##### 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 September 30, 2008
 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
(State or other jurisdiction of 
incorporation or organization)
    
    91-1725825
(I.R.S. Employer
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(Do not check if a smaller reporting company)
Smaller reporting company o o þ




---



##### 



Table of Contents
 PagePART I 
FINANCIAL INFORMATIONItem 1.
    
    Financial StatementsCondensed
Consolidated Statements of Financial Condition 
September 30, 2008 and December 31, 2007
    
    
    1Condensed Consolidated Statements of Income 
Three and Nine Months Ended September 30, 2008 and 2007
    
    
    2Condensed Consolidated Statements of Shareholders Equity and Comprehensive Income 
Nine Months Ended September 30, 2008 and 2007
    
    
    3Condensed Consolidated Statements of Cash Flows 
Nine Months Ended September 30, 2008 and 2007
    
    
    4Notes to Condensed Consolidated Financial Statements
    
    
    5Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    11Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    22Item 4.
    
    Controls and Procedures
    
    
    22PART II  OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    23Item 1A.
    
    Risk Factors
    
    
    23Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    24Item 3.
    

Defaults Upon Senior Securities
    
    
    24Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    24Item 5.
    
    Other InformationItem 6.
    
    Exhibits
    
    
    25Signatures
    
    
    26Exhibit 10.1Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
  i




---



##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 WASHINGTON BANKING COMPANY
AND SUBSIDIARY
 
 
 September 30,
    
    
    December 31,2008
    
    
    2007AssetsCash and due from banks 
($1,721 and $3,496, respectively, are restricted)
    
    $
    19,202
    
    
    $
    18,795Interest-bearing deposits
    
    
    451
    
    
    
    257Federal funds sold
    
    
    17,410
    
    
    
    Total cash, restricted cash, and cash equivalents
    
    
    37,063
    
    
    
    19,052Investment securities available for sale
    
    
    10,781
    
    
    
    13,832Federal Home Loan Bank stock
    
    
    2,880
    
    
    
    1,984Loans held for sale
    
    
    995
    
    
    
    2,347Loans receivable
    
    
    823,089
    
    
    
    805,862Allowance for loan losses
    
    
    (11,488
    )
    
    
    (11,126
    )Total loans, net
    
    
    811,601
    
    
    
    794,736Premises and equipment, net
    
    
    24,476
    
    
    
    25,138Bank owned life insurance
    
    
    16,750
    
    
    
    16,517Other assets
    
    
    7,916
    
    
    
    8,683Total assets
    
    $
    912,462
    
    
    $
    882,289Liabilities and Shareholders EquityLiabilities:DepositsNoninterest-bearing
    
    $
    90,183
    
    
    $
    101,539Interest-bearing
    
    
    320,762
    
    
    
    315,298Certificate of deposits
    
    
    372,796
    
    
    
    341,517Total deposits
    
    
    783,741
    
    
    
    758,354FHLB overnight borrowings
    
    
    
    
    
    
    20,500Other borrowed funds
    
    
    20,000
    
    
    
    Junior subordinated debentures
    
    
    25,774
    
    
    
    25,774Other liabilities
    
    
    3,964
    
    
    
    4,091Total liabilities
    
    
    833,479
    
    
    
    808,719Commitments and contingencies
    
    
    
    
    
    
    Shareholders equity:Preferred stock, no par value. Authorized 20,000 shares:
no shares issued or outstanding
    
    
    
    
    
    
    Common stock, no par value. Authorized 13,679,757 shares:
issued and outstanding 9,488,101 at 9/30/2008 and
9,453,767 at 12/31/2007
    
    
    33,384
    
    
    
    32,812Retained earnings
    
    
    45,513
    
    
    
    40,652Accumulated other comprehensive income
    
    
    86
    
    
    
    106Total shareholders equity
    
    
    78,983
    
    
    
    73,570Total liabilities and shareholders equity
    
    $
    912,462
    
    
    $
    882,289
  1




---



##### Table of Contents



WASHINGTON BANKING COMPANY
AND SUBSIDIARY
 
 
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Interest income:Interest and fees on loans
    
    $
    14,432
    
    
    $
    15,959
    
    
    $
    44,176
    
    
    $
    45,573Interest on taxable investment securities
    
    
    88
    
    
    
    143
    
    
    
    294
    
    
    
    412Interest on tax exempt investment securities
    
    
    51
    
    
    
    65
    
    
    
    153
    
    
    
    204Other
    
    
    6
    
    
    
    54
    
    
    
    14
    
    
    
    153Total interest income
    
    
    14,577
    
    
    
    16,221
    
    
    
    44,637
    
    
    
    46,342Interest expense:Interest on deposits
    
    
    4,411
    
    
    
    5,849
    
    
    
    14,247
    
    
    
    16,652Interest on other borrowings
    
    
    276
    
    
    
    147
    
    
    
    939
    
    
    
    317Interest on junior subordinated debentures
    
    
    286
    
    
    
    469
    
    
    
    975
    
    
    
    1,291Total interest expense
    
    
    4,973
    
    
    
    6,465
    
    
    
    16,161
    
    
    
    18,260Net interest income
    
    
    9,604
    
    
    
    9,756
    
    
    
    28,476
    
    
    
    28,082Provision for loan losses
    
    
    1,075
    
    
    
    800
    
    
    
    3,150
    
    
    
    2,200Net interest income after provision for loan losses
    
    
    8,529
    
    
    
    8,956
    
    
    
    25,326
    
    
    
    25,882Noninterest income:Service charges and fees
    
    
    708
    
    
    
    749
    
    
    
    2,145
    
    
    
    2,362Income from the sale of loans
    
    
    36
    
    
    
    192
    
    
    
    177
    
    
    
    558SBA premium income
    
    
    50
    
    
    
    74
    
    
    
    239
    
    
    
    335Other
    
    
    1,081
    
    
    
    908
    
    
    
    2,746
    
    
    
