##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
  þ
    
    Quarterly report pursuant to Section 13 or l5(d) of the Securities Exchange Act of 1934
 For the quarterly period ended March 31, 2006
 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
    
    (I.R.S. Employerincorporation or organization)
    
    Identification Number)
 450 SW Bayshore Drive
Oak Harbor, Washington 98277
 (360) 679-3121
  þ o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-Accelerated filer o
 o þ




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##### 



Table of ContentsPagePART I  FINANCIAL INFORMATIONItem 1. Financial StatementsCondensed
Consolidated Statements of Financial Condition 
March 31, 2006 and December 31, 2005
    
    
    1Condensed
Consolidated Statements of Income 
Three Months Ended March 31, 2006 and 2005
    
    
    2Condensed
Consolidated Statements of Shareholders Equity and
Comprehensive Income 
Three Months Ended March 31, 2006 and 2005
    
    
    3Condensed
Consolidated Statements of Cash Flows 
Three Months Ended March 31, 2006 and 2005
    
    
    4Notes to Condensed Consolidated Financial Statements
    
    
    5Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    9Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    16Item 4. Controls and Procedures
    
    
    16PART II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    17Item 1A. Risk Factors
    
    
    17Item 2. Unregistered Sale of Equity Securities and Use of Proceeds
    
    
    17Item 3. Defaults Upon Senior Securities
    
    
    17Item 4. Submission of Matters to a Vote of Security Holders
    
    
    17Item 5. Other Information
    
    
    17Item 6. Exhibits
    
    
    17Signatures
    
    
    17EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  i




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 WASHINGTON BANKING COMPANY
 AND SUBSIDIARY
 
    March
31,
    
    
    December 31,2006
    
    
    2005AssetsCash and due from banks
($618 and $3,313, respectively, are restricted)
    
    $
    22,433
    
    
    $
    19,949Interest-bearing deposits
    
    
    692
    
    
    
    983Federal funds sold
    
    
    8,530
    
    
    
    21,095Total cash, restricted cash, and cash equivalents
    
    
    31,655
    
    
    
    42,027Investment securities available for sale
    
    
    19,013
    
    
    
    19,077Federal Home Loan Bank stock
    
    
    1,984
    
    
    
    1,984Loans held for sale
    
    
    1,356
    
    
    
    2,829Loans receivable
    
    
    651,134
    
    
    
    630,258Allowance for loan losses
    
    
    (9,130
    )
    
    
    (8,810
    )Total loans, net
    
    
    642,004
    
    
    
    621,448Premises and equipment, net
    
    
    20,591
    
    
    
    20,514Bank owned life insurance
    
    
    10,646
    
    
    
    10,558Other assets
    
    
    8,372
    
    
    
    7,539Total assets
    
    $
    735,621
    
    
    $
    725,976Liabilities and Shareholders EquityLiabilities:DepositsNoninterest-bearing
    
    $
    100,537
    
    
    $
    105,365Interest-bearing
    
    
    300,096
    
    
    
    287,214Time deposits
    
    
    245,373
    
    
    
    244,910Total deposits
    
    
    646,006
    
    
    
    637,489Other borrowed funds
    
    
    10,000
    
    
    
    10,000Junior subordinated debentures
    
    
    15,007
    
    
    
    15,007Other liabilities
    
    
    4,560
    
    
    
    5,631Total liabilities
    
    
    675,573
    
    
    
    668,127Commitments and contingencies
    
    
    
    
    
    
    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 7,409,115 and 7,382,210 shares
atMarch 31, 2006 and December 31, 2005, respectively
    
    
    32,251
    
    
    
    32,106Retained earnings
    
    
    27,878
    
    
    
    25,789Accumulated other comprehensive income
    
    
    (81
    )
    
    
    (46
    )Total shareholders equity
    
    
    60,048
    
    
    
    57,849Total liabilities and shareholders equity
    
    $
    735,621
    
    
    $
    725,976
  1




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WASHINGTON BANKING COMPANY
AND SUBSIDIARY
 
    Three Months EndedMarch 31,2006
    
    
    2005Interest income:Interest and fees on loans
    
    $
    12,407
    
    
    $
    10,094Interest on taxable investment securities
    
    
    103
    
    
    
    88Interest on tax exempt investment securities
    
    
    80
    
    
    
    80Other
    
    
    59
    
    
    
    31Total interest income
    
    
    12,649
    
    
    
    10,293Interest expense:Interest on deposits
    
    
    3,095
    
    
    
    2,107Interest on other borrowings
    
    
    150
    
    
    
    169Interest on junior subordinated debentures
    
    
    309
    
    
    
    237Total interest expense
    
    
    3,554
    
    
    
    2,513Net interest income
    
    
    9,095
    
    
    
    7,780Provision for loan losses
    
    
    500
    
    
    
    425Net interest income after provision for loan losses
    
    
    8,595
    
    
    
    7,355Noninterest income:Service charges and fees
    
    
    817
    
    
    
    699Income from the sale of loans
    
    
    182
    
    
    
    172SBA premium income
    
    
    135
    
    
    
    112Other
    
    
    749
    
    
    
    668Total noninterest income
    
    
    1,883
    
    
    
    1,651Noninterest expense:Salaries and benefits
    
    
    4,276
    
    
    
    3,431Occupancy and equipment
    
    
    859
    
    
    
    789Office supplies and printing
    
    
    181
    
    
    
    185Data processing
    
    
    82
    
    
    
    118Consulting and professional fees
    
    
    119
    
    
    
    266Other
    
    
    1,165
    
    
    
    1,198Total noninterest expense
    
    
    6,682
    
    
    
    5,987Income before income taxes and discontinued operations
    
    
    3,796
    
    
    
    3,019Provision for income taxes
    
    
    1,244
    
    
    
    976Net income
    
    $
    2,552
    
    
    $
    2,043Net income per share, basic
    
    $
    0.35
    
    
    $
    0.28Net income per share, diluted
    
    $
    0.34
    
    
    $
    0.27Average number of shares outstanding, basic
    
    
    7,362,843
    
    
    
    7,249,213Average number of shares outstanding, diluted
    
    
    7,578,177
    
    
    
    7,521,261
  2




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WASHINGTON BANKING COMPANY
AND SUBSIDIARY
 
     Accumulatedother
    
    
    TotalCommon stock

    
    
    Retained
    
    
    Deferred
    
    
    comprehensive
    
    
    shareholdersShares
    
    
    Amount
    
    
    earnings
    
    
    compensation
    
    
    income
    
    
    equityBalances at December 31, 2004
    
    
    5,429
    
    
    $
    31,516
    
    
    $
    17,928
    
    
    
    
    
    
    $
    147
    
    
    $
    49,591Comprehensive income:Net income
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    2,043
    
    
    
    
    
    
    
    3⁄4
    
    
    
    2,043Net unrealized loss on
securities available for
sale, net of tax of ($79)
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    
    
    
    
    (134
    )
    
    
    (134
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,909Cash dividend, $0.054 per share
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (395
    )
    
    
    
    
    
    
    3⁄4
    
    
    
    (395
    )Stock option compensation
    
    
    3⁄4
    
    
    
    6
    
    
    
    3⁄4
    
    
    
    
    
    
    
    3⁄4
    
    
    
    6Four-for-three stock split
    
    
    1,810
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    
    
    
    
    3⁄4
    
    
    
    3⁄4Stock options exercised
    
    
    16
    
    
    
    64
    
    
    
    3⁄4
    
    
    
    
    
    
    
    3⁄4
    
    
    
    64Restricted Stock
    
    
    35
    
    
    
    637
    
    
    
    3⁄4
    
    
    
    (637
    )
    
    
    3⁄4
    
    
    
    3⁄4Balances at March 31, 2005
    
    
    7,290
    
    
    $
    32,223
    
    
    $
    19,576
    
    
    $
    (637
    )
    
    $
    13
    
    
    $
    51,175Balances at December 31, 2005
    
    
    7,382
    
    
    $
    32,492
    
    
    $
    25,789
    
    
    $
    (386
    )
    
    $
    (46
    )
    
    $
    57,849Comprehensive income:Net income
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    2,552
    
    
    
    
    
    
    
    3⁄4
    
    
    
    2,552Net unrealized loss on
securities available for
sale, net of tax of ($18)
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    
    
    
    
    (35
    )
    
    
    (35
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,517Cash dividend, $0.625 per share
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (463
    )
    
    
    
    
    
    
    3⁄4
    
    
    
    (463
    )Stock option compensation
    
    
    3⁄4
    
    
    
    17
    
    
    
    3⁄4
    
    
    
    
    
    
    
    3⁄4
    
    
    
    17Stock options exercised
    
    
    24
    
    
    
    91
    
    
    
    3⁄4
    
    
    
    
    
    
    
    3⁄4
    
    
    
    91Issuance of restricted stock
    
    
    3
    
    
    
    62
    
    
    
    3⁄4
    
    
    
    (62
    )
    
    
    3⁄4
    
    
    
    3⁄4Amortization of stock compensation
    
    
    3⁄4
    
    
    
    
    
    
    
    3⁄4
    
    
    
    37
    
    
    
    3⁄4
    
    
    
    37Balances at March 31, 2006
    
    
    7,409
    
    
    $
    32,662
    
    
    $
    27,878
    
    
    $
    (411
    )
    
    $
    (81
    )
    
    $
    60,048
  3




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##### Table of Contents



WASHINGTON BANKING COMPANY
AND SUBSIDIARY
 
    Three Months Ended March 31,2006
    
    
    2005Cash flows from operating activities:Net income from continuing operations
    
    $
    2,552
    
    
    $
    2,043Adjustments to reconcile net income to net cash
provided by operating activities:Federal Home Loan Bank stock dividends
    
    
    
    
    
    
    (8
    )Amortization of investment premiums, net
    
    
    3
    
    
    
    7Amortization of stock compensation
    
    
    54
    
    
    
    Net decrease (increase) in subsidiary investment
    
    
    12
    
    
    
    19Earnings on bank owned life insurance
    
    
    (88
    )
    
    
    (85
    )Provision for loan losses
    
    
    500
    
    
    
    425Net decrease in loans held for sale
    
    
    1,404
    
    
    
    2,627Depreciation and amortization of premises and equipment
    
    
    408
    
    
    
    399Net loss (gain) on sale of premises and equipment
    
    
    127
    
    
    
    (95
    )Net loss on sale of other real estate
    
    
    (6
    )
    
    
    (7
    )Write-downs of other real estate
    
    
    10
    
    
    
    85Increase in other assets
    
    
    (827
    )
    
    
    (1,236
    )(Decrease) increase in other liabilities
    
    
    (1,071
    )
    
    
    680Cash provided by operating activities
    
    
    3,078
    
    
    
    4,854Cash flows from investing activities:Maturities/calls/principal payments of investment andmortgage-backed securities available for sale
    
    
    8
    
    
    
    25Net increase in loans
    
    
    (21,056
    )
    
    
    (10,780
    )Purchases of premises and equipment
    
    
    (612
    )
    
    
    (1,357
    )Proceeds from the sale of other real estate owned and premises and
equipment
    
    
    65
    
    
    
    714Cash flows used by investing activities
    
    
    (21,595
    )
    
    
    (11,398
    )Cash flows from financing activities:Net increase in deposits
    
    
    8,517
    
    
    
    24,538Net decrease in FHLB overnight borrowings
    
    
    
    
    
    
    (13,000
    )Dividends paid on common stock
    
    
    (463
    )
    
    
    (395
    )Proceeds from stock options exercised
    
    
    91
    
    
    
    64Cash flows provided by financing activities
    
    
    8,145
    
    
    
    11,207Net change in cash and cash equivalents
    
    
    (10,372
    )
    
    
    4,663Cash and cash equivalents at beginning of period
    
    
    42,027
    
    
    
    17,933Cash and cash equivalents at end of period
    
    $
    31,655
    
    
    $
    22,596Supplemental information:Loans foreclosed and transferred to other real estate owned
    
    $
    69
    
    
    $
    53Cash paid for interest
    
    
    3,572
    
    
    
    2,510Cash paid for income taxes
    
    
    
    
    
    
    220
  4




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (1) Description of Business and Summary of Significant Accounting Policies
       (2) Recent Financial Accounting Pronouncements
 Shared Based Payment, Accounting for Stock-Based Compensation. Accounting for Stock Issued to Employees Statement of Cash Flows Stock-Based Compensation.
 Accounting for
Certain Hybrid Financial Instruments
 5




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Accounting for Servicing of Financial Assets Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities,
 (3) Earnings Per Share
  Three Months Ended March 31,2006
    
    
    2005Weighted average shares-basic
    
    
    7,362,843
    
    
    
    7,249,213Effect of dilutive securities: stock options
    
    
    215,334
    
    
    
    272,048Weighted average shares-diluted
    
    
    7,578,177
    
    
    
    7,521,261
   (4) Stock-Based Compensation
 Share Based Payment
  Accounting
for Stock-Based Compensation Transition and
Disclosure
 6




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 March 31,2005Net income, as reported
    
    $
    2,043Stock compensation recognized, net of tax
    
    
    4Additional compensation for
fair value of stock options, net of tax
    
    
    (15
    )Pro forma net income
    
    $
    2,032Basic earnings per share:Net Income, as reported
    
    $
    0.28Net Income, pro forma
    
    $
    0.28Diluted earnings per share:Net Income, as reported
    
    $
    0.27Net Income, pro forma
    
    $
    0.27
  2006Risk-free interest rate
    
    
    4.32
    %Dividend yield rate
    
    
    1.40
    %Price volatility
    
    
    38.13
    %Expected life of options
    
    7 years
 Weighted AverageWeighted
    
    
    Remaining
    
    
    AggregateAverage
    
    
    Contractual
    
    
    Intrinsic ValueShares
    
    
    Exercise Price
    
    
    Terms (in years)
    
    
    (in thousands)Outstanding at January 1, 2006
    
    
    336,493
    
    
    $
    5.93Granted
    
    
    500
    
    
    
    17.76
    
    
    
    9.76Exercised
    
    
    (23,905
    )
    
    
    3.99
    
    
    
    
    
    
    $
    337Forfeited, expired or cancelled
    
    
    (35
    )Outstanding at March 31, 2006
    
    
    313,053
    
    
    $
    6.10
    
    
    
    3.84
    
    
    $
    3,740Exercisable at March 31, 2006
    
    
    268,547
    
    
    $
    5.94
    
    
    
    3.37
    
    
    $
    3,247
  7




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (5) Subsequent Event
  (6) Commitments and Guarantees
   
 8




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  Note Regarding Forward-Looking Statements
  Overview
   Results of Operations Overview
  9




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##### Table of Contents



Net Interest Income:
   Consolidated Average Balance Sheet and Analysis of Net Interest Income and Expense
  Three Months Ended March 31, 2006
    
    
    Three Months Ended March 31, 2005Average
    
    
    Interest
    
    
    Average
    
    
    Average
    
    
    Interest
    
    
    Average(Dollars in thousands)
    
    balance
    
    
    earned/paid
    
    
    yield
    
    
    balance
    
    
    earned/paid
    
    
    yieldAssetsLoans (1) (2)
    
    $
    639,742
    
    
    $
    12,433
    
    
    
    7.88%
    
    
    $
    585,952
    
    
    $
    10,112
    
    
    
    7.00%Federal funds sold
    
    
    3,457
    
    
    
    39
    
    
    
    4.58%
    
    
    
    1,680
    
    
    
    10
    
    
    
    2.41%Interest-earning cash
    
    
    867
    
    
    
    11
    
    
    
    5.15%
    
    
    
    1,049
    
    
    
    6
    
    
    
    2.32%Investments:Taxable
    
    
    13,696
    
    
    
    112
    
    
    
    3.32%
    
    
    
    14,404
    
    
    
    103
    
    
    
    2.90%Non-taxable (2)
    
    
    7,589
    
    
    
    124
    
    
    
    6.63%
    
    
    
    7,085
    
    
    
    119
    
    
    
    6.81%Interest-earning assets
    
    
    665,351
    
    
    
    12,719
    
    
    
    7.75%
    
    
    
    610,170
    
    
    
    10,350
    
    
    
    6.88%Noninterest-earning assets
    
    
    46,702
    
    
    
    
    
    
    
    
    
    
    
    49,477Total assets
    
    $
    712,053
    
    
    
    
    
    
    
    
    
    
    $
    659,647Liabilities and
Shareholders equityDeposits:Interest demand and
money market
    
    $
    216,038
    
    
    $
    814
    
    
    
    1.53%
    
    
    $
    217,329
    
    
    $
    492
    
    
    
    0.92%Savings
    
    
    57,690
    
    
    
    112
    
    
    
    0.79%
    
    
    
    56,283
    
    
    
    110
    
    
    
    0.79%CDs
    
    
    247,336
    
    
    
    2,169
    
    
    
    3.56%
    
    
    
    210,471
    
    
    
    1,515
    
    
    
    2.92%Interest-bearing deposits
    
    
    521,064
    
    
    
    3,095
    
    
    
    2.41%
    
    
    
    484,083
    
    
    
    2,117
    
    
    
    1.77%
 10




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##### Table of Contents



CONTINUED
 Three Months Ended March 31, 2006
    
    
    Three Months Ended March 31, 2005Average
    
    
    Interest
    
    
    Average
    
    
    Average
    
    
    Interest
    
    
    Average(Dollars in thousands)
    
    balance
    
    
    earned/paid
    
    
    yield
    
    
    balance
    
    
    earned/paid
    
    
    yieldFederal funds purchased
    
    
    4,519
    
    
    
    54
    
    
    
    4.85%
    
    
    
    14,450
    
    
    
    90
    
    
    
    2.53%Junior subordinated
debentures
    
    
    15,007
    
    
    
    309
    
    
    
    8.35%
    
    
    
    15,007
    
    
    
    237
    
    
    
    6.40%Other borrowed funds
    
    
    10,046
    
    
    
    96
    
    
    
    3.88%
    
    
    
    8,185
    
    
    
    79
    
    
    
    3.91%Interest-bearing liabilities
    
    
    550,636
    
    
    
    3,554
    
    
    
    2.62%
    
    
    
    521,725
    
    
    
    2,523
    
    
    
    1.96%Noninterest-bearing deposits
    
    
    98,780
    
    
    
    
    
    
    
    
    
    
    
    85,022Other noninterest-bearing
liabilities
    
    
    4,094
    
    
    
    
    
    
    
    
    
    
    
    3,009Total liabilities
    
    
    653,510
    
    
    
    
    
    
    
    
    
    
    
    609,756Shareholders equity
    
    
    58,543
    
    
    
    
    
    
    
    
    
    
    
    49,891Total liabilities and
shareholders equity
    
    $
    712,053
    
    
    
    
    
    
    
    
    
    
    $
    659,647Net interest income
    
    
    
    
    
    $
    9,165
    
    
    
    
    
    
    
    
    
    
    $
    7,827Net interest spread
    
    
    
    
    
    
    
    
    
    
    5.13%
    
    
    
    
    
    
    
    
    
    
    
    4.92%Net interest margin
    
    
    
    
    
    
    
    
    
    
    5.59%
    
    
    
    
    
    
    
    
    
    
    
    5.20%
 (1)
    
    Average balance includes nonaccrual loans.(2)
    
    Interest income on non-taxable investments and loans is presented on a fully tax-equivalent basis
using the federal statutory rate of 34%. These adjustments were $70 and $57 for the three months ended March 31,
2006 and 2005, respectively. Fully tax-equivalent is a Non GAAP performance measurement that management
believes provides investors with a more accurate picture of the net interest margin and efficiency ratio for
comparative purposes.  Three months ended March 312006 vs. 2005Increase (decrease) due to(2)Volume
    
    
    Rate
    
    
    TotalAssets:Loans (1) (3)
    
    $
    978
    
    
    $
    1,343
    
    
    $
    2,321Federal funds sold
    
    
    16
    
    
    
    13
    
    
    
    29Interest-earning cash
    
    
    (1
    )
    
    
    6
    
    
    
    5Investments (1)
    
    
    3
    
    
    
    11
    
    
    
    14Total
interest-earning assets
    
    $
    996
    
    
    $
    1,373
    
    
    $
    2,369Liabilities:DepositsInterest demand and money market
    
    $
    (3
    )
    
    $
    325
    
    
    $
    322Savings
    
    
    3
    
    
    
    (1
    )
    
    
    2Time deposits
    
    
    291
    
    
    
    363
    
    
    
    654Interest on other borrowed funds
    
    
    107
    
    
    
    (143
    )
    
    
    (36
    )Junior subordinated debentures
    
    
    
    
    
    
    72
    
    
    
    72Other
interest-bearing liabilities
    
    
    18
    
    
    
    (1
    )
    
    
    17Total
interest-bearing liabilities
    
    $
    416
    
    
    $
    615
    
    
    $
    1,031
 (1)
    
    Interest on loans and investments is presented on a fully tax-equivalent
basis.(2)
    
    The changes attributable to the combined effect of volume and interest rates
have been allocated proportionately.(3)
    
    Interest income previously accrued on nonaccrual loans is reversed in the
period the loan is placed on nonaccrual status. 11




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##### Table of Contents



Provision for Loan Losses:
 Noninterest Income:
 Noninterest Expense:
 Income Taxes:
 Financial Condition Overview
  Federal Funds Sold:
 Loans:
 12




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##### Table of Contents



Loan Portfolio Composition as of:March 31, 2006
    
    
    December 31, 2005
    
    
    Change(Dollars in thousands)
    
    Balance
    
    
    % of total
    
    
    Balance
    
    
    % of total
    
    
    2006 vs. 2005Commercial
    
    $
    80,667
    
    
    
    12.4%
    
    
    $
    79,341
    
    
    
    12.6%
    
    
    $
    1,326Real estate mortgages:One-to-four family residential
    
    
    50,095
    
    
    
    7.7%
    
    
    
    45,278
    
    
    
    7.2%
    
    
    
    4,817Commercial
    
    
    223,979
    
    
    
    34.4%
    
    
    
    218,260
    
    
    
    34.6%
    
    
    
    5,719Total real estate mortgages
    
    
    274,074
    
    
    
    42.1%
    
    
    
    263,538
    
    
    
    41.8%
    
    
    
    10,536Real estate construction:One-to-four family residential
    
    
    86,437
    
    
    
    13.3%
    
    
    
    79,016
    
    
    
    12.5%
    
    
    
    7,421Multi-family and commercial
    
    
    34,163
    
    
    
    5.2%
    
    
    
    34,645
    
    
    
    5.5%
    
    
    
    (482
    )Total real estate construction
    
    
    120,600
    
    
    
    18.5%
    
    
    
    113,661
    
    
    
    18.0%
    
    
    
    6,939Consumer:Indirect
    
    
    93,900
    
    
    
    14.4%
    
    
    
    91,251
    
    
    
    14.5%
    
    
    
    2,649Direct
    
    
    81,712
    
    
    
    12.6%
    
    
    
    82,425
    
    
    
    13.1%
    
    
    
    (713
    )Total consumer
    
    
    175,612
    
    
    
    27.0%
    
    
    
    173,676
    
    
    
    27.6%
    
    
    
    1,936Subtotal
    
    
    650,953
    
    
    
    100.0%
    
    
    
    630,216
    
    
    
    100.0%
    
    
    
    20,737Less: allowance for loan losses
    
    
    (9,130
    )
    
    
    
    
    
    
    (8,810
    )
    
    
    
    
    
    
    (320
    )Deferred loan fees, net
    
    
    181
    
    
    
    
    
    
    
    42
    
    
    
    
    
    
    
    139Total loans, net
    
    $
    642,004
    
    
    
    
    
    
    $
    621,448
    
    
    
    
    
    
    $
    20,556
 Allowance for Loan Losses:
 Activity of Allowance for Loan Losses as of:
 March 31,
    
    
    March 31,(Dollars in thousands)
    
    2006
    
    
    2005Balance at beginning of period
    
    $
    8,810
    
    
    $
    7,903Charge-offs:Commercial
    
    
    (163
    )
    
    
    (108
    )Real estate
    
    
    (60
    )
    
    
    (27
    )ConsumerDirect
    
    
    (101
    )
    
    
    (131
    )Indirect
    
    
    (231
    )
    
    
    (318
    )Total charge-offs
    
    
    (555
    )
    
    
    (584
    )
 13




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##### Table of Contents



CONTINUED
 March 31,
    


    March 31,(Dollars in thousands)
    
    2006
    
    
    2005Recoveries:Commercial
    
    $
    191
    
    
    $
    82Real estate
    
    
    0
    
    
    
    123ConsumerDirect
    
    
    53
    
    
    
    21Indirect
    
    
    131
    
    
    
    82Total recoveries
    
    
    375
    
    
    
    308Net charge-offs
    
    
    (180
    )
    
    
    (276
    )Provision for loan losses
    
    
    500
    
    
    
    425Balance at end of period
    
    $
    9,130
    
    
    $
    8,052Indirect net charge-offs to average indirect
loans(1)
    
    
    0.43%
    
    
    
    0.96%Other net charge-offs to average other loans (1)
    
    
    0.06%
    
    
    
    0.03%Net charge-offs to average loans (1)
    
    
    0.11%
    
    
    
    0.19%Allowance for loan losses to loans
    
    
    1.40%
    
    
    
    1.36%
 (1)   Net charge-offs are annualized. Nonperforming Assets:
 Nonperforming Assets as of:March 31,
    
    
    March 31,(Dollars in thousands)
    
    2006
    
    
    2005Nonaccrual loans
    
    $
    1,599
    
    
    $
    2,159Restructured loans
    
    
    
    
    
    
    Total nonperforming loans
    
    
    1,599
    
    
    
    2,159Other real estate owned
    
    
    
    
    
    
    Total nonperforming assets
    
    $
    1,599
    
    
    $
    2,159Total impaired loans
    
    $
    1,599
    
    
    $
    2,159Accruing loans past due 3 90 days
    
    
    24
    
    
    
    Potential problem loans
    
    
    
    
    
    
    Allowance for loan losses
    
    
    9,130
    
    
    
    8,810Nonperforming loans to loans
    
    
    0.25%
    
    
    
    0.34%Allowance for loan losses to nonperforming loans
    
    
    570.98%
    
    
    
    408.06%Allowance for loan losses to nonperforming assets
    
    
    570.98%
    
    
    
    408.06%Nonperforming assets to total assets
    
    
    0.22%
    
    
    
    0.30%
 Deposits:
 14




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##### Table of Contents

\

Deposit Composition as of:March 31, 2006
    
    
    December 31, 2005
    
    
    Change(Dollars in thousands)
    
    Balance
    
    
    % of total
    
    
    Balance
    
    
    % of total
    
    
    2006 vs. 2005Noninterest-bearing demand
    
    $
    100,537
    
    
    
    15.6%
    
    
    $
    105,365
    
    
    
    16.5%
    
    
    $
    (4,828
    )NOW accounts
    
    
    154,170
    
    
    
    23.9%
    
    
    
    143,042
    
    
    
    22.4%
    
    
    
    11,128Money market
    
    
    89,086
    
    
    
    13.8%
    
    
    
    84,537
    
    
    
    13.3%
    
    
    
    4,549Savings
    
    
    56,840
    
    
    
    8.8%
    
    
    
    59,635
    
    
    
    9.4%
    
    
    
    (2,795
    )Time deposits
    
    
    245,373
    
    
    
    38.0%
    
    
    
    244,910
    
    
    
    38.4%
    
    
    
    463Total deposits
    
    $
    646,006
    
    
    
    100.0%
    
    
    $
    637,489
    
    
    
    100.0%
    
    
    $
    8,517
 Off-Balance Sheet Items:
 Shareholders Equity:
 Liquidity and Sources of Funds
 Sources of Funds:
 Capital and Capital Ratios
   15




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##### Table of Contents



Regulatory Requirements
    
    Actual RatiosAdequately-
    
    Well-
    
    March 31,
    
    December 31,capitalized
    
    capitalized
    
    2006
    
    2005Total risk-based capital ratioConsolidated
    
    
    8%
    
    
    
    N/A
    

    
    
    11.48%
    
    
    
    11.52%Whidbey Island Bank
    
    
    8%
    
    
    
    10%
    
    
    
    11.23%
    
    
    
    11.21%Tier 1 risk-based capital ratioConsolidated
    
    
    4%
    
    
    

    N/A
    
    
    
    10.23%
    
    
    
    10.28%Whidbey Island Bank
    
    
    4%
    
    
    
    6%
    
    
    
    9.98%
    
    
    
    9.96%Leverage ratioConsolidated
    
    
    4%
    
    
    
    N/A
    
   
    
    10.55%
    
    
    
    10.26%Whidbey Island Bank
    
    
    4%
    
    
    
    5%
    
    
    
    10.28%
    
    
    
    9.93%
  Capital Expenditures and Commitments
  Significant Accounting Policies
  
 Item 3. Quantitative and Qualitative Disclosures about Market Risk
  
 Item 4. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Control over Disclosure and Reporting
  16




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##### Table of Contents



PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
 (a)
    
    Not applicable(b)
    
    There have been no material changes in the procedures for shareholders to
nominate directors to the Companys board.
 
 Item 6. Exhibits
  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
 17




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##### Table of Contents



SIGNATURES
  WASHINGTON BANKING COMPANY
 Date: May 9, 2006
    
    By
    
    /s/ Michal D. CannMichal D. CannPresident andChief Executive OfficerDate: May 9, 2006
    
    By
    
    /s/ Richard A. ShieldsRichard A. ShieldsSenior Vice President andChief Financial Officer
 18