##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
  [X]                    Quarterly report pursuant to Section 13 or l5(d) of the Securities Exchange Act of 1934
  [  ]                    Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
  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




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##### 



Table of Contents
 PagePART I  FINANCIAL INFORMATIONItem 1.
    
    Financial StatementsCondensed Consolidated Statements of Financial Condition - June 30, 2007 and December 31, 2006
    
    
    1Condensed Consolidated Statements of Income - Three and Six Months Ended June 30, 2007 and 2006
    
    
    2Condensed Consolidated Statements of Shareholders Equity and Comprehensive Income - Six Months Ended June 30, 2007 and 2006
    
    
    3Condensed
Consolidated Statements of Cash Flows - Six Months Ended June 30, 2007 and 2006
    
    
    4Notes to Condensed Consolidated Financial Statements
    
    
    5Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    10Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    19Item 4.
    
    Controls and Procedures
    
    
    19PART II  OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    20Item 1A.
    
    Risk Factors
    
    
    20Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    20Item 3.
    
    Defaults Upon Senior Securities
    
    
    20Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    20Item 5.
    
    Other Information
    
    
    21Item 6.
    
    Exhibits
    
    
    21Signatures
    
    
    22EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  i




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##### Table of Contents



PART
I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 WASHINGTON BANKING COMPANY
AND SUBSIDIARIES
 
   June 30,
    
    
    December 31,2007
    
    
    2006AssetsCash and due from banks
    
    $
    24,563
    
    
    $
    18,984($5,292 and $3,703, respectively, are restricted)Interest-bearing deposits
    
    
    319
    
    
    
    761Total cash, restricted cash, and cash equivalents
    
    
    24,882
    
    
    
    19,745Investment securities available for sale
    
    
    17,019
    
    
    
    16,790Federal Home Loan Bank stock
    
    
    1,984
    
    
    
    1,984Loans held for sale
    
    
    4,835
    
    
    
    2,458Loans receivable
    
    
    764,438
    
    
    
    719,580Allowance for loan losses
    
    
    (10,526
    )
    
    
    (10,048
    )Total loans, net
    
    
    753,912
    
    
    
    709,532Premises and equipment, net
    
    
    23,167
    
    
    
    23,372Bank owned life insurance
    
    
    16,177
    
    
    
    10,930Other assets
    
    
    10,080
    
    
    
    9,734Total assets
    
    $
    852,056
    
    
    $
    794,545Liabilities and Shareholders EquityLiabilities:DepositsNoninterest-bearing
    
    $
    107,543
    
    
    $
    96,858Interest-bearing
    
    
    318,398
    
    
    
    303,979Time deposits
    
    
    303,645
    
    
    
    302,930Total deposits
    
    
    729,586
    
    
    
    703,767FHLB overnight borrowings
    
    
    11,000
    
    
    
    3,075Other borrowed funds
    
    
    10,000
    
    
    
    Junior subordinated debentures
    
    
    25,774
    
    
    
    15,007Other liabilities
    
    
    6,575
    
    
    
    6,303Total liabilities
    
    
    782,935
    
    
    
    728,152Commitments 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 9,380,486 6/30/2007
and 9,388,600 at 12/31/06
    
    
    32,117
    
    
    
    33,016Retained earnings
    
    
    37,108
    
    
    
    33,422Accumulated other comprehensive loss, net
    
    
    (104
    )
    
    
    (45
    )Total shareholders equity
    
    
    69,121
    
    
    
    66,393Total liabilities and shareholders equity
    
    $
    852,056
    
    
    $
    794,545
  1




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WASHINGTON BANKING COMPANY
AND SUBSIDIARY
 
   Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Interest income:Interest and fees on loans
    
    $
    15,185
    
    
    $
    13,223
    
    
    $
    29,614
    
    
    $
    25,569Interest on taxable investment securities
    
    
    136
    
    
    
    111
    
    
    
    269
    
    
    
    223Interest on tax exempt investment securities
    
    
    68
    
    
    
    80
    
    
    
    138
    
    
    
    161Other
    
    
    67
    
    
    
    38
    
    
    
    99
    
    
    
    88Total interest income
    
    
    15,456
    
    
    
    13,452
    
    
    
    30,120
    
    
    
    26,041Interest expense:Interest on deposits
    
    
    5,480
    
    
    
    3,720
    
    
    
    10,803
    
    
    
    6,814Interest on other borrowings
    
    
    137
    
    
    
    229
    
    
    
    170
    
    
    
    378Interest on junior subordinated debentures
    
    
    484
    
    
    
    334
    
    
    
    822
    
    
    
    644Total interest expense
    
    
    6,100
    
    
    
    4,282
    
    
    
    11,795
    
    
    
    7,836Net interest income
    
    
    9,356
    
    
    
    9,169
    
    
    
    18,325
    
    
    
    18,205Provision for loan losses
    
    
    850
    
    
    
    800
    
    
    
    1,400
    
    
    
    1,300Net interest income after provision for loan losses
    
    
    8,506
    
    
    
    8,369
    
    
    
    16,925
    
    
    
    16,905Noninterest income:Service charges and fees
    
    
    797
    
    
    
    852
    
    
    
    1,614
    
    
    
    1,669Income from the sale of loans
    
    
    211
    
    
    
    150
    
    
    
    366
    
    
    
