##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 10-Q (Mark One) [X]
    
    Quarterly report pursuant to Section 13 or l5(d) of the Securities Exchange Act of 1934
 For the quarterly period ended September 30, 2004 [  ]
    
    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
(Address of principal executive offices)
    
    98277
(Zip Code)
 (360) 679-3121
(Issuers telephone number, including area code) (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the issuer: (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X]   No [  ] Indicate by check mark if the registrant is an accelerated filer within the
meaning of Rule 12b-2 under the Securities Exchange Act of 1934, as amended.
Yes [  ]   No [X] The number of shares of the issuers Common Stock outstanding at November 12, 2004 was 5,419,802.




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Table of Contents  
 PagePART IItem 1. Financial StatementsCondensed Consolidated Statements of Financial Condition -
September 30, 2004 and December 31, 2003
    
    
    1Condensed Consolidated Statements of Income -
Three and Nine Months Ended September 30, 2004 and 2003
    
    
    2Condensed Consolidated Statements of Shareholders Equity and Comprehensive Income -
Nine Months Ended September 30, 2004 and 2003
    
    
    4Condensed Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 2004 and 2003
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    11Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    23Item 4. Controls and Procedures
    
    
    23PART IIItem 5. Other Information
    
    
    24Item 6. Exhibits
    
    
    24Signatures
    
    
    25EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2




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##### Table of Contents



PART I 
 Item 1. Financial Statements WASHINGTON BANKING COMPANY
AND SUBSIDIARIES 
 
  September 30,
    
    December 31,2004
    
    2003AssetsCash and due from banks
    
    $
    20,047
    
    
    $
    15,454($488 and $1,138, respectively, are restricted)Interest-earning deposits
    
    
    719
    
    
    
    356Federal funds sold
    
    
    31,950
    
    
    
    4,795Total cash, restricted cash, and cash equivalents
    
    
    52,716
    
    
    
    20,605Investment securities available for sale
    
    
    19,069
    
    
    
    15,421Investment securities held to maturity
    
    
    
    
    
    
    14,745Total investment securities
    
    
    19,069
    
    
    
    30,166Subsidiary investment
    
    
    307
    
    
    
    Federal Home Loan Bank stock
    
    
    2,160
    
    
    
    2,280Loans held for sale
    
    
    5,596
    
    
    
    8,251Loans receivable
    
    
    552,128
    
    
    
    499,919Allowance for loan losses
    
    
    (7,506
    )
    
    
    (6,116
    )Total loans, net
    
    
    550,218
    
    
    
    502,054Premises and equipment, net
    
    
    20,636
    
    
    
    19,814Bank owned life insurance
    
    
    10,113
    
    
    
    Other assets
    
    
    7,811
    
    
    
    6,822Total assets
    
    $
    663,030
    
    
    $
    581,741Liabilities and Shareholders EquityLiabilities:DepositsNoninterest-bearing
    
    $
    83,393
    
    
    $
    75,756Interest-bearing
    
    
    291,054
    
    
    
    238,180Time deposits
    
    
    214,513
    
    
    
    187,561Total deposits
    
    
    588,960
    
    
    
    501,497Other borrowed funds
    
    
    7,500
    
    
    
    17,500Junior subordinated debentures
    
    
    15,007
    
    
    
    Trust preferred securities
    
    
    
    
    
    
    15,000Other liabilities
    
    
    3,682
    
    
    
    3,384Total liabilities
    
    
    615,149
    
    
    
    537,381Commitments and contingencies
    
    
    
    
    
    
    Shareholders equity:Preferred stock, no par value. Authorized 20,000 shares:no shares issued or outstanding
    
    
    
    
    
    
    Common stock, no par value. Authorized 10,000,000 shares:issued and outstanding 5,413,161 and 5,357,880 shares
at September 30, 2004 and December 31, 2003, respectively
    
    
    31,308
    
    
    
    31,125Retained earnings
    
    
    16,341
    
    
    
    13,273Accumulated other comprehensive income (loss), net
    
    
    232
    
    
    
    (38
    )Total shareholders equity
    
    
    47,881
    
    
    
    44,360Total liabilities and shareholders equity
    
    $
    663,030
    
    
    $
    581,741
 See accompanying notes to condensed consolidated financial statements. 1




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WASHINGTON BANKING COMPANY
AND SUBSIDIARIES 
 
  Three Months Ended
    
    Nine Months EndedSeptember 30
    
    September 302004
    
    2003
    
    2004
    
    2003Interest income:Interest and fees on loans
    
    $
    9,788
    
    
    $
    9,031
    
    
    $
    27,898
    
    
    $
    26,357Interest on taxable investment securities
    
    
    77
    
    
    
    74
    
    
    
    264
    
    
    
    215Interest on tax-exempt investment securities
    
    
    92
    
    
    
    165
    
    
    
    394
    
    
    
    500Other
    
    
    62
    
    
    
    95
    
    
    
    155
    
    
    
    313Total interest income
    
    
    10,019
    
    
    
    9,365
    
    
    
    28,711
    
    
    
    27,385Interest expense:Interest on deposits
    
    
    1,967
    
    
    
    1,796
    
    
    
    5,634
    
    
    
    5,696Interest on other borrowings
    
    
    93
    
    
    
    155
    
    
    
    340
    
    
    
    465Interest on junior subordinated debentures
    
    
    201
    
    
    
    
    
    
    
    565
    
    
    
    Interest on trust preferred securities
    
    
    
    
    
    
    182
    
    
    
    
    
    
    
    560Total interest expense
    
    
    2,261
    
    
    
    2,133
    
    
    
    6,539
    
    
    
    6,721Net interest income
    
    
    7,758
    
    
    
    7,232
    
    
    
    22,172
    
    
    
    20,664Provision for loan losses
    
    
    (725
    )
    
    
    (838
    )
    
    
    (2,325
    )
    
    
    (2,438
    )Net interest income after provision
for loan losses
    
    
    7,033
    
    
    
    6,394
    
    
    
    19,847
    
    
    
    18,226Noninterest income:Service charges and fees
    
    
    740
    
    
    
    482
    
    
    
    2,257
    
    
    
    1,476Gain on sale of securities
    
    
    
    
    
    
    
    
    
    
    144
    
    
    
    Gain on sale of loans
    
    
    315
    
    
    
    650
    
    
    
    939
    
    
    
    1,612Secondary market fees
    
    
    19
    
    
    
    75
    
    
    
    73
    
    
    
    208ATM income
    
    
    165
    
    
    
    117
    
    
    
    445
    
    
    
    333Other
    
    
    288
    
    
    
    118
    
    
    
    538
    
    
    
    385Total noninterest income
    
    
    1,527
    
    
    
    1,442
    
    
    
    4,396
    
    
    
    4,014Noninterest expense:Salaries and benefits
    
    
    3,418
    
    
    
    3,122
    
    
    
    10,324
    
    
    
    9,158Occupancy
    
    
    945
    
    
    
    914
    
    
    
    2,907
    
    
    
    2,625Office supplies and printing
    
    
    161
    
    
    
    149
    
    
    
    477
    
    
    
    477Data processing
    
    
    131
    
    
    
    123
    
    
    
    373
    
    
    
    345Consulting and professional fees
    
    
    280
    
    
    
    204
    
    
    
    583
    
    
    
    409Other
    
    
    854
    
    
    
    791
    
    
    
    2,736
    
    
    
    2,497Total noninterest expense
    
    
    5,789
    
    
    
    5,303
    
    
    
    17,400
    
    
    
    15,511Income before income taxes
    
    
    2,771
    
    
    
    2,533
    
    
    
    6,843
    
    
    
    6,729Provision for income taxes
    
    
    (915
    )
    
    
    (869
    )
    
    
    (2,277
    )
    
    
    (2,324
    )Income from continuing operations
    
    
    1,856
    
    
    
    1,664
    
    
    
    4,566
    
    
    
    4,405Income (loss) from discontinued operations, net of
tax of $0, $50, $238 and ($26) for the three and
nine months ended September 30, 2004 and 2003,
respectively.
    
