noninterest bearing
deposits and shareholders' equity. Average interest earning assets increased
$44.7 million and $33.6 million for fiscal years ended 1998 and 1997,
respectively, while average interest bearing liabilities increased by $35.3
million and $29.0 million for the same periods.

The average yield on interest earning assets decreased to 8.86% for the year
ended December 31, 1998 from 9.30% for the year ended December 31, 1997 and
9.34% for the year ended December 31, 1996. This decrease is due primarily to a
decrease in the rates earned on loans. Average yield on loans decreased to 9.83%
for the year ended December 31, 1998 from 10.18% for the year ended December 31,
1997 and 10.59% for the year ended December 31, 1996. In addition, an overall
decrease in rates earned on investments contributed to the decrease in average
yield on interest earning assets. Average yields on taxable investments
decreased to 6.01% for the year ended December 31, 1998 from 6.22% for the year
ended December 31, 1997 and increased at December 31, 1997 from 5.90% for the
year ended December 31, 1996. Average yields on non-taxable investments
decreased to 6.44% for the year ended December 31, 1998 from 6.67% and 6.95%,
respectively, for the years ended December 31, 1997 and 1996. The average yield
on interest bearing liabilities also decreased in 1998 to 4.12% for the year
ended December 31, 1998 from 4.17% for the year ended December 31, 1997 as rates
on all deposit types decreased during the year. For the year ended 1997, the
yield on average interest bearing liabilities increased from 3.90% for the year
ended December 31, 1996. Average interest earning assets increased 34.5% from
December 31, 1997 to December 31, 1998 and 35.0% from December 31, 1996 to
December 31, 1997, and average interest bearing liabilities increased 33.7% and
38.4%, respectively, during the same periods. The overall result of these
changes was a decrease in the net interest spread to 4.74% for the year ended
December 31, 1998 from 5.13% for the year ended December 31, 1997 and 5.44% for
the year ended December 31, 1996 and a decrease in net interest margin to 5.56%
from 5.94% and 6.27%, respectively, for the same periods.

                                       29
<PAGE>   29

PROVISION FOR LOAN LOSSES Provision for loan losses are charges to earnings to
bring the total allowance for loan losses to a level considered by management as
adequate to provide for estimated loan losses based on management's evaluation
of the collectability of the loan portfolio, including the nature of the
portfolio, credit concentrations, trends in historical loss experience, specific
impaired loans and economic conditions. For the years ended December 31, 1998,
1997 and 1996, net loan charge-offs amounted to $286,000, $147,000, and
$174,000, respectively. The Company's provision for loan losses for the years
ended December 31, 1998, 1997 and 1996 totaled $735,000, $647,000, and $350,000,
respectively. The provision for loan losses was increased substantially in 1998,
1997 and 1996 to keep pace with the strong growth and losses inherent in the
loan portfolio. During 1998, the allowance for loan losses increased by $449,000
to 1.17% of loans and 206.02% of nonperforming loans at December 31, 1998.
During 1997, the allowance for loan losses increased by $500,000 to 1.10% of
loans and 112.60% of nonperforming loans at December 31, 1997. The allowance
represented 0.98% of loans at December 31, 1996.

NONINTEREST INCOME Noninterest income for the years ended December 31, 1998,
1997 and 1996 was $1.9 million, $1.7 million, and $1.4 million, respectively.
The increases of $269,000 in 1998, $242,000 in 1997 and $364,000 in 1996,
reflecting an increase in service charges on deposit accounts and other fees and
an increase in merchant credit card account fees due to an expansion of that
program in late 1995.

NONINTEREST EXPENSE Noninterest expense for the years ended December 31, 1998,
1997, and 1996 was $7.5 million, $5.8 million, and $4.7 million, respectively.
Increases in noninterest expense were primarily related to compensation and
employee benefits, occupancy expense and data processing expenses. These
increases reflect the rapid expansion of the Company which began in late 1995
and is more fully reflected in 1996, 1997, and 1998. Included in increased
salaries and benefits expense in 1998 and 1997 were increased staffing levels in
executive and administrative personnel, branch personnel and additions to
mortgage lending and consumer lending departments. A portion of the preopening
expenses for two new branches opening in the first half of fiscal 1998 were also
reflected in 1997 noninterest expense. The Company expects this trend in
increased noninterest expense to continue as a result of continued planned
expansion. Set forth below is a schedule showing additional detail concerning
increases in the Company's noninterest expense for 1998 compared with 1997 and
for 1997 compared with 1996:

<TABLE>
<CAPTION>
                                                                                    INCREASE/     INCREASE/
                                             FOR THE YEARS ENDING DECEMBER 31       DECREASE       DECREASE
                                               1998         1997          1996    1998 VS. 1997  1997 VS. 1996
                                              ------       ------       ------    -------------  -------------
                                                                 (Dollars in thousands)
<S>                                          <C>           <C>          <C>       <C>            <C>
Salaries and benefits                         $5,068        3,543        2,678        1,525           865
   Less: loan origination costs                1,879        1,109          659          770           450
                                              ------       ------       ------       ------        ------
Net salaries and benefits (as reported)        3,189        2,434        2,019          755           415
Occupancy expense                              1,455        1,033          745          422           288
Office supplies and printing                     365          275          220           90            55
Insurance expense                                373          271          251          102            20
Data processing                                  260          219          125           41            94
Consulting and professional fees                 175          202          165          (27)           37
Other                                          1,718        1,406        1,159          312           247
                                              ------       ------       ------       ------        ------
     Total noninterest expense                $7,535        5,840        4,684        1,695         1,156
                                              ======       ======       ======       ======        ======
</TABLE>

LIQUIDITY AND CAPITAL RESOURCES

The Company's sources of funds are customer deposits, cash and demand balances
due from other banks, Federal funds sold, short-term investments and investment
securities available for sale. These funds, together with loan repayments, are
used to make loans and to fund continuing operations. In addition, at December
31, 1998 the Company had unused lines of credit with the Federal Home Loan Bank
of Seattle ("FHLB") of $32.9 million and unused lines of credit with financial
institutions in the amount of $11.4 million, with no advances on these lines of
credit at December 31, 1998. The Company expects to use FHLB advances to
supplement its funding sources.

Total deposits were $189.7 million, $146.4 million, and $105.2 million December
31, 1998, 1997, and 1996, respectively. The increases in deposits were 29.6% in
1998 and 39.2% and 18.9%, respectively, in 1997 and 1996. 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
the delivery of quality service.

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 have stated maturity dates. At December 31, 1998, the Company had
$64.7 million in certificates of deposit of which approximately $56.8 million,
or 88%, are scheduled to mature on or prior to December 31, 1999. Based on prior
experience, the Company anticipates that a substantial portion of outstanding
certificates of deposit will renew upon maturity.

Management anticipates that the Bank will rely primarily upon customer deposits,
loan repayments and current earnings to provide liquidity, and will use such
funds primarily to make loans and to purchase securities, primarily issued by
the federal government and state and local governments.



                                       30
<PAGE>   30

The Company's shareholders' equity increased to $29.7 million at December 31,
1998 from $13.0 million at December 31, 1997 and from $11.6 million at December
31, 1996. The increase from year end 1997 to year end 1998 was from net income
less dividends plus $14.9 million in proceeds from the Company's initial public
offering in June of 1998. The increase from year end 1996 to year end 1997 was
from net income less dividends. At December 31, 1998, shareholders' equity was
13.47% of total assets compared to 8.14% and 9.87% of total assets at December
31, 1997 and 1996, respectively. The increase in this ratio from year end 1997
primarily results from offering proceeds received in June of 1998. The decrease
in this ratio at year end 1997 from year end 1996 was primarily a result of an
increase in total assets of $42.8 million from December 31, 1996 to December 31,
1997. The increase in total assets was due primarily to an increase in total
loans, and to a lesser extent, to an increase in cash equivalents and other
assets.

CAPITAL RATIOS

The Bank is subject to minimum capital requirements. See "Supervision and
Regulation." As the following table indicates, at December 31, 1998 the Bank
exceeded regulatory capital requirements.

<TABLE>
<CAPTION>
                                                      AT DECEMBER 31, 1998
                                          --------------------------------------------
                                            MINIMUM      WELL-CAPITALIZED       ACTUAL
                                          REQUIREMENT       REQUIREMENT          RATIO
                                          -----------       -----------          -----
<S>                                       <C>            <C>                    <C>   
Total risk-based capital ratio                8.00%            10.00%            15.99%
Tier 1 risk-based capital ratio               4.00%             6.00%            14.93%
Leverage ratio                                4.00%             5.00%            11.67%
</TABLE>

Management expects the Bank to remain "well-capitalized" for regulatory
purposes, although there can be no assurance that additional capital will not be
required in the near future due to greater-than-expected growth, or otherwise.

ASSET/LIABILITY MANAGEMENT

The Company's results of operations depend substantially on its net interest
income. Like most financial institutions, the Company's interest income and cost
of funds are affected by general economic conditions and by competition in the
market place. The purpose of asset/liability management is to provide stable net
interest income growth by protecting the Company's earnings from undue interest
rate risk, which arises from volatile interest rates and changes in the balance
sheet mix, and by managing the risk/return relationships between liquidity,
interest rate risk, market risk, and capital adequacy. The Company maintains an
asset/liability management policy that provides guidelines for controlling
exposure to interest rate risk by utilizing the following ratios and trend
analysis: liquidity, equity, volatile liability dependence, portfolio
maturities, maturing assets and maturing liabilities. The Company's policy is to
control the exposure of its earnings to changing interest rates by generally
endeavoring to maintain a position within a narrow range around an "earnings
neutral position," which is defined as the mix of assets and liabilities that
generate a net interest margin that is least affected by interest rate changes.

INTEREST RATE SENSITIVITY When suitable lending opportunities are not sufficient
to utilize available funds, the Company has generally invested such funds in
securities, primarily U.S. Treasury securities, securities issued by
governmental agencies, municipal securities and corporate obligations. The
securities portfolio contributes to the Company's profits and plays an important
part in the overall interest rate management. However, management of the
securities portfolio alone cannot balance overall interest rate risk. The
securities portfolio must be used in combination with other asset/liability
techniques to actively manage the balance sheet. The primary objectives in the
overall management of the securities portfolio are safety, liquidity, yield,
asset/liability management (interest rate risk), and investing in securities
that can be pledged for public deposits.

In reviewing the needs of the Company with regard to proper management of its
asset/liability program, the Company's management estimates its future needs,
taking into consideration historical periods of high loan demand and low deposit
balances, estimated loan and deposit increases (due to increased demand through
marketing), and forecasted interest rate changes.

The Company is exposed to interest rate risk. Interest rate risk is the risk
that financial performance will decline over time due to changes in prevailing
interest rates and resulting yields on interest earning assets and costs of
interest bearing liabilities. 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 pre-



                                       31
<PAGE>   31
cisely 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 and changes in market
conditions and management strategies, among other factors.

Based on the results of the income simulation model as of December 31, 1998, the
Company would expect an increase in net interest income of $73,000 if interest
rates increase from current rates by 100 basis points and a decrease in net
interest income of $73,000 if interest rates decrease from current rates by 100
basis points.

The analysis of an institution's interest rate gap (the difference between the
repricing of interest earning assets and interest bearing liabilities during a
given period of time) is another standard tool for the measurement of the
exposure to interest rate risk. The Company believes that because interest rate
gap analysis does not address all factors that can affect earnings performance,
it should be used in conjunction with other methods of evaluating interest rate
risk.

The following table sets forth the estimated maturity or repricing, and the
resulting interest rate gap of the Company's interest earning assets and
interest earning liabilities at December 31, 1998. The interest rate gaps
reported in the table arise when assets are funded with liabilities having
different repricing intervals. The amounts shown below could be significantly
affected by external factors such as changes in prepayment assumptions, early
withdrawals of deposits and competition.

<TABLE>
<CAPTION>
                                                    0-3 MONTHS       4-12 MONTHS       1-5 YEARS      OVER 5 YRS         TOTAL
                                                    ----------       -----------       ---------      ----------         -----
                                                                                (Dollars in thousands)
<S>                                                 <C>              <C>               <C>            <C>             <C>      
Interest earning assets:
    Federal funds sold                               $   4,100        $      --        $      --       $      --       $   4,100
    Investment securities                                1,145            6,920           19,418          10,719          38,202
    Loans                                               51,755           24,562           55,515          17,785         149,617
                                                    ----------       ----------        ---------       ---------        --------
    Total interest earning assets                    $  57,000        $  31,482        $  74,933       $  28,504       $ 191,919

    Interest earning assets to total assets              29.70%           16.40%           39.04%          14.85%         100.00%

Interest bearing liabilities:
    Interest bearing demand accounts                 $  36,213               --               --              --       $  36,213
    Money market accounts                               29,821               --               --              --          29,821
    Savings accounts                                    25,517               --               --              --          25,517
    Time deposits                                       21,882           34,925            7,891              --          64,698
                                                    ----------       ----------        ---------       ---------        --------
    Total interest bearing liabilities               $ 113,433        $  34,925        $   7,891              --       $ 156,249

    Interest bearing liab. to total liabilities          72.60%           22.35%            5.05%           0.00%         100.00%

Interest sensitivity gap                             ($ 56,433)       ($  3,443)       $  67,042       $  28,504       $  35,670

Cumulative interest sensitivity gap                  ($ 56,433)       ($ 59,876)       $   7,166       $  35,670

Cumulative interest sensitivity gap,
    as a percentage of total assets                    (25.59%)         (27.16%)            3.25%          16.18%
</TABLE>

The table illustrates that if assets and liabilities reprice in the time
intervals indicated in the table, the Company is liability sensitive 0-12 months
and asset sensitive thereafter. Thus the table indicates that in an environment
of increasing interest rates, the net interest income of the Company would be
adversely affected and in a declining interest rate environment, the Company's
net interest income would be favorably affected. As stated above, certain
shortcomings are inherent in the method of analysis presented in the foregoing
table. For example, although certain assets and liabilities may have similar
maturities or periods to repricing, they may react in different degrees to
changes in market interest rates. Also, the interest rates on certain types of
assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
interest rates. For instance, while the table is based on the assumption that
interest bearing demand accounts, money market accounts and savings accounts are
immediately sensitive to movements in rates, the Company expects that in a
changing rate environment the amount of the adjustment in interest rates for
such accounts would be less than the adjustment in categories of assets which
are considered to be immediately sensitive. Additionally, certain assets have
features which restrict changes in the interest rates of such assets both on a
short-term basis and over the lives of such assets. Further, in the event of a
change in market interest rates, pre-payment and early withdrawal levels could
deviate significantly from those assumed in calculating the tables. Finally, the
ability of many borrowers to service their adjustable-rate debt may decrease in
the event of an increase in market interest rates. Due to these shortcomings,
the Company places primary emphasis on its income simulation model when managing
its exposure to changes in interest rates.



                                       32
<PAGE>   32

IMPACT OF THE YEAR 2000 ISSUE (Y2K)

The Company, like all financial institutions, is faced with the challenges that
the year 2000 brings. The Year 2000 issue relates to the inability of many
computer systems to recognize dates for the year 2000 and beyond. Computers
programmed with a two-digit field for identifying the year interpret "99," as
"1999," but may interpret "00" as "1900" rather than "2000," resulting in
incorrect calculations in date sensitive programs. In order to meet these
challenges, the Company is going through a multi-phase program to assure a state
of readiness for Year 2000.

THE COMPANY'S STATE OF READINESS The Company began working on Year 2000
readiness in early 1997. The Board of Directors formed a readiness team in
consultation with senior management. This team has the responsibility for
identifying all systems, application software and supporting equipment for
information and non-information technology that might have an impact on the
Company from a Year 2000 perspective. The initial portion of this phase was
completed February 1998 and the team continues to monitor on an ongoing basis
systems, software and equipment as the Company makes purchases or changes in
these areas to identify Year 2000 issues.

The Company has completed several projects designed to promote awareness of Year
2000 issues throughout the organization and customer base. These projects
include providing training for lending officers and other staff, sponsoring
public informational meetings and mailing information brochures to deposit and
loan customers.

The readiness team began initial assessment of our systems in early 1997. The
Company does not have in-house programs and relies upon third party vendors to
provide the software applications we use. The team identified the Company's
service providers and software/hardware vendors through the awareness phase and
contacted them to determine their approach to the Year 2000 issue and to receive
commitment dates for the delivery of their readiness plans and/or compliant
releases of software packages. In addition, the Company has analyzed the extent
that Year 2000 issues could adversely impact its borrower's business operations,
particularly its commercial borrowers. The Company has performed an initial
assessment of each major borrower and has established an ongoing assessment as
part of the Company's credit granting and loan review process. Tracking and
monitoring the progress of these providers, vendors and large customers is
coordinated by the team and regularly reported to the Company's Board of
Directors.

The team completed the assessment portion of this phase in February 1998, but
continues to monitor new or any changes in providers or vendors. The renovation
portion of this phase is still in process. The team has prioritized providers
and vendors using a "business critical" methodology. The Company is in the
process of testing all systems, software and hardware that have been deemed
"business critical."

The Company's most critical third party vendors are those that provide the main
frame software and hardware. These vendors have successfully completed their
Year 2000 internal testing. Our Company has chosen to test the software and
hardware via group testing. Software and hardware from other third party vendors
is being tested internally with oversight by members of the team. Internal
testing includes creation of a test environment specifically dedicated to Year
2000 testing. This environment allows simulation of the Year 2000 change in each
of our critical systems by rolling dates forward to validate vendor testing
prior to the actual Year 2000 date change. We expect to complete this testing by
April 1999. The Company had an independent, external audit performed in late
1998 to evaluate the testing and overall readiness on Year 2000. No significant
findings were noted.

THE COSTS TO ADDRESS THE COMPANY'S YEAR 2000 ISSUES The Company has expended
approximately $63,000 in addressing the Y2K issue. The majority of these costs
have been spent on managing the Year 2000 project and educating employees and
customers of the Company. Remaining estimated costs for completion of the Year
2000 readiness project are estimated at approximately $130,800. These costs will
be for completion of the phases in process under direction of the readiness
team. Costs related to renovating and testing will be expensed in the period
incurred. Actual costs for replacing equipment and software can not be
established until the renovation and testing phases are fully completed. Thus
far these costs and costs related to fixing Year 2000 issues have been minimal
and future costs are not anticipated to be material.

THE RISKS OF THE COMPANY'S YEAR 2000 ISSUES The Company has taken steps to
mitigate the risks associated with Year 2000 issues by testing software and
hard- ware and following the progress of vendors, service providers and large
customers. The most reasonably likely worst case scenario would be that testing
of software and hardware reveals the need for additional Year 2000 expenditures.
Management believes that should this scenario occur, that impact of such
expenditures would not be material to the Company's financial position and
results of operations. Although the Company can and will prepare its operations
for the century change, there can be no assurance that forces beyond its control
will not impact its operations. The Company purchases systems, equipment and
data processing services from vendors and suppliers. It also depends on many
other vendors for various services needed for day-to-day operations. The
Company's customers could also be impacted adversely by the century change and
thereby impact the financial performance of the Company. In spite of the
Company's diligent efforts in assuring its outside suppliers, vendors and
customers are Y2K ready, there can be no assurance that when the century
changes, certain systems, technology and equipment of the Company, its vendors
and its customers will not be impacted and consequently impact the operations of
the Company.

THE COMPANY'S CONTINGENCY PLANS The Company has developed a comprehensive Year
2000 contingency plan. The Plan is in the process of revision with information
generated from working through the phases. Contingency processes will be
augmented by the Company's existing disaster recovery plan, which enables it to
function under unusual circumstances. The Plan includes management's
preparations to accommodate the potentially increased liquidity needs of the
Company during the fourth quarter of 1999. Although the Company has taken
precautions to assure its technology is Y2K ready, it will continue to address
possible emergency scenarios.



                                       33
<PAGE>   33

IMPACT OF INFLATION AND CHANGING PRICES

The primary impact of inflation on the Company's operations is increased
operating costs. Unlike most industrial companies, virtually all the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates generally have a more significant impact on a financial
institution's performance than the effects of general levels of inflation.
Although interest rates do not necessarily move in the same direction or to the
same extent as the prices of goods and services, increases in inflation
generally have resulted in increased interest rates.

QUARTERLY COMMON STOCK PRICES AND DIVIDEND PAYMENTS

The Company's common stock is traded on the Nasdaq National Market under the
symbol WBCO. On December 31, 1998, the last sale price was $8.50.

The Company is aware that blocks of its stock are held in street name by
brokerage firms. At December 31, 1998, the number of shareholders of record was
364.

The following are the high and sales prices for the Company's stock in the
over-the-counter market during 1998 since the Company's initial public offering
as reported on Nasdaq.

<TABLE>
<CAPTION>
                                                          1998
                                              --------------------------
                                              HIGH                   LOW
                                              ----                   ---
<S>                                          <C>                    <C>
Second Quarter                                $14                    $12 3/8
Third Quarter                                  13 7/16                 9
Fourth Quarter                                 10 1/4                  8 3/8
For the year                                   14                      8 3/8
</TABLE>

Since 1998, the Company has paid the following annual amounts on a per share
basis, as adjusted for splits, as dividends to its shareholders:

<TABLE>
<CAPTION>
                                              Year                  Amount
                                              ----                  ------
<S>                                                                 <C>  
                                              1998                  $0.14
                                              1997                   0.13
                                              1996                   0.12
</TABLE>

The Board of Directors dividend policy is to review the Company's financial
performance, capital adequacy, cash resources, regulatory restrictions, economic
conditions and other factors, and if such review is favorable, to declare and
pay a cash dividend. For 1997 and prior years, dividends have been paid on an
annual basis. After completion of the initial public offering, the Company paid
dividends on a quarterly basis. As a transition to quarterly dividends, on March
26, 1998, the Board of Directors of the Company declared a dividend in the
amount of $0.07 per outstanding share of Common Stock (adjusted for the 1998
stock splits) for the first half of 1998, and dividends in the amount of $0.035
per outstanding share during each of the last two quarters of the year. The
ability of the Company to pay dividends will depend on the profitability of the
Bank, the need to retain or increase capital, and the dividend restrictions
imposed upon the Bank by applicable banking law. Although the Company
anticipates payment of a regular quarterly cash dividend, future dividends are
subject to these limitations and to the discretion of the Board of Directors,
and could be reduced or eliminated.

RECENT CHANGE IN ACCOUNTING FIRMS

On December 15, 1997, the Company engaged KPMG LLP as the Company's principal
accountant. Prior to KPMG LLP's engagement, David Christensen, CPA & Consultant,
PLLC ("David O. Christensen") independent certified public accountants, had
served as the principal independent accountant for the Company and rendered its
report with respect to the Company's consolidated financial statements for the
year ended December 31, 1996. The recommendation to dismiss David O. Christensen
was made by management of the Company and was approved by the Board of Directors
effective November 20, 1997.

In the two most recent fiscal years preceding the Board's action, and through
December 15, 1997, there were no disagreements with David O. Christensen on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which, if not resolved to David O. Christensen's
satisfaction, would have caused them to make reference to the subject matter of
the disagreement in connection with their report. David O. Christensen's reports
on the Company's statements for such fiscal year did not contain any adverse
opinion or disclaimer of opinion, nor were such reports modified or qualified in
any respect.