    332SBA premium income
    
    
    123
    
    
    
    134
    
    
    
    261
    
    
    
    329Other
    
    
    822
    
    
    
    610
    
    
    
    1,517
    
    
    
    1,359Total noninterest income
    
    
    1,953
    
    
    
    1,746
    
    
    
    3,758
    
    
    
    3,689Noninterest expense:Salaries and benefits
    
    
    4,132
    
    
    
    3,973
    
    
    
    8,543
    
    
    
    8,249Occupancy and equipment
    
    
    980
    
    
    
    891
    
    
    
    1,936
    
    
    
    1,749Office supplies and printing
    
    
    179
    
    
    
    140
    
    
    
    309
    
    
    
    321Data processing
    
    
    167
    
    
    
    122
    
    
    
    308
    
    
    
    205Consulting and professional fees
    
    
    99
    
    
    
    157
    
    
    
    270
    
    
    
    276Other
    
    
    1,312
    
    
    
    1,110
    
    
    
    2,428
    
    
    
    2,276Total noninterest expense
    
    
    6,870
    
    
    
    6,393
    
    
    
    13,794
    
    
    
    13,076Income before provision for income taxes
    
    
    3,589
    
    
    
    3,722
    
    
    
    6,889
    
    
    
    7,518Provision for income taxes
    
    
    1,129
    
    
    
    1,236
    
    
    
    2,161
    
    
    
    2,480Net income
    
    $
    2,460
    
    
    $
    2,486
    
    
    $
    4,728
    
    
    $
    5,038Net income per share, basic
    
    $
    0.26
    
    
    $
    0.27
    
    
    $
    0.50
    
    
    $
    0.55Net income per share, diluted
    
    $
    0.26
    
    
    $
    0.26
    
    
    $
    0.50
    
    
    $
    0.53Average
number of shares outstanding, basic (1)
    
    
    9,363,000
    
    
    
    9,220,000
    
    
    
    9,403,000
    
    
    
    9,211,000Average number of shares outstanding, diluted
    
    
    9,486,000
    
    
    
    9,478,000
    
    
    
    9,548,000
    
    
    
    9,474,000
 (1)
    
    Adjusted to reflect a 5-for-4 stock split distributed by the Company on September 6, 2006
  2




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WASHINGTON BANKING COMPANY
AND SUBSIDIARY
 
    Accumulatedother
    
    
    TotalCommon stock
    
    
    Retained
    
    
    Deferred
    
    
    comprehensive
    
    
    shareholdersShares
    
    
    Amount
    
    
    earnings
    
    
    compensation
    
    
    loss
    
    
    equityBalances at December 31, 2005(1)
    
    
    9,228
    
    
    $
    32,492
    
    
    $
    25,789
    
    
    $
    (386
    )
    
    $
    (46
    )
    
    $
    57,849Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    5,038
    
    
    
    
    
    
    
    
    
    
    
    5,038Net change in unrealized loss on securities available for sale,
net of tax of ($38)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (74
    )
    
    
    (74
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,964Transition adjustment for adoption of SFAS 123(R)
    
    
    
    
    
    
    (386
    )
    
    
    
    
    
    
    386
    
    
    
    
    
    
    
    Cash dividend, $0.10 per share
    
    
    
    
    
    
    
    
    
    
    (926
    )
    
    
    
    
    
    
    
    
    
    
    (926
    )Stock-based compensation expense
    
    
    
    
    
    
    118
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    118Issuance of common stock- stock options(1)
    
    
    36
    
    
    
    109
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    109Issuance of restricted stock(1)
    
    
    16
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balances at June 30, 2006
    
    
    9,280
    
    
    $
    32,333
    
    
    $
    29,901
    
    
    $
    
    
    
    $
    (120
    )
    
    $
    62,114Balances at December 31, 2006(1)
    
    
    9,389
    
    
    $
    33,016
    
    
    $
    33,422
    
    
    $
    
    
    
    $
    (45
    )
    
    $
    66,393Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    4,728
    
    
    
    
    
    
    
    
    
    
    
    4,728Net change in unrealized loss on securities available for sale,
net of tax of ($32)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (59
    )
    
    
    (59
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,669Tax benefit associated with stock awards
    
    
    
    
    
    
    122
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    122Cash dividend, $0.11 per share
    
    
    
    
    
    
    
    
    
    
    (1,042
    )
    
    
    
    
    
    
    
    
    
    
    (1,042
    )Stock-based compensation
    
    
    
    
    
    
    155
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    155Common stock repurchased and retired
    
    
    (116
    )
    
    
    (1,851
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,851
    )Stock options exercised
    
    
    109
    
    
    
    675
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    675Forfeited and cancelled restricted stock
    
    
    (2
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balances at June 30, 2007
    
    
    9,380
    
    
    $
    32,117
    
    
    $
    37,108
    
    
    $
    
    
    
    $
    (104
    )
    
    $
    69,121
 (1)
    
    Adjusted to reflect a 5-for-4 stock split distributed by the Company on September 6, 2006
  3




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WASHINGTON BANKING COMPANY
AND SUBSIDIARY
 
   Six Months EndedJune 30,2007
    
    
    2006Cash flows from operating activities:Net income from continuing operations
    
    $
    4,728
    
    
    $
    5,038Adjustments to reconcile net income to net cash
provided by operating activities:Amortization (accretion) of investment premiums, net
    