    
    
    
    
    
    86
    
    
    
    (370
    )
    
    
    5Net income
    
    $
    1,856
    
    
    $
    1,750
    
    
    $
    4,196
    
    
    $
    4,410
 (Continued) 2




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##### Table of Contents



WASHINGTON BANKING COMPANY
AND SUBSIDIARIES
Condensed Consolidated Statements of Income
Three and Nine months ended September 30, 2004 and 2003 (unaudited)
(Dollars in thousands, except per share data) Three Months Ended
    
    Nine Months EndedSeptember 30
    
    September 302004
    
    2003
    
    2004
    
    2003Net income (loss) per common shareBasicContinuing operations
    
    $
    0.34
    
    
    $
    0.31
    
    
    $
    0.85
    
    
    $
    0.83Discontinued operations
    
    
    
    
    
    
    0.02
    
    
    
    (0.07
    )
    
    
    Net income per share, basic
    
    $
    0.34
    
    
    $
    0.33
    
    
    $
    0.78
    
    
    $
    0.83DilutedContinuing operations
    
    $
    0.33
    
    
    $
    0.30
    
    
    $
    0.82
    
    
    $
    0.80Discontinued operations
    
    
    
    
    
    
    0.01
    
    
    
    (0.07
    )
    
    
    Net income per share, diluted
    
    $
    0.33
    
    
    $
    0.31
    
    
    $
    0.75
    
    
    $
    0.80Average number of shares outstanding, basic
    
    
    5,410,583
    
    
    
    5,354,835
    
    
    
    5,403,142
    
    
    
    5,336,846Average number of shares outstanding, diluted
    
    
    5,602,817
    
    
    
    5,574,219
    
    
    
    5,601,857
    
    
    
    5,538,321
 See accompanying notes to condensed consolidated financial statements. 3




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##### Table of Contents



WASHINGTON BANKING COMPANY
AND SUBSIDIARIES 
    AccumulatedotherCommon stock
    
    Retained
    
    comprehensiveincome
    

TotalshareholdersShares
    
    Amount
    
    earnings
    
    (loss), net
    
    equityBalances at December 31, 2002
    
    
    4,541
    
    
    $
    21,025
    
    
    $
    18,363
    
    
    $
    44
    
    
    $
    39,432Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    4,410
    
    
    
    
    
    
    
    4,410Net change in unrealized gain (loss) on
securities available for sale, net of tax of $(43)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (81
    )
    
    
    (81
    )Total comprehensive income (1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,329Cash dividend, $0.18 per share (2)
    
    
    
    
    
    
    
    
    
    
    (977
    )
    
    
    
    
    
    
    (977
    )Stock option compensation
    
    
    
    
    
    
    17
    
    
    
    
    
    
    
    
    
    
    
    17Stock options exercised
    
    
    115
    
    
    
    311
    
    
    
    
    
    
    
    
    
    
    
    311Balances at September 30, 2003
    
    
    4,656
    
    
    $
    21,353
    
    
    $
    21,796
    
    
    $
    (37
    )
    
    $
    43,112Balances at December 31, 2003
    
    
    5,358
    
    
    $
    31,125
    
    
    $
    13,273
    
    
    $
    (38
    )
    
    $
    44,360Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    4,196
    
    
    
    
    
    
    
    4,196Net change in unrealized gain (loss) on
securities available for sale, net of tax of
$(147)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    367
    
    
    
    367Less adjustment for gains included in net income,
net of income tax of $47
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (97
    )
    
    
    (97
    )Total comprehensive income (1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,466Cash dividend, $0.2175 per share
    
    
    
    
    
    
    
    
    
    
    (1,128
    )
    
    
    
    
    
    
    (1,128
    )Stock option compensation
    
    
    
    
    
    
    17
    
    
    
    
    
    
    
    
    
    
    
    17Stock options exercised
    
    
    55
    
    
    
    166
    
    
    
    
    
    
    
    
    
    
    
    166Balances at September 30, 2004
    
    
    5,413
    
    
    $
    31,308
    
    
    $
    16,341
    
    
    $
    232
    
    
    $
    47,881
  (1)
    
    Comprehensive income for the three months ended September 30, 2004 and 2003 was $1,985 and $1,671, respectively.  (2)
    
    Per share data adjusted to reflect the 15% stock dividend distributed February 26, 2004. See accompanying notes to condensed consolidated financial statements. 4




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##### Table of Contents



WASHINGTON BANKING COMPANY
AND SUBSIDIARIES 
    Nine Months EndedSeptember 302004
    
    2003Cash flows from operating activities:Net income from continuing operations
    
    $
    4,566
    
    
    $
    4,405Adjustments to reconcile net income to net cash
provided by operating activities:Federal Home Loan Bank stock dividends
    
    
    (64
    )
    
    
    (94
    )Deferred income tax benefit
    
    
    (5
    )
    
    
    (6
    )Amortization (accretion) of investment premiums, net
    
    
    37
    
    
    
    (3
    )Net increase in subsidiary investment
    
    
    (300
    )
    
    
    Earnings on bank owned life insurance
    
    
    (113
    )
    
    
    Provision for loan losses
    
    
    2,325
    
    
    
    2,438Net (increase) decrease in loans held for sale
    
    
    2,655
    
    
    
    (5,693
    )Depreciation of premises and equipment
    
    
    1,288
    
    
    
    1,175Net gain on sale of securities
    
    
    (144
    )
    
    
    Net (gain)loss on sale of other real estate, premises and equipment
    
    
    193
    
    
    
    (12
    )Net increase in other assets
    
    
    (177
    )
    
    
    (1,365
    )Stock option compensation
    
    
    17
    
    
    
    17Net decrease in other liabilities
    
    
    298
    
    
    
    182Net cash provided by continuing operating activities
    
    
    10,576
    
    
    
    1,044Net income (loss) from discontinued operations
    
    
    (370
    )
    
    
    5Net cash provided by operating activities
    
    
    10,206
    
    
    
    1,049Cash flows from investing activities:Purchases of investment securities available for sale
    
    
    
    
    
    
    (14,500
    )Maturities/calls of investment securities available for sale
    
    
    5,185
    
    
    
    6,500Principal payments on mortgage-backed securities
    
    
    162
    
    
    
    1,912Sale of investment securities, available for sale
    
    
    5,799
    
    
    
    Purchases of investment securities, held to maturity
    
    
    
    
    
    
    (1,870
    )Maturities/calls of investment securities held to maturity
    
    
    475
    
    
    
    875Purchase of bank-owned life insurance
    
    
    (10,000
    )
    
    
    FHLB stock redemptions
    
    
    184
    
    
    
    Net increase in loans
    
    
    (54,354
    )
    
    
    (50,842
    )Purchases of premises and equipment
    
    
    (2,347
    )
    
    
    (2,796
    )Proceeds from the sale of other real estate owned and premises and
equipment
    
    
    300
    
    
    
    664Net cash used in investing activities
    
    
    (54,596
    )
    
    
    (60,057
    )Cash flows from financing activities:Net increase in deposits
    
    
    87,463
    
    
    
    47,910Net decrease in other borrowed funds
    
    
    (5,000
    )
    
    
    Net decrease in federal funds purchased
    
    
    (5,000
    )
    
    
    Dividends paid on common stock
    
    
    (1,128
    )
    
    
    (977
    )Proceeds from stock options exercised
    
    
    166
    
    
    
    311Net cash provided by financing activities
    
    
    76,501
    
    
    
    47,244Net increase (decrease) in cash and cash equivalents
    
    
    32,111
    
    
    
    (11,764
    )Cash and cash equivalents at beginning of period
    
    
    20,605
    
    
    
    55,887Cash and cash equivalents at end of period
    
    $
    52,716
    
    
    $
    44,123(Continued)
 5




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WASHINGTON BANKING COMPANY
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
Nine months ended September 30, 2004 and 2003 (unaudited)
(Dollars in thousands) Nine Months EndedSeptember 302004
    
    2003Supplemental information:Loans foreclosed and transferred to other real estate owned
    
    $
    1,210
    
    
    $
    557Loans made on bank-owned property sold
    
    
    
    
    
    
    94Cash paid for interest
    
    
    6,407
    
    
    
    6,921Cash paid for income taxes
    
    
    2,105
    
    
    
    2,191Transfer of investments from HTM to AFS
    
    
    14,260
    
    
    
    
 See accompanying notes to condensed consolidated financial statements. 
 6




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 
 (1) Description of Business and Summary of Significant Accounting Policies (a) Description of Business Washington Banking Company (WBCO) is a registered bank holding company formed
on April 30, 1996. At September 30, 2004, WBCO had two wholly-owned
subsidiaries  Whidbey Island Bank (WIB or the Bank), the Companys
principal subsidiary and Washington Banking Capital Trust I (the Trust). On
May 26, 2004, WBCO announced plans to close its wholesale lending subsidiary,
Washington Funding Group, Inc. (WFG) effective June 30, 2004. WFG was formed
in January 2003 for the purpose of expanding the Banks wholesale mortgage real
estate lending platform. During the second quarter of 2004, the Company
decided to concentrate corporate resources toward the Banks retail operations
and close WFGs operations. Although the wholesale business enhanced the
Companys noninterest income during 2003, the operation of those offices did
not provide a satisfactory financial return. The business of the Bank, WBCOs principal subsidiary, which is focused in the
northern area of Western Washington, consists primarily of attracting deposits
from the general public and originating loans. Although the Bank has a
diversified loan portfolio, a substantial portion of its borrowers ability to
repay their loans is dependent upon the economic conditions affecting this
area. The Trust, a non-consolidated subsidiary of WBCO, was formed in June 2002 for
the exclusive purpose of issuing trust preferred securities and common
securities and using the $15,000 in proceeds from the issuance to acquire
junior subordinated debentures issued by WBCO. The Companys website address is www.wibank.com. Exchange Act reports are
available free of charge from the Companys website. The reports can also be
obtained through the Securities and Exchange Commissions (the SEC) EDGAR
database at http://www.sec.gov. The contents of the Companys Internet website
are not incorporated into this report or into any other communication delivered
to security holders or furnished to the SEC. (b) Basis of Presentation The accompanying interim condensed consolidated financial statements include
the accounts of WBCO and two of its subsidiaries, WIB and WFG, (together, the
Company). The accompanying interim condensed consolidated financial
statements have been prepared, without audit, pursuant to the rules and
regulations of the SEC. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. These condensed consolidated financial
statements should be read in conjunction with the December 31, 2003 audited
consolidated financial statements and notes thereto included in the Companys
Annual Report on Form 10-K filed with the SEC on March 24, 2004. In
managements opinion, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been included.
Operating results for the nine months ended September 30, 2004 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2004. In preparing the consolidated financial statements,
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses are required. Actual results could differ
from those estimates. (c) Segments Pursuant to Statement of Financial Accounting Standards (SFAS) No. 131,
Disclosure about Segments of an Enterprise and Related Information,the Company
has evaluated the requirements of this standard and had identified two
reportable segments: Whidbey Island Bank and the discontinued operations of
Washington Funding Group, Inc., both wholly-owned subsidiaries of Washington
Banking Company. Due to the discontinuation of WFG in the second quarter of
2004, the Company currently has only one segment, Whidbey Island Bank and is
not required to disclose segment reporting by this standard. 7




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Nine months ended September 30, 2004 and 2003 (unaudited)
(Dollars in thousands, except per share data) (d) Reclassifications Certain amounts in prior years financial statements may have been reclassified
to conform to the 2004 presentation. These reclassifications had no significant
impact on the Companys financial position or results of operations. (e) Recent Financial Accounting Pronouncements In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46, Consolidation of Variable Interest Entities, which was
replaced by FASB Interpretation No. 46R (FIN 46R) in December 2003. FIN 46R
became effective in the first quarter of 2004 and defined a variable interest
entity (VIE) as a corporation, partnership, trust, or any other legal
structure used for the business purpose that either does not have equity
investors with voting rights or has equity investors that do not provide
sufficient financial resources for the entity to support its activities. This
interpretation requires a VIE to be consolidated or deconsolidated by a company
generally based on the risk of loss or return. Most of the original provisions
of Interpretation No. 46 were delayed until March 31, 2004 through the issuance
of FIN 46R. The Company has a VIE in the form of a trust set up to issue trust
preferred securities and accordingly, the implementation of FIN 46R required
the deconsolidation of the Trust. The Companys adoption of FIN 46R did not
have a material impact on the Companys financial position and results of
operations. The restatement of prior years financial statements was not
required by FIN 46R and the Company did not restate the prior years financial
statements. (2) Earnings Per Share The following table reconciles the denominator of the basic and diluted
earnings per share computation: Three Months Ended
    
    Nine Months EndedSeptember 30
    
    September 302004
    
    2003
    
    2004
    
    2003Weighted average shares-basic
    
    
    5,410,583
    
    
    
    5,354,835
    
    
    
    5,403,142
    
    
    
    5,336,846Effect of dilutive securities: stock options
    
    
    192,234
    
    
    
    219,384
    
    
    
    198,715
    
    
    
    201,475Weighted average shares-diluted
    
    
    5,602,817
    
    
    
    5,574,219
    
    
    
    5,601,857
    
    
    
    5,538,321
 On February 26, 2004, the Company issued a 15% stock dividend to shareholders
of record as of February 10, 2004. On October 24, 2002, the Company issued a
10% stock dividend to shareholders of record as of October 8, 2002. All
periods presented have been restated to reflect the stock dividends. At
September 30, 2004 and 2003, there were options to purchase 360,962 and 419,507
shares of common stock outstanding, respectively. For the three and nine
months ended September 30, 2004 and 2003 no shares were antidilutive and
therefore all were included in the computation of diluted net income per share. (3) Trust Preferred Securities Washington Banking Capital Trust I (the Trust), a wholly-owned
non-consolidated subsidiary of WBCO, is a statutory business trust created for
the exclusive purposes of issuing and selling capital securities and utilizing
sale proceeds to acquire junior subordinated debt issued to WBCO. On June 27,
2002, the Trust issued $15,000 of trust preferred securities with a 30-year
maturity, callable after the fifth year by Washington Banking Company. The
rate adjusts quarterly based on the Three-Month LIBOR plus 3.65%. These
securities, within certain limitations, are considered Tier I capital for the
purposes of regulatory capital requirements. Accordingly, the junior
subordinated debentures are the sole assets of the Trust, and payments under
the junior subordinated debentures will be the sole revenues of the Trust. All
of the common securities of the Trust are owned by WBCO. Washington Banking
Company has fully and unconditionally guaranteed the capital securities along
with all obligations of the Trust under the trust agreements. Prior to FIN
46R, the Trust was a consolidated subsidiary of the Company. As a result of
the adoption of FIN 46R, the Company deconsolidated the special purpose trust,
as the Company is not considered to be the primary beneficiary under this
accounting interpretation. Accordingly, on the Companys Consolidated
Statements of Financial Condition, the trust preferred securities that were
issued by the Trust have been replaced by the junior subordinated debentures
issued to the Trust by WBCO. 8




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Nine months ended September 30, 2004 and 2003 (unaudited)
(Dollars in thousands, except per share data) The following table sets forth the financial data pertaining to the previously
consolidated special purpose trust: Aggregate
    
    Aggregateliquidation amount
    
    liquidation amountof trust preferred
    
    of common
    
    Aggregate principal
    
    Stated maturity of
    
    Per annum interestName of trust
    
    securities
    
    securities
    
    amount of notes
    
    notes
    
    rate of notes
    
    Redemption optionWashington Banking
Capital Trust I
    
    $
    15,000
    
    
    $
    464
    
    
    $
    15,464
    
    
    
    2032
    
    
    
    4.94
    %
    
    On or after June
27, 2007
 (4) Stock-Based Compensation The Company recognizes the financial effects of stock-based employee
compensation based on the intrinsic value method of accounting prescribed by
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees(APB 25) and FASB Interpretation No. 44, Accounting for Certain
Transactions Involving Stock Compensation(FIN 44). Generally, stock options
are issued at a price equal to the fair value of the Companys stock as of the
grant date. Under APB 25, options issued in this manner do not result in the
recognition of employee compensation in the Companys financial statements.
The following table illustrates the effect on net income and earnings per share
if the Company had applied the fair value provisions of FASB SFAS 123,
Accounting for Stock-Based Compensation. The following table sets forth the reconciliation of pro forma net income and
pro forma earnings per share: Three Months Ended
    
    Nine Months EndedSeptember 30
    
    September 302004
    
    2003
    
    2004
    
    2003Net income, as reported
    
    $
    1,856
    
    
    $
    1,750
    
    
    $
    4,196
    
    
    $
    4,410Stock compensation recognized
    
    
    6
    
    
    
    6
    
    
    
    17
    
    
    
    17Additional compensation for
fair value of stock options
    
    
    (22
    )
    
    
    (22
    )
    
    
    (67
    )
    
    
    (67
    )Pro forma net income
    
    $
    1,840
    
    
    $
    1,734
    
    
    $
    4,146
    
    
    $
    4,360Basic earnings per share:As reportedIncome from continuing operations
    
    $
    0.34
    
    
    $
    0.31
    
    
    $
    0.85
    
    
    $
    0.83Income (loss) from discontinued operations
    
    
    
    
    
    
    0.02
    
    
    
    (0.07
    )
    
    
    Net Income
    
    $
    0.34
    
    
    $
    0.33
    
    
    $
    0.78
    
    
    $
    0.83Pro formaIncome from continuing operations
    
    $
    0.34
    
    
    $
    0.30
    
    
    $
    0.84
    
    
    $
    0.82Income (loss) from discontinued operations
    
    
    
    
    
    
    0.02
    
    
    
    (0.07
    )
    
    
    Net Income
    
    $
    0.34
    
    
    $
    0.32
    
    
    $
    0.77
    
    
    $
    0.82Diluted earnings per share:As reportedIncome from continuing operations
    
    $
    0.33
    
    
    $
    0.30
    
    
    $
    0.82
    
    
    $
    0.80Income (loss) from discontinued operations
    
    
    
    
    
    
    0.01
    
    
    
    (0.07
    )
    
    
    Net Income
    
    $
    0.33
    
    
    $
    0.31
    
    
    $
    0.75
    
    
    $
    0.80Pro formaIncome from continuing operations
    
    $
    0.33
    
    
    $
    0.30
    
    
    $
    0.81
    
    
    $
    0.79Income (loss) from discontinued operations
    
    
    
    
    
    
    0.01
    
    
    
    (0.07
    )
    
    
    Net Income
    
    $
    0.33
    
    
    $
    0.31
    
    
    $
    0.74
    
    
    $
    0.79
 9




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Nine months ended September 30, 2004 and 2003 (unaudited)
(Dollars in thousands, except per share data) (5) Subsequent Event On October 21, 2004, the Board of Directors declared a cash dividend of $0.0725
per share to shareholders of record as of November 8, 2004, which is payable on
November 24, 2004. (6) Commitments Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements,
including commercial paper, bond financing and similar transactions. Except
for certain long-term guarantees, most guarantees expire in one year. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers. Collateral supporting
those commitments, for which collateral is deemed necessary, generally amounts
to one hundred percent of the commitment amount at September 30, 2004. The
Company routinely charges a fee for these credit facilities. Such fees are
amortized into income over the life of the agreement, and unamortized amounts
are not significant as of September 30, 2004. As of September 30, 2004 the commitments under these agreements were as
follows: Standby letters of credit and financial guarantees $220 At September 30, 2004, the Company is the guarantor of trust preferred
securities. The Company has issued junior subordinated debentures to a
wholly-owned special purpose trust, which has issued trust preferred
securities. The sole assets of the special purpose trust are the junior
subordinated debentures issued by the Company. Washington Banking Company has
fully and unconditionally guaranteed the capital securities along with all
obligations of the Trust under the trust agreements. The maximum amount of
future payments the Company will be required to make under these agreements is
the principal and interest of the trust preferred securities, the principal of
which totaled $15,000 at September 30, 2004. (7) Closing of Subsidiary The Company closed its Washington Funding Group, Inc. (WFG) subsidiary
effective June 30, 2004. The subsidiary provided a loan funding source for
mortgage loan brokers, primarily in Washington, Oregon and Idaho. Business in
process was transferred to the Banks Burlington, WA office. WFG was formed in January 2003 and began operations in April 2003 as a way to
expand services and grow revenues. It provided a loan funding source for
mortgage brokers. While gain on sale of loans enhanced noninterest income for
the third quarter last year, WFG continued to have a negative impact on WBCOs
earnings in spite of efforts to improve WFGs performance. Whidbey Island Bank
will continue to offer retail mortgages and wholesale mortgage funding to
brokers as it did before WFG was established. (8) Investment Securities Investment securities available for sale include securities that management
intends to use as part of its overall asset/liability management strategy and
that may be sold in response to changes in interest rates and resultant
prepayment risk and other related factors. Securities available for sale are
carried at market value, and unrealized gains and losses (net of related tax
effects) are excluded from net income but are included as a separate component
of comprehensive income. Upon realization, such gains and losses will be
included in net income using the specific identification method. The Company
transferred its held-to-maturity municipal security portfolio of $14,300 to
available-for-sale investments in the second quarter of 2004.
Available-for-sale investments are recorded at market value and this transfer
caused an increase in accumulated other comprehensive income of $272. 10




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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: This Form 10-Q includes
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended (the Exchange Act). These forward-looking
statements describe Washington Banking Companys (the Company) managements
expectations regarding future events and developments such as future operating
results, growth in loans and deposits, continued success of the Companys
business plan and the strength of the local economy. The words will,
believe, expect, should, anticipate and words of similar construction
are intended in part to help identify forward-looking statements. Future
events are difficult to predict, and the expectations described below are
necessarily subject to risk and uncertainty that may cause actual results to
differ materially and adversely. In addition to discussions about risks and
uncertainties set forth from time to time in the Companys filings with the
Securities and Exchange Commission (the SEC), factors that may cause actual
results to differ materially from those contemplated in such forward-looking
statements include, among others, the following possibilities: (1) local and
national general and economic conditions, including the possible impact of
international conflict or further terrorist events, are less favorable than
expected or have a more direct and pronounced effect than expected on the
Company and adversely affect the Companys ability to continue its internal
growth at historical rates and maintain the quality of its earning assets; (2)
changes in interest rates reduce interest margins more than expected or
negatively affect liquidity; (3) projected business increases following
strategic expansion or the opening or acquisition of new branches are lower
than expected; (4) there are greater than expected costs or difficulties
related to the integration of acquisitions; (5) there is increased competitive
pressure among financial institutions; (6) legislation or regulatory
requirements or changes that adversely affect the banking and financial
services sector; and (7) the Company is unable to realize the efficiencies it
expects to derive from its investment in personnel and infrastructure.
However, you should be aware that these factors are not an exhaustive list, and
you should not assume that these are the only factors that may cause actual
results to differ from expectations. In addition, you should note that we do
not intend to update any of the forward-looking statements or the uncertainties
that may adversely impact those statements. The following discussion and analysis should be read in conjunction with the
financial statements and notes thereto presented elsewhere in this report. Overview Washington Banking Company (WBCO or the Company) is a registered bank
holding company with two wholly-owned subsidiaries: Whidbey Island Bank (the
Bank or WIB) and Washington Banking Capital Trust I (the Trust); and one
discontinued subsidiary, Washington Funding Group, Inc. (WFG). The Companys
principal subsidiary, the Bank, is a Washington state-chartered bank that
conducts a full-service community commercial banking business. Its business
includes commercial, real estate and construction loan portfolios, and it is
active in the consumer banking field, providing personal and consumer-oriented
loan programs. The Bank also provides a wide range of deposit services,
insured by the Federal Deposit Insurance Corporation (the FDIC), for
individuals and businesses including checking and savings accounts as well as
money market accounts, certificates of deposit, individual retirement accounts,
safe deposit boxes and other consumer and business related financial services.
The Bank also offers nondeposit managed investment products and services, which
are not FDIC insured. These programs are provided through the investment
advisory company Elliott Cove Capital Management LLC, DFC Services & DFC
Insurance Services. Several Whidbey Island Bank employees have been registered
in Washington State as investment advisor representatives. These employees work
with individuals, companies and institutions to help them determine their risk
preferences in selecting investment portfolios or insurance products. Another
nondeposit product offered through the Bank, which is not FDIC insured, is a
sweep investment option available through a brokerage account. Prior to the
Banks affiliation with Elliott Cove, non-FDIC insured investment products were
offered through the Banks wholly-owned subsidiary, WIB Financial Services,
Inc. The Banks subsidiary was dissolved in 2004. The Banks primary market area is located in northwestern Washington State
between Seattle and the Canadian border. Its geographical expansion to date
has been concentrated along the I-5 corridor from Snohomish to Whatcom
counties, however, additional areas will be considered if they meet the
Companys criteria. The Trust, a non-consolidated subsidiary, was formed in June 2002 for the
exclusive purpose of issuing trust preferred securities to acquire junior
subordinated debentures issued by the Company. Those debentures are the sole 11




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##### Table of Contents



assets of the Trust and payments on the debt will be the sole revenues of the
Trust. The Company has fully and unconditionally guaranteed all obligations of
the Trust. WFG, a wholesale mortgage real estate lending company, was a Washington State
corporation formed in January 2003. The primary purpose of this subsidiary was
to provide a loan funding source for brokers of mortgage loans. The loans were
originated and sold in the name of the Bank. During the second quarter of 2004,
the Company decided to concentrate corporate resources toward the Banks retail
operations and close WFGs wholesale lending operations. Although the
wholesale business enhanced the Companys noninterest income during 2003, the
operation of those offices did not provide a satisfactory financial return. Headquartered in Oak Harbor, the Companys market area is primarily
northwestern Washington. The market area encompasses distinct economies, and
none are particularly dependent upon a single industrial or occupational
source. The economies within the market areas have evolved from being heavily
dependent upon forestry, fishing and farming to a more diverse blend of
industries including retail trade, services, manufacturing, tourism and a large
military presence. Unemployment levels in the Pacific Northwest over the past
few years have been higher than national averages, but the region appears to be
showing signs of a slow, but steady economic recovery. The Companys strategy is one of value-added growth. Management believes that
qualitative and sustainable growth of the Company, coupled with maintaining
profitability, is currently the most appropriate path to enhancing good value
for its shareholders. To date, the Companys growth has been achieved
organically and it attributes its reputation for focusing on customer service
and satisfaction as one of the cornerstones to the Companys success.
Acquisition of banks or branches may also be used as a means of expansion if
appropriate opportunities are presented. Management recognizes that growth
requires expenditures of substantial sums to purchase or lease real property
and equipment and to hire experienced personnel, and that earnings may be
negatively affected. The Companys primary long-term objectives are to improve
profitability and operating efficiencies, to increase market penetration in
areas currently served and to continue an expansion strategy in appropriate
market areas. Financial Condition Total Assets.Total assets grew to $663.0 million at September 30, 2004 from
$581.7 million at December 31, 2003, an increase of 14.0%. This increase
resulted mainly from growth in the loan portfolio and the investment in bank
owned life insurance (BOLI), which was funded by deposit growth and the sale
of investment securities. Total Loans.Total loans were $557.7 million at September 30, 2004, an
increase of 9.8% from $508.2 million at December 31, 2003. During the quarter,
the Company sold $10.0 million of indirect consumer loans. The Company
increased its allowance for loan losses to $7.5 million at September 30, 2004
representing 1.36% of loans (excluding loans held for sale), from $6.1 million
or 1.22% of loans (excluding loans held for sale) at December 31, 2003. The
allowance was increased to keep pace with loan growth and prospective losses
inherent in the loan portfolio, while remaining conservative and maintaining
adequate coverage. Total Investment Securities.Total investment securities were $19.1 million
and $30.2 million at September 30, 2004 and December 31, 2003, respectively.
The decrease of 36.8% was a result of the sale and maturity of investment
securities that were not replaced due to the low rate environment coupled with
an anticipated increase in loan demand and purchase of a BOLI investment. Premises and Equipment.Premises and equipment, net of depreciation, were
$20.6 million at September 30, 2004 and $19.8 million at December 31, 2003.
The Company purchased a building located in Oak Harbor, WA for the purpose of
consolidating its back room operating functions. This consolidation has
resulted in two surplus commercial properties available for sale. The carrying
value of the combined properties is approximately $873,000, and the Company
anticipates a nominal gain following the sale of the properties. The Company has continued its expansion strategy by opening a new grocery store
branch in Arlington, WA; leasing space for a future branch site in Friday
Harbor, WA; and leasing additional office space in Bellingham, WA. Other Assets.During the second quarter of 2004, the Bank made a $10.0 million
investment in bank owned life insurance (BOLI). These policies insure the
lives of officers of the Bank, and name the Bank as beneficiary. 12




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##### Table of Contents



Noninterest income is generated tax-free from the increase in the policies
underlying investments made by the insurance company. WIB is capitalizing on
the ability to partially offset costs associated with employee compensation and
benefit programs with the BOLI. Deposits.Deposits grew 17.4% to $589.0 million at September 30, 2004 from
$501.5 million at December 31, 2003. Managements philosophy is to develop
long-term customer relationships. Management believes that the best way to
establish customer loyalty is by placing an emphasis on meeting customers
financial needs and providing exceptional service. Management attributes the
Companys successful deposit growth to its on-going cross-sales efforts,
periodic deposit promotions, strategic planning and other means. In addition,
many customers continue to seek the security of FDIC-insured deposit vehicles
in contrast to the potential volatility of the investment market. For the quarter ended September 30, 2004, average noninterest-bearing deposits
decreased 1.7% from the third quarter 2003, while average interest-bearing
deposits increased 13.5% for the same period. Average interest demand and money
market deposits represented 45.89% of total average interest-bearing deposits
at September 30, 2004 compared to 46.58% a year ago. Average savings deposits and average CDs represented 10.36% and 43.76%,
respectively, of total average interest-bearing deposits at September 30, 2004
compared to 8.86% and 44.56%, respectively, a year ago. All interest- bearing
deposit product averages increased during the third quarter of 2004 as
management focused on establishing customer relationships and attracting
deposits. Shareholders Equity.The Companys shareholders equity increased 7.9% to
$47.9 million at September 30, 2004 from $44.4 million at December 31, 2003.
The increase reflects earnings, proceeds from stock options exercised, stock
option compensation and an increase in unrealized gain on available-for-sale
securities, net of tax, offset by the payment of cash dividends during the
first nine months of 2004. 13




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##### Table of Contents



Consolidated Average Balance Sheet and Analysis of Net Interest Income and
Expense The following table sets forth the Companys consolidated average balance
sheet and analysis of net interest income and expense: Three Months Ended September 30, 2004
    
    Three Months Ended September 30, 2003Average
    
    Interest
    
    Average
    
    Average
    
    Interest
    
    Average(Dollars in thousands)
    
    balance
    
    earned/paid
    
    yield (1)
    
    balance
    
    earned/paid
    
    yield (1)AssetsLoans (2)
    
    $
    557,911
    
    
    $
    9,788
    
    
    
    7.02
    %
    
    $
    492,789
    
    
    $
    9,031
    
    
    
    7.33
    %Federal funds sold
    
    
    9,308
    
    
    
    35
    
    
    
    1.50
    %
    
    
    26,694
    
    
    
    65
    
    
    
    0.97
    %Interest-earning cash
    
    
    596
    
    
    
    2
    
    
    
    1.34
    %
    
    
    689
    
    
    
    1
    
    
    
    0.58
    %Investments:Taxable
    
    
    13,166
    
    
    
    102
    
    
    
    3.10
    %
    
    
    12,715
    
    
    
    103
    
    
    
    3.24
    %Non-taxable (3)
    
    
    8,273
    
    
    
    123
    
    
    
    5.95
    %
    
    
    14,213
    
    
    
    222
    
    
    
    6.25
    %Interest-earning assets
    
    
    589,254
    
    
    
    10,050
    
    
    
    6.82
    %
    
    
    547,100
    
    
    
    9,422
    
    
    
    6.89
    %Noninterest-earning assets
    
    
    51,228
    
    
    
    
    
    
    
    
    
    
    
    36,688Total assets
    
    $
    640,482
    
    
    
    
    
    
    
    
    
    
    $
    583,788Liabilities and
Shareholders equityDeposits:Interest demand and
money market
    
    $
    222,840
    
    
    $
    422
    
    
    
    0.76
    %
    
    $
    199,273
    
    
    $
    397
    
    
    
    0.80
    %Savings
    
    
    50,296
    
    
    
    100
    
    
    
    0.80
    %
    
    
    37,907
    
    
    
    74
    
    
    
    0.78
    %CDs
    
    
    212,503
    
    
    
    1,445
    
    
    
    2.72
    %
    
    
    190,615
    
    
    
    1,325
    
    
    
    2.78
    %Interest-bearing deposits
    
    
    485,639
    
    
    
    1,967
    
    
    
    1.62
    %
    
    
    427,795
    
    
    
    1,796
    
    
    
    1.68
    %Federal funds purchased
    
    
    2,244
    
    
    
    9
    
    
    
    1.60
    %
    
    
    
    
    
    
    
    
    
    
    Junior subordinated debentures
    
    
    15,007
    
    
    
    201
    
    
    
    5.36
    %
    
    
    
    
    
    
    
    
    
    
    Trust preferred securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,674
    
    
    
    182
    
    
    
    4.96
    %Other interest-bearing liabilities
    
    
    7,577
    
    
    
    84
    
    
    
    4.43
    %
    
    
    15,107
    
    
    
    155
    
    
    
    4.10
    %Interest-bearing liabilities
    
    
    510,467
    
    
    
    2,261
    
    
    
    1.77
    %
    
    
    457,576
    
    
    
    2,133
    
    
    
    1.86
    %Noninterest-bearing deposits
    
    
    80,085
    
    
    
    
    
    
    
    
    
    
    
    81,482Other noninterest-bearing
liabilities
    
    
    3,333
    
    
    
    
    
    
    
    
    
    
    
    3,372Total liabilities
    
    
    593,885
    
    
    
    
    
    
    
    
    
    
    
    542,430Shareholders equity
    
    
    46,597
    
    
    
    
    
    
    
    
    
    
    
    41,358Total liabilities and
shareholders equity
    
    $
    640,482
    
    
    
    
    
    
    
    
    
    
    $
    583,788Net interest income (3)
    
    
    
    
    
    $
    7,789
    
    
    
    
    
    
    
    
    
    
    $
    7,289Net interest spread (1)
    
    
    
    
    
    
    
    
    
    
    5.05
    %
    
    
    
    
    
    
    
    
    
    
    5.03
    %Net interest margin (1)
    
    
    
    
    
    
    
    
    
    
    5.29
    %
    
    
    
    
    
    
    
    
    
    
    5.33
    %
  (1)
    
    Annualized(2)
    
    Includes loan fees of $400 and $406 for the three months ended September 30, 2004 and 2003, respectively.(3)
    
    Interest income on non-taxable investments is presented on a fully taxable-equivalent basis using the federal statutory rate of 34%.These adjustments were $31 and $57 for the three months ended September 30, 2004 and 2003, respectively. 14




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##### Table of Contents



Results of Operations The Companys results of operations are dependent to a large degree on net
interest income. Interest income and cost of funds are affected significantly
by general economic conditions, particularly changes in market interest rates,
and by government policies and the actions of regulatory authorities. The
Company generates noninterest income generally through service charges and
fees, gain on sale of loans and other sources. The Companys noninterest
expenses consist primarily of compensation and employee benefit expense, and
occupancy expense. Net Income.Net income for the third quarter of 2004 increased 6.1% to $1.9
million or $0.33 per diluted share as compared to $1.8 million, or $0.31 per
diluted share for the third quarter of 2003. During the third quarter of 2004,
the increased loan volumes and the rising rate environment contributed to the
Companys increased net interest margin as compared to the second quarter of
2004. Net income for the nine months ended September 30, 2004 decreased 4.9% to
$4.2 million, or $0.75 per diluted share, from $4.4 million, or $0.80 per
diluted share, for the nine months ended September 30, 2003. The decrease was
due largely to the increase in noninterest expense, the reduction in gain on
sale of loans, and the operating losses and costs associated with closing the
Washington Funding Group, Inc. subsidiary. Income from continuing operations for the third quarter of 2004 increased 11.5%
to $1.9 million from $1.7 million for the third quarter of 2003. The rising
interest rate environment coupled with the income received from service charges
contributed to the overall increase in net income. Income from continuing operations for the nine months ended September 30, 2004
increased 3.7% to $4.6 million, from $4.4 million for the like period one year
ago. The Companys loss from discontinued operations, net of tax, for the nine
month period in 2004 was ($370,000) from income of $5,000 for the like period
one year earlier. Net Interest Income.Net interest income for the third quarter of 2004
increased 7.3% to $7.8 million from $7.2 million for the third quarter of 2003.
For the first nine months of 2004, net interest income increased 7.3% to $22.2
million from $20.7 million for the like period in 2003. The increase is largely
due to interest income from higher loan rates and increased average loan
volumes, combined with a decrease in the cost of funds. Average interest-earning assets for the third quarter increased to $589.3
million at September 30, 2004, compared to $547.1 million at September 30,
2003, a growth of 7.7%, while the average yield on interest-earning assets
decreased to 6.82% compared to 6.89% in third quarter of the prior year. The
average yield on loans decreased to 7.02% for the quarter ended September 30,
2004 from 7.33% for the third quarter of 2003. The average cost of interest-bearing liabilities decreased in the third quarter
of 2004 to 1.77% from 1.86% for the quarter ended September 30, 2003. Average
interest-bearing liabilities for the quarter increased to $510.5 million at
September 30, 2004 compared to $457.6 million a year ago, a growth of 11.6%. The overall result of these changes was an increase in the net interest spread
to 5.05% for the quarter ended September 30, 2004 from 5.03% for the quarter
ended September 30, 2003. Net interest margin (net interest income divided by
average interest-earning assets) decreased to 5.29% in the third quarter of
2004 from 5.33% in the third quarter of 2003. Noninterest Income.Noninterest income increased $85,000, or 5.9%, in the
third quarter of 2004 compared to the like period in 2003. For the first nine
months of 2004, noninterest income increased $382,000, or 9.5% compared to the
like period in 2003. This increase was primarily due to an increase in service
charges and fees on deposits in association with the Banks new overdraft
product, Whidbey Overdraft Coverage and a gain on sale of securities offset by
a decrease in gain on sale of loans. In the past, selling single-family residential loans to the secondary market
contributed significantly to the noninterest income, but slowing of mortgage
activity caused a decrease in income from the gain on sale of loans. Noninterest Expense.Noninterest expense increased $486,000 in the third
quarter of 2004, or 9.2% from a year ago. Four major components of noninterest
expense  employee compensation, occupancy, consulting and 15




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##### Table of Contents



professional fees and other noninterest expense  increased 9.5%, 3.4%, 37.3%
and 8.0%, respectively, for the quarter compared with the like period in 2003. For the first nine months of 2004, noninterest expense rose to $17.4 million
from $15.5 million one year ago, a 12.2% increase. Employee compensation,
occupancy, consulting and professional fees and other noninterest expense
increased 12.7%, 10.7%, 42.5% and 9.6%, respectively, compared with the like
period in 2003. The Company experienced a cost increase in employee benefits. Additionally,
increased costs associated with insurance, operating fees and advertising have
contributed to other noninterest expense, primarily as a result of the
expansion of the Company. With the purchase of an office building in Oak
Harbor, WA the Company expects to improve operating efficiencies by
consolidating back office operations into one building. The efficiency ratio (noninterest expense divided by the sum of net interest
income plus noninterest income) was 62.35% for the third quarter 2004 compared
to 61.14% for the like period in 2003. For the first nine months of 2004 and
2003, the efficiency ratio was 65.49% and 62.85%, respectively. Income Taxes.For the third quarters of 2004 and 2003, the Company recorded an
income tax provision of $915,000 and $869,000, respectively. The Company
recorded an income tax provision of $2.3 million for the first nine months of
2004 and for the 2003 nine-month period. The overall effective tax rate was
approximately 33% and 34% for the three months ended September 30, 2004 and
2003, respectively. For the nine months ended September 30, 2004 and 2003, the
overall effective tax rate was approximately 33% and 35%, respectively. Lending Activities Loan Portfolio Composition.The Company originates a wide variety of loans
including commercial, real estate and consumer loans. The following table sets
forth the Companys loan portfolio composition by type of loan: September 30, 2004
    
    December 31, 2003(Dollars in thousands)
    
    Balance
    
    % of total
    
    Balance
    
    % of totalCommercial
    
    $
    81,703
    
    
    
    14.7
    %
    
    $
    87,371
    
    
    
    17.2
    %Real estate mortgages:1  4 Family residential
    
    
    46,081
    
    
    
    8.3
    %
    
    
    43,460
    
    
    
    8.5
    %Commercial
    
    
    163,735
    
    
    
    29.3
    %
    
    
    133,539
    
    
    
    26.3
    %Total real estate mortgages
    
    
    209,816
    
    
    
    37.6
    %
    
    
    176,999
    
    
    
    34.8
    %Real estate construction
    
    
    94,137
    
    
    
    16.9
    %
    
    
    70,974
    
    
    
    14.0
    %Consumer
    
    
    171,740
    
    
    
    30.8
    %
    
    
    172,406
    
    
    
    34.0
    %Subtotal
    
    
    557,396
    
    
    
    100.0
    %
    
    
    507,750
    
    
    
    100.0
    %Less: allowance for loan losses
    
    
    (7,506
    )
    
    
    
    
    
    
    (6,116
    )Deferred loan fees, net
    
    
    328
    
    
    
    
    
    
    
    420Total loans, net
    
    $
    550,218
    
    
    
    
    
    
    $
    502,054
 Total loans, net, were $550.2 million at September 30, 2004, representing a
9.6% increase from year-end 2003. The majority of the increase was in real
estate mortgage and real estate construction loans, which increased 18.5% and
32.6%, respectively, at September 30, 2004 from year-end 2003. Included in
real estate mortgages are loans originated and held for sale on the secondary
market. At September 30, 2004, loans held for sale were $5.6 million as
compared to $8.3 million at December 31, 2003, a decrease of 32.2%. The Company
sold $10.0 million of indirect consumer loans during September 2004, which were
included in Loans Held for Sale at June 30, 2004. The Company earned a net gain
of $84,000 from the sale of those loans. Due to the liability sensitivity of
our balance sheet, the Company opted to sell these fixed rate loans without
recourse to increase liquidity for core lending activity. Of the remaining
loans held for sale, all $5.6 million were originated by the Banks retail real
estate division, compared to $3.8 million originated by WFG and $4.5 million
originated from the Banks retail real estate division at December 31, 2003.
The majority of the increase in real estate construction loans was due to
residential construction, residential land development projects and a few large
commercial construction loans. 16




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##### Table of Contents



The Company makes automobile and recreational vehicle loans for new and used
vehicles originated indirectly by selected automobile dealers located in the
Companys market areas. Indirect loans were $98.0 million, or 57.06% of the
consumer loan portfolio and 17.57% of the total loan portfolio at September 30,
2004. At December 31, 2003, indirect loans were $105.6 million, or 61.27% of
the consumer loan portfolio and 20.79% of the total loan portfolio. Nonperforming Assets.The following table sets forth an analysis of the
composition of the Companys nonperforming assets: (Dollars in thousands)
    
    September 30, 2004
    
    December 31, 2003Nonaccrual loans
    
    $
    3,197
    
    
    $
    4,158Restructured loans
    
    
    
    
    
    
    Total nonperforming loans
    
    
    3,197
    
    
    
    4,158Other real estate owned
    
    
    1,458
    
    
    
    504Total nonperforming assets
    
    $
    4,655
    
    
    $
    4,662Impaired loans
    
    $
    191
    
    
    $
    2,563Accruing
loans past due 3 90 days
    
    
    
    
    
    
    Potential problem loans
    
    
    120
    
    
    
    314Allowance for loan losses
    
    
    7,506
    
    
    
    6,116Nonperforming loans to loans (1)
    
    
    0.58
    %
    
    
    0.83
    %Allowance for loan losses to loans (1)
    
    
    1.36
    %
    
    
    1.22
    %Allowance for loan losses to nonperforming loans
    
    
    234.78
    %
    
    
    147.09
    %Nonperforming assets to total assets
    
    
    0.70
    %
    
    
    0.80
    %
 (1) Excludes loans held for sale Nonperforming loans decreased to $3.2 million, or 0.58% of loans (excluding
loans held for sale), at September 30, 2004 from $4.2 million, or 0.83% of
loans (excluding loans held for sale), at December 31, 2003. The current
allowance for loan losses of $7.5 million represents 234.78% of nonperforming
loans as compared to 147.09% of nonperforming loans at December 31, 2003. The
allowance for loan losses is 1.36% of loans (excluding loans held for sale) at
September 30, 2004 as compared to 1.22% at December 31, 2003. Impaired loans
were $191,000 at the end of the quarter. A loan in the amount of $2.6 million
listed as impaired at December 2003 was removed from impaired status during the
2004 second quarter. The loan balance was significantly reduced and the credit
is performing. Provision and Allowance for Loan Losses.The Company recorded a $725,000
provision for loan losses for the third quarter of 2004, compared to $838,000
for the like period a year ago. Net loan charge-offs were $145,000 for the
third quarter of 2004, compared with $443,000 for the like period last year. The Company recorded $2.3 million and $2.4 million provisions for loan losses
for the nine months ended September 30, 2004 and 2003, respectively. The
Company recorded $935,000 in net loan charge-offs, representing 0.18% of
average loans (excluding loans held for sale) during the first nine months of
2004, compared to $1.6 million or 0.36% for the like period in 2003. Indirect loans may involve greater risk than other consumer loans, including
direct automobile loans, due to the nature of third-party transactions. To
mitigate these risks, the Company limits its indirect dealer loan purchases
primarily to dealerships that are established and well known in their market
areas and to applicants that are not classified as sub-prime. In addition, the
Company has increased its oversight of the approval process and uses a loan
grading system, which limits the risks inherent in dealer originated loans. 17




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##### Table of Contents



The following table sets forth an analysis of the Companys indirect and other
net charge-offs to average loans: Three Months Ended
    
    Nine Months EndedSeptember 30
    
    September 30(Dollars in thousands)
    
    2004
    
    2003
    
    2004
    
    2003Indirect net charge-offs
    
    $
    (140
    )
    
    $
    (234
    )
    
    $
    (675
    )
    
    $
    (682
    )Other net charge-offs
    
    
    (5
    )
    
    
    (209
    )
    
    
    (260
    )
    
    
    (928
    )Total net charge-offs
    
    $
    (145
    )
    
    $
    (443
    )
    
    $
    (935
    )
    
    $
    (1,610
    )Average indirect loans
    
    $
    103,515
    
    
    $
    100,978
    
    
    $
    104,633
    
    
    $
    99,447Average other loans(1)
    
    
    449,039
    
    
    
    366,616
    
    
    
    426,961
    
    
    
    352,630Total average loans(1)
    
    $
    552,554
    
    
    $
    467,594
    
    
    $
    531,594
    
    
    $
    452,077Indirect net charge-offs to average indirect
loans(2)
    
    
    0.54
    %
    
    
    0.93
    %
    
    
    0.86
    %
    
    
    0.91
    %Other net charge-offs to average other loans (1) (2)
    
    
    0.00
    %
    
    
    0.23
    %
    
    
    0.08
    %
    
    
    0.35
    %Net charge-offs to average loans(1) (2)
    
    
    0.10
    %
    
    
    0.38
    %
    
    
    0.23
    %
    
    
    0.47
    %
  (1)
    
    Excludes loans held for sale(2)
    
    Net charge-offs are annualized Net loan charge-offs attributed to indirect loans were $140,000, representing
83.33% of net consumer charge-offs during the third quarter of 2004, compared
to $234,000 or 80.69% of net consumer charge-offs for the like period in 2003.
For the nine months ended September 30, 2004, net charge-offs attributed to
indirect dealer loans were $675,000, or 75.25% of net consumer charge-offs, as
compared with $682,000, or 78.66%, for the like period in 2003. The allowance for loan losses is maintained at a level considered adequate by
management to provide for anticipated loan losses based on managements
assessment of various factors affecting the loan portfolio. This includes a
review of problem loans, general business and economic conditions, seasoning of
the loan portfolio, bank regulatory examination results and findings of
internal credit examiners, loss experience and an overall evaluation of the
quality of the underlying collateral. Management reviews the allowance
quarterly. The allowance is increased by provisions charged to operations and
reduced by loans charged off, net of recoveries. The following table sets forth the changes in the Companys allowance for loan
losses. The provision is based on an evaluation of defined loan problems,
historical ratios of loan losses and other factors that may affect future loan
losses in the categories of loans shown: 18




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##### Table of Contents



Three Months Ended
    
    Nine Months EndedSeptember 30
    
    September 30(Dollars in thousands)
    
    2004
    
    2003
    
    2004
    
    2003Balance at beginning of period
    
    $
    6,926
    
    
    $
    5,947
    
    
    $
    6,116
    
    
    $
    5,514Charge-offs:Commercial
    
    
    (41
    )
    
    
    (276
    )
    
    
    (240
    )
    
    
    (798
    )Real estate
    
    
    (15
    )
    
    
    
    
    
    
    (37
    )
    
    
    (95
    )Consumer
    
    
    (247
    )
    
    
    (377
    )
    
    
    (1,189
    )
    
    
    (1,099
    )Total charge-offs
    
    $
    (303
    )
    
    $
    (653
    )
    
    $
    (1,466
    )
    
    $
    (1,992
    )Recoveries:Commercial
    
    
    44
    
    
    
    123
    
    
    
    184
    
    
    
    150Real estate
    
    
    36
    
    
    
    
    
    
    
    54
    
    
    
    Consumer
    
    
    78
    
    
    
    87
    
    
    
    293
    
    
    
    232Total recoveries
    
    $
    158
    
    
    $
    210
    
    
    $
    531
    
    
    $
    382Net charge-offs
    
    
    (145
    )
    
    
    (443
    )
    
    
    (935
    )
    
    
    (1,610
    )Provision for loan losses
    
    
    725
    
    
    
    838
    
    
    
    2,325
    
    
    
    2,438Balance at end of period
    
    $
    7,506
    
    
    $
    6,342
    
    
    $
    7,506
    
    
    $
    6,342
 While management believes that it uses the best information available to
determine the allowance for loan losses, unforeseen market conditions could
result in adjustments to the allowance for loan losses, and net income could be
significantly affected if circumstances differ substantially from the
assumptions used in making the final determination. Management anticipates
that normal growth of the loan portfolio may require continued increases in the
allowance for loan losses. Deposits The Company provides an array of deposit services, including
noninterest-bearing checking accounts, interest-bearing checking and savings
accounts, money market accounts and certificates of deposit (CDs). These
accounts generally earn interest at rates established by management based on
competitive market factors and managements desire to increase or decrease
certain types or maturities of deposits. The Company does not pay brokerage
commissions to attract deposits. It strives to establish customer
relationships to attract core deposits in noninterest-bearing transactional
accounts and thus reduce its costs of funds. 19




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##### Table of Contents



The following table sets forth the average balances outstanding and average
interest rates for each major category of deposits: Three Months Ended September 302004
    
    2003Average
    
    Average
    
    Average
    
    Average(Dollars in thousands)
    
    balance
    
    rate
    
    balance
    
    rateInterest-bearing demand and
money market deposits
    
    $
    222,840
    
    
    
    0.76
    %
    
    $
    199,273
    
    
    
    0.80
    %Savings deposits
    
    
    50,296
    
    
    
    0.80
    %
    
    
    37,907
    
    
    
    0.78
    %CDs
    
    
    212,503
    
    
    
    2.72
    %
    
    
    190,615
    
    
    
    2.78
    %Total interest-bearing deposits
    
    
    485,639
    
    
    
    1.62
    %
    
    
    427,795
    
    
    
    1.68
    %Demand and other
noninterest-bearing deposits
    
    
    80,085
    
    
    
    
    
    
    
    81,482Total average deposits
    
    $
    565,724
    
    
    
    
    
    
    $
    509,277
 Average balances in noninterest-bearing deposits decreased slightly by 1.7% in
the third quarter of 2004 compared to the third quarter of 2003. For the same
period, average balances in total interest-bearing deposits increased 13.5%,
while the average rate decreased. Liquidity and Sources of Funds Sources of Funds.The Companys sources of funds are customer deposits, loan
repayments, current earnings, cash and demand balances due from other banks,
federal funds, short-term investments, investment securities available for sale
and trust preferred securities. These funds are used for loan originations and
deposit withdrawals, to satisfy other financial commitments and to support
continuing operations. The Company relies primarily upon customer deposits and
investments to provide liquidity. The Company will mainly use such funds to
make loans and to purchase securities, the majority of which are issued by
federal, state and local governments. Additional funds are available through
established Federal Home Loan Bank (FHLB) and correspondent bank lines of
credit, which the Company may use to supplement funding sources. The Companys strategy includes maintaining a well-capitalized status for
regulatory purposes, while maintaining a favorable liquidity position and
proper asset/liability mix. With this strategy in mind, management evaluated
potential capital-raising alternatives such as trust preferred securities,
issuance of common stock and other sources. Management determined that issuing
trust preferred securities would be in the best interest of the Company and on
June 27, 2002, the Trust issued $15.0 million of trust preferred securities.
Trust preferred securities are held as debt for tax purposes, while the
proceeds of the offering count as Tier I capital without increasing the
shareholder base, and therefore not diluting earnings per share. Due to FIN
46R, the Trust was deconsolidated in current period financial statements. Deposits.Total deposits increased 17.4% to $589.0 million at September 30,
2004 from $501.5 million at December 31, 2003. Certificates of deposit are the
only deposit group that has stated maturity dates. At September 30, 2004, the
Company had $214.5 million in CDs, of which approximately $131.1 million, or
61.11%, are scheduled to mature within one year. Management anticipates that a
sizable portion of outstanding CDs will renew upon maturity. The Company has not accepted brokered deposits. It has made a concerted effort
to attract deposits in the market area it serves through competitive pricing
and delivery of quality service. Historically, the Company has been able to
retain a considerable amount of its deposits as they mature. Borrowings.At September 30, 2004 the Company had a line of credit with the
FHLB of $99.2 million, of which $7.5 million was advanced in short-term
borrowings. The Company also had unused lines of credit with correspondent
banks in the amount of $27.0 million at September 30, 2004. Investments.The Companys total portfolio of investment securities decreased
36.8% to $19.1 million at September 30, 2004 from $30.2 million at December 31,
2003. The Company transferred its held-to-maturity municipal security
portfolio of $14.3 million to available-for-sale investments in the second
quarter of 2004. 20




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##### Table of Contents



Available-for-sale investments are recorded at market value and this transfer
caused an increase in accumulated other comprehensive income of $272,000.
During the second quarter of 2004, $5.8 million of municipal security
investments were sold to help reposition the Companys liability sensitive
balance sheet against the anticipation of a rising rate environment. The
investment portfolio consists of government agency securities, pass-through
securities, corporate securities, municipal securities and preferred stock. No
investment exceeds 10% of the shareholders equity. The following table summarizes the amortized cost and market value of
securities in the Companys portfolio by contractual maturity groups: September 30, 2004Amortized
    
    Market(Dollars in thousands)
    
    Cost
    
    valueAmounts maturing:Within one year
    
    $
    2,131
    
    
    $
    2,149One to five years
    
    
    15,370
    
    
    
    15,662Six to ten years
    
    
    705
    
    
    
    754Over ten years
    
    
    504
    
    
    
    504Total
    
    $
    18,710
    
    
    $
    19,069
 At September 30, 2004, the Companys investment portfolio consisted of no
held-to-maturity investments, as compared with $14.7 million, or 48.88% of the
total portfolio at December 31, 2003. Available-for-sale securities, which
are carried at market value, were $19.1 million, or 100.0% of the investment
portfolio as compared with $15.4 million, or 51.12% at December 31, 2003. In
the second quarter of 2004, the Company changed the designation of the
municipal securities from held-to-maturity to available-for-sale. For
liquidity purposes, the Companys future security purchases will primarily be
designated as available-for-sale. Capital and Capital Ratios The Companys shareholders equity increased to $47.9 million at September 30,
2004 from $44.4 million at December 31, 2003. This increase is due to net
income of $4.2 million, proceeds from stock options exercised in the amount of
$166,000, stock option compensation of $17,000 and an increase in unrealized
gain on available-for-sale securities, net of tax, of $270,000, offset by the
payment of cash dividends of $1.1 million during the first nine months of 2004.
Total assets increased to $663.0 million at September 30, 2004 from $581.7
million at December 31, 2003, an increase of 14.0%. Shareholders equity to
total assets was 7.2% at September 30, 2004 compared to 7.6% at December 31,
2003. Banking regulations require bank holding companies and banks to maintain a
minimum leverage ratio of core capital to adjusted average total assets of at
least 4%. In addition, banking regulators have adopted risk-based capital
guidelines, under which risk percentages are assigned to various categories of
assets and off-balance sheet items to calculate a risk-adjusted capital ratio.
Tier I capital generally consists of common shareholders equity (which does
not include unrealized gains and losses on securities), less goodwill and
certain identifiable intangible assets, while Tier II capital includes the
allowance for loan losses and subordinated debt, both subject to certain
limitations. 21




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##### Table of Contents



The FDIC established the qualifications necessary to be classified as a
well-capitalized bank, primarily for assignment of FDIC insurance premium
rates. As the following table indicates, the Company (on a consolidated basis)
and the Bank qualified as well-capitalized at September 30, 2004 and December
31, 2003: FDIC Requirements
    
    Actual RatiosAdequately-
    
    Well-
    
    September 30,
    
    December 31,capitalized
    
    capitalized
    
    2004
    
    2003Total risk-based capital ratioConsolidated
    
    
    8
    %
    
    
    10
    %
    
    
    11.43
    %
    
    
    12.01
    %Whidbey Island Bank
    
    
    8
    %
    
    
    10
    %
    
    
    11.10
    %
    
    
    11.69
    %Tier 1 risk-based capital ratioConsolidated
    
    
    4
    %
    
    
    6
    %
    
    
    10.21
    %
    
    
    10.85
    %Whidbey Island Bank
    
    
    4
    %
    
    
    6
    %
    
    
    9.87
    %
    
    
    10.56
    %Leverage ratioConsolidated
    
    
    4
    %
    
    
    5
    %
    
    
    9.78
    %
    
    
    10.17
    %Whidbey Island Bank
    
    
    4
    %
    
    
    5
    %
    
    
    9.45
    %
    
    
    9.89
    %
 There can be no assurance that additional capital will not be required in the
near future due to greater-than-expected growth, unforeseen expenses or revenue
shortfalls, or otherwise. Capital Expenditures and Commitments The Company entered into an option to purchase agreement for a 70,000
square-foot property located in the Smokey Point / Arlington, WA area for the
purpose of relocating the Smokey Point branch, which is currently in leased
space. Significant Accounting Policies SeeNotes to Condensed Consolidated Financial Statements. Anticipated Future Performance Future events are difficult to predict, and the expectations of management are
necessarily subject to uncertainty and risk that may cause actual results to
differ materially from those stated here. In making the following statements,
management has made a number of assumptions for the remainder of 2004 including
that: (1) the interest rate environment will remain steady, (2) the current
local economy will not be substantially altered, and (3) competition for
commercial lending business will increase. If deposit rate repricing is
required to maintain deposits or should rates increase more than expected, the
net interest margin could be negatively impacted due to the Companys current
position of being slightly liability sensitive. Other unexpected changes, such
as significant changes in the economy, substantial credit deterioration, or
depositors moving sizeable amounts of their funds back into the stock market,
could also affect the anticipated performance of the Company. Management had expected WFG to contribute to 2004 earnings when earnings growth
projections were identified earlier in the year. Considering the impact caused
by the closure and losses of the mortgage subsidiary, and given the preceding
assumptions, management expects that it will be difficult to substantially
increase profits over 2003. WBCO expects to continue its growth strategy and expand its presence in the
Pacific Northwest. The Companys commitment to maintaining asset quality,
improving operating efficiency, being attentive to customer satisfaction and
maximizing shareholder value remains strong. The Bank has a large portion of
market share in Island County, which is where the Company was founded and has
an established identity and reputation within the community. Management
believes there are significant opportunities to gain a larger share of the
market in the other three counties where the branches are still relatively
young and not as well known. Opportunities will be pursued while applying
credit discipline and deliberate analysis to ensure quality growth. 22




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##### Table of Contents



WBCO has identified long-term performance measurement targets. Management does
not expect to attain these targets in the near-term, but rather measures its
business plan progression against these long-term goals. The targets include a
return on equity of 18%, an efficiency ratio in the mid-50% range, earnings per
share growth of 10% per year, and dividend payouts of at least 8% annually. Readers should not construe these statements as assurances of future
performance, and should note that management does not plan to update these
projections as the year progresses. 
 Item 3. Quantitative and Qualitative Disclosures about Market Risk A number of measures are used to monitor and manage interest rate risk,
including income simulations and interest sensitivity (gap) analyses. An
income simulation model is the primary tool used to assess the direction and
magnitude of changes in net interest income resulting from changes in interest
rates. Key assumptions in the model include prepayment speeds on
mortgage-related assets, cash flows and maturities of other investment
securities, loan and deposit volumes, and pricing. These assumptions are
inherently uncertain and, as a result, the model cannot precisely estimate net
interest income or precisely predict the impact of higher or lower interest
rates on net interest income. Actual results will differ from simulated
results due to timing, magnitude and frequency of interest rate changes,
changes in market conditions and management strategies, among other factors.
At September 30, 2004, based on the measures used to monitor and manage
interest rate risk, there had not been a material change in the Companys
interest rate risk since December 31, 2003. Should rates increase, the Company
could be negatively impacted due to its current slightly liability sensitive
position. For additional information, refer to the Companys Form 10-K for
year ended December 31, 2003 filed with the SEC on March 24, 2004. 
 Item 4. Controls and Procedures As of the end of the period covered by this report, management evaluated the
effectiveness of the design and operation of its disclosure controls and
procedures. The principal executive and financial officers supervised and
participated in this evaluation. Based on this evaluation, the chief executive
and financial officer each concluded that the Companys disclosure controls and
procedures are effective in timely alerting them to material information
required to be included in the periodic reports to the SEC. The design of any
system of controls is based in part upon various assumptions about the
likelihood of future events, and there can be no assurance that any of the
Companys plans, products, services or procedures will succeed in achieving
their intended goals under future conditions. In addition, there have been no
significant changes in the internal controls or in other factors known to
management that could significantly affect the internal controls subsequent to
the most recent evaluation. Management found no facts that would require WBCO
to take any corrective actions with regard to significant deficiencies or
material weaknesses. 23




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PART II 
 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 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
 24




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized. WASHINGTON BANKING COMPANY Date: November 12, 2004
    
    By
    
    /s/ Michal D. CannMichal D. CannPresident andChief Executive OfficerDate: November 12, 2004
    
    By
    
    /s/ Richard A. Shields, Jr.Richard A. Shields, Jr.Senior Vice President andChief Financial Officer
 25