    2,425Total noninterest income
    
    
    1,875
    
    
    
    1,923
    
    
    
    5,307
    
    
    
    5,680Noninterest expense:Salaries and benefits
    
    
    3,940
    
    
    
    4,166
    
    
    
    11,729
    
    
    
    12,709Occupancy and equipment
    
    
    944
    
    
    
    932
    
    
    
    2,796
    
    
    
    2,867Office supplies and printing
    
    
    162
    
    
    
    146
    
    
    
    402
    
    
    
    455Data processing
    
    
    155
    
    
    
    185
    
    
    
    469
    
    
    
    493Consulting and professional fees
    
    
    107
    
    
    
    172
    
    
    
    469
    
    
    
    441Other
    
    
    2,270
    
    
    
    1,226
    
    
    
    4,923
    
    
    
    3,655Total noninterest expense
    
    
    7,578
    
    
    
    6,827
    
    
    
    20,788
    
    
    
    20,620Income before provision for income taxes
    
    
    2,825
    
    
    
    4,052
    
    
    
    9,845
    
    
    
    10,942Provision for income taxes
    
    
    921
    
    
    
    1,232
    
    
    
    3,183
    
    
    
    3,394Net income
    
    $
    1,904
    
    
    $
    2,820
    
    
    $
    6,662
    
    
    $
    7,548Net income per share, basic
    
    $
    0.20
    
    
    $
    0.30
    
    
    $
    0.70
    
    
    $
    0.80Net income per share, diluted
    
    $
    0.20
    
    
    $
    0.30
    
    
    $
    0.70
    
    
    $
    0.79Average number of shares outstanding, basic
    
    
    9,473,000
    
    
    
    9,323,000
    
    
    
    9,457,000
    
    
    
    9,392,000Average number of shares outstanding, diluted
    
    
    9,518,000
    
    
    
    9,435,000
    
    
    
    9,514,000
    
    
    
    9,525,000
  2




---



##### Table of Contents



WASHINGTON BANKING COMPANY
AND SUBSIDIARY
 
 
 Accumulatedother
    
    
    TotalCommon stock
    
    
    Retained
    
    
    comprehensive
    
    
    ShareholdersShares
    
    
    Amount
    
    
    earnings
    
    
    Income (loss)
    
    
    equityBalances at December 31, 2006
    
    
    9,389
    
    
    $
    33,016
    
    
    $
    33,422
    
    
    $
    (45
    )
    
    $
    66,393Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    7,548
    
    
    
    
    
    
    
    7,548Net change in unrealized loss on securities available for
sale, net of tax of $37
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    67
    
    
    
    67Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,615Cash dividend, $0.17 per share
    
    
    
    
    
    
    
    
    
    
    (1,605
    )
    
    
    
    
    
    
    (1,605
    )Stock-based compensation
    
    
    
    
    
    
    250
    
    
    
    
    
    
    
    
    
    
    
    250Common stock repurchased and retired
    
    
    (116
    )
    
    
    (1,851
    )
    
    
    
    
    
    
    
    
    
    
    (1,851
    )Stock options exercised
    
    
    126
    
    
    
    782
    
    
    
    
    
    
    
    
    
    
    
    782Forfeited and cancelled restricted stock
    
    
    (2
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Tax benefit associated with stock awards
    
    
    
    
    
    
    138
    
    
    
    
    
    
    
    
    
    
    
    138Balances at September 30, 2007
    
    
    9,397
    
    
    $
    32,335
    
    
    $
    39,365
    
    
    $
    22
    
    
    $
    71,722Balances at December 31, 2007
    
    
    9,454
    
    
    $
    32,812
    
    
    $
    40,652
    
    
    $
    106
    
    
    $
    73,570Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    6,662
    
    
    
    
    
    
    
    6,662Net change in unrealized gain on
securities available for sale, net
of tax of $11
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (20
    )
    
    
    (20
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,642Cash dividend, $0.195 per share
    
    
    
    
    
    
    
    
    
    
    (1,801
    )
    
    
    
    
    
    
    (1,801
    )Stock based compensation
    
    
    
    
    
    
    358
    
    
    
    
    
    
    
    
    
    
    
    358Stock options exercised
    
    
    36
    
    
    
    174
    
    
    
    
    
    
    
    
    
    
    
    174Forfeited and cancelled restricted stock
    
    
    (2
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Tax benefit associated with stock awards
    
    
    
    
    
    
    40
    
    
    
    
    
    
    
    
    
    
    
    40Balances at September 30, 2008
    
    
    9,488
    
    
    $
    33,384
    
    
    $
    45,513
    
    
    $
    86
    
    
    $
    78,983
 3




---



##### Table of Contents



WASHINGTON BANKING COMPANY
AND SUBSIDIARY
 
 
 Nine Months EndedSeptember 30,2008
    
    
    2007Cash flows from operating activities:Net income from continuing operations
    
    $
    6,662
    
    
    $
    7,548Adjustments to reconcile net income to net cash
provided by operating activities:Accretion of investment discounts, net
    
    
    (8
    )
    
    
    (6
    )Deferred income tax expense
    
    
    7
    
    
    
    325Depreciation and amortization
    
    
    1,319
    
    
    
    1,331Earnings on bank owned life insurance
    
    
    (233
    )
    
    
    (433
    )Provision for loan losses
    
    
    3,150
    
    
    
    2,200Net loss on sale of premises and equipment
    
    
    5
    
    
    
    Net gain on sale of other real estate
    
    
    (54
    )
    
    
    (78
    )Write-downs of other real estate
    
    
    134
    
    
    
    Amortization of stock-based compensation
    
    
    358
    
    
    
    250Excess tax benefit from stock-based compensation
    
    
    (40
    )
    
    
    (138
    )Net change in assets and liabilities:Net decrease in loans held for sale
    
    
    1,352
    
    
    
    954Decrease in other assets
    
    
    41
    
    
    