    
    (3
    )
    
    
    6Deferred taxes
    
    
    223
    
    
    
    419Depreciation and amortization
    
    
    886
    
    
    
    823Earnings on bank owned life insurance
    
    
    (247
    )
    
    
    (178
    )Provision for loan losses
    
    
    1,400
    
    
    
    1,300Net gain on sale of other real estate
    
    
    (71
    )
    
    
    (6
    )Write-downs of other real estate
    
    
    3⁄4
    
    
    
    10Amortization of stock-based compensation
    
    
    155
    
    
    
    118Excess tax benefit from stock-based compensation
    
    
    (122
    )
    
    
    3⁄4Net change in assets and liabilitiesLoans held for sale
    
    
    (2,377
    )
    
    
    1,962Other assets
    
    
    (778
    )
    
    
    (1,503
    )Other liabilities
    
    
    272
    
    
    
    (1,591
    )Cash flows from operating activities:
    
    
    4,066
    
    
    
    6,398Cash flows from investing activities:Purchases of available-for-sale securities
    
    
    (2,635
    )
    
    
    3⁄4Maturities/calls/principal payments of available-for-sale securities
    
    
    2,318
    
    
    
    1,014Net increase in loans
    
    
    (46,286
    )
    
    
    (56,423
    )Purchases of premises and equipment
    
    
    (681
    )
    
    
    (1,156
    )Purchases of bank owned life insurance
    
    
    (5,000
    )
    
    
    3⁄4Proceeds from the sale of other real estate owned and premises and
equipment
    
    
    940
    
    
    
    65Cash flows used by investing activities
    
    
    (51,344
    )
    
    
    (56,500
    )Cash flows from financing activities:Net increase in deposits
    
    
    25,819
    
    
    
    42,369Gross payments on the other borrowed funds
    
    
    (10,000
    )
    
    
    (21,845
    )New borrowings on other borrowed funds
    
    
    20,000
    
    
    
    16,845Net increase in FHLB overnight borrowings
    
    
    7,925
    
    
    
    2,000Gross payments on junior subordinated debentures
    
    
    (15,007
    )
    
    
    3⁄4New borrowings on junior subordinated debentures
    
    
    25,774Dividends paid on common stock
    
    
    (1,042
    )
    
    
    (926
    )Common stock repurchased
    
    
    (1,851
    )
    
    
    3⁄4Excess tax benefits from stock-based compensation
    
    
    122
    
    
    
    3⁄4Proceeds from issuance of common stock- stock options
    
    
    675
    
    
    
    109Cash flows from financing activities
    
    
    52,415
    
    
    
    38,552Net change in cash and cash equivalents
    
    
    5,137
    
    
    
    (11,550
    )Cash and cash equivalents at beginning of period
    
    
    19,745
    
    
    
    42,027Cash and cash equivalents at end of period
    
    $
    24,882
    
    
    $
    30,477Supplemental information:Loans foreclosed and transferred to other real estate owned
    
    $
    548
    
    
    $
    69Cash paid for interest
    
    
    12,054
    
    
    
    7,357Cash paid for income taxes
    
    
    1,360
    
    
    
    3,010
  4




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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
 The Fair
Value Option for Financial Assets and Financial Liabilities
 5




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (3) Earnings Per Share
   Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2007
    
    2006
    
    2007
    
    2006Weighted average shares-basic
    
    
    9,363,000
    
    
    
    9,220,000
    
    
    
    9,403,000
    
    
    
    9,211,000Effect of dilutive securities: stock awards
    
    
    123,000
    
    
    
    258,000
    
    
    
    145,000
    
    
    
    263,000Weighted average shares-diluted
    
    
    9,486,000
    
    
    
    9,478,000
    
    
    
    9,548,000
    
    
    
    9,474,000
  (4) Stock-Based Compensation
 (a) Stock Options:
 Six Months EndedJune 30,2007
    
    
    2006Risk-free interest rate
    
    
    4.59
    %
    
    
    4.95
    %Dividend yield rate
    
    
    1.50
    %
    
    
    1.40
    %Price volatility
    
    
    33.00
    %
    
    
    38.13
    %Expected life of stock options
    
    5 years
    
    7 years
  6




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  Weighted
    
    
    Weighted average
    
    
    Aggregateaverage exercise
    
    
    remaining contractual
    
    
    intrinsicShares
    
    
    price per share
    
    
    terms (in years)
    
    
    valueOutstanding at January 1, 2007
    
    
    331,145
    
    
    $
    6.06Granted
    
    
    55,869
    
    
    
    15.98Exercised
    
    
    (109,367
    )
    
    
    5.13
    
    
    
    
    
    
    $
    1,158Forfeited, expired or cancelled
    
    
    (7,647
    )
    
    
    8.37Outstanding at June 30, 2007
    
    
    270,000
    
    
    $
    8.41
    
    
    
    5.32
    
    
    $
    2,033Exercisable at June 30, 2007
    
    
    178,623
    
    
    $
    5.32
    
    
    
    3.42
    
    
    $
    1,892
  (b) Restricted Stock Awards:
  Weighted average
        
    
    Weighted average remainingShares
    
    
    
    grant price per share
    
    
    
    contractual terms (in years)Outstanding at January 1, 2007
    
    
    50,123
    
    
    $
    12.51Granted
    
    
    20,829
    
    
    
