##### 







UNITED STATES SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549


Form 10-K/A




þ Annual
report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934


For the fiscal year ended December 31, 2005


OR


o Transition
report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934


For the transition period from

to


Commission File Number
000-24503


Washington Banking Company




|                                                                   |  |                                            
|------------------------------------------------------------------ |  | -------------------------------------------
|Washington                                                         |  | 91-1725825                                 
|(State or other jurisdiction of
    incorporation or organization) |  | (I.R.S. Employer
    Identification Number)
|                                                                  

450 SW Bayshore Drive


Oak Harbor, Washington 98277




(360) 679-3121


None




Common Stock, No Par Value




o þ


o þ


þ o


S-K 10-K 10-K. þ


12b-2


o þ o


12b-2 o þ






10-K


|                                                                 |  |                                                                          
|---------------------------------------------------------------- |  | -------------------------------------------------------------------------
|                                                                
|Registrants definitive Proxy Statement
    dated March 24, 2006 |  | Part III, except the reports of the audit and
    compensation committees







---



##### 



Explanatory
Note





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##### 








|        |                                            
|------- | -------------------------------------------
|Item 8. | Financial Statements and Supplementary Data

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


|                                                                                                         |  |      |    | 
|-------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|                                                                                                         |  | Page
|                                                                                                         |  |     
|Managements Report on Internal Control over Financial
    Reporting                                     |  |      | 3  | 
|Report of Independent Registered Public Accounting Firm                                                  |  |      | 4  | 
|Consolidated Statements of Financial Condition at
    December 31, 2005 and 2004                         |  |      | 6  | 
|Consolidated Statements of Income for the years ended
    December 31, 2005, 2004 and 2003               |  |      | 7  | 
|Consolidated Statements of Shareholders Equity for the
    years ended December 31, 2005, 2004 and 2003 |  |      | 8  | 
|Consolidated Statements of Comprehensive Income for the years
    ended December 31, 2005, 2004 and 2003 |  |      | 9  | 
|Consolidated Statements of Cash Flows for the years ended
    December 31, 2005, 2004 and 2003           |  |      | 10 | 
|Notes to Consolidated Financial Statements                                                               |  |      | 11 | 

2



---



##### 






MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL
REPORTING


13a-15(f)






Internal
Control-Integrated Framework.




3



---



##### 









REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM














4



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##### 






REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM-(CONTINUED)











5



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##### 



WASHINGTON BANKING COMPANY


AND SUBSIDIARIES











|                                                        |                                                           |                                                                                          |                     |                                                   |        |         |         |        |        |         |         | 
|------------------------------------------------------- | --------------------------------------------------------- | ---------------------------------------------------------------------------------------- | ------------------- | ------------------------------------------------- | ------ | ------- | ------- | ------ | ------ | ------- | ------- | 
|                                                        |                                                           | 2005                                                                                     |                     | 2004                                             
|                                                        |                                                           |                                                                                          |                     |                                                  
|                                                        |                                                           |                                                                                          |                     | Assets                                            |        |         |         |        |        |         |         | 
|Cash and due from banks                                 |                                                           | $                                                                                        | 19,949              |                                                   |        | $       | 16,814  |       
|                                                        | ($3,313 and $2,686, respectively, are restricted)         |                                                                                          |                     |                                                   |        |         |         |        |       
|Interest-bearing deposits                               |                                                           |                                                                                          | 983                 |                                                   |        |         | 1,119   |       
|Federal funds sold                                      |                                                           |                                                                                          | 21,095              |                                                   |        |         |        |       
|                                                        |                                                           |                                                                                          |                     |                                                   |        |         |         |       
|                                                        |                                                           |                                                                                          |                     | Total cash, restricted cash, and cash equivalents |        |         | 42,027  |        |        |         | 17,933  | 
|Investment securities available for sale                |                                                           |                                                                                          | 19,077              |                                                   |        |         | 19,304  |       
|                                                        |                                                           |                                                                                          |                     |                                                   |        |         |         |       
|                                                        |                                                           |                                                                                          |                     | Total investment securities                       |        |         | 19,077  |        |        |         | 19,304  | 
|Subsidiary investment in the Trust                      |                                                           |                                                                                          | 247                 |                                                   |        |         | 295     |       
|Federal Home Loan Bank stock                            |                                                           |                                                                                          | 1,984               |                                                   |        |         | 1,976   |       
|Loans held for sale                                     |                                                           |                                                                                          | 2,829               |                                                   |        |         | 8,311   |       
|Loans receivable                                        |                                                           |                                                                                          | 630,258             |                                                   |        |         | 579,980 |       
|Allowance for loan losses                               |                                                           |                                                                                          | (8,810              | )                                                 |        |         | (7,903  | )     
|                                                        |                                                           |                                                                                          |                     |                                                   |        |         |         |       
|                                                        |                                                           |                                                                                          |                     | Total loans, net                                  |        |         | 621,448 |        |        |         | 572,077 | 
|Premises and equipment, net                             |                                                           |                                                                                          | 20,514              |                                                   |        |         | 20,375  |       
|Bank owned life insurance                               |                                                           |                                                                                          | 10,558              |                                                   |        |         | 10,217  |       
|Other assets                                            |                                                           |                                                                                          | 7,292               |                                                   |        |         | 7,236   |       
|                                                        |                                                           |                                                                                          |                     |                                                   |        |         |         |       
|                                                        |                                                           |                                                                                          |                     | Total assets                                      |        | $       | 725,976 |        |        | $       | 657,724 | 
|                                                        |                                                           |                                                                                          |                     |                                                   |        |         |         |       
|                                                        |                                                           |                                                                                          |                     | Liabilities and Shareholders Equity              |        |         |         |        |        |         |         | 
|Liabilities:                                            |                                                           |                                                                                          |                     |                                                   |        |         |         |       
|                                                        | Deposits                                                  |                                                                                          |                     |                                                   |        |         |         |        |       
|                                                        |                                                           |                                                                                          | Noninterest-bearing |                                                   | $      | 105,365 |         |        | $      | 77,820  |        
|                                                        |                                                           |                                                                                          | Interest-bearing    |                                                   |        | 287,214 |         |        |        | 274,999 |        
|                                                        |                                                           |                                                                                          | Time deposits       |                                                   |        | 244,910 |         |        |        | 210,182 |        
|                                                        |                                                           |                                                                                          |                     |                                                   |        |         |         |       
|                                                        |                                                           |                                                                                          |                     | Total deposits                                    |        |         | 637,489 |        |        |         | 563,001 | 
|                                                        | Other borrowed funds                                      |                                                                                          |                     | 10,000                                            |        |         |         | 27,000 |       
|                                                        | Junior subordinated debentures                            |                                                                                          |                     | 15,007                                            |        |         |         | 15,007 |       
|                                                        | Other liabilities                                         |                                                                                          |                     | 5,631                                             |        |         |         | 3,125  |       
|                                                        |                                                           |                                                                                          |                     |                                                   |        |         |         |       
|                                                        |                                                           |                                                                                          |                     | Total liabilities                                 |        |         | 668,127 |        |        |         | 608,133 | 
|Commitments and contingencies (See Notes 16, 17 and 19) |                                                           |                                                                                          |                     |                                                   |        |         |         |       
|Shareholders equity:                                   |                                                           |                                                                                          |                     |                                                   |        |         |         |       
|                                                        | Preferred stock, no par value. Authorized 20,000 shares:  |                                                                                          |                     |                                                   |        |         |         |        |       
|                                                        |                                                           | no shares issued or outstanding                                                          |                     |                                                   |       |         |         |        |       |        
|                                                        | Common stock, no par value. Authorized 11,822,706 shares: |                                                                                          |                     |                                                   |        |         |         |        |       
|                                                        |                                                           | issued and outstanding 7,382,210 and 7,239,052 shares in
    2005 and 2004, respectively |                     |                                                   | 32,106 |         |         |        | 31,516 |        
|                                                        | Retained earnings                                         |                                                                                          |                     | 25,789                                            |        |         |         | 17,928 |       
|                                                        | Accumulated other comprehensive income (loss), net        |                                                                                          |                     | (46)                                              |        |         |         | 147    |       
|                                                        |                                                           |                                                                                          |                     |                                                   |        |         |         |       
|                                                        |                                                           |                                                                                          |                     | Total shareholders equity                        |        |         | 57,849  |        |        |         | 49,591  | 
|                                                        |                                                           |                                                                                          |                     |                                                   |        |         |         |       
|                                                        |                                                           |                                                                                          |                     | Total liabilities and shareholders equity        |        | $       | 725,976 |        |        | $       | 657,724 | 
|                                                        |                                                           |                                                                                          |                     |                                                   |        |         |         |       



|                                                             | 
|------------------------------------------------------------ | 
|See accompanying notes to consolidated financial statements.

6



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##### 



WASHINGTON BANKING COMPANY


AND SUBSIDIARIES











|                                                                                                                                        |                                               |                                                        |                                                     |        |        |        |           |        |        |        |           |        |        |        | 
|--------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------- | ------------------------------------------------------ | --------------------------------------------------- | ------ | ------ | ------ | --------- | ------ | ------ | ------ | --------- | ------ | ------ | ------ | 
|                                                                                                                                        |                                               | 2005                                                   |                                                     | 2004   |        | 2003  
|                                                                                                                                        |                                               |                                                        |                                                     |        |        |       
|Interest income:                                                                                                                        |                                               |                                                        |                                                     |        |        |        |           |        |        |        |           |       
|                                                                                                                                        | Interest and fees on loans                    |                                                        | $                                                   | 44,615 |        |        | $         | 37,428 |        |        | $         | 34,533 |       
|                                                                                                                                        | Interest on taxable investment securities     |                                                        |                                                     | 357    |        |        |           | 345    |        |        |           | 324    |       
|                                                                                                                                        | Interest on tax-exempt investment securities  |                                                        |                                                     | 310    |        |        |           | 482    |        |        |           | 675    |       
|                                                                                                                                        | Other                                         |                                                        |                                                     | 508    |        |        |           | 209    |        |        |           | 381    |       
|                                                                                                                                        |                                               |                                                        |                                                     |        |        |        |           |        |        |        |           |       
|                                                                                                                                        |                                               | Total interest income                                  |                                                     |        | 45,790 |        |           |        | 38,464 |        |           |        | 35,913 |       
|Interest expense:                                                                                                                       |                                               |                                                        |                                                     |        |        |        |           |        |        |        |           |       
|                                                                                                                                        | Interest on time deposits                     |                                                        |                                                     | 7,024  |        |        |           | 5,632  |        |        |           | 5,380  |       
|                                                                                                                                        | Interest on savings and money market deposits |                                                        |                                                     | 1,995  |        |        |           | 1,369  |        |        |           | 1,353  |       
|                                                                                                                                        | Interest on NOW deposits                      |                                                        |                                                     | 938    |        |        |           | 623    |        |        |           | 650    |       
|                                                                                                                                        | Interest on other borrowings                  |                                                        |                                                     | 538    |        |        |           | 431    |        |        |           | 612    |       
|                                                                                                                                        | Interest on junior subordinated debentures    |                                                        |                                                     | 1,071  |        |        |           | 782    |        |        |           |       |       
|                                                                                                                                        | Interest on trust preferred securities        |                                                        |                                                     |       |        |        |           |       |        |        |           | 742    |       
|                                                                                                                                        |                                               |                                                        |                                                     |        |        |        |           |        |        |        |           |       
|                                                                                                                                        |                                               | Total interest expense                                 |                                                     |        | 11,566 |        |           |        | 8,837  |        |           |        | 8,737  |       
|                                                                                                                                        |                                               |                                                        |                                                     |        |        |        |           |        |        |        |           |       
|                                                                                                                                        |                                               |                                                        | Net interest income                                 |        |        | 34,224 |           |        |        | 29,627 |           |        |        | 27,176 | 
|Provision for loan losses                                                                                                               |                                               |                                                        | 2,250                                               |        |        |        | 3,500     |        |        |        | 3,200     |       
|                                                                                                                                        |                                               |                                                        |                                                     |        |        |        |           |        |        |        |           |       
|                                                                                                                                        |                                               |                                                        | Net interest income after provision for loan losses |        |        | 31,974 |           |        |        | 26,127 |           |        |        | 23,976 | 
|Noninterest income:                                                                                                                     |                                               |                                                        |                                                     |        |        |        |           |        |        |        |           |       
|                                                                                                                                        | Service charges and fees                      |                                                        |                                                     | 3,150  |        |        |           | 2,986  |        |        |           | 2,127  |       
|                                                                                                                                        | Income from the sale of loans                 |                                                        |                                                     | 773    |        |        |           | 1,183  |        |        |           | 2,117  |       
|                                                                                                                                        | (Loss) Gain on sale of securities             |                                                        |                                                     | (50    | )      |        |           | 144    |        |        |           |       |       
|                                                                                                                                        | Electronic banking income                     |                                                        |                                                     | 764    |        |        |           | 612    |        |        |           | 446    |       
|                                                                                                                                        | SBA premium income                            |                                                        |                                                     | 757    |        |        |           | 559    |        |        |           | 515    |       
|                                                                                                                                        | Other                                         |                                                        |                                                     | 1,905  |        |        |           | 1,187  |        |        |           | 654    |       
|                                                                                                                                        |                                               |                                                        |                                                     |        |        |        |           |        |        |        |           |       
|                                                                                                                                        |                                               | Total noninterest income                               |                                                     |        | 7,299  |        |           |        | 6,671  |        |           |        | 5,859  |       
|                                                                                                                                        |                                               |                                                        |                                                     |        |        |        |           |        |        |        |           |       
|Noninterest expense:                                                                                                                    |                                               |                                                        |                                                     |        |        |        |           |        |        |        |           |       
|                                                                                                                                        | Salaries and benefits                         |                                                        |                                                     | 15,086 |        |        |           | 13,744 |        |        |           | 12,274 |       
|                                                                                                                                        | Occupancy and equipment                       |                                                        |                                                     | 3,379  |        |        |           | 3,290  |        |        |           | 3,028  |       
|                                                                                                                                        | Office supplies and printing                  |                                                        |                                                     | 659    |        |        |           | 644    |        |        |           | 657    |       
|                                                                                                                                        | Data processing                               |                                                        |                                                     | 493    |        |        |           | 490    |        |        |           | 459    |       
|                                                                                                                                        | Consulting and professional fees              |                                                        |                                                     | 617    |        |        |           | 793    |        |        |           | 637    |       
|                                                                                                                                        | Other                                         |                                                        |                                                     | 4,991  |        |        |           | 4,306  |        |        |           | 3,959  |       
|                                                                                                                                        |                                               |                                                        |                                                     |        |        |        |           |        |        |        |           |       
|                                                                                                                                        |                                               | Total noninterest expense                              |                                                     |        | 25,225 |        |           |        | 23,267 |        |           |        | 21,014 |       
|                                                                                                                                        |                                               |                                                        |                                                     |        |        |        |           |        |        |        |           |       
|                                                                                                                                        |                                               | Income before income taxes and discontinued operations |                                                     |        | 14,048 |        |           |        | 9,531  |        |           |        | 8,821  |       
|Provision for income taxes                                                                                                              |                                               |                                                        | 4,580                                               |        |        |        | 2,985     |        |        |        | 2,798     |       
|                                                                                                                                        |                                               |                                                        |                                                     |        |        |        |           |        |        |        |           |       
|Income from continuing operations                                                                                                       |                                               |                                                        | 9,468                                               |        |        |        | 6,546     |        |        |        | 6,023     |       
|Loss from discontinued operations, net of tax, of ($238) and
    ($69) for the years ended December 31, 2004 and 2003,
    respectively |                                               |                                                        |                                                    |        |        |        | (370      | )      |        |        | (56       | )     
|                                                                                                                                        |                                               |                                                        |                                                     |        |        |        |           |        |        |        |           |       
|                                                                                                                                        |                                               |                                                        | Net income                                          |        | $      | 9,468  |           |        | $      | 6,176  |           |        | $      | 5,967  | 
|                                                                                                                                        |                                               |                                                        |                                                     |        |        |        |           |        |        |        |           |       
|Earnings (loss) per common share, basic                                                                                                 |                                               |                                                        |                                                     |        |        |        |           |        |        |        |           |       
|                                                                                                                                        | Continuing operations                         |                                                        | $                                                   | 1.30   |        |        | $         | 0.91   |        |        | $         | 0.85   |       
|                                                                                                                                        | Discontinued operations                       |                                                        |                                                     |       |        |        |           | (0.05  | )      |        |           | (0.01  | )     
|                                                                                                                                        |                                               |                                                        |                                                     |        |        |        |           |        |        |        |           |       
|                                                                                                                                        |                                               |                                                        | Net income per share                                |        | $      | 1.30   |           |        | $      | 0.86   |           |        | $      | 0.84   | 
|                                                                                                                                        |                                               |                                                        |                                                     |        |        |        |           |        |        |        |           |       
|Earnings (loss) per common share, diluted                                                                                               |                                               |                                                        |                                                     |        |        |        |           |        |        |        |           |       
|                                                                                                                                        | Continuing operations                         |                                                        | $                                                   | 1.26   |        |        | $         | 0.88   |        |        | $         | 0.82   |       
|                                                                                                                                        | Discontinued operations                       |                                                        |                                                     |       |        |        |           | (0.05  | )      |        |           | (0.01  | )     
|                                                                                                                                        |                                               |                                                        |                                                     |        |        |        |           |        |        |        |           |       
|                                                                                                                                        |                                               |                                                        | Net income per share                                |        | $      | 1.26   |           |        | $      | 0.83   |           |        | $      | 0.81   | 
|                                                                                                                                        |                                               |                                                        |                                                     |        |        |        |           |        |        |        |           |       
|Average number of shares outstanding, basic                                                                                             |                                               |                                                        | 7,278,486                                           |        |        |        | 7,209,349 |        |        |        | 7,121,948 |       
|Average number of shares outstanding, diluted                                                                                           |                                               |                                                        | 7,542,174                                           |        |        |        | 7,460,596 |        |        |        | 7,398,241 |       



7



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##### 



WASHINGTON BANKING COMPANY


AND SUBSIDIARIES











|                                                                         |  |              |       |  |          |   |        |             |       |   |               |       |  |               |      |   |        |   |      |   |  |   |        |  
|------------------------------------------------------------------------ |  | ------------ | ----- |  | -------- | - | ------ | ----------- | ----- | - | ------------- | ----- |  | ------------- | ---- | - | ------ | - | ---- | - |  | - | ------ | -
|                                                                         |  |              |       |  |          |   |        | Accumulated |       |   |              
|                                                                         |  | Common stock |       |  |          |   |        |             | other |   |               | Total | 
|                                                                         |  |              |       |  | Retained |   |        | Deferred    |       |   | comprehensive |       |  | shareholders |     
|                                                                         |  | Shares       |       |  | Amount   |   |        | earnings    |       |   | compensation  |       |  | income        |      |   | equity |  
|                                                                         |  |              |       |  |          |   |        |             |       |   |               |       |  |               |      |   |        |  
|Balance at December 31,
    2002(1)                                      |  |              | 6,055 |  |          | $ | 21,025 |             |       | $ | 18,363        |       |  | $             |     |   |        | $ | 44   |   |  | $ | 39,432 |  
|Net income                                                               |  |              |      |  |          |   |       |             |       |   | 5,967         |       |  |               |      |   |        |   |     |   |  |   | 5,967  |  
|Net change in unrealized (loss) on securities available for sale         |  |              |      |  |          |   |       |             |       |   |              |       |  |               |      |   |        |   | (82  | ) |  |   | (82    | )
|Cash dividend, $0.18 per share                                           |  |              |      |  |          |   |       |             |       |   | (1,303        | )     |  |               |      |   |        |   |     |   |  |   | (1,303 | )
|Stock option compensation                                                |  |              |      |  |          |   | 23     |             |       |   |              |       |  |               |      |   |        |   |     |   |  |   | 23     |  
|Stock options exercised                                                  |  |              | 157   |  |          |   | 323    |             |       |   |              |       |  |               |      |   |        |   |     |   |  |   | 323    |  
|15% stock dividend                                                       |  |              | 932   |  |          |   | 9,754  |             |       |   | (9,754        | )     |  |               |      |   |        |   |     |   |  |   |       |  
|                                                                         |  |              |       |  |          |   |        |             |       |   |               |       |  |               |      |   |        |  
|Balance at December 31, 2003                                             |  |              | 7,144 |  |          |   | 31,125 |             |       |   | 13,273        |       |  |               |     |   |        |   | (38  | ) |  |   | 44,360 |  
|Net income                                                               |  |              |      |  |          |   |       |             |       |   | 6,176         |       |  |               |      |   |        |   |     |   |  |   | 6,176  |  
|Net change in unrealized gain on securities available for sale           |  |              |      |  |          |   |       |             |       |   |              |       |  |               |      |   |        |   | 282  |   |  |   | 282    |  
|Less: adjustment for gains included in net income, net of tax of
    $47 |  |              |      |  |          |   |       |             |       |   |              |       |  |               |      |   |        |   | (97  | ) |  |   | (97    | )
|Tax benefit associated with stock options                                |  |              |      |  |          |   | 160    |             |       |   |              |       |  |               |      |   |        |   |     |   |  |   | 160    |  
|Cash dividend, $0.22 per share                                           |  |              |      |  |          |   |       |             |       |   | (1,521        | )     |  |               |      |   |        |   |     |   |  |   | (1,521 | )
|Stock option compensation                                                |  |              |      |  |          |   | 23     |             |       |   |              |       |  |               |      |   |        |   |     |   |  |   | 23     |  
|Stock options exercised                                                  |  |              | 95    |  |          |   | 208    |             |       |   |              |       |  |               |      |   |        |   |     |   |  |   | 208    |  
|                                                                         |  |              |       |  |          |   |        |             |       |   |               |       |  |               |      |   |        |  
|Balance at December 31, 2004                                             |  |              | 7,239 |  |          |   | 31,516 |             |       |   | 17,928        |       |  |               |     |   |        |   | 147  |   |  |   | 49,591 |  
|Net income                                                               |  |              |      |  |          |   |       |             |       |   | 9,468         |       |  |               |      |   |        |   |     |   |  |   | 9,468  |  
|Net change in unrealized (loss) on securities available for sale         |  |              |      |  |          |   |       |             |       |   |              |       |  |               |      |   |        |   | (226 | ) |  |   | (226   | )
|Plus adjustment for gains included in net income, net of tax of
    $17  |  |              |      |  |          |   |       |             |       |   |              |       |  |               |      |   |        |   | 33   |   |  |   | 33     |  
|Tax benefit associated with stock options                                |  |              |      |  |          |   | 113    |             |       |   |              |       |  |               |      |   |        |   |     |   |  |   | 113    |  
|Cash dividend, $0.22 per share                                           |  |              |      |  |          |   |       |             |       |   | (1,607        | )     |  |               |      |   |        |   |     |   |  |   | (1,607 | )
|Stock option compensation                                                |  |              |      |  |          |   | 23     |             |       |   |              |       |  |               |      |   |        |   |     |   |  |   | 23     |  
|Issuance of restricted stock                                             |  |              | 35    |  |          |   | 483    |             |       |   |              |       |  |               | (483 | ) |        |   |     |   |  |   |       |  
|Amortization of restricted stock                                         |  |              |      |  |          |   |       |             |       |   |              |       |  |               | 97   |   |        |   |     |   |  |   | 97     |  
|Stock options exercised                                                  |  |              | 108   |  |          |   | 357    |             |       |   |              |       |  |               |      |   |        |   |     |   |  |   | 357    |  
|                                                                         |  |              |       |  |          |   |        |             |       |   |               |       |  |               |      |   |        |  
|Balance at December 31, 2005                                             |  |              | 7,382 |  |          | $ | 32,492 |             |       | $ | 25,789        |       |  | $             | (386 | ) |        | $ | (46  | ) |  | $ | 57,849 |  
|                                                                         |  |              |       |  |          |   |        |             |       |   |               |       |  |               |      |   |        |  



|    |                                                                                       
|--- | --------------------------------------------------------------------------------------
|(1) | Adjusted to reflect a 4-for-3 stock split distributed by the
    Company May 17, 2005.



8



---



##### 



WASHINGTON BANKING COMPANY


AND SUBSIDIARIES








|                                                                                                                                                                         |  |      |       |      |  |      |       |   |  |   |       |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ---- | ----- | ---- |  | ---- | ----- | - |  | - | ----- | -
|                                                                                                                                                                         |  | 2005 |       | 2004 |  | 2003
|Comprehensive Income:                                                                                                                                                    |  |      |       |      |  |     
|Net income                                                                                                                                                               |  | $    | 9,468 |      |  | $    | 6,176 |   |  | $ | 5,967 |  
|Increase (decrease) in unrealized gain on securities available
    for sale, net of tax, of ($85), ($106) and $43, for years ended
    2005, 2004 and 2003, respectively |  |      | 226   |      |  |      | 282   |   |  |   | (82   | )
|Less: adjustment for gains (losses) included in net income, net
    of tax, of $17 and $47, for years ended 2005 and 2004,
    respectively                              |  |      | 33    |      |  |      | (97   | ) |  |   |      |  
|                                                                                                                                                                         |  |      |       |      |  |      |       |   |  |   |       |  
|Comprehensive income                                                                                                                                                     |  | $    | 9,727 |      |  | $    | 6,361 |   |  | $ | 5,885 |  
|                                                                                                                                                                         |  |      |       |      |  |      |       |   |  |   |       |  



9



---



##### 



WASHINGTON BANKING COMPANY


AND SUBSIDIARIES











|                                                 |                                                                                                         |                                                         |                                                 |                                         |        |        |         |         |       |        |         |         |        |       |         |  
|------------------------------------------------ | ------------------------------------------------------------------------------------------------------- | ------------------------------------------------------- | ----------------------------------------------- | --------------------------------------- | ------ | ------ | ------- | ------- | ----- | ------ | ------- | ------- | ------ | ----- | ------- | -
|                                                 |                                                                                                         | 2005                                                    |                                                 | 2004                                    |        | 2003  
|                                                 |                                                                                                         |                                                         |                                                 |                                         |        |       
|Cash flows from operating activities:            |                                                                                                         |                                                         |                                                 |                                         |        |        |         |         |       |        |         |        
|                                                 | Net income from continuing operations                                                                   |                                                         | $                                               | 9,468                                   |        |        | $       | 6,546   |       |        | $       | 6,023   |       
|                                                 | Adjustments to reconcile net income to net cash provided by
    operating activities:                   |                                                         |                                                 |                                         |        |        |         |         |       |        |         |         |       
|                                                 |                                                                                                         | Federal Home Loan Bank stock dividends                  |                                                 |                                         | (8     | )      |         |         | (64   | )      |         |         | (122   | )    
|                                                 |                                                                                                         | Deferred income tax expense (benefit)                   |                                                 |                                         | 1,440  |        |         |         | (630  | )      |         |         | (409   | )    
|                                                 |                                                                                                         | Amortization of investment premiums, net                |                                                 |                                         | 2      |        |         |         | 44    |        |         |         | 11     |      
|                                                 |                                                                                                         | Net (increase) decrease in subsidiary investment        |                                                 |                                         | 81     |        |         |         | (288  | )      |         |         |       |      
|                                                 |                                                                                                         | Earnings on bank owned life insurance                   |                                                 |                                         | (341   | )      |         |         | (217  | )      |         |         |       |      
|                                                 |                                                                                                         | Provision for loan losses                               |                                                 |                                         | 2,250  |        |         |         | 3,500 |        |         |         | 3,200  |      
|                                                 |                                                                                                         | Net decrease (increase) in loans held for sale          |                                                 |                                         | 5,482  |        |         |         | (60   | )      |         |         | (1,622 | )    
|                                                 |                                                                                                         | Depreciation and amortization of premises and equipment |                                                 |                                         | 1,605  |        |         |         | 1,682 |        |         |         | 1,610  |      
|                                                 |                                                                                                         | Net (gain) loss on sale of securities                   |                                                 |                                         | 50     |        |         |         | (144  | )      |         |         |       |      
|                                                 |                                                                                                         | Net (gain) loss on sale of premises and equipment       |                                                 |                                         | (103   | )      |         |         | 152   |        |         |         | 6      |      
|                                                 |                                                                                                         | Net (gain) loss on sale of other real estate            |                                                 |                                         | (20    | )      |         |         | (136  | )      |         |         | (19    | )    
|                                                 |                                                                                                         | Write downs on other real estate                        |                                                 |                                         | 254    |        |         |         | 34    |        |         |         |       |      
|                                                 |                                                                                                         | (Increase) decrease in other assets                     |                                                 |                                         | (2,666 | )      |         |         | 880   |        |         |         | (1,205 | )    
|                                                 |                                                                                                         | Stock option compensation                               |                                                 |                                         | 23     |        |         |         | 23    |        |         |         | 23     |      
|                                                 |                                                                                                         | Tax benefit associated with stock options               |                                                 |                                         | 113    |        |         |         | 160   |        |         |         |       |      
|                                                 |                                                                                                         | Amortization of restricted stock                        |                                                 |                                         | 97     |        |         |         |      |        |         |         |       |      
|                                                 |                                                                                                         | Increase (decrease) in other liabilities                |                                                 |                                         | 2,506  |        |         |         | (311  | )      |         |         | 399    |      
|                                                 |                                                                                                         |                                                         | Cash flows from continuing operating activities |                                         |        | 20,233 |         |         |       | 11,171 |         |         |        | 7,895 |        
|                                                 |                                                                                                         |                                                         | Loss from discontinued operations, net of tax   |                                         |        |       |         |         |       | (370   | )       |         |        | (56   | )      
|                                                 |                                                                                                         |                                                         |                                                 |                                         |        |        |         |         |       |        |         |        
|                                                 |                                                                                                         |                                                         |                                                 | Cash flows from operations              |        |        | 20,233  |         |       |        | 10,801  |         |        |       | 7,839   |  
|                                                 |                                                                                                         |                                                         |                                                 |                                         |        |        |         |         |       |        |         |        
|Cash flows from investing activities:            |                                                                                                         |                                                         |                                                 |                                         |        |        |         |         |       |        |         |        
|                                                 | Purchases of investment securities available for sale                                                   |                                                         |                                                 | (6,110                                  | )      |        |         | (1,500  | )     |        |         | (17,500 | )     
|                                                 | Maturities/calls/principal payments of investment and
    mortgage-backed securities available for sale |                                                         |                                                 | 5,503                                   |        |        |         | 6,479   |       |        |         | 11,053  |       
|                                                 | Sale of investment securities available for sale                                                        |                                                         |                                                 | 504                                     |        |        |         | 5,799   |       |        |         |        |       
|                                                 | Purchases of investment securities held to maturity                                                     |                                                         |                                                 |                                        |        |        |         |        |       |        |         | (1,870  | )     
|                                                 | Maturities/calls of investment securities held to maturity                                              |                                                         |                                                 |                                        |        |        |         | 475     |       |        |         | 2,190   |       
|                                                 | Purchase of bank owned life insurance                                                                   |                                                         |                                                 |                                        |        |        |         | (10,000 | )     |        |         |        |       
|                                                 | Sale of Federal Home Loan Bank stock                                                                    |                                                         |                                                 |                                        |        |        |         | 368     |       |        |         |        |       
|                                                 | Net increase in loans                                                                                   |                                                         |                                                 | (51,681                                 | )      |        |         | (83,051 | )     |        |         | (73,000 | )     
|                                                 | Purchases of premises and equipment                                                                     |                                                         |                                                 | (2,112                                  | )      |        |         | (3,069  | )     |        |         | (4,680  | )     
|                                                 | Proceeds from sale of other real estate owned and premises and
    equipment                            |                                                         |                                                 | 1,519                                   |        |        |         | 1,335   |       |        |         | 664     |       
|                                                 |                                                                                                         |                                                         |                                                 |                                         |        |        |         |         |       |        |         |        
|                                                 |                                                                                                         |                                                         |                                                 | Cash flows from investing activities    |        |        | (52,377 | )       |       |        | (83,164 | )       |        |       | (83,143 | )
|                                                 |                                                                                                         |                                                         |                                                 |                                         |        |        |         |         |       |        |         |        
|Cash flows from financing activities:            |                                                                                                         |                                                         |                                                 |                                         |        |        |         |         |       |        |         |        
|                                                 | Net increase in deposits                                                                                |                                                         |                                                 | 74,488                                  |        |        |         | 61,504  |       |        |         | 38,502  |       
|                                                 | Increase (decrease) in other borrowed funds                                                             |                                                         |                                                 | 5,000                                   |        |        |         | (7,500  | )     |        |         | 5,000   |       
|                                                 | Increase (decrease) in overnight borrowings                                                             |                                                         |                                                 | (22,000                                 | )      |        |         | 17,000  |       |        |         | (2,500  | )     
|                                                 | Dividends paid on common stock                                                                          |                                                         |                                                 | (1,607                                  | )      |        |         | (1,521  | )     |        |         | (1,303  | )     
|                                                 | Proceeds from stock options exercised                                                                   |                                                         |                                                 | 357                                     |        |        |         | 208     |       |        |         | 323     |       
|                                                 |                                                                                                         |                                                         |                                                 |                                         |        |        |         |         |       |        |         |        
|                                                 |                                                                                                         |                                                         |                                                 | Cash flows from financing activities    |        |        | 56,238  |         |       |        | 69,691  |         |        |       | 40,022  |  
|                                                 |                                                                                                         |                                                         |                                                 |                                         |        |        |         |         |       |        |         |        
|                                                 |                                                                                                         |                                                         |                                                 | Net change in cash and cash equivalents |        |        | 24,094  |         |       |        | (2,672  | )       |        |       | (35,282 | )
|                                                 |                                                                                                         |                                                         |                                                 |                                         |        |        |         |         |       |        |         |        
|Cash and cash equivalents at beginning of period |                                                                                                         |                                                         | 17,933                                          |                                         |        |        | 20,605  |         |       |        | 55,887  |        
|                                                 |                                                                                                         |                                                         |                                                 |                                         |        |        |         |         |       |        |         |        
|Cash and cash equivalents at end of period       |                                                                                                         | $                                                       | 42,027                                          |                                         |        | $      | 17,933  |         |       | $      | 20,605  |        
|                                                 |                                                                                                         |                                                         |                                                 |                                         |        |        |         |         |       |        |         |        
|Supplemental information:                        |                                                                                                         |                                                         |                                                 |                                         |        |        |         |         |       |        |         |        
|                                                 | Loans foreclosed and transferred to other real estate owned                                             |                                                         | $                                               | 53                                      |        |        | $       | 1,333   |       |        | $       | 557     |       
|                                                 | Loans made on bank-owned property sold                                                                  |                                                         |                                                 |                                        |        |        |         | 272     |       |        |         | 94      |       
|                                                 | Cash paid for interest                                                                                  |                                                         |                                                 | 11,221                                  |        |        |         | 8,759   |       |        |         | 8,959   |       
|                                                 | Cash paid for income taxes                                                                              |                                                         |                                                 | 4,170                                   |        |        |         | 2,992   |       |        |         | 2,960   |       
|                                                 | Transfer of investments from held to maturity to available for
    sale                                 |                                                         |                                                 |                                        |        |        |         | 14,267  |       |        |         |        |       
|                                                 | Deconsolidation of trust preferred securities                                                           |                                                         |                                                 |                                        |        |        |         | 15,000  |       |        |         |        |       



10



---



##### 






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









|    |                      
|--- | ---------------------
|(b) | Basis of Presentation





|    |         
|--- | --------
|(c) | Segments

Disclosure about Segments of
an Enterprise and Related Information


11



---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


(Dollars in thousands, except per share data)






|    |                                           
|--- | ------------------------------------------
|(d) | Recent Financial Accounting Pronouncements

Accounting
Changes and Error Corrections Accounting Changes Reporting Accounting Changes in Interim
Financial Statements




Shared
Based Payment Accounting for Stock-Based
Compensation Accounting for Stock Issued to Employees Statement of Cash Flows








|    |                          
|--- | -------------------------
|(e) | Cash and Cash Equivalents



12



---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


(Dollars in thousands, except per share data)




|    |                             
|--- | ----------------------------
|(f) | Federal Home Loan Bank Stock





|    |                      
|--- | ---------------------
|(g) | Investment Securities





Accounting for Certain Investments in
Debt and Equity Securities




|    |                    
|--- | -------------------
|(h) | Loans Held for Sale





|    |                      
|--- | ---------------------
|(i) | Loans Receivable, Net











13



---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


(Dollars in thousands, except per share data)








|    |                          
|--- | -------------------------
|(j) | Allowance for Loan Losses





|    |                       
|--- | ----------------------
|(k) | Premises and Equipment





|    |                          
|--- | -------------------------
|(l) | Bank Owned Life Insurance





|    |                        
|--- | -----------------------
|(m) | Other Real Estate Owned







|    |                     
|--- | --------------------
|(n) | Federal Income Taxes



14



---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


(Dollars in thousands, except per share data)






|    |                         
|--- | ------------------------
|(o) | Stock-Based Compensation

Accounting for Stock
Issued to Employees Accounting for Certain
Transactions Involving Stock Compensation


Accounting for
Stock-Based Compensation


|                                                                        |             |                         |       |  |      |   |        |      |  |   |        |  | 
|----------------------------------------------------------------------- | ----------- | ----------------------- | ----- |  | ---- | - | ------ | ---- |  | - | ------ |  | 
|                                                                        |             | Years Ended December 31 |      
|                                                                        |             |                         |      
|                                                                        |             | 2005                    |       |  | 2004 |   |        | 2003 | 
|                                                                        |             |                         |       |  |      |   |        |      | 
|Net income, as reported                                                 |             | $                       | 9,468 |  |      | $ | 6,176  |      |  | $ | 5,967  | 
|Stock compensation recognized, net of tax                               |             |                         | 15    |  |      |   | 15     |      |  |   | 15     | 
|Additional compensation for fair value of stock options, net of
    tax |             |                         | (21)  |  |      |   | (59)   |      |  |   | (59)   | 
|                                                                        |             |                         |       |  |      |   |        |      | 
|Pro forma net income                                                    |             | $                       | 9,462 |  |      | $ | 6,132  |      |  | $ | 5,923  | 
|                                                                        |             |                         |       |  |      |   |        |      | 
|Basic earnings per
    share(1):                                        |             |                         |       |  |      |   |        |      |  |   |        | 
|                                                                        | As reported |                         |       |  |      |   |        |      |  |   |        |  | 
|Income from continuing operations                                       |             | $                       | 1.30  |  |      | $ | 0.91   |      |  | $ | 0.85   | 
|Loss from discontinued operations                                       |             |                         |      |  |      |   | (0.05) |      |  |   | (0.01) | 
|                                                                        |             |                         |       |  |      |   |        |      | 
|Net income                                                              |             | $                       | 1.30  |  |      | $ | 0.86   |      |  | $ | 0.84   | 
|                                                                        |             |                         |       |  |      |   |        |      | 
|                                                                        | Pro forma   |                         |       |  |      |   |        |      |  |   |        |  | 
|Income from continuing operations                                       |             | $                       | 1.30  |  |      | $ | 0.90   |      |  | $ | 0.84   | 
|Loss from discontinued operations                                       |             |                         |      |  |      |   | (0.05) |      |  |   | (0.01) | 
|                                                                        |             |                         |       |  |      |   |        |      | 
|Net income                                                              |             | $                       | 1.30  |  |      | $ | 0.85   |      |  | $ | 0.83   | 
|                                                                        |             |                         |       |  |      |   |        |      | 
|Diluted earnings per
    share(1):                                      |             |                         |       |  |      |   |        |      |  |   |        | 
|                                                                        | As reported |                         |       |  |      |   |        |      |  |   |        |  | 
|Income from continuing operations                                       |             | $                       | 1.26  |  |      | $ | 0.87   |      |  | $ | 0.82   | 
|Loss from discontinued operations                                       |             |                         |      |  |      |   | (0.05) |      |  |   | (0.01) | 
|                                                                        |             |                         |       |  |      |   |        |      | 
|Net income                                                              |             | $                       | 1.26  |  |      | $ | 0.82   |      |  | $ | 0.81   | 
|                                                                        |             |                         |       |  |      |   |        |      | 
|                                                                        | Pro forma   |                         |       |  |      |   |        |      |  |   |        |  | 
|Income from continuing operations                                       |             | $                       | 1.25  |  |      | $ | 0.87   |      |  | $ | 0.81   | 
|Loss from discontinued operations                                       |             |                         |      |  |      |   | (0.05) |      |  |   | (0.01) | 
|                                                                        |             |                         |       |  |      |   |        |      | 
|Net income                                                              |             | $                       | 1.25  |  |      | $ | 0.82   |      |  | $ | 0.80   | 
|                                                                        |             |                         |       |  |      |   |        |      | 



|    |                                                                                           
|--- | ------------------------------------------------------------------------------------------
|(1) | Adjusted to reflect a
    4-for-3 stock split
    distributed by the Company May 17, 2005.

15



---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


(Dollars in thousands, except per share data)






|                         |  |      |          | 
|------------------------ |  | ---- | -------- | 
|                         |  | 2003
|                         |  |     
|Risk-free interest rate  |  |      | 1.17%    | 
|Dividend yield rate      |  |      | 3.23%    | 
|Price volatility         |  |      | 40.87%   | 
|Expected life of options |  |      | 8  years | 





|    |                  
|--- | -----------------
|(p) | Reclassifications





|    |                             
|--- | ----------------------------
|(2) | Restrictions on Cash Balance





|    |                      
|--- | ---------------------
|(3) | Investment Securities



|                                |                                   |                                                |   |            |        |            |   |              |    |        |   |      |      |  |   |      |      |  |   |        |        | 
|------------------------------- | --------------------------------- | ---------------------------------------------- | - | ---------- | ------ | ---------- | - | ------------ | -- | ------ | - | ---- | ---- |  | - | ---- | ---- |  | - | ------ | ------ | 
|                                |                                   |                                                |   |            |        | Gross      |   | Gross        |    |       
|                                |                                   |                                                |   |            |        | unrealized |   | unrealized   |    |       
|                                |                                   |                                                |   | Gross      |        | losses     |   | losses       |    |       
|                                |                                   | Amortized                                      |   | unrealized |        | less than  |   | greater than |    | Market
|                                |                                   | cost                                           |   | gains      |        | 12 months  |   | 12 months    |    | value 
|December 31, 2005:              |                                   |                                                |   |            |        |            |   |              |    |       
|                                |                                   |                                                |   |            |        |            |   |              |    |       
|Investments available for sale: |                                   |                                                |   |            |        |            |   |              |    |        |   |      |      |  |   |      |      |  |   |       
|                                | U.S. government agency securities |                                                | $ | 10,494     |        |            | $ |             |    |        | $ | (43) |      |  | $ | (90) |      |  | $ | 10,361 |       
|                                | Pass-through securities           |                                                |   | 126        |        |            |   | 1            |    |        |   |     |      |  |   |     |      |  |   | 127    |       
|                                | Corporate obligations             |                                                |   | 999        |        |            |   |             |    |        |   | (12) |      |  |   |     |      |  |   | 987    |       
|                                | State and political subdivisions  |                                                |   | 7,529      |        |            |   | 81           |    |        |   |     |      |  |   | (8)  |      |  |   | 7,602  |       
|                                |                                   |                                                |   |            |        |            |   |              |    |        |   |      |      |  |   |      |      |  |   |       
|                                |                                   | Total investment securities available for sale |   | $          | 19,148 |            |   | $            | 82 |        |   | $    | (55) |  |   | $    | (98) |  |   | $      | 19,077 | 
|                                |                                   |                                                |   |            |        |            |   |              |    |        |   |      |      |  |   |      |      |  |   |       

16



---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


(Dollars in thousands, except per share data)


(Continued)


|                                |                                   |                                                |   |            |        |            |   |              |     |        |   |      |      |  |   |      |      |  |   |        |        | 
|------------------------------- | --------------------------------- | ---------------------------------------------- | - | ---------- | ------ | ---------- | - | ------------ | --- | ------ | - | ---- | ---- |  | - | ---- | ---- |  | - | ------ | ------ | 
|                                |                                   |                                                |   |            |        | Gross      |   | Gross        |     |       
|                                |                                   |                                                |   |            |        | unrealized |   | unrealized   |     |       
|                                |                                   |                                                |   | Gross      |        | losses     |   | losses       |     |       
|                                |                                   | Amortized                                      |   | unrealized |        | less than  |   | greater than |     | Market
|                                |                                   | cost                                           |   | gains      |        | 12 months  |   | 12 months    |     | value 
|December 31, 2004:              |                                   |                                                |   |            |        |            |   |              |     |       
|                                |                                   |                                                |   |            |        |            |   |              |     |       
|Investments available for sale: |                                   |                                                |   |            |        |            |   |              |     |        |   |      |      |  |   |      |      |  |   |       
|                                | U.S. government agency securities |                                                | $ | 10,535     |        |            | $ | 9            |     |        | $ | (15) |      |  | $ | (47) |      |  | $ | 10,482 |       
|                                | Pass-through securities           |                                                |   | 214        |        |            |   | 6            |     |        |   |     |      |  |   |     |      |  |   | 220    |       
|                                | Corporate obligations             |                                                |   | 999        |        |            |   |             |     |        |   |     |      |  |   | (12) |      |  |   | 987    |       
|                                | Preferred stock                   |                                                |   | 504        |        |            |   |             |     |        |   |     |      |  |   |     |      |  |   | 504    |       
|                                |                                   |                                                |   |            |        |            |   |              |     |        |   |      |      |  |   |      |      |  |   |       
|                                | State and political subdivisions  |                                                |   | 6,819      |        |            |   | 292          |     |        |   |     |      |  |   |     |      |  |   | 7,111  |       
|                                |                                   |                                                |   |            |        |            |   |              |     |        |   |      |      |  |   |      |      |  |   |       
|                                |                                   | Total investment securities available for sale |   | $          | 19,071 |            |   | $            | 307 |        |   | $    | (15) |  |   | $    | (59) |  |   | $      | 19,304 | 
|                                |                                   |                                                |   |            |        |            |   |              |     |        |   |      |      |  |   |      |      |  |   |       







17



---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


(Dollars in thousands, except per share data)




|                                |                                    |                     |                      |       |       |       |  |          |       |        |  |   |       |       |  |   |   |   |  |   |        |        | 
|------------------------------- | ---------------------------------- | ------------------- | -------------------- | ----- | ----- | ----- |  | -------- | ----- | ------ |  | - | ----- | ----- |  | - | - | - |  | - | ------ | ------ | 
|                                |                                    | Dates of Maturities
|                                |                                    |                    
|                                |                                    | Under               |                      | 1-5   |       | 5-10  |  | Over     |       |       
|                                |                                    | 1 year              |                      | years |       | years |  | 10 years |       | Total 
|                                |                                    |                     |                      |       |       |       |  |          |       |       
|Investments available for sale: |                                    |                     |                      |       |       |       |  |          |       |        |  |   |       |       |  |   |   |   |  |  
|                                | U.S. government agency securities: |                     |                      |       |       |       |  |          |       |        |  |   |       |       |  |   |   |   |  |   |       
|                                |                                    | Amortized cost      |                      | $     | 3,500 |       |  | $        | 6,994 |        |  | $ |      |       |  | $ |  |   |  | $ | 10,494 |       
|                                |                                    | Market value        |                      |       | 3,457 |       |  |          | 6,904 |        |  |   |      |       |  |   |  |   |  |   | 10,361 |       
|                                | Pass-through securities:           |                     |                      |       |       |       |  |          |       |        |  |   |       |       |  |   |   |   |  |   |       
|                                |                                    | Amortized cost      |                      |       | 126   |       |  |          |      |        |  |   |      |       |  |   |  |   |  |   | 126    |       
|                                |                                    | Market value        |                      |       | 127   |       |  |          |      |        |  |   |      |       |  |   |  |   |  |   | 127    |       
|                                | Corporate obligations:             |                     |                      |       |       |       |  |          |       |        |  |   |       |       |  |   |   |   |  |   |       
|                                |                                    | Amortized cost      |                      |       | 999   |       |  |          |      |        |  |   |      |       |  |   |  |   |  |   | 999    |       
|                                |                                    | Market value        |                      |       | 987   |       |  |          |      |        |  |   |      |       |  |   |  |   |  |   | 987    |       
|                                | State and political subdivisions:  |                     |                      |       |       |       |  |          |       |        |  |   |       |       |  |   |   |   |  |   |       
|                                |                                    | Amortized cost      |                      |       | 1,327 |       |  |          | 4,170 |        |  |   | 2,032 |       |  |   |  |   |  |   | 7,529  |       
|                                |                                    | Market value        |                      |       | 1,343 |       |  |          | 4,226 |        |  |   | 2,033 |       |  |   |  |   |  |   | 7,602  |       
|                                |                                    |                     |                      |       |       |       |  |          |       |        |  |   |       |       |  |   |   |   |  |  
|                                |                                    |                     | Total amortized cost |       |       | 5,952 |  |          |       | 11,164 |  |   |       | 2,032 |  |   |   |  |  |   |        | 19,148 | 
|                                |                                    |                     | Total market value   |       | $     | 5,914 |  |          | $     | 11,130 |  |   | $     | 2,033 |  |   | $ |  |  |   | $      | 19,077 | 
|                                |                                    |                     |                      |       |       |       |  |          |       |        |  |   |       |       |  |   |   |   |  |  





|    |                                    
|--- | -----------------------------------
|(4) | Loans and Allowance for Loan Losses



|                               |           |             |         |         |  |   |         |         | 
|------------------------------ | --------- | ----------- | ------- | ------- |  | - | ------- | ------- | 
|                               |           | December 31
|                               |           |            
|                               |           | 2005        |         | 2004   
|                               |           |             |         |        
|Commercial loans               |           | $           | 79,341  |         |  | $ | 80,927  |        
|Real estate mortgages          |           |             | 263,538 |         |  |   | 219,522 |        
|Real estate construction loans |           |             | 113,661 |         |  |   | 105,940 |        
|Consumer loans                 |           |             | 173,676 |         |  |   | 173,216 |        
|                               |           |             |         |         |  |   |         |        
|                               | Subtotal  |             |         | 630,216 |  |   |         | 579,605 | 
|Less:                          |           |             |         |         |  |   |         |        
|Allowance for loan losses      |           |             | (8,810) |         |  |   | (7,903) |        
|Deferred loan fees, net        |           |             | 42      |         |  |   | 375     |        
|                               |           |             |         |         |  |   |         |        
|                               | Net loans |             | $       | 621,448 |  |   | $       | 572,077 | 
|                               |           |             |         |         |  |   |         |        

18



---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


(Dollars in thousands, except per share data)




|                          |                |             |        |       |  |      |        |       |  |   |        |       | 
|------------------------- | -------------- | ----------- | ------ | ----- |  | ---- | ------ | ----- |  | - | ------ | ----- | 
|                          |                | December 31
|                          |                |            
|                          |                | 2005        |        | 2004  |  | 2003
|                          |                |             |        |       |  |     
|Beginning balance         |                | $           | 7,903  |       |  | $    | 6,116  |       |  | $ | 5,514  |      
|Provision for loan losses |                |             | 2,250  |       |  |      | 3,500  |       |  |   | 3,200  |      
|Recoveries                |                |             | 873    |       |  |      | 628    |       |  |   | 597    |      
|Charge-offs               |                |             | (2,216 | )     |  |      | (2,341 | )     |  |   | (3,195 | )    
|                          |                |             |        |       |  |      |        |       |  |   |        |      
|                          | Ending balance |             | $      | 8,810 |  |      | $      | 7,903 |  |   | $      | 6,116 | 
|                          |                |             |        |       |  |      |        |       |  |   |        |      



|                        |                  |                               |   |       |       |      |   |       |       |  |   |       |       | 
|----------------------- | ---------------- | ----------------------------- | - | ----- | ----- | ---- | - | ----- | ----- |  | - | ----- | ----- | 
|                        |                  | December 31                  
|                        |                  |                              
|                        |                  | 2005                          |   | 2004  |       | 2003
|                        |                  |                               |   |       |       |     
|Impaired loans          |                  |                               |   |       |       |      |   |       |       |  |   |      
|                        | Nonaccrual loans |                               | $ | 2,159 |       |      | $ | 2,812 |       |  | $ | 4,158 |      
|                        | Accrual loans    |                               |   |      |       |      |   | 605   |       |  |   | 2,563 |      
|                        |                  |                               |   |       |       |      |   |       |       |  |   |      
|                        |                  | Total impaired loans          |   | $     | 2,159 |      |   | $     | 3,417 |  |   | $     | 6,721 | 
|                        |                  |                               |   |       |       |      |   |       |       |  |   |      
|Reserve for loan losses |                  |                               |   |       |       |      |   |       |       |  |   |      
|                        | Nonaccrual loans |                               | $ | 239   |       |      | $ | 477   |       |  | $ | 417   |      
|                        | Accrual loans    |                               |   |      |       |      |   | 394   |       |  |   |      |      
|                        |                  |                               |   |       |       |      |   |       |       |  |   |      
|                        |                  | Total reserve for loan losses |   | $     | 239   |      |   | $     | 871   |  |   | $     | 417   | 
|                        |                  |                               |   |       |       |      |   |       |       |  |   |      



|                               |                |             |       |       |  |      |       |       |  |   |       |       | 
|------------------------------ | -------------- | ----------- | ----- | ----- |  | ---- | ----- | ----- |  | - | ----- | ----- | 
|                               |                | December 31
|                               |                |            
|                               |                | 2005        |       | 2004  |  | 2003
|                               |                |             |       |       |  |     
|Average balance impaired loans |                |             |       |       |  |      |       |       |  |   |       |      
|Nonaccrual loans               |                | $           | 2,521 |       |  | $    | 3,902 |       |  | $ | 3,587 |      
|Accrual loans                  |                |             |      |       |  |      | 135   |       |  |   | 639   |      
|                               |                |             |       |       |  |      |       |       |  |   |       |      
|                               | Ending balance |             | $     | 2,521 |  |      | $     | 4,037 |  |   | $     | 4,226 | 
|                               |                |             |       |       |  |      |       |       |  |   |       |      



|                                                 |  |             |     |      |  |      |     |  |  |   |     | 
|------------------------------------------------ |  | ----------- | --- | ---- |  | ---- | --- |  |  | - | --- | 
|                                                 |  | December 31
|                                                 |  |            
|                                                 |  | 2005        |     | 2004 |  | 2003
|                                                 |  |             |     |      |  |     
|Interest income not recognized on impaired loans |  | $           | 185 |      |  | $    | 204 |  |  | $ | 224 | 
|Interest income recognized on impaired loans     |  | $           |    |      |  | $    | 42  |  |  | $ | 227 | 

19



---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


(Dollars in thousands, except per share data)


(5) Premises and Equipment




|                               |          |             |        |        |  |   |        |        | 
|------------------------------ | -------- | ----------- | ------ | ------ |  | - | ------ | ------ | 
|                               |          | December 31
|                               |          |            
|                               |          | 2005        |        | 2004  
|                               |          |             |        |       
|Land and buildings             |          | $           | 17,513 |        |  | $ | 16,892 |       
|Furniture and equipment        |          |             | 8,547  |        |  |   | 7,999  |       
|Land improvements              |          |             | 2,101  |        |  |   | 1,998  |       
|Computer software              |          |             | 1,743  |        |  |   | 1,660  |       
|Construction in progress       |          |             | 257    |        |  |   | 486    |       
|                               |          |             |        |        |  |   |        |       
|                               | Subtotal |             |        | 30,161 |  |   |        | 29,035 | 
|Less: accumulated depreciation |          |             | (9,647 | )      |  |   | (8,660 | )     
|                               |          |             |        |        |  |   |        |       
|                               | Total    |             | $      | 20,514 |  |   | $      | 20,375 | 
|                               |          |             |        |        |  |   |        |       

(6) Deposits




|                                         |       |             |         |         |  |   |         |         | 
|---------------------------------------- | ----- | ----------- | ------- | ------- |  | - | ------- | ------- | 
|                                         |       | December 31
|                                         |       |            
|                                         |       | 2005        |         | 2004   
|                                         |       |             |         |        
|CDs                                      |       | $           | 244,910 |         |  | $ | 210,182 |        
|Savings                                  |       |             | 59,635  |         |  |   | 55,742  |        
|Money market                             |       |             | 84,537  |         |  |   | 91,872  |        
|Negotiable orders of withdrawal (NOWs) |       |             | 143,042 |         |  |   | 127,385 |        
|Noninterest-bearing demand               |       |             | 105,365 |         |  |   | 77,820  |        
|                                         |       |             |         |         |  |   |         |        
|                                         | Total |             | $       | 637,489 |  |   | $       | 563,001 | 
|                                         |       |             |         |         |  |   |         |        



|                        |       |                   |        |           |  |           |        |           |  |           |        |              |  |       |       |        |  |   |       |       |  |   |   |   |  |   |         |         | 
|----------------------- | ----- | ----------------- | ------ | --------- |  | --------- | ------ | --------- |  | --------- | ------ | ------------ |  | ----- | ----- | ------ |  | - | ----- | ----- |  | - | - | - |  | - | ------- | ------- | 
|                        |       | December 31, 2005
|                        |       |                  
|                        |       | Less than         |        |          
|                        |       | 1 year            |        | 1-2 years |  | 2-3 years |        | 3-4 years |  | 4-5 years |        | Over 5 years |  | Total
|                        |       |                   |        |           |  |           |        |           |  |           |        |              |  |      
|CDs of $100,000 or more |       | $                 | 81,055 |           |  | $         | 15,213 |           |  | $         | 14,793 |              |  | $     | 4,561 |        |  | $ | 1,171 |       |  | $ |  |   |  | $ | 116,793 |        
|All other CDs           |       |                   | 85,296 |           |  |           | 18,674 |           |  |           | 13,733 |              |  |       | 9,655 |        |  |   | 759   |       |  |   |  |   |  |   | 128,117 |        
|                        |       |                   |        |           |  |           |        |           |  |           |        |              |  |       |       |        |  |   |       |       |  |   |   |   |  |   |         |        
|                        | Total |                   | $      | 166,351   |  |           | $      | 33,887    |  |           | $      | 28,526       |  |       | $     | 14,216 |  |   | $     | 1,930 |  |   | $ |  |  |   | $       | 244,910 | 
|                        |       |                   |        |           |  |           |        |           |  |           |        |              |  |       |       |        |  |   |       |       |  |   |   |   |  |   |         |        

(7) FHLB Advances and Stock






| |   |                                                                                                   
| | - | --------------------------------------------------------------------------------------------------
| |  | 3.5% of the average daily balance of advances outstanding during
    the most recent quarter; plus
|
| |  | the greater of $500 or 0.75% of mortgage loans and pass-through
    securities; or                
|
| |  | 5.0% of the outstanding balance of loans sold to the FHLB minus
    the membership requirement.   



20



---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


(Dollars in thousands, except per share data)






|                 |       |                   |  |                   |        |        |  |                  |       |  |  |   |       |  |  |  |       | 
|---------------- | ----- | ----------------- |  | ----------------- | ------ | ------ |  | ---------------- | ----- |  |  | - | ----- |  |  |  | ----- | 
|                 |       | December 31, 2005 |  | December 31, 2004
|                 |       |                   |  |                  
|                 |       |                   |  | Weighted          |        |        |  | Weighted        
|                 |       |                   |  | average interest  |        |        |  | average interest
|Date of maturity |       | Amount            |  | rate              |        | Amount |  | rate            
|                 |       |                   |  |                   |        |        |  |                 
|                 | 2005  |                   |  | $                 |       |        |  |                  |      |  |  | $ | 5,000 |  |  |  | 4.38% | 
|                 | 2006  |                   |  |                   | 10,000 |        |  |                  | 3.76% |  |  |   |      |  |  |  |      | 
|                 |       |                   |  |                   |        |        |  |                  |       |  |  |   |       |  |  |  |       | 
|                 | Total |                   |  | $                 | 10,000 |        |  |                  |       |  |  | $ | 5,000 |  |  |  |       | 
|                 |       |                   |  |                   |        |        |  |                  |       |  |  |   |       |  |  |  |       | 

|                                            |  |             |        |      |  |   |        | 
|------------------------------------------- |  | ----------- | ------ | ---- |  | - | ------ | 
|                                            |  | December 31
|                                            |  |            
|                                            |  | 2005        |        | 2004
|                                            |  |             |        |     
|Average balance                             |  | $           | 5,586  |      |  | $ | 8,839  | 
|Maximum amount outstanding at any month end |  |             | 30,000 |      |  |   | 12,500 | 



(8) Trust Preferred Securities and Junior Subordinated
Debentures


30-year






21



---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


(Dollars in thousands, except per share data)


(9) Income Taxes




|                          |                                |             |   |       |       |      |   |       |       |  |    |       |       | 
|------------------------- | ------------------------------ | ----------- | - | ----- | ----- | ---- | - | ----- | ----- |  | -- | ----- | ----- | 
|                          |                                | December 31
|                          |                                |            
|                          |                                | 2005        |   | 2004  |       | 2003
|                          |                                |             |   |       |       |     
|Federal:                  |                                |             |   |       |       |      |   |       |       |  |    |      
|                          | Current tax expense            |             | $ | 3,140 |       |      | $ | 3,615 |       |  | $  | 3,173 |      
|                          | Deferred tax expense (benefit) |             |   | 1,440 |       |      |   | (630) |       |  |    | (409  | )    
|State current tax expense |                                |             |  |       |       |      |  |       |       |  | 34 |      
|                          |                                |             |   |       |       |      |   |       |       |  |    |      
|                          |                                | Total       |   | $     | 4,580 |      |   | $     | 2,985 |  |    | $     | 2,798 | 
|                          |                                |             |   |       |       |      |   |       |       |  |    |      



|                          |                                                                         |                                |   |       |       |  |   |       |       | 
|------------------------- | ----------------------------------------------------------------------- | ------------------------------ | - | ----- | ----- |  | - | ----- | ----- | 
|                          |                                                                         | December 31                   
|                          |                                                                         |                               
|                          |                                                                         | 2005                           |   | 2004 
|                          |                                                                         |                                |   |      
|Deferred tax assets:      |                                                                         |                                |   |       |       |  |   |      
|                          | Loan loss allowances                                                    |                                | $ | 3,022 |       |  | $ | 2,549 |      
|                          | Deferred compensation                                                   |                                |   | 310   |       |  |   | 248   |      
|                          | Deferred loan fees                                                      |                                |   |      |       |  |   | 145   |      
|                          | Other                                                                   |                                |   | 61    |       |  |   | 62    |      
|                          | Market value adjustment of investment securities available for
    sale |                                |   | 25    |       |  |   |      |      
|                          |                                                                         |                                |   |       |       |  |   |      
|                          |                                                                         | Total deferred tax assets      |   |       | 3,418 |  |   |       | 3,004 | 
|Deferred tax liabilities: |                                                                         |                                |   |       |       |  |   |      
|                          | Deferred loan fees                                                      |                                |   | 1,799 |       |  |   |      |      
|                          | Premises and equipment                                                  |                                |   | 505   |       |  |   | 526   |      
|                          | FHLB stock                                                              |                                |   | 149   |       |  |   | 210   |      
|                          | Prepaid expenses                                                        |                                |   | 111   |       |  |   |      |      
|                          | Market value adjustment of investment securities available for
    sale |                                |   |      |       |  |   | 79    |      
|                          |                                                                         |                                |   |       |       |  |   |      
|                          |                                                                         | Total deferred tax liabilities |   |       | 2,564 |  |   |       | 815   | 
|                          |                                                                         |                                |   |       |       |  |   |      
|                          |                                                                         | Deferred tax assets, net       |   | $     | 854   |  |   | $     | 2,189 | 
|                          |                                                                         |                                |   |       |       |  |   |      



|                                             |       |             |       |       |  |      |       |       |  |   |       |       |  |  |     |     |  |   |       |       |  |  |     |     | 
|-------------------------------------------- | ----- | ----------- | ----- | ----- |  | ---- | ----- | ----- |  | - | ----- | ----- |  |  | --- | --- |  | - | ----- | ----- |  |  | --- | --- | 
|                                             |       | December 31
|                                             |       |            
|                                             |       | 2005        |       | 2004  |  | 2003
|                                             |       |             |       |       |  |     
|Income tax expense at federal statutory rate |       | $           | 4,857 |       |  |      | 34.3% |       |  | $ | 3,241 |       |  |  | 34% |     |  | $ | 3,014 |       |  |  | 34% |    
|Interest income on tax-exempt securities     |       |             | (285  | )     |  |      | (1.9% | )     |  |   | (297  | )     |  |  | (3% | )   |  |   | (241  | )     |  |  | (3% | )  
|Other, net                                   |       |             | 8     |       |  |      |      |       |  |   | 41    |       |  |  |    |     |  |   | (9)   |       |  |  |    |    
|State tax, net of federal tax benefit        |       |             |      |       |  |      |      |       |  |   |      |       |  |  |    |     |  |   | 34    |       |  |  |    |    
|                                             |       |             |       |       |  |      |       |       |  |   |       |       |  |  |     |     |  |   |       |       |  |  |     |    
|                                             | Total |             | $     | 4,580 |  |      |       | 32.4% |  |   | $     | 2,985 |  |  |     | 31% |  |   | $     | 2,798 |  |  |     | 31% | 
|                                             |       |             |       |       |  |      |       |       |  |   |       |       |  |  |     |     |  |   |       |       |  |  |     |    



22



---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


(Dollars in thousands, except per share data)






|     |                   
|---- | ------------------
|(10) | Earnings Per Share



|                                             |  |                              |       |                         |  |                  |           |  |  |   |       |  
|-------------------------------------------- |  | ---------------------------- | ----- | ----------------------- |  | ---------------- | --------- |  |  | - | ----- | -
|                                             |  | Year Ended December 31, 2005
|                                             |  |                             
|                                             |  | Income                       |       | Weighted average shares |  | Per share amount
|                                             |  |                              |       |                         |  |                 
|Basic EPS                                    |  |                              |       |                         |  |                  |           |  |  |   |       |  
|Income available to common shareholders      |  | $                            | 9,468 |                         |  |                  | 7,278,486 |  |  | $ | 1.30  |  
|Effect of dilutive securities: stock options |  |                              |      |                         |  |                  | 263,688   |  |  |   | (0.04 | )
|                                             |  |                              |       |                         |  |                  |           |  |  |   |       |  
|Diluted EPS                                  |  | $                            | 9,468 |                         |  |                  | 7,542,174 |  |  | $ | 1.26  |  
|                                             |  |                              |       |                         |  |                  |           |  |  |   |       |  

|                                             |  |                              |       |                         |  |                  |           |  |  |   |       |  
|-------------------------------------------- |  | ---------------------------- | ----- | ----------------------- |  | ---------------- | --------- |  |  | - | ----- | -
|                                             |  | Year Ended December 31, 2004
|                                             |  |                             
|                                             |  | Income                       |       | Weighted average shares |  | Per share amount
|                                             |  |                              |       |                         |  |                 
|Basic EPS                                    |  |                              |       |                         |  |                  |           |  |  |   |       |  
|Income available to common shareholders      |  | $                            | 6,176 |                         |  |                  | 7,209,349 |  |  | $ | 0.86  |  
|Effect of dilutive securities: stock options |  |                              |      |                         |  |                  | 251,247   |  |  |   | (0.03 | )
|                                             |  |                              |       |                         |  |                  |           |  |  |   |       |  
|Diluted EPS                                  |  | $                            | 6,176 |                         |  |                  | 7,460,596 |  |  | $ | 0.83  |  
|                                             |  |                              |       |                         |  |                  |           |  |  |   |       |  

|                                             |  |                              |       |                         |  |                  |           |  |  |   |       |  
|-------------------------------------------- |  | ---------------------------- | ----- | ----------------------- |  | ---------------- | --------- |  |  | - | ----- | -
|                                             |  | Year Ended December 31, 2003
|                                             |  |                             
|                                             |  | Income                       |       | Weighted average shares |  | Per share amount
|                                             |  |                              |       |                         |  |                 
|Basic EPS                                    |  |                              |       |                         |  |                  |           |  |  |   |       |  
|Income available to common shareholders      |  | $                            | 5,967 |                         |  |                  | 7,121,948 |  |  | $ | 0.84  |  
|Effect of dilutive securities: stock options |  |                              |      |                         |  |                  | 276,293   |  |  |   | (0.03 | )
|                                             |  |                              |       |                         |  |                  |           |  |  |   |       |  
|Diluted EPS                                  |  | $                            | 5,967 |                         |  |                  | 7,398,241 |  |  | $ | 0.81  |  
|                                             |  |                              |       |                         |  |                  |           |  |  |   |       |  



(11) Employee Benefit Plans








23



---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


(Dollars in thousands, except per share data)








| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Purpose: The purpose of the Comp Plan is to
    (1) provide a deferred compensation arrangement for a
    select group of management or highly compensated employees
    within the meaning of Sections 201(2) and 301(a)(3) of
    ERISA and directors of the Bank, and (2) attract and retain
    the best available personnel for positions of responsibility
    with the Bank and its subsidiaries. The Comp Plan is intended to
    be an unfunded deferred compensation agreement. Participation in
    the Comp Plan is voluntary.                                                 
|
| | Source of Benefits: Benefits under the Comp Plan are
    payable solely by the Bank. To enable the Bank to meet its
    financial commitment under the Comp Plan, assets may be set
    aside in a corporate-owned vehicle. These assets are available
    to all general creditors of the Bank in the event of the
    Banks insolvency. Participants of the Comp Plan are
    unsecured general creditors of the Bank with respect to the Comp
    Plan benefits. Deferrals under the Comp Plan may reduce
    compensation used to calculate benefits under the Banks
    401(k) Plan.





(12) Stock Incentive Plans










24



---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


(Dollars in thousands, except per share data)




|                                |  |                         |         |                 |  |        |      |                 |  |        |         |                 |  |   |      |  |  |  |          |   |  |   |      | 
|------------------------------- |  | ----------------------- | ------- | --------------- |  | ------ | ---- | --------------- |  | ------ | ------- | --------------- |  | - | ---- |  |  |  | -------- | - |  | - | ---- | 
|                                |  | Years Ended December 31
|                                |  |                        
|                                |  | 2005                    |         | 2004            |  | 2003  
|                                |  |                         |         |                 |  |       
|                                |  |                         |         | Weighted        |  |        |      | Weighted        |  |        |         | Weighted       
|                                |  |                         |         | average option  |  |        |      | average option  |  |        |         | average option 
|                                |  | Shares                  |         | price per share |  | Shares |      | price per share |  | Shares |         | price per share
|                                |  |                         |         |                 |  |        |      |                 |  |        |         |                
|Balance at beginning of year    |  |                         | 343,908 |                 |  | $      | 5.16 |                 |  |        | 427,715 |                 |  | $ | 4.67 |  |  |  | 503,361  |   |  | $ | 3.66 | 
|Grants                          |  |                         |        |                 |  |        |     |                 |  |        |        |                 |  |   |     |  |  |  | 48,214   |   |  |   | 7.74 | 
|Exercised                       |  |                         | (81,982 | )               |  |        | 2.93 |                 |  |        | (76,530 | )               |  |   | 2.28 |  |  |  | (123,860 | ) |  |   | 1.79 | 
|Expired, cancelled or forfeited |  |                         | (4,630  | )               |  |        | 6.60 |                 |  |        | (7,277  | )               |  |   | 6.29 |  |  |  |         |   |  |   |     | 
|                                |  |                         |         |                 |  |        |      |                 |  |        |         |                 |  |   |      |  |  |  |          |   |  |   |      | 
|Balance at end of year          |  |                         | 257,296 |                 |  | $      | 5.85 |                 |  |        | 343,908 |                 |  | $ | 5.16 |  |  |  | 427,715  |   |  | $ | 4.67 | 
|                                |  |                         |         |                 |  |        |      |                 |  |        |         |                 |  |   |      |  |  |  |          |   |  |   |      | 



|                  |         |                |  |           |         |            |  |  |       |  |  |                  
|----------------- | ------- | -------------- |  | --------- | ------- | ---------- |  |  | ----- |  |  | -----------------
|December 31, 2005
|                 
|                  |         | Exercise price |  |          
|Total shares      |         | Vested shares  |  | per share |         | Expiration
|                  |         |                |  |           |         |           
|                  | 6,325   |                |  |           | 6,325   |            |  |  | $2.51 |  |  | April 1, 2006    
|                  | 37,950  |                |  |           | 37,950  |            |  |  | 3.18  |  |  | December 31, 2006
|                  | 59,718  |                |  |           | 59,718  |            |  |  | 5.49  |  |  | December 31, 2007
|                  | 58,190  |                |  |           | 58,190  |            |  |  | 7.11  |  |  | December 31, 2008
|                  | 52,368  |                |  |           | 31,420  |            |  |  | 5.63  |  |  | January 1, 2012  
|                  | 2,310   |                |  |           | 1,386   |            |  |  | 7.69  |  |  | February 29, 2012
|                  | 35,478  |                |  |           | 14,191  |            |  |  | 7.69  |  |  | January 2, 2013  
|                  | 4,957   |                |  |           | 1,983   |            |  |  | 8.18  |  |  | February 19, 2013
|                  |         |                |  |           |         |            |  |  |       |  |  |                  
|                  | 257,296 |                |  |           | 211,163 |            |  |  |       |  |  |                  
|                  |         |                |  |           |         |            |  |  |       |  |  |                  



|                                |  |                         |         |                 |  |        |      |                 |  |        |         |                 |  |   |      |  |  |  |         |   |  |   |      | 
|------------------------------- |  | ----------------------- | ------- | --------------- |  | ------ | ---- | --------------- |  | ------ | ------- | --------------- |  | - | ---- |  |  |  | ------- | - |  | - | ---- | 
|                                |  | Years Ended December 31
|                                |  |                        
|                                |  | 2005                    |         | 2004            |  | 2003  
|                                |  |                         |         |                 |  |       
|                                |  |                         |         | Weighted        |  |        |      | Weighted        |  |        |         | Weighted       
|                                |  |                         |         | average option  |  |        |      | average option  |  |        |         | average option 
|                                |  | Shares                  |         | price per share |  | Shares |      | price per share |  | Shares |         | price per share
|                                |  |                         |         |                 |  |        |      |                 |  |        |         |                
|Balance at beginning of year    |  |                         | 108,607 |                 |  | $      | 5.79 |                 |  |        | 127,581 |                 |  | $ | 5.20 |  |  |  | 162,426 |   |  | $ | 3.59 | 
|Grants                          |  |                         |        |                 |  |        |     |                 |  |        |        |                 |  |   |     |  |  |  | 22,080  |   |  |   | 8.18 | 
|Exercised                       |  |                         | (26,404 | )               |  |        | 4.44 |                 |  |        | (18,975 | )               |  |   | 1.82 |  |  |  | (56,925 | ) |  |   | 1.78 | 
|Expired, cancelled or forfeited |  |                         | (3,006  | )               |  |        | 7.04 |                 |  |        |        |                 |  |   |     |  |  |  |        |   |  |   |     | 
|                                |  |                         |         |                 |  |        |      |                 |  |        |         |                 |  |   |      |  |  |  |         |   |  |   |      | 
|Balance at end of year          |  |                         | 79,197  |                 |  | $      | 6.19 |                 |  |        | 108,607 |                 |  | $ | 5.79 |  |  |  | 127,581 |   |  | $ | 5.20 | 
|                                |  |                         |         |                 |  |        |      |                 |  |        |         |                 |  |   |      |  |  |  |         |   |  |   |      | 



|                  |        |                |  |           |        |            |  |  |         |  |  |                  
|----------------- | ------ | -------------- |  | --------- | ------ | ---------- |  |  | ------- |  |  | -----------------
|December 31, 2005
|                 
|                  |        | Exercise price |  |          
|Total shares      |        | Vested shares  |  | per share |        | Expiration
|                  |        |                |  |           |        |           
|                  | 32,890 |                |  |           | 32,890 |            |  |  | $  5.48 |  |  | December 31, 2007
|                  | 26,987 |                |  |           | 16,192 |            |  |  | 5.63    |  |  | May 16, 2012     
|                  | 19,320 |                |  |           | 7,728  |            |  |  | 8.18    |  |  | February 19, 2013
|                  |        |                |  |           |        |            |  |  |         |  |  |                  
|                  | 79,197 |                |  |           | 56,810 |            |  |  |         |  |  |                  
|                  |        |                |  |           |        |            |  |  |         |  |  |                  

25



---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


(Dollars in thousands, except per share data)


Accounting for
Stock-Based Compensation,








|     |                           
|---- | --------------------------
|(13) | Regulatory Capital Matters









|                                                       |                     |        |   |                   |  |                         |  |                        |  |         |   |        |  |  |  |       |  |  |   |        |  |  |  |        | 
|------------------------------------------------------ | ------------------- | ------ | - | ----------------- |  | ----------------------- |  | ---------------------- |  | ------- | - | ------ |  |  |  | ----- |  |  | - | ------ |  |  |  | ------ | 
|                                                       |                     |        |   |                   |  |                         |  | To be well-capitalized
|                                                       |                     |        |   | For capital       |  | under prompt corrective
|                                                       |                     | Actual |   | adequacy purposes |  | action provisions      
|                                                       |                     |        |   |                   |  |                        
|                                                       |                     |        |   |                   |  | Minimum                 |  |                        |  | Minimum
|                                                       |                     | Amount |   | Ratio             |  | Amount                  |  | ratio                  |  | Amount  |   | ratio 
|                                                       |                     |        |   |                   |  |                        
|December 31, 2005:                                     |                     |        |   |                   |  |                         |  |                        |  |         |   |        |  |  |  |       |  |  |   |        |  |  |  |       
|Total risk-based capital
    (to risk-weighted assets) |                     |        |   |                   |  |                         |  |                        |  |         |   |        |  |  |  |       |  |  |   |        |  |  |  |       
|                                                       | Consolidated        |        | $ | 81,689            |  |                         |  | 11.52%                 |  |         | $ | 56,722 |  |  |  | 8.00% |  |  | $ | N/A    |  |  |  |        | 
|                                                       | Whidbey Island Bank |        |   | 79,277            |  |                         |  | 11.21%                 |  |         |   | 56,591 |  |  |  | 8.00% |  |  |   | 70,739 |  |  |  | 10.00% | 
|Tier 1 capital (to risk-weighted assets)               |                     |        |   |                   |  |                         |  |                        |  |         |   |        |  |  |  |       |  |  |   |        |  |  |  |       
|                                                       | Consolidated        |        |   | 72,879            |  |                         |  | 10.28%                 |  |         |   | 28,361 |  |  |  | 4.00% |  |  |   | N/A    |  |  |  |        | 
|                                                       | Whidbey Island Bank |        |   | 70,467            |  |                         |  | 9.96%                  |  |         |   | 28,296 |  |  |  | 4.00% |  |  |   | 42,444 |  |  |  | 6.00%  | 
|Tier 1 capital (to average assets)                     |                     |        |   |                   |  |                         |  |                        |  |         |   |        |  |  |  |       |  |  |   |        |  |  |  |       
|                                                       | Consolidated        |        |   | 72,879            |  |                         |  | 10.26%                 |  |         |   | 28,423 |  |  |  | 4.00% |  |  |   | N/A    |  |  |  |        | 
|                                                       | Whidbey Island Bank |        |   | 70,467            |  |                         |  | 9.93%                  |  |         |   | 28,375 |  |  |  | 4.00% |  |  |   | 35,469 |  |  |  | 5.00%  | 

26



---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


(Dollars in thousands, except per share data)


|                                                       |                     |        |   |                   |  |                         |  |                        |  |         |   |        |  |  |  |       |  |  |   |        |  |  |  |        | 
|------------------------------------------------------ | ------------------- | ------ | - | ----------------- |  | ----------------------- |  | ---------------------- |  | ------- | - | ------ |  |  |  | ----- |  |  | - | ------ |  |  |  | ------ | 
|                                                       |                     |        |   |                   |  |                         |  | To be well-capitalized
|                                                       |                     |        |   | For capital       |  | under prompt corrective
|                                                       |                     | Actual |   | adequacy purposes |  | action provisions      
|                                                       |                     |        |   |                   |  |                        
|                                                       |                     |        |   |                   |  | Minimum                 |  |                        |  | Minimum
|                                                       |                     | Amount |   | Ratio             |  | Amount                  |  | ratio                  |  | Amount  |   | ratio 
|                                                       |                     |        |   |                   |  |                        
|December 31, 2004:                                     |                     |        |   |                   |  |                         |  |                        |  |         |   |        |  |  |  |       |  |  |   |        |  |  |  |       
|Total risk-based capital
    (to risk-weighted assets) |                     |        |   |                   |  |                         |  |                        |  |         |   |        |  |  |  |       |  |  |   |        |  |  |  |       
|                                                       | Consolidated        |        | $ | 72,346            |  |                         |  | 11.40%                 |  |         | $ | 50,771 |  |  |  | 8.00% |  |  | $ | N/A    |  |  |  |        | 
|                                                       | Whidbey Island Bank |        |   | 69,913            |  |                         |  | 11.03%                 |  |         |   | 50,694 |  |  |  | 8.00% |  |  |   | 63,368 |  |  |  | 10.00% | 
|Tier 1 capital (to risk-weighted assets)               |                     |        |   |                   |  |                         |  |                        |  |         |   |        |  |  |  |       |  |  |   |        |  |  |  |       
|                                                       | Consolidated        |        |   | 64,443            |  |                         |  | 10.15%                 |  |         |   | 25,386 |  |  |  | 4.00% |  |  |   | N/A    |  |  |  |        | 
|                                                       | Whidbey Island Bank |        |   | 62,010            |  |                         |  | 9.79%                  |  |         |   | 25,347 |  |  |  | 4.00% |  |  |   | 38,021 |  |  |  | 6.00%  | 
|Tier 1 capital (to average assets)                     |                     |        |   |                   |  |                         |  |                        |  |         |   |        |  |  |  |       |  |  |   |        |  |  |  |       
|                                                       | Consolidated        |        |   | 64,443            |  |                         |  | 9.87%                  |  |         |   | 26,119 |  |  |  | 4.00% |  |  |   | N/A    |  |  |  |        | 
|                                                       | Whidbey Island Bank |        |   | 62,010            |  |                         |  | 9.51%                  |  |         |   | 26,079 |  |  |  | 4.00% |  |  |   | 32,599 |  |  |  | 5.00%  | 





|     |                                    
|---- | -----------------------------------
|(14) | Fair Value of Financial Instruments













27



---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


(Dollars in thousands, except per share data)






























28



---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


(Dollars in thousands, except per share data)




|                       |                                |                    |   |         |        |          |   |         |        |  |   |         |        |  |   |         |        | 
|---------------------- | ------------------------------ | ------------------ | - | ------- | ------ | -------- | - | ------- | ------ |  | - | ------- | ------ |  | - | ------- | ------ | 
|                       |                                | December 31       
|                       |                                |                   
|                       |                                | 2005               |   | 2004   
|                       |                                |                    |   |        
|                       |                                | Carrying           |   | Fair    |        | Carrying |   | Fair   
|                       |                                | value              |   | value   |        | value    |   | value  
|                       |                                |                    |   |         |        |          |   |        
|Financial assets:      |                                |                    |   |         |        |          |   |         |        |  |   |         |        |  |   |        
|                       | Cash and cash equivalents      |                    | $ | 19,949  |        |          | $ | 19,949  |        |  | $ | 16,814  |        |  | $ | 16,814  |       
|                       | Interest-earning deposits      |                    |   | 983     |        |          |   | 983     |        |  |   | 1,119   |        |  |   | 1,119   |       
|                       | Federal funds sold             |                    |   | 21,095  |        |          |   | 21,095  |        |  |   |        |        |  |   |        |       
|                       | FHLB stock                     |                    |   | 1,984   |        |          |   | 1,984   |        |  |   | 1,976   |        |  |   | 1,976   |       
|                       | Investment securities:         |                    |   |         |        |          |   |         |        |  |   |         |        |  |   |         |       
|                       |                                | Available for sale |   |         | 19,077 |          |   |         | 19,077 |  |   |         | 19,304 |  |   |         | 19,304 | 
|                       | Loans held for sale            |                    |   | 2,829   |        |          |   | 2,829   |        |  |   | 8,311   |        |  |   | 8,311   |       
|                       | Loans                          |                    |   | 630,258 |        |          |   | 623,698 |        |  |   | 579,980 |        |  |   | 578,048 |       
|Financial liabilities: |                                |                    |   |         |        |          |   |         |        |  |   |         |        |  |   |        
|                       | Deposits                       |                    |   | 637,489 |        |          |   | 636,676 |        |  |   | 563,001 |        |  |   | 562,507 |       
|                       | FHLB overnight borrowings      |                    |   |        |        |          |   |        |        |  |   | 22,000  |        |  |   | 22,000  |       
|                       | Junior subordinated debentures |                    |   | 15,007  |        |          |   | 15,007  |        |  |   | 15,007  |        |  |   | 15,007  |       
|                       | Other borrowed funds           |                    |   | 10,000  |        |          |   | 10,000  |        |  |   | 5,000   |        |  |   | 5,000   |       

(15) Washington Banking Company Information




|                         |                                             |                                            |   |        |        |  |   |        |        | 
|------------------------ | ------------------------------------------- | ------------------------------------------ | - | ------ | ------ |  | - | ------ | ------ | 
|                         |                                             | December 31                               
|                         |                                             |                                           
|                         |                                             | 2005                                       |   | 2004  
|Condensed Balance Sheets |                                             |                                            |   |       
|Assets:                  |                                             |                                            |   |        |        |  |   |       
|                         | Cash and cash equivalents                   |                                            | $ | 895    |        |  | $ | 1,343  |       
|                         | Other assets                                |                                            |   | 1,277  |        |  |   | 477    |       
|                         | Investment in subsidiaries                  |                                            |   | 70,684 |        |  |   | 62,778 |       
|                         |                                             |                                            |   |        |        |  |   |       
|                         |                                             | Total assets                               |   | $      | 72,856 |  |   | $      | 64,598 | 
|                         |                                             |                                            |   |        |        |  |   |       
|                        
|Liabilities:             |                                             |                                            |   |        |        |  |   |       
|                         | Junior subordinated debentures              |                                            | $ | 15,007 |        |  | $ | 15,007 |       
|Shareholders equity:    |                                             |                                            |   |        |        |  |   |       
|                         | Common stock                                |                                            |   | 32,106 |        |  |   | 31,516 |       
|                         | Retained earnings                           |                                            |   | 25,789 |        |  |   | 17,928 |       
|                         | Accumulated other comprehensive income, net |                                            |   | (46    | )      |  |   | 147    |       
|                         |                                             |                                            |   |        |        |  |   |       
|                         |                                             | Total shareholders equity                 |   |        | 57,849 |  |   |        | 49,591 | 
|                         |                                             |                                            |   |        |        |  |   |       
|                         |                                             | Total liabilities and shareholders equity |   | $      | 72,856 |  |   | $      | 64,598 | 
|                         |                                             |                                            |   |        |        |  |   |       

29



---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


(Dollars in thousands, except per share data)


|                                                                              |                                |                            |        |       |        |      |        |     |       |   |        |     |       |  
|----------------------------------------------------------------------------- | ------------------------------ | -------------------------- | ------ | ----- | ------ | ---- | ------ | --- | ----- | - | ------ | --- | ----- | -
|                                                                              |                                | Years Ended December 31   
|                                                                              |                                |                           
|                                                                              |                                | 2005                       |        | 2004  |        | 2003
|Condensed Statements of Income                                                |                                |                            |        |       |        |     
|Interest income:                                                              |                                |                            |        |       |        |      |        |     |       |   |        |    
|                                                                              | Interest-earning deposits      |                            | $      | 18    |        |      | $      | 5   |       |   | $      | 1   |      
|                                                                              | Common securities              |                            |        | 33    |        |      |        | 24  |       |   |        | 23  |      
|                                                                              |                                |                            |        |       |        |      |        |     |       |   |        |    
|                                                                              |                                | Total interest income      |        |       | 51     |      |        |     | 29    |   |        |     | 24    |  
|Interest expense:                                                             |                                |                            |        |       |        |      |        |     |       |   |        |    
|                                                                              | Junior subordinated debentures |                            |        | 1,071 |        |      |        | 782 |       |   |        | 742 |      
|                                                                              |                                |                            |        |       |        |      |        |     |       |   |        |    
|                                                                              |                                | Net interest income (loss) |        |       | (1,020 | )    |        |     | (753  | ) |        |     | (718  | )
|                                                                              | Noninterest expense            |                            |        | 600   |        |      |        | 503 |       |   |        | 591 |      
|                                                                              |                                |                            |        |       |        |      |        |     |       |   |        |    
|Loss before income tax benefit and undistributed earnings of
    subsidiaries |                                |                            | (1,620 | )     |        |      | (1,256 | )   |       |   | (1,309 | )  
|Income tax benefit                                                            |                                |                            | 556    |       |        |      | 479    |     |       |   | 445    |    
|                                                                              |                                |                            |        |       |        |      |        |     |       |   |        |    
|Loss before undistributed earnings of subsidiaries                            |                                |                            | (1,064 | )     |        |      | (777   | )   |       |   | (864   | )  
|Undistributed earnings of subsidiaries                                        |                                |                            | 8,182  |       |        |      | 4,173  |     |       |   | 3,880  |    
|Dividend income from the Bank                                                 |                                |                            | 2,350  |       |        |      | 3,150  |     |       |   | 3,007  |    
|Loss from discontinued operations                                             |                                |                            |       |       |        |      | (370   | )   |       |   | (56    | )  
|                                                                              |                                |                            |        |       |        |      |        |     |       |   |        |    
|                                                                              |                                | Net income                 |        | $     | 9,468  |      |        | $   | 6,176 |   |        | $   | 5,967 |  
|                                                                              |                                |                            |        |       |        |      |        |     |       |   |        |    

|                                               |                                                                                   |                                                      |       |        |        |      |       |        |        |   |     |        |       |  
|---------------------------------------------- | --------------------------------------------------------------------------------- | ---------------------------------------------------- | ----- | ------ | ------ | ---- | ----- | ------ | ------ | - | --- | ------ | ----- | -
|                                               |                                                                                   | Years Ended December 31                             
|                                               |                                                                                   |                                                     
|                                               |                                                                                   | 2005                                                 |       | 2004   |        | 2003
|Condensed Statements of Cash Flows             |                                                                                   |                                                      |       |        |        |     
|Operating activities:                          |                                                                                   |                                                      |       |        |        |      |       |        |        |   |     |       
|                                               | Net income from continuing operations                                             |                                                      | $     | 9,468  |        |      | $     | 6,546  |        |   | $   | 6,023  |      
|                                               | Adjustments to reconcile net income to net cash used in
    operating activities: |                                                      |       |        |        |      |       |        |        |   |     |        |      
|                                               | Equity in undistributed earnings of subsidiaries                                  |                                                      |       | (8,182 | )      |      |       | (4,173 | )      |   |     | (3,880 | )    
|                                               | Stock option compensation                                                         |                                                      |       | 24     |        |      |       | 23     |        |   |     | 23     |      
|                                               | Other assets                                                                      |                                                      |       | (801   | )      |      |       | 375    |        |   |     | (451   | )    
|                                               |                                                                                   |                                                      |       |        |        |      |       |        |        |   |     |       
|                                               |                                                                                   | Cash flows provided by operating activities          |       |        | 509    |      |       |        | 2,771  |   |     |        | 1,715 |  
|                                               |                                                                                   |                                                      |       |        |        |      |       |        |        |   |     |       
|Investing activities:                          |                                                                                   |                                                      |       |        |        |      |       |        |        |   |     |       
|                                               | Investment in subsidiaries                                                        |                                                      |       | (293   | )      |      |       | (247   | )      |   |     | (773   | )    
|Financing activities:                          |                                                                                   |                                                      |       |        |        |      |       |        |        |   |     |       
|                                               | Dividends paid to shareholders                                                    |                                                      |       | (1,607 | )      |      |       | (1,521 | )      |   |     | (1,303 | )    
|                                               | Proceeds from exercise of stock options and stock issuances                       |                                                      |       | 357    |        |      |       | 208    |        |   |     | 323    |      
|                                               |                                                                                   | Cash flows provided by financing activities          |       |        | (1,250 | )    |       |        | (1,313 | ) |     |        | (980  | )
|                                               |                                                                                   |                                                      |       |        |        |      |       |        |        |   |     |       
|                                               |                                                                                   | Net increase (decrease) in cash and cash equivalents |       |        | (488   | )    |       |        | 1,211  |   |     |        | (38   | )
|Cash and cash equivalents at beginning of year |                                                                                   |                                                      | 1,343 |        |        |      | 132   |        |        |   | 170 |       
|                                               |                                                                                   |                                                      |       |        |        |      |       |        |        |   |     |       
|Cash and cash equivalents at end of year       |                                                                                   | $                                                    | 895   |        |        | $    | 1,343 |        |        | $ | 132 |       
|                                               |                                                                                   |                                                      |       |        |        |      |       |        |        |   |     |       

(16) Commitments




|    |                      
|--- | ---------------------
|(a) | Leasing Arrangements:



30



---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


(Dollars in thousands, except per share data)




|           |  |                   |       | 
|---------- |  | ----------------- | ----- | 
|           |  | December 31, 2005
|           |  |                  
|2006       |  | $                 | 364   | 
|2007       |  |                   | 319   | 
|2008       |  |                   | 238   | 
|2009       |  |                   | 176   | 
|2010       |  |                   | 92    | 
|Thereafter |  |                   | 712   | 
|           |  |                   |       | 
|Total      |  | $                 | 1,901 | 
|           |  |                   |       | 













|                          |               |                   |       |         | 
|------------------------- | ------------- | ----------------- | ----- | ------- | 
|                          |               | December 31, 2005
|                          |               |                  
|Loan commitments          |               |                   |       |        
|                          | Fixed rate    |                   | $     | 38,554  | 
|                          | Variable rate |                   |       | 140,477 | 
|Standby letters of credit |               |                   | 1,573 |        



|     |                                                  
|---- | -------------------------------------------------
|(17) | Mortgage Loan Commitments and Loans Held for Sale



31



---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


(Dollars in thousands, except per share data)


held-for-sale.




|                                                      |  |          |       |       |  |   |     |  
|----------------------------------------------------- |  | -------- | ----- | ----- |  | - | --- | -
|                                                      |  | 2003    
|                                                      |  |         
|                                                      |  | Notional |       | Fair 
|                                                      |  | amount   |       | value
|(Dollars in thousands)                                |  |          |       |      
|Interest-rate-locked loan commitments                 |  | $        | 6,744 |       |  | $ | 2   |  
|Forward sales of loans and mortgage-backed securities |  |          | 6,000 |       |  |   | (46 | )



|     |                           
|---- | --------------------------
|(18) | Related Party Transactions







|     |              
|---- | -------------
|(19) | Contingencies





|     |                  
|---- | -----------------
|(20) | Subsequent Events



32



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##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


(Dollars in thousands, except per share data)




|     |                                              
|---- | ---------------------------------------------
|(21) | Selected Quarterly Financial Data (Unaudited)



|                                  |                                                     |                              |        |         |  |         |        |         |  |   |        |       |  |   |        |       | 
|--------------------------------- | --------------------------------------------------- | ---------------------------- | ------ | ------- |  | ------- | ------ | ------- |  | - | ------ | ----- |  | - | ------ | ----- | 
|                                  |                                                     | Year Ended December 31, 2005
|                                  |                                                     |                             
|                                  |                                                     | First                        |        | Second  |  | Third   |        | Fourth 
|                                  |                                                     | quarter(1)                   |        | quarter |  | quarter |        | quarter
|                                  |                                                     |                              |        |         |  |         |        |        
|Interest income                   |                                                     | $                            | 10,293 |         |  | $       | 11,137 |         |  | $ | 11,788 |       |  | $ | 12,572 |      
|Interest expense                  |                                                     |                              | 2,513  |         |  |         | 2,796  |         |  |   | 2,975  |       |  |   | 3,282  |      
|                                  |                                                     |                              |        |         |  |         |        |         |  |   |        |       |  |   |        |      
|                                  | Net interest income                                 |                              |        | 7,780   |  |         |        | 8,341   |  |   |        | 8,813 |  |   |        | 9,290 | 
|Provision for loan losses         |                                                     |                              | 425    |         |  |         | 525    |         |  |   | 550    |       |  |   | 750    |      
|                                  |                                                     |                              |        |         |  |         |        |         |  |   |        |       |  |   |        |      
|                                  | Net interest income after provision for loan losses |                              |        | 7,355   |  |         |        | 7,816   |  |   |        | 8,263 |  |   |        | 8,540 | 
|Noninterest income                |                                                     |                              | 1,651  |         |  |         | 1,892  |         |  |   | 1,991  |       |  |   | 1,765  |      
|Noninterest expense               |                                                     |                              | 5,987  |         |  |         | 6,159  |         |  |   | 6,336  |       |  |   | 6,743  |      
|                                  |                                                     |                              |        |         |  |         |        |         |  |   |        |       |  |   |        |      
|                                  | Income before provision for income taxes            |                              |        | 3,019   |  |         |        | 3,549   |  |   |        | 3,918 |  |   |        | 3,562 | 
|                                  |                                                     |                              |        |         |  |         |        |         |  |   |        |       |  |   |        |      
|Provision for income taxes        |                                                     |                              | 976    |         |  |         | 1,200  |         |  |   | 1,239  |       |  |   | 1,165  |      
|                                  |                                                     |                              |        |         |  |         |        |         |  |   |        |       |  |   |        |      
|                                  | Net income                                          |                              | $      | 2,043   |  |         | $      | 2,349   |  |   | $      | 2,679 |  |   | $      | 2,397 | 
|                                  |                                                     |                              |        |         |  |         |        |         |  |   |        |       |  |   |        |      
|Basic earnings per share          |                                                     | $                            | 0.28   |         |  | $       | 0.32   |         |  | $ | 0.37   |       |  | $ | 0.33   |      
|Diluted earnings per share        |                                                     | $                            | 0.27   |         |  | $       | 0.31   |         |  | $ | 0.35   |       |  | $ | 0.32   |      
|Cash dividends declared per share |                                                     | $                            | 0.054  |         |  | $       | 0.055  |         |  | $ | 0.055  |       |  | $ | 0.055  |      

33



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##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


(Dollars in thousands, except per share data)


|                                  |                         |                                                        |       |         |       |         |       |         |       |   |       |      |       |   |        |      |       | 
|--------------------------------- | ----------------------- | ------------------------------------------------------ | ----- | ------- | ----- | ------- | ----- | ------- | ----- | - | ----- | ---- | ----- | - | ------ | ---- | ----- | 
|                                  |                         | Year Ended December 31, 2004(1)                       
|                                  |                         |                                                       
|                                  |                         | First                                                  |       | Second  |       | Third   |       | Fourth 
|                                  |                         | quarter                                                |       | quarter |       | quarter |       | quarter
|                                  |                         |                                                        |       |         |       |         |       |        
|Interest income                   |                         | $                                                      | 9,085 |         |       | $       | 9,361 |         |       | $ | 9,861 |      |       | $ | 10,157 |     
|Interest expense                  |                         |                                                        | 2,094 |         |       |         | 2,166 |         |       |   | 2,248 |      |       |   | 2,329  |     
|                                  |                         |                                                        |       |         |       |         |       |         |       |   |       |      |       |   |        |     
|                                  |                         | Net interest income                                    |       |         | 6,991 |         |       |         | 7,195 |   |       |      | 7,613 |   |        |      | 7,828 | 
|Provision for loan losses         |                         |                                                        | 825   |         |       |         | 775   |         |       |   | 725   |      |       |   | 1,175  |     
|                                  |                         |                                                        |       |         |       |         |       |         |       |   |       |      |       |   |        |     
|                                  |                         | Net interest income after provision for loan losses    |       |         | 6,166 |         |       |         | 6,420 |   |       |      | 6,888 |   |        |      | 6,653 | 
|Noninterest income                |                         |                                                        | 1,377 |         |       |         | 1,720 |         |       |   | 1,672 |      |       |   | 1,902  |     
|Noninterest expense               |                         |                                                        | 5,705 |         |       |         | 5,906 |         |       |   | 5,789 |      |       |   | 5,867  |     
|                                  |                         |                                                        |       |         |       |         |       |         |       |   |       |      |       |   |        |     
|                                  |                         | Income before provision for income taxes               |       |         | 1,838 |         |       |         | 2,234 |   |       |      | 2,771 |   |        |      | 2,688 | 
|                                  |                         |                                                        |       |         |       |         |       |         |       |   |       |      |       |   |        |     
|Provision for income taxes        |                         |                                                        | 620   |         |       |         | 742   |         |       |   | 915   |      |       |   | 708    |     
|                                  |                         | Income from continuing operations, net of tax          |       |         | 1,218 |         |       |         | 1,492 |   |       |      | 1,856 |   |        |      | 1,980 | 
|                                  |                         | Income (loss) from discontinued operations, net of tax |       |         | (123  | )       |       |         | (247  | ) |       |      |      |   |        |      |      | 
|                                  |                         |                                                        |       |         |       |         |       |         |       |   |       |      |       |   |        |     
|                                  |                         | Net income                                             |       | $       | 1,095 |         |       | $       | 1,245 |   |       | $    | 1,856 |   |        | $    | 1,980 | 
|                                  |                         |                                                        |       |         |       |         |       |         |       |   |       |      |       |   |        |     
|Basic earnings per share          |                         |                                                        |       |         |       |         |       |         |       |   |       |      |       |   |        |     
|                                  | Continuing operations   |                                                        | $     | 0.15    |       |         | $     | 0.17    |       |   | $     | 0.26 |       |   | $      | 0.27 |      
|                                  | Discontinued operations |                                                        |       | (0.02   | )     |         |       | (0.05   | )     |   |       |     |       |   |        |     |      
|                                  |                         |                                                        |       |         |       |         |       |         |       |   |       |      |       |   |        |     
|Net basic earnings per share      |                         | $                                                      | 0.13  |         |       | $       | 0.12  |         |       | $ | 0.26  |      |       | $ | 0.27   |     
|                                  |                         |                                                        |       |         |       |         |       |         |       |   |       |      |       |   |        |     
|Diluted earnings per share        |                         |                                                        |       |         |       |         |       |         |       |   |       |      |       |   |        |     
|                                  | Continuing operations   |                                                        | $     | 0.15    |       |         | $     | 0.17    |       |   | $     | 0.25 |       |   | $      | 0.26 |      
|                                  | Discontinued operations |                                                        |       | (0.02   | )     |         |       | (0.04   | )     |   |       |     |       |   |        |     |      
|                                  |                         |                                                        |       |         |       |         |       |         |       |   |       |      |       |   |        |     
|Net diluted earnings per share    |                         | $                                                      | 0.13  |         |       | $       | 0.13  |         |       | $ | 0.25  |      |       | $ | 0.26   |     
|                                  |                         |                                                        |       |         |       |         |       |         |       |   |       |      |       |   |        |     
|Cash dividends declared per share |                         | $                                                      | 0.04  | 7       |       | $       | 0.05  | 4       |       | $ | 0.05  | 4    |       | $ | 0.05   | 4   



|    |                                                                                                             
|--- | ------------------------------------------------------------------------------------------------------------
|(1) | Per share information adjusted to reflect a 4-for-3 stock split
    distributed by the Company May 17, 2005.

34



---



##### 



PART IV
 Item 15. Exhibits, Financial Statement Schedules
 (a)
    
    (1) Financial Statements:The financial statements and related documents listed in the index
set forth in Item 8 of this report are filed as part of this report.
 (2) Financial Statements Schedules:
 (3) Exhibits:
 35




---



##### 



SIGNATURES
  WASHINGTON BANKING COMPANY
(Registrant)By /s/ Michal D. CannMichal D. Cann
President and
Chief Executive Officer
  Principal Executive Officer:By /s/ Michal D. CannMichal D. Cann
President and
Chief Executive OfficerPrincipal Financial and Accounting Officer:By /s/ Richard A. ShieldsRichard A. Shields
Senior Vice President and
Chief Financial Officer
 36




---



##### 



By
    
    /s/ Michal D. CannMichal D. CannAttorney-in-factMarch 16, 2006
 37




---



##### 



INDEX TO EXHIBITS
 Exhibit No.
    
    Exhibit Description3.1
    
    
    Articles of Amendment to Articles of Incorporation of the Company (1)3.2
    
    
    Amended and Restated Articles of Incorporation of the Company (1)3.3
    
    
    Articles of Amendment to the Amended and Restated Articles of
Incorporation of the Company (6)3.4
    
    
    Bylaws of the Company (1)4.1
    
    
    Form of Common Stock Certificate (1)4.2
    
    
    Stock Repurchase Plan (3)4.3
    
    
    Pursuant to Section 601(b)(4)(iii)(A) of Regulation S-K, copies of
instruments defining the rights of holders of long-term debt and
preferred securities are not filed. The Company agrees to furnish a
copy thereof to the Securities and Exchange Commission upon request.10.1
    
    
    1992 Employee Stock Option Plan (1)10.2
    
    
    1993 Director Stock Option Plan (1)10.3
    
    
    1998 Stock Option and Restricted Stock Award Plan (2)10.4
    
    
    Form of Severance Agreement (1)10.5
    
    
    Executive Employment Agreements (4)10.6
    
    
    2005 Stock Incentive Plan(5)21
    
    
    Subsidiaries of the Registrant(7)23
    
    
    Consent of Moss Adams LLP(7)24
    
    
    Power of Attorney(7)31.1
    
    
    Certification of Chief Executive Officer required by Rule 13a-14(b)
or Rule 15d-14(a) and Section 302 of the Sarbanes Oxley Act of 200231.2
    
    
    Certification of Chief Financial Officer required by Rule 13a-14(b)
or Rule 15d-14(a) and Section 302 of the Sarbanes Oxley Act of 200232.1
    
    
    Certification of Chief Executive Officer required by Rule 13a-14(b)
or Rule 15d-14(b) and Section 906 of the Sarbanes Oxley Act of 2002,
18 U.S.C. Section 135032.2
    
    
    Certification of Chief Financial Officer required by Rule 13a-14(b)
or Rule 15d-14(b) and Section 906 of the Sarbanes Oxley Act of 2002,
18 U.S.C. Section 1350
 
 (1)
    
    Incorporated by reference to the Form SB-2 (Registration No. 333-49925) previously filed by the
Company, declared effective on June 22, 1998.(2)
    
    Incorporated by reference to the definitive proxy statement dated August 19, 1998 for the Annual
Meeting of Shareholders held September 24, 1998.(3)
    
    Incorporated by reference to the Form 8-K dated April 30, 1999, previously filed by the Company.(4)
    
    Incorporated by reference to Forms 8-K dated May 12, 2005 and September 30, 2005, previously
filed by the Company.(5)
    
    Incorporated by reference to Form S-8 dated November 10, 2005, previously filed by the Company.(6)
    
    Incorporated by reference to Form 8-K dated July 14, 2005, previously filed by the Company.(7)
    
    Incorporated by reference to the Form 10-K dated March 13, 2006, previously filed by the Company. 38