    1,612Decrease in other liabilities
    
    
    (127
    )
    
    
    (2,694
    )Cash provided by operating activities:
    
    
    12,566
    
    
    
    10,871Cash flows from investing activities:Purchases of investment securities, available-for-sale
    
    
    (498
    )
    
    
    (2,635
    )Purchase of Federal Home Loan Bank Stock
    
    
    (896
    )
    
    
    Maturities/calls/principal payments of investment and
mortgage  backed securities, available for sale
    
    
    3,525
    
    
    
    2,628Net increase in loans
    
    
    (20,615
    )
    
    
    (65,846
    )Purchases of premises and equipment
    
    
    (662
    )
    
    
    (2,545
    )Purchases of bank owned life insurance
    
    
    
    
    
    
    (5,000
    )Proceeds from the sale of other real estate owned
    
    
    1,291
    
    
    
    947Cash flows used by investing activities
    
    
    (17,855
    )
    
    
    (72,451
    )Cash flows from financing activities:Net increase in deposits
    
    
    25,387
    
    
    
    62,541Gross payments on other borrowed funds
    
    
    (20,000
    )
    
    
    New borrowings on other borrowed funds
    
    
    40,000
    
    
    
    Net decrease in FHLB overnight borrowings
    
    
    (20,500
    )
    
    
    (3,075
    )Gross payments on junior subordinated debentures
    
    
    
    
    
    
    (15,007
    )New borrowings on junior subordinated debentures
    
    
    
    
    
    
    25,774Dividends paid on common stock
    
    
    (1,801
    )
    
    
    (1,605
    )Common stock repurchased
    
    
    
    
    
    
    (1,851
    )Excess tax benefits from stock-based compensation
    
    
    40
    
    
    
    138Proceeds from exercise of stock options
    
    
    174
    
    
    
    782Cash provided by financing activities
    
    
    23,300
    
    
    
    67,697Net change in cash and cash equivalents
    
    
    18,011
    
    
    
    6,117Cash and cash equivalents at beginning of period
    
    
    19,052
    
    
    
    19,745Cash and cash equivalents at end of period
    
    $
    37,063
    
    
    $
    25,862Supplemental information:Loans foreclosed and transferred to other real estate owned
    
    $
    600
    
    
    $
    1,838Cash paid for interest
    
    
    16,491
    
    
    
    18,290Cash paid for income taxes
    
    
    3,752
    
    
    
    2,660
  4




---



##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (1) Description of Business and Summary of Significant Accounting Policies
 (a) Description of Business:
 (b) Basis of Presentation:
 (c) Reclassifications:
 (2) Recent Financial Accounting Pronouncements
 Disclosures about Derivative Instruments and Hedging Activities  an Amendment of FASB Statement
133. a b Accounting for Derivative Instruments and Hedging Activities; c
 
    
    Disclosure of the objectives for using derivative instruments be disclosed in terms of
underlying risk and accounting designation;
    
    Disclosure of the fair values of derivative instruments and their gains and losses in a
tabular format;
    
    Disclosure of information about credit-risk-related contingent features; and
    
    Cross-reference from the derivative footnote to other footnotes in which
derivative-related information is disclosed.
  5




---



##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (2) Recent
Financial Accounting Pronouncements (Continued)
 The
Hierarchy of Generally Accepted Accounting Principles
  Accounting for Financial Guarantee Insurance Contracts:
An interpretation of FASB Statement No. 60.
  (3) Earnings Per Share
   Three Months Ended
    
    
    Nine Months Ended2008
    
    
    2007
    
    
    2008
    
    
    2007Weighted average shares-basic
    
    
    9,473,000
    
    
    
    9,323,000
    
    
    
    9,457,000
    
    
    
    9,392,000Effect of dilutive securities: stock awards
    
    
    45,000
    
    
    
    112,000
    
    
    
    57,000
    
    
    
    133,000Weighted average shares-diluted
    
    
    9,518,000
    
    
    
    9,435,000
    
    
    
    9,514,000
    
    
    
    9,525,000
  Three Months Ended
    
    Nine Months Ended2008
    
    2007
    
    2008
    
    2007Antidilutive awards
not included in
diluted earnings
per share
    
    
    232,653
    
    
    
    82,277
    
    
    
    140,647
    
    
    
    74,013
 6




---



##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (4) Stock-Based Compensation
 (a) Stock Options:
 Nine Months EndedSeptember 30,2008
    
    2007Risk-free interest rate
    
    
    3.44
    %
    
    
    4.59
    %Dividend yield rate
    
    
    2.90
    %
    
    
    1.50
    %Price volatility
    
    
    40.50
    %
    
    
    33.00
    %Expected life of stock options
    
    5 years
    
    5 years
   Weighted
    
    Weighted average
    
    Aggregateaverage exercise
    
    remaining contractual
    
    intrinsicShares
    
    price per share
    
    terms (in years)
    
    valueOutstanding at January 1, 2008
    
    
    192,618
    
    
    $
    9.63Granted
    
    
    131,500
    
    
    
    9.11Exercised
    
    
    (31,851
    )
    
    
    5.47
    
    
    
    
    
    
    $
    275Forfeited, expired or cancelled
    
    
    (11,216
    )
    
    
    14.25Outstanding at September 30, 2008
    
    
    281,051
    
    
    $
    9.67
    
    
    
    7.48
    
    
    $
    301Exercisable at September 30, 2008
    
    
    102,461
    
    
    $
    7.46
    
    
    
    4.24
    
    
    $
    301
  (b) Restricted Stock Awards:
  Weighted averageWeighted average
    
    remaininggrant price per
    
    contractual termsShares
    
    share
    
    (in years)Outstanding at January 1, 2008
    
    
    29,561
    
    
    $
    12.73Granted
    
    
    Vested
    
    
    (13,991
    )
    
    
    11.73Forfeited, expired or cancelled
    
    
    (1,290
    )
    
    
    13.41Outstanding at September 30, 2008
    
    
    14,280
    
    
    $
    13.64
    
    
    
    1.69
 7




---



##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  (c) Restricted Stock Units:
  Weighted averageWeighted average
    
    remaininggrant price per
    
    contractual termsShares
    
    share
    
    (in years)Outstanding at January 1, 2008
    
    
    17,815
    
    
    $
    15.98Granted
    
    
    18,025
    
    
    
    11.84Vested
    
    
    (4,185
    )
    
    
    14.46Forfeited, expired or cancelled
    
    
    (1,036
    )
    
    
    15.98Outstanding at September 30, 2008
    
    
    30,619
    
    
    $
    13.54
    
    
    
    1.96
  (5) Fair Value Measurements
 Fair Value Measurements
  Level 1:
    
    Quoted prices for identical instruments in active markets.Level 2:
    
    Quoted prices for similar instruments in active markets; quoted prices for
identical or similar instruments in markets that are not active; and model-derived
valuations whose inputs are observable or whose significant value drivers are
observable.Level 3:
    
    Significant inputs to the valuation model are unobservable.
  Investments in debt and equity securities
 8




---



##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Impaired loans :
 Other real estate owned :
  Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    TotalAssetsInvestment securities
    
    $
    
    
    
    $
    10,781
    
    
    $
    
    
    
    $
    10,781Total
    
    $
    
    
    
    $
    10,781
    
    
    $
    
    
    
    $
    10,781
  Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    TotalAssetsImpaired loans
    
    $
    
    
    
    $
    
    
    
    $
    3,888
    
    
    $
    3,888Other real estate owned
    
    
    
    
    
    
    
    
    
    
    669
    
    
    
    669Total
    
    $
    
    
    
    $
    
    
    
    $
    4,557
    
    
    $
    4,557
 Accounting by Creditors for Impairment of a Loan
 Accounting for the Impairment or Disposal of Long-Lived
Assets
 (6) Subsequent Events
  9




---



##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (7) Commitments and Contingencies
   10




---



##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  Note Regarding Forward-Looking Statements
  Overview
   Summary of Critical Accounting Policies and Estimates
  Allowance for Loan Losses:
 Stock-based Compensation:
 11




---



##### Table of Contents



Results of Operations Overview
   Net Interest Income:
 
    
    The volume, pricing, mix and maturity of interest-earning assets and interest-bearing
liabilities;
    
    The volume of free funds (consisting of noninterest-bearing deposits and other
liabilities and shareholders equity);
    
    The volume of noninterest-earning assets;
    
    Market interest rate fluctuations; and
    
    Asset quality.
  Average Balance Sheet and Analysis of Net Interest Income and Yields/RatesThree Months Ended
    
    
    Three Months EndedSeptember 30, 2008
    
    
    September 30, 2007Average
    
    
    Interest
    
    
    Average
    
    
    Average
    
    
    Interest
    
    
    Average(Dollars in thousands)
    
    balance
    
    
    earned/paid
    
    
    yield
    
    
    balance
    
    
    earned/paid
    
    
    yieldAssetsLoans(1)(2)
    
    $
    820,425
    
    
    $
    14,542
    
    
    
    7.03
    %
    
    $
    773,145
    
    
    $
    16,091
    
    
    
    8.26
    %Federal funds sold
    
    
    883
    
    
    
    4
    
    
    
    1.62
    %
    
    
    3,899
    
    
    
    47
    
    
    
    4.80
    %Interest-bearing cash
    
    
    472
    
    
    
    2
    
    
    
    1.83
    %
    
    
    371
    
    
    
    7
    
    
    
    7.13
    %InvestmentsTaxable
    
    
    8,717
    
    
    
    88
    
    
    
    4.02
    %
    
    
    12,388
    
    
    
    143
    
    
    
    4.57
    %Non-taxable(2)
    
    
    5,207
    
    
    
    76
    
    
    
    5.76
    %
    
    
    6,443
    
    
    
    95
    
    
    
    5.84
    %Interest-earning assets
    
    
    835,704
    
    
    
    14,712
    
    
    
    6.98
    %
    
    
    796,246
    
    
    
    16,382
    
    
    
    8.16
    %Noninterest-earning assets
    
    
    53,780
    
    
    
    
    
    
    
    
    
    
    
    57,662Total assets
    
    $
    889,483
    
    
    
    
    
    
    
    
    
    
    $
    853,908Liabilities and shareholders equityDeposits:Interest demand and
money market
    
    $
    260,665
    
    
    $
    951
    
    
    
    1.45
    %
    
    $
    278,977
    
    
    $
    1,898
    
    
    
    2.70
    %Savings
    
    
    41,355
    
    
    
    42
    
    
    
    0.40
    %
    
    
    44,873
    
    
    
    78
    
    
    
    0.69
    %Certificate of deposits
    
    
    353,522
    
    
    
    3,418
    
    
    
    3.84
    %
    
    
    315,003
    
    
    
    3,873
    
    
    
    4.88
    %Total interest-bearing deposits
    
    
    655,542
    
    
    
    4,411
    
    
    
    2.67
    %
    
    
    638,853
    
    
    
    5,849
    
    
    
    3.63
    %Federal funds purchased
    
    
    7,338
    
    
    
    50
    
    
    
    2.68
    %
    
    
    3,482
    
    
    
    53
    
    
    
    6.08
    %Junior subordinated debentures
    
    
    25,774
    
    
    
    286
    
    
    
    4.40
    %
    
    
    25,774
    
    
    
    469
    
    
    
    7.22
    %Other interest bearing liabilities
    
    
    26,413
    
    
    
    226
    
    
    
    3.40
    %
    
    
    6,413
    
    
    
    94
    
    
    
    5.78
    %Total interest bearing liabilities
    
    
    715,068
    
    
    
    4,972
    
    
    
    2.76
    %
    
    
    674,522
    
    
    
    6,465
    
    
    
    3.80
    %Noninterest-bearing DDA
    
    
    92,832
    
    
    
    
    
    
    
    
    
    
    
    104,989Other liabilities
    
    
    3,499
    
    
    
    
    
    
    
    
    
    
    
    4,489Total liabilities
    
    
    811,399
    
    
    
    
    
    
    
    
    
    
    
    784,000Total shareholders equity
    
    
    78,084
    
    
    
    
    
    
    
    
    
    
    
    69,908Total liabilities and shareholders equity
    
    $
    889,483
    
    
    
    
    
    
    
    
    
    
    $
    853,908Net interest income /Spread
    
    
    
    
    
    $
    9,739
    
    
    
    4.23
    %
    
    
    
    
    
    $
    9,917
    
    
    
    4.36
    %Credit for interest bearing funds
    
    
    
    
    
    
    
    
    
    
    0.40
    %
    
    
    
    
    
    
    
    
    
    
    0.58
    %Net interest margin(2)
    
    
    
    
    
    
    
    
    
    
    4.62
    %
    
    
    
    
    
    
    
    
    
    
    4.94
    %
 12




---



##### Table of Contents



(1)
    
    Average balance includes nonaccrual loans.(2)
    
    Interest income on non-taxable investments and loans is
presented on a taxable-equivalent basis using the federal statutory rate of
35%. These adjustments were $134 and $162 for the three months ended September
30, 2008 and 2007, respectively. Taxable-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. Average Balance Sheet and Analysis of Net Interest Income and Yields/RatesNine Months Ended
    
    
    Nine Months EndedSeptember 30, 2008
    
    
    September 30, 2007Average
    
    
    Interest
    
    
    Average
    
    
    Average
    
    
    Interest
    
    
    Average(Dollars in thousands)
    
    balance
    
    
    earned/paid
    
    
    yield
    
    
    balance
    
    
    earned/paid
    
    
    yieldAssetsLoans(1)(2)
    
    $
    818,210
    
    
    $
    44,430
    
    
    
    7.23
    %
    
    $
    748,356
    
    
    $
    45,972
    
    
    
    8.21
    %Federal funds sold
    
    
    469
    
    
    
    7
    
    
    
    1.93
    %
    
    
    2,765
    
    
    
    104
    
    
    
    5.02
    %Interest-bearing cash
    
    
    378
    
    
    
    7
    
    
    
    2.50
    %
    
    
    1,191
    
    
    
    49
    
    
    
    5.46
    %InvestmentsTaxable
    
    
    9,208
    
    
    
    294
    
    
    
    4.25
    %
    
    
    12,362
    
    
    
    412
    
    
    
    4.46
    %Non-taxable(2)
    
    
    5,245
    
    
    
    225
    
    
    
    5.72
    %
    
    
    6,685
    
    
    
    299
    
    
    
    5.98
    %Interest-earning assets
    
    
    833,509
    
    
    
    44,963
    
    
    
    7.19
    %
    
    
    771,359
    
    
    
    46,835
    
    
    
    8.12
    %Non-earning assets
    
    
    53,421
    
    
    
    
    
    
    
    
    
    
    
    55,061Total assets
    
    $
    886,930
    
    
    
    
    
    
    
    
    
    
    $
    826,420Liabilities and shareholders equityDeposits:Interest demand and money market
    
    $
    261,923
    
    
    $
    3,234
    
    
    
    1.64
    %
    
    $
    264,736
    
    
    $
    5,171
    
    
    
    2.61
    %Savings
    
    
    41,652
    
    
    
    135
    
    
    
    0.43
    %
    
    
    47,062
    
    
    
    253
    
    
    
    0.72
    %Certificate of deposits
    
    
    346,278
    
    
    
    10,878
    
    
    
    4.18
    %
    
    
    310,147
    
    
    
    11,228
    
    
    
    4.84
    %Total interest-bearing deposits
    
    
    649,852
    
    
    
    14,247
    
    
    
    2.92
    %
    
    
    621,945
    
    
    
    16,652
    
    
    
    3.58
    %Federal funds purchased
    
    
    14,724
    
    
    
    340
    
    
    
    3.07
    %
    
    
    4,200
    
    
    
    180
    
    
    
    5.73
    %Junior subordinated debentures
    
    
    25,774
    
    
    
    975
    
    
    
    5.04
    %
    
    
    22,146
    
    
    
    1,291
    
    
    
    7.79
    %Other interest-bearing liabilities
    
    
    23,978
    
    
    
    600
    
    
    
    3.33
    %
    
    
    3,333
    
    
    
    137
    
    
    
    5.49
    %Total interest-bearing liabilities
    
    
    714,329
    
    
    
    16,162
    
    
    
    3.01
    %
    
    
    651,624
    
    
    
    18,260
    
    
    
    3.75
    %Noninterest-bearing DDA
    
    
    92,850
    
    
    
    
    
    
    
    
    
    
    
    100,872Other liabilities
    
    
    3,561
    
    
    
    
    
    
    
    
    
    
    
    5,430Total liabilities
    
    
    810,739
    
    
    
    
    
    
    
    
    
    
    
    757,926Total equity
    
    
    76,191
    
    
    
    
    
    
    
    
    
    
    
    68,493Total liabilities and shareholders equity
    
    $
    886,930
    
    
    
    
    
    
    
    
    
    
    $
    826,420Net interest income /Spread
    
    
    
    
    
    $
    28,801
    
    
    
    4.17
    %
    
    
    
    
    
    $
    28,575
    
    
    
    4.37
    %Credit for interest-bearing funds
    
    
    
    
    
    
    
    
    
    
    0.43
    %
    
    
    
    
    
    
    
    
    
    
    0.58
    %Net interest margin(2)
    
    
    
    
    
    
    
    
    
    
    4.60
    %
    
    
    
    
    
    
    
    
    
    
    4.95
    %
 
 (1)
    
    Average balance includes nonaccrual loans.(2)
    
    Interest income on non-taxable investments and loans is
presented on a taxable-equivalent basis using the federal statutory rate of
35%. These adjustments were $326 and $494 for the nine months ended September
30, 2008 and 2007, respectively. Taxable-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.  13




---



##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008 vs. 2007
    
    
    2008 vs. 2007Increase (decrease) due to(2):
    
    
    Increase (decrease) due to(2):Volume
    
    
    Rate
    
    
    Total
    
    
    Volume
    
    
    Rate
    
    
    TotalAssets:Loans(1)(3)
    
    $
    1,086
    
    
    $
    (2,635
    )
    
    $
    (1,549
    )
    
    $
    5,554
    
    
    $
    (7,097
    )
    
    $
    (1,543
    )Federal funds sold
    
    
    (23
    )
    
    
    (20
    )
    
    
    (43
    )
    
    
    (56
    )
    
    
    (41
    )
    
    
    (97
    )Interest-bearing cash
    
    
    3
    
    
    
    (7
    )
    
    
    (4
    )
    
    
    (23
    )
    
    
    (18
    )
    
    
    (41
    )Investments(1)Taxable
    
    
    (38
    )
    
    
    (16
    )
    
    
    (54
    )
    
    
    (100
    )
    
    
    (18
    )
    
    
    (118
    )Non-taxable(2)
    
    
    (18
    )
    
    
    (2
    )
    
    
    (20
    )
    
    
    (61
    )
    
    
    (13
    )
    
    
    (74
    )Interest- earning assets
    
    $
    1,010
    
    
    $
    (2,680
    )
    
    $
    (1,670
    )
    
    $
    5,314
    
    
    $
    (7,187
    )
    
    $
    (1,873
    )Liabilities:Deposits:Interest demand and money market
    
    $
    (118
    )
    
    $
    (829
    )
    
    $
    (947
    )
    
    $
    (54
    )
    
    $
    (1,883
    )
    
    $
    (1,937
    )Savings
    
    
    (6
    )
    
    
    (30
    )
    
    
    (36
    )
    
    
    (26
    )
    
    
    (91
    )
    
    
    (117
    )Time deposits
    
    
    610
    
    
    
    (1,065
    )
    
    
    (455
    )
    
    
    2,155
    
    
    
    (2,505
    )
    
    
    (350
    )Total interest-bearing deposits
    
    
    486
    
    
    
    (1,924
    )
    
    
    (1,438
    )
    
    
    2,075
    
    
    
    (4,479
    )
    
    
    (2,404
    )Fed funds purchased
    
    
    (8
    )
    
    
    4
    
    
    
    (4
    )
    
    
    196
    
    
    
    (36
    )
    
    
    160Junior subordinated debentures
    
    
    
    
    
    
    (183
    )
    
    
    (183
    )
    
    
    273
    
    
    
    (589
    )
    
    
    (316
    )Other interest-bearing liabilities
    
    
    153
    
    
    
    (20
    )
    
    
    133
    
    
    
    494
    
    
    
    (31
    )
    
    
    463Total interest-bearing liabilities
    
    $
    631
    
    
    $
    (2,123
    )
    
    $
    (1,492
    )
    
    $
    3,038
    
    
    $
    (5,135
    )
    
    $
    (2,097
    )
 
 (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. 14




---



##### Table of Contents



Provision for Loan Losses:
 Allowance for Loan Losses and
Nonperforming Assets
 Noninterest Income:
  Noninterest Expense:
  Income Taxes:
 Financial Condition Overview
  Loans:
 15




---



##### Table of Contents



Loan Portfolio Composition as of:September 30, 2008
    
    
    December 31, 2007(Dollars in thousands)
    
    Balance
    
    
    % of total
    
    
    Balance
    
    
    % of total
    
    
    ChangeCommercial
    
    $
    93,821
    
    
    
    11.4
    %
    
    $
    102,284
    
    
    
    12.7
    %
    
    $
    (8,463
    )Real estate mortgages:One-to-four family residential
    
    
    55,984
    
    
    
    6.8
    %
    
    
    56,636
    
    
    
    7.0
    %
    
    
    (652
    )Multi-family residential & commercial
    
    
    325,314
    
    
    
    39.7
    %
    
    
    296,902
    
    
    
    37.0
    %
    
    
    28,412Total real estate mortgages
    
    
    381,298
    
    
    
    46.5
    %
    
    
    353,538
    
    
    
    44.0
    %
    
    
    27,760Real estate construction:One-to-four family residential
    
    
    104,505
    
    
    
    12.7
    %
    
    
    101,912
    
    
    
    12.7
    %
    
    
    2,593Multi-family and commercial
    
    
    45,147
    
    
    
    5.5
    %
    
    
    44,735
    
    
    
    5.6
    %
    
    
    412Total real estate construction
    
    
    149,652
    
    
    
    18.2
    %
    
    
    146,647
    
    
    
    18.3
    %
    
    
    3,005Consumer:Indirect
    
    
    110,239
    
    
    
    13.4
    %
    
    
    114,271
    
    
    
    14.2
    %
    
    
    (4,032
    )Direct
    
    
    85,321
    
    
    
    10.4
    %
    
    
    86,716
    
    
    
    10.8
    %
    
    
    (1,395
    )Total consumer
    
    
    195,560
    
    
    
    23.8
    %
    
    
    200,987
    
    
    
    25.0
    %
    
    
    (5,427
    )Subtotal
    
    
    820,331
    
    
    
    100.0
    %
    
    
    803,456
    
    
    
    100.0
    %
    
    
    16,875Deferred loan costs, net
    
    
    2,758
    
    
    
    
    
    
    
    2,406
    
    
    
    
    
    
    
    352Total loans, net
    
    $
    823,089
    
    
    
    
    
    
    $
    805,862
    
    
    
    
    
    
    $
    17,227
 Real Estate Construction:
  Real Estate Construction Loan Portfolio Composition as of:September 30, 2008
    
    
    December 31, 2007(Dollars in thousands)
    
    Balance
    
    
    % of total
    
    
    Balance
    
    
    % of total
    
    
    ChangeConstruction & land developmentOne-to-four family residential
    
    $
    64,996
    
    
    
    43.4
    %
    
    $
    64,594
    
    
    
    44.0
    %
    
    $
    402Multi-family residential &
commercial
    
    
    32,874
    
    
    
    22.0
    %
    
    
    33,006
    
    
    
    22.5
    %
    
    
    (132
    )Raw land commercial
    
    
    12,273
    
    
    
    8.20
    %
    
    
    11,692
    
    
    
    8.0
    %
    
    
    581Raw land residential
    
    
    37,813
    
    
    
    25.3
    %
    
    
    36,057
    
    
    
    24.6
    %
    
    
    1,756Other
    
    
    1,696
    
    
    
    1.1
    %
    
    
    1,298
    
    
    
    0.9
    %
    
    
    398Total Construction
    
    
    149,652
    
    
    
    100.0
    %
    
    
    146,647
    
    
    
    100.0
    %
    
    
    3,005Unused CommitmentsConstruction & land developmentOne-to-four family residential
    
    
    9,940
    
    
    
    62.9
    %
    
    
    20,443
    
    
    
    55.8
    %
    
    
    (10,503
    )Multi-family residential &
commercial
    
    
    3,761
    
    
    
    23.8
    %
    
    
    10,923
    
    
    
    29.8
    %
    
    
    (7,162
    )Raw land commercial
    
    
    583
    
    
    
    3.7
    %
    
    
    313
    
    
    
    0.9
    %
    
    
    270Raw land residential
    
    
    1,510
    
    
    
    9.6
    %
    
    
    4,928
    
    
    
    13.5
    %
    
    
    (3,418
    )Other
    
    
    
    
    
    
    0.0
    %
    
    
    
    
    
    
    0.0
    %
    
    
    Total Unused Commitments
    
    $
    15,794
    
    
    
    100.0
    %
    
    $
    36,607
    
    
    
    100.0
    %
    
    $
    (20,813
    )
 16




---



##### Table of Contents



Allowance for Loan Losses:
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(Dollars in thousands)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Balance at beginning of period
    
    $
    11,585
    
    
    $
    10,526
    
    
    $
    11,126
    
    
    $
    10,048Charge-offs:Commercial
    
    
    (485
    )
    
    
    (312
    )
    
    
    (1,107
    )
    
    
    (928
    )Real estate
    
    
    (19
    )
    
    
    (20
    )
    
    
    (520
    )
    
    
    (20
    )Consumer
Direct
    
    
    (295
    )
    
    
    (241
    )
    
    
    (604
    )
    
    
    (526
    )Indirect
    
    
    (638
    )
    
    
    (200
    )
    
    
    (1,331
    )
    
    
    (598
    )Total charge-offs
    
    $
    (1,437
    )
    
    $
    (773
    )
    
    $
    (3,562
    )
    
    $
    (2,072
    )Recoveries:Commercial
    
    
    29
    
    
    
    64
    
    
    
    176
    
    
    
    168Real estate
    
    
    55
    
    
    
    2
    
    
    
    59
    
    
    
    75Consumer
Direct
    
    
    69
    
    
    
    53
    
    
    
    140
    
    
    
    136Indirect
    
    
    111
    
    
    
    82
    
    
    
    399
    
    
    
    200Total recoveries
    
    $
    264
    
    
    $
    202
    
    
    $
    774
    
    
    $
    579Net charge-offs
    
    
    (1,173
    )
    
    
    (571
    )
    
    
    (2,788
    )
    
    
    (1,493
    )Provision for loan losses
    
    
    1,075
    
    
    
    800
    
    
    
    3,150
    
    
    
    2,200Balance at end of period
    
    $
    11,488
    
    
    $
    10,755
    
    
    $
    11,488
    
    
    $
    10,755Indirect loans net charge-offs to average indirect loans (2)
    
    
    1.89
    %
    
    
    0.42
    %
    
    
    1.12
    %
    
    
    0.49
    %Other net charge-offs to average other loans(2)
    
    
    0.36
    %
    
    
    0.27
    %
    
    
    0.35
    %
    
    
    0.23
    %Net charge-offs to average loans (1) (2)
    
    
    0.57
    %
    
    
    0.29
    %
    
    
    0.46
    %
    
    
    0.27
    %
 
 (1)
    
    Excludes loans held for sale.(2)
    
    Ratios are on an annualized basis.  17




---



##### Table of Contents



Nonperforming Assets and Other Real Estate Owned Properties (OREO):
 Accounting by Creditors for
the Impairment of a Loan
   Nonperforming Assets as of:September 30,
    
    
    December 31,(Dollars in thousands)
    
    2008
    
    
    2007Nonaccrual loans
    
    $
    3,888
    
    
    $
    2,839Restructured loans
    
    
     ̄
    
    
    
     ̄Total nonperforming loans
    
    
    3,888
    
    
    
    2,839Other real estate owned properties
    
    
    669
    
    
    
    1,440Total nonperforming assets
    
    $
    4,557
    
    
    $
    4,279Total impaired loans
    
    $
    3,888
    
    
    $
    2,839Accruing
loans past due 3 90 days
    
    
     ̄
    
    
    
     ̄Potential problem loans (1)
    
    $
    780
    
    
    
     ̄Allowance for loan losses
    
    $
    11,488
    
    
    $
    11,126Nonperforming loans to loans
    
    
    0.47
    %
    
    
    0.35
    %Nonperforming assets to total assets
    
    
    0.50
    %
    
    
    0.49
    %Allowance for loan losses to loans
    
    
    1.40
    %
    
    
    1.38
    %Allowance for loan losses to nonperforming loans
    
    
    295.47
    %
    
    
    391.90
    %
 
 (1)
    
    As defined under Securities Act
Industry Guide 3-Statistical Disclosure by Bank
Holding Companies, Section III, C, 2.   Deposits: Net Interest Income
 18




---



##### Table of Contents



Deposits:
 Deposit Composition  as of:September 30, 2008
    
    
    December 31, 2007
    
    
    Change(Dollars in thousands)
    
    Balance
    
    
    % of total
    
    
    Balance
    
    
    % of total
    
    
    2008 vs. 2007Noninterest-bearing demand
    
    $
    90,183
    
    
    
    11.5
    %
    
    $
    101,539
    
    
    
    13.4
    %
    
    $
    (11,356
    )NOW accounts
    
    
    121,503
    
    
    
    15.5
    %
    
    
    140,145
    
    
    
    18.5
    %
    
    
    (18,642
    )Money market
    
    
    157,614
    
    
    
    20.1
    %
    
    
    133,265
    
    
    
    17.6
    %
    
    
    24,349Savings
    
    
    41,645
    
    
    
    5.3
    %
    
    
    41,888
    
    
    
    5.5
    %
    
    
    (243
    )Certificate of deposits
    
    
    372,796
    
    
    
    47.6
    %
    
    
    341,517
    
    
    
    45.0
    %
    
    
    31,279Total deposits
    
    $
    783,741
    
    
    
    100.0
    %
    
    $
    758,354
    
    
    
    100.0
    %
    
    $
    25,387
 Wholesale Deposits:
 Wholesale Deposit Composition as of:September 30, 2008
    
    
    December 31, 2007
    
    
    Change(Dollars in thousands)
    
    Balance
    
    
    % of total
    
    
    Balance
    
    
    % of total
    
    
    2008 vs. 2007Brokered time deposits
    
    $
    10,000
    
    
    
    27.1
    %
    
    $
    10,000
    
    
    
    100.0
    %
    
    $
    Mutual fund money market deposits
    
    
    24,980
    
    
    
    67.8
    %
    
    
    
    
    
    
    0.0
    %
    
    
    24,980Certificate of deposits account
registry system deposits
    
    
    1,880
    
    
    
    5.1
    %
    
    
    
    
    
    
    0.0
    %
    
    
    1,880Total wholesale deposits
    
    $
    36,860
    
    
    
    100.0
    %
    
    $
    10,000
    
    
    
    100.0
    %
    
    $
    26,860Wholesale deposits to total deposits
    
    
    4.7
    %
    
    
    
    
    
    
    1.3
    %
    Borrowings:
 FHLB Overnight Borrowings and Other Borrowed Funds:
  19




---



##### Table of Contents




    
    $10.0 million advance with a fixed interest rate of 3.64% maturing in January 2009.
    
    $10.0 million advance with a fixed interest rate of 3.71% maturing in August 2010.
 Federal Funds Purchased:
 Junior Subordinated Debentures:
 Capital
 Shareholders Equity:
 Stock Repurchase Plan:
 Regulatory Capital Requirements:
  Regulatory Requirements

        
    Actual RatiosAdequately-

    
    
    Well-

    
    
    September 30,

    
    
    December 31,capitalized

    
    
    capitalized

    
    
    2008

    
    
    2007Total risk-based capital ratioCompany (consolidated)
    
    
    8
    %
    
    
    N/A
    
    
    
    13.06
    %
    
    
    12.45
    %Whidbey Island Bank
    
    
    8
    %
    
    
    10
    %
    
    
    12.97
    %
    
    
    12.03
    %Tier 1 risk-based capital ratioCompany (consolidated)
    
    
    4
    %
    
    
    N/A
    
    
    
    11.81
    %
    
    
    11.14
    %Whidbey Island Bank
    
    
    4
    %
    
    
    6
    %
    
    
    11.72
    %
    
    
    10.78
    %Leverage ratioCompany (consolidated)
    
    
    4
    %
    
    
    N/A
    
    
    
    11.68
    %
    
    
    11.29
    %Whidbey Island Bank
    
    
    4
    %
    
    
    5
    %
    
    
    11.58
    %
    
    
    10.92
    %
  20




---



##### Table of Contents



Liquidity and Cash Flows
 Liquidity:
 Whidbey Island Bank:
 Washington Banking Company:
  Consolidated Cash Flows: Condensed Consolidated Statements of Cash Flows
 Capital Resources:
 Off-Balance Sheet Items:
 21




---



##### Table of Contents



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
  22




---



##### Table of Contents



PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
 The following is a discussion of the most significant risks and uncertainties that may affect our
business, financial condition and future results. These risk factors should be read in conjunction
with the risk factors in Item 1A of the Companys Form 10-K for the year ended December 31, 2007.
 Fluctuating interest rates can adversely affect our profitability
  Allowance for loan losses may not be adequate to cover actual loan losses, which could adversely
affect earnings
  Concentration in real estate market
  23




---



##### Table of Contents



Tightening of credit markets and liquidity risk
  An economic downturn in the market areas we serve may cause us to have lower earnings and could
increase our credit risk associated with our loan portfolio
  The FDIC likely will increase insurance premiums to rebuild and maintain the federal deposit
insurance fund
  The Company may be adversely affected by the FDICs recently announced Temporary Liquidity
Guarantee Program
  
 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
  24




---



##### Table of Contents



(b)
    
    There have been no material changes in the procedures for shareholders to
nominate directors to the Companys board.
 
 Item 6. Exhibits
  10.1
    
    
    Severance Agreement and General Release between Michal Cann and Washington
Banking Company31.1
    
    
    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
 25




---



##### Table of Contents



SIGNATURES
  WASHINGTON BANKING COMPANY
 Date: November 7, 2008
    By
    /s/ John L. WagnerJohn L. Wagner
President and
Chief Executive OfficerDate: November 7, 2008
    By
    /s/ Richard A. ShieldsRichard A. Shields
Executive Vice President and
Chief Financial Officer 26