    15.96Vested
    
    
    (18,449
    )
    
    
    11.87Forfeited, expired or cancelled
    
    
    (2,678
    )
    
    
    12.53Outstanding at June 30, 2007
    
    
    49,825
    
    
    $
    14.18
    
    
    
    4.70
  (5) Income Taxes
 Accounting for Uncertainty in Income Taxes, Accounting for Income Taxes,
 7




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Federal:Current tax expense
    
    $
    1,055
    
    
    $
    1,757
    
    
    $
    1,923
    
    
    $
    3,123Deferred tax expense (benefit)
    
    
    74
    
    
    
    (521
    )
    
    
    238
    
    
    
    (643
    )Total
    
    $
    1,129
    
    
    
    1,236
    
    
    $
    2,161
    
    
    $
    2,480
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Income tax expense at
federal statutory rates
    
    $
    1,283
    
    
    $
    1,300
    
    
    $
    2,438
    
    
    $
    2,602Federal tax credits
    
    
    (100
    )
    
    
    3⁄4
    
    
    
    (200
    )
    
    
    3⁄4Tax-exempt securities
    
    
    (102
    )
    
    
    (74
    )
    
    
    (180
    )
    
    
    (149
    )Other items
    
    
    48
    
    
    
    10
    
    
    
    103
    
    
    
    27Total
    
    $
    1,129
    
    
    $
    1,236
    
    
    $
    2,161
    
    
    $
    2,480
   June 30,
    
    
    December 31,2007
    
    
    2006Deferred tax assets:Loan loss allowances
    
    $
    3,684
    
    
    $
    3,517Deferred compensation
    
    
    326
    
    
    
    404Other
    
    
    24
    
    
    
    20Market value adjustment of investment
securities available for sale
    
    
    57
    
    
    
    25Total deferred tax assets
    
    
    4,091
    
    
    
    3,966Deferred tax liabilities:Deferred loan fees
    
    
    1,795
    
    
    
    1,552Premises and equipment
    
    
    360
    
    
    
    433Investment in partnership
    
    
    210
    
    
    
    140FHLB stock
    
    
    152
    
    
    
    152Prepaid expenses
    
    
    174
    
    
    
    111Other
    
    
    68
    
    
    
    23Total deferred tax liabilities
    
    
    2,759
    
    
    
    2,411Deferred tax assets, net
    
    $
    1,332
    
    
    $
    1,555
 8




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  (6) Subsequent Events
  (7) Commitments and Guarantees
  
 9




---



##### 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
  Allowance for Loan Losses:
 Stock-based Compensation:
 10




---



##### 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 EndedJune 30, 2007
    
    
    June 30, 2006Average
    
    Interest
    
    
    Average
    
    
    Average
    
    
    Interest
    
    
    Average(Dollars in thousands)
    
    
    balance
    
    
    earned/paid
    
    
    yield
    
    
    balance
    
    
    earned/paid
    
    
    yieldAssetsLoans (1) (2)
    
    $
    747,645
    
    
    $
    15,317
    
    
    
    8.22%
    
    
    $
    670,884
    
    
    $
    13,244
    
    
    
    7.92%Federal funds sold
    
    
    2,600
    
    
    
    35
    
    
    
    5.41%
    
    
    
    2,316
    
    
    
    29
    
    
    
    4.98%Interest-bearing cash
    
    
    2,437
    
    
    
    32
    
    
    
    5.26%
    
    
    
    718
    
    
    
    9
    
    
    
    5.07%InvestmentsTaxable
    
    
    12,300
    
    
    
    136
    
    
    
    4.44%
    
    
    
    13,395
    
    
    
    111
    
    
    
    3.33%Non-taxable (2)
    
    
    6,817
    
    
    
    99
    
    
    
    5.84%
    
    
    
    7,522
    
    
    
    119
    
    
    
    6.34%Interest-earning assets
    
    
    771,799
    
    
    
    15,620
    
    
    
    8.12%
    
    
    
    694,835
    
    
    
    13,512
    
    
    
    7.80%Noninterest-earning assets
    
    
    55,838
    
    
    
    
    
    
    
    
    
    
    
    49,152Total assets
    
    $
    827,636
    
    
    
    
    
    
    
    
    
    
    $
    743,987Liabilities and shareholders
equityDeposits:Interest demand and
money market
    
    $
    262,008
    
    
    $
    1,690
    
    
    
    2.59%
    
    
    $
    223,040
    
    
    $
    935
    
    
    
    1.68%Savings
    
    
    47,185
    
    
    
    84
    
    
    
    0.71%
    
    
    
    55,081
    
    
    
    108
    
    
    
    0.78%CDs
    
    
    306,774
    
    
    
    3,706
    
    
    
    4.85%
    
    
    
    266,755
    
    
    
    2,677
    
    
    
    4.03%Total interest-bearing deposits
    
    
    615,967
    
    
    
    5,480
    
    
    
    3.57%
    
    
    
    544,876
    
    
    
    3,720
    
    
    
    2.74%Federal funds purchased
    
    
    6,815
    
    
    
    94
    
    
    
    5.53%
    
    
    
    11,833
    
    
    
    153
    
    
    
    5.20%Junior subordinated debentures
    
    
    25,540
    
    
    
    484
    
    
    
    7.60%
    
    
    
    15,007
    
    
    
    334
    
    
    
    8.93%Other interest bearing liabilities
    
    
    3,516
    
    
    
    43
    
    
    
    4.91%
    
    
    
    5,879
    
    
    
    75
    
    
    
    5.14%Total interest bearing liabilities
    
    
    651,838
    
    
    
    6,100
    
    
    
    3.75%
    
    
    
    577,595
    
    
    
    4,282
    
    
    
    2.97%Noninterest-bearing DDA
    
    
    101,433
    
    
    
    
    
    
    
    
    
    
    
    100,008Other liabilities
    
    
    5,988
    
    
    
    
    
    
    
    
    
    
    
    5,733Total liabilities
    
    
    759,259
    
    
    
    
    
    
    
    
    
    
    
    683,336Total shareholders equity
    
    
    68,377
    
    
    
    
    
    
    
    
    
    
    
    60,651Total liabilities and
shareholders equity
    
    $
    827,636
    
    
    
    
    
    
    
    
    
    
    $
    743,987Net interest income /Spread
    
    
    
    
    
    $
    9,520
    
    
    
    4.36%
    
    
    
    
    
    
    $
    9,230
    
    
    
    4.83%Credit for interest bearing funds
    
    
    
    
    
    
    
    
    
    
    0.58%
    
    
    
    
    
    
    
    
    
    
    
    0.50%Net interest margin (2)
    
    
    
    
    
    
    
    
    
    
    4.95%
    
    
    
    
    
    
    
    
    
    
    
    5.33%
 11




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##### 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%and 34.3% in 2006. These adjustments were $164 and $60 for the three months
ended June 30, 2007 and 2006, 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/RatesSix Months Ended
    
    
    Six Months EndedJune 30, 2007
    
    
    June 30, 2006Average
    
    
    Interest
    
    
    Average
    
    
    Average
    
    
    Interest
    
    
    Average(Dollars in thousands)
    
    
    balance
    
    
    earned/paid
    
    
    yield
    
    
    balance
    
    
    earned/paid
    
    
    yieldAssetsLoans (1) (2)
    
    $
    735,756
    
    
    $
    29,879
    
    
    
    8.19%
    
    
    $
    655,399
    
    
    $
    25,615
    
    
    
    7.88%Federal funds sold
    
    
    2,188
    
    
    
    57
    
    
    
    5.23%
    
    
    
    2,883
    
    
    
    68
    
    
    
    4.76%Interest-bearing cash
    
    
    1,608
    
    
    
    42
    
    
    
    5.27%
    
    
    
    792
    
    
    
    19
    
    
    
    4.96%InvestmentsTaxable
    
    
    12,349
    
    
    
    269
    
    
    
    4.39%
    
    
    
    13,544
    
    
    
    223
    
    
    
    3.33%Non-taxable (2)
    
    
    6,808
    
    
    
    203
    
    
    
    6.00%
    
    
    
    7,555
    
    
    
    238
    
    
    
    6.36%Interest-earning assets
    
    
    758,709
    
    
    
    30,450
    
    
    
    8.09%
    
    
    
    680,173
    
    
    
    26,165
    
    
    
    7.76%Non-earning assets
    
    
    53,739
    
    
    
    
    
    
    
    
    
    
    
    48,600Total assets
    
    $
    812,447
    
    
    
    
    
    
    
    
    
    
    $
    728,773Liabilities and shareholders equityDeposits:Interest demand and money market
    
    $
    257,497
    
    
    $
    3,274
    
    
    
    2.56%
    
    
    $
    219,795
    
    
    $
    1,749
    
    
    
    1.60%Savings
    
    
    48,175
    
    
    
    175
    
    
    
    0.73%
    
    
    
    56,378
    
    
    
    219
    
    
    
    0.78%Time deposits
    
    
    307,678
    
    
    
    7,355
    
    
    
    4.82%
    
    
    
    257,099
    
    
    
    4,846
    
    
    
    3.80%Total interest-bearing deposits
    
    
    613,350
    
    
    
    10,803
    
    
    
    3.55%
    
    
    
    533,272
    
    
    
    6,814
    
    
    
    2.58%Federal funds purchased
    
    
    4,565
    
    
    
    127
    
    
    
    5.59%
    
    
    
    8,196
    
    
    
    207
    
    
    
    5.10%Junior subordinated debentures
    
    
    20,302
    
    
    
    822
    
    
    
    8.17%
    
    
    
    15,007
    
    
    
    644
    
    
    
    8.65%Other interest-bearing liabilities
    
    
    1,768
    
    
    
    43
    
    
    
    4.96%
    
    
    
    7,938
    
    
    
    171
    
    
    
    4.34%Total interest-bearing liabilities
    
    
    639,986
    
    
    
    11,795
    
    
    
    3.72%
    
    
    
    564,413
    
    
    
    7,836
    
    
    
    2.80%Noninterest-bearing DDA
    
    
    98,780
    
    
    
    
    
    
    
    
    
    
    
    99,396Other liabilities
    
    
    5,908
    
    
    
    
    
    
    
    
    
    
    
    5,361Total liabilities
    
    
    744,673
    
    
    
    
    
    
    
    
    
    
    
    669,170Total equity
    
    
    67,774
    
    
    
    
    
    
    
    
    
    
    
    59,603Total liabilities and shareholders equity
    
    $
    812,447
    
    
    
    
    
    
    
    
    
    
    $
    728,773Net interest income /Spread
    
    
    
    
    
    $
    18,655
    
    
    
    4.37%
    
    
    
    
    
    
    $
    18,329
    
    
    
    4.95%Credit for interest-bearing funds
    
    
    
    
    
    
    
    
    
    
    0.59%
    
    
    
    
    
    
    
    
    
    
    
    0.49%Net interest margin (2)
    
    
    
    
    
    
    
    
    
    
    4.96%
    
    
    
    
    
    
    
    
    
    
    
    5.43%
 (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 $330 and $124 for the six months ended June 30,
2007 and 2006, 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.
  12




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##### Table of Contents



Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2007 vs. 2006
    
    
    2007 vs. 2006Increase (decrease) due to(2):
    
    
    Increase (decrease) due to(2):Volume
    
    
    Rate
    
    
    Total
    
    
    Volume
    
    
    Rate
    
    
    TotalAssets:Loans (1) (3)
    
    $
    1,515
    
    
    $
    558
    
    
    $
    2,073
    
    
    $
    3,141
    
    
    $
    1,123
    
    
    $
    4,264Federal funds sold
    
    
    4
    
    
    
    3
    
    
    
    7
    
    
    
    (16
    )
    
    
    5
    
    
    
    (11
    )Interest-bearing cash
    
    
    22
    
    
    
    1
    
    
    
    23
    
    
    
    20
    
    
    
    2
    
    
    
    23Investments (1)Taxable
    
    
    (9
    )
    
    
    34
    
    
    
    25
    
    
    
    (20
    )
    
    
    65
    
    
    
    46Non-taxable (2)
    
    
    (11
    )
    
    
    (9
    )
    
    
    (20
    )
    
    
    (24
    )
    
    
    (12
    )
    
    
    (36
    )Interest earning assets
    
    $
    1,521
    
    
    $
    587
    
    
    $
    2,108
    
    
    $
    3,101
    
    
    $
    1,184
    
    
    $
    4,285Liabilities:Deposits:Interest demand and money market
    
    $
    163
    
    
    $
    592
    
    
    $
    755
    
    
    $
    300
    
    
    $
    1,224
    
    
    $
    1,524Savings
    
    
    (15
    )
    
    
    (9
    )
    
    
    (24
    )
    
    
    (32
    )
    
    
    (13
    )
    
    
    (44
    )Time deposits
    
    
    402
    
    
    
    627
    
    
    
    1,029
    
    
    
    953
    
    
    
    1,556
    
    
    
    2,509Fed funds purchased
    
    
    
    
    
    
    94
    
    
    
    94
    
    
    
    (92
    )
    
    
    11
    
    
    
    (81
    )Junior subordinated debentures
    
    
    235
    
    
    
    (85
    )
    
    
    150
    
    
    
    227
    
    
    
    (49
    )
    
    
    178Other interest-bearing liabilities
    
    
    (30
    )
    
    
    (45
    )
    
    
    (75
    )
    
    
    (132
    )
    
    
    
    
    
    
    (132
    )Total interest-bearing liabilities
    
    $
    754
    
    
    $
    1,175
    
    
    $
    1,929
    
    
    $
    1,225
    
    
    $
    2,730
    
    
    $
    3,955
 (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.
 13




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##### Table of Contents



Noninterest Income:
  Noninterest Expense:
  Income Taxes:
 Financial Condition Overview
  Loans:
 14




---



##### Table of Contents



Loan Portfolio Composition as of:June 30, 2007
    
    
    December 31, 2006(Dollars in thousands)
    
    
    Balance
    
    
    % of total
    
    
    Balance
    
    
    % of total
    
    
    ChangeCommercial
    
    $
    99,132
    
    
    
    13.0%
    
    
    $
    82,990
    
    
    
    11.6%
    
    
    $
    16,142Real estate mortgages:One-to-four family residential
    
    
    53,941
    
    
    
    7.1%
    
    
    
    54,509
    
    
    
    7.6%
    
    
    
    (568
    )Multi-family residential & commercial
    
    
    262,855
    
    
    
    34.5%
    
    
    
    249,109
    
    
    
    34.7%
    
    
    
    13,746Total real estate mortgages
    
    
    316,796
    
    
    
    41.6%
    
    
    
    303,618
    
    
    
    42.3%
    
    
    
    13,178Real estate construction:One-to-four family residential
    
    
    101,131
    
    
    
    13.3%
    
    
    
    96,107
    
    
    
    13.3%
    
    
    
    5,024Multi-family and commercial
    
    
    47,855
    
    
    
    6.3%
    
    
    
    46,329
    
    
    
    6.5%
    
    
    
    1,526Total real estate construction
    
    
    148,986
    
    
    
    19.6%
    
    
    
    142,436
    
    
    
    19.8%
    
    
    
    6,550Consumer:Indirect
    
    
    112,991
    
    
    
    14.8%
    
    
    
    104,794
    
    
    
    14.6%
    
    
    
    8,197Direct
    
    
    84,112
    
    
    
    11.0%
    
    
    
    83,741
    
    
    
    11.7%
    
    
    
    371Total consumer
    
    
    197,103
    
    
    
    25.8%
    
    
    
    188,535
    
    
    
    26.3%
    
    
    
    8,568Subtotal
    
    
    762,017
    
    
    
    100.0%
    
    
    
    717,579
    
    
    
    100.0%
    
    
    
    44,438Deferred loan fees, net
    
    
    2,421
    
    
    
    
    
    
    
    2,001
    
    
    
    
    
    
    
    420Total loans, net
    
    $
    764,438
    
    
    
    
    
    
    $
    719,580
    
    
    
    
    
    
    $
    44,858
 Allowance for Loan Losses:
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,(Dollars in thousands)
    
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Balance at beginning of period
    
    $
    10,212
    
    
    $
    9,130
    
    
    $
    10,048
    
    
    $
    8,810Charge-offs:Commercial
    
    
    (246
    )
    
    
    (303
    )
    
    
    (616
    )
    
    
    (466
    )Real estate
    
    
    3⁄4
    
    
    
    (26
    )
    
    
    3⁄4
    
    
    
    (86
    )ConsumerDirect
    
    
    (196
    )
    
    
    (94
    )
    
    
    (285
    )
    
    
    (194
    )Indirect
    
    
    (263
    )
    
    
    (169
    )
    
    
    (398
    )
    
    
    (401
    )Total charge-offs
    
    $
    (705
    )
    
    $
    (592
    )
    
    $
    (1,299
    )
    
    $
    (1,147
    )
 15




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##### Table of Contents



Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,(Dollars in thousands)
    
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Recoveries:Commercial
    
    
    56
    
    
    
    111
    
    
    
    105
    
    
    
    301Real estate
    
    
    3
    
    
    
    1
    
    
    
    73
    
    
    
    1ConsumerDirect
    
    
    48
    
    
    
    68
    
    
    
    82
    
    
    
    121Indirect
    
    
    63
    
    
    
    88
    
    
    
    117
    
    
    
    220Total recoveries
    
    $
    170
    
    
    $
    268
    
    
    $
    377
    
    
    $
    643Net charge-offs
    
    
    (536
    )
    
    
    (324
    )
    
    
    (922
    )
    
    
    (504
    )Provision for loan losses
    
    
    850
    
    
    
    800
    
    
    
    1,400
    
    
    
    1,300Balance at end of period
    
    $
    10,526
    
    
    $
    9,606
    
    
    $
    10,526
    
    
    $
    9,606Net dealer charge-offs
    
    
    0.77%
    
    
    
    0.34%
    
    
    
    0.54%
    
    
    
    0.39%Other net charge-offs to average other loans
    
    
    0.21%
    
    
    
    0.17%
    
    
    
    0.20%
    
    
    
    0.12%Net charge-offs to average loans (1)
    
    
    0.28%
    
    
    
    0.19%
    
    
    
    0.25%
    
    
    
    0.15%
 (1)
    
    Excludes loans held for sale.
     Allocation of the Allowance for Loan Losses as of:June 30, 2007
    
    
    December 31, 2006
    
    
    June 30, 2006% of
    
    
    % of
    
    
    
    
    
    
    % of
    
    
    % of
    
    
    
    
    
    
    % of
    
    
    % of(Dollars in thousands)
    
    
    Amount
    
    
    Allowance(2)
    
    
    Loans(1)
    
    
    Amount
    
    
    Allowance(2)
    
    
    Loans(1)
    
    
    Amount
    
    
    Allowance(2)
    
    
    Loans(1)Balance applicable to:Commercial
    
    $
    937
    
    
    
    8.9%
    
    
    
    13.0%
    
    
    $
    782
    
    
    
    7.8%
    
    
    
    11.6%
    
    
    $
    788
    
    
    
    8.2%
    
    
    
    12.2%Real estate mortgage
    
    
    3,486
    
    
    
    33.1%
    
    
    
    41.6%
    
    
    
    3,303
    
    
    
    32.9%
    
    
    
    42.3%
    
    
    
    3,072
    
    
    
    32.0%
    
    
    
    41.3%Real estate construction
    
    
    1,862
    
    
    
    17.7%
    
    
    
    19.6%
    
    
    
    1,781
    
    
    
    17.7%
    
    
    
    19.8%
    
    
    
    1,751
    
    
    
    18.2%
    
    
    
    20.5%Consumer
    
    
    2,754
    
    
    
    26.2%
    
    
    
    25.8%
    
    
    
    2,593
    
    
    
    25.8%
    
    
    
    26.3%
    
    
    
    2,420
    
    
    
    25.2%
    
    
    
    26.0%Unallocated
    
    
    1,487
    
    
    
    14.1%
    
    
    
    N/A
    
    
    
    1,589
    
    
    
    15.8%
    
    
    
    N/A
    
    
    
    1,575
    
    
    
    16.4%
    
    
    
    N/ATotal
    
    $
    10,526
    
    
    
    100.0%
    
    
    
    100.0%
    
    
    $
    10,048
    
    
    
    100.0%
    
    
    
    100.0%
    
    
    $
    9,606
    
    
    
    100.0%
    
    
    
    100.0%
 (1)
    
    Represents the total of all outstanding loans in each category as a percent of total
loans outstanding.(2)
    
    Represents the total allowance allocated to each loan category as a percent of total
allowance for loan losses.
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##### Table of Contents



Nonperforming Assets:
 Nonperforming Assets as of:(Dollars in thousands)
    
    
    June 30,
    
    
    December 31,2007
    
    
    2006Nonaccrual loans
    
    $
    2,379
    
    
    $
    3,638Restructured loans
    
    
    3⁄4
    
    
    
    3⁄4Total nonperforming loans
    
    
    2,379
    
    
    
    3,638Other real estate owned
    
    
    3⁄4
    
    
    
    363Total nonperforming assets
    
    $
    2,379
    
    
    $
    4,001Total impaired loans
    
    $
    2,379
    
    
    $
    4,001Accruing
loans past due ≥ 90 days
    
    
    3⁄4
    
    
    
    30Potential problem loans
    
    
    3⁄4
    
    
    
    3⁄4Allowance for loan losses
    
    $
    10,526
    
    
    $
    10,048Nonperforming loans to loans
    
    
    0.31%
    
    
    
    0.51%Allowance for loan losses to nonperforming loans
    
    
    442.46%
    
    
    
    276.19%Allowance for loan losses to nonperforming assets
    
    
    442.46%
    
    
    
    251.13%Nonperforming assets to total assets
    
    
    0.28%
    
    
    
    0.50%
 Deposits:
  Deposit Composition as of:June 30, 2007
    
    
    December 31, 2006(Dollars in thousands)
    
    
    Balance
    
    
    % of total
    
    
    Balance
    
    
    % of total
    
    
    ChangeNoninterest-bearing demand
    
    $
    107,543
    
    
    
    14.7%
    
    
    $
    96,858
    
    
    
    13.8%
    
    
    $
    10,685NOW accounts
    
    
    152,722
    
    
    
    20.9%
    
    
    
    152,087
    
    
    
    21.6%
    
    
    
    635Money market
    
    
    120,476
    
    
    
    16.5%
    
    
    
    101,856
    
    
    
    14.5%
    
    
    
    18,620Savings
    
    
    45,200
    
    
    
    6.2%
    
    
    
    50,036
    
    
    
    7.1%
    
    
    
    (4,836
    )Time deposits
    
    
    303,645
    
    
    
    41.7%
    
    
    
    302,930
    
    
    
    43.0%
    
    
    
    715Total deposits
    
    $
    729,586
    
    
    
    100.0%
    
    
    $
    703,767
    
    
    
    100.0%
    
    
    $
    25,819
 Borrowings:
 FHLB Borrowings:
 17




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##### Table of Contents



Junior Subordinated Debentures:
 Capital
 Shareholders Equity:
 Regulatory Capital Requirements:
  Regulatory Requirements
    
    Actual RatiosAdequately-
    
    Well-
    
    June 30,
    
    December 31,capitalized
    
    capitalized
    
    2007
    
    2006Total risk-based capital ratioCompany (consolidated)
    
    8%
    
    N/A
    
    12.43%
    
    11.52%Whidbey Island Bank
    
    8%
    
    10%
    
    11.79%
    
    11.19%Tier 1 risk-based capital ratioCompany (consolidated)
    
    4%
    
    N/A
    
    10.95%
    
    10.27%Whidbey Island Bank
    
    4%
    
    6%
    
    10.54%
    
    9.94%Leverage ratioCompany (consolidated)
    
    4%
    
    N/A
    
    11.15%
    
    10.24%Whidbey Island Bank
    
    4%
    
    5%
    
    10.75%
    
    9.92%
  Liquidity and Cash Flows
 Liquidity:
  18




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##### Table of Contents



Consolidated Cash Flows: Condensed Consolidated Statements of Cash Flows
 Capital Resources:
 Off-Balance Sheet Items:
 
 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
  19




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##### Table of Contents



PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 (a)
    
    Issue Purchases of Equity Securities: The following table presents a summary of share
repurchases made by the Company during the quarter ended June 30, 2007. In April 2007, the
Board of Directors approved a share repurchase program authorizing up to 472,134 shares to be
purchased.
 Total
    
    
    
    
    
    
    Total number of
    
    
    Maximum numbernumber of
    
    
    Average
    
    
    shares purchased as
    
    
    of shares that mayshares
    
    
    price paid
    
    
    part of publicly
    
    
    yet be purchasedPeriod
    
    purchased
    
    
    per share
    
    
    announced plans
    
    
    under plansApril 1 to 30, 2007
    
    
    85,000
    

    $
    
    16.00
    
    
    
    85,000
    
    
    
    387,134May 1 to 31, 2007
    
    
    23,541
    
    
    
    15.57
    
    
    
    23,541
    
    
    
    363,593June 1 to 30, 2007
    
    
    7,436
    
    
    
    15.48
    
    
    
    7,436
    
    
    
    356,157115,977
    

    $
    
    15.57
    
    
    
    115,977
 
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
   For
    
    Against
    
    WithheldMichal D. Cann
    
    7,605,871
    
    0
    
    119,714Dennis A. Wintch
    
    7,601,363
    
    0
    
    124,222
  20




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##### Table of Contents



Item 5. Other Information
 (a)
    
    Not applicable(b)
    
    There have been no material changes in the procedures for shareholders to
nominate directors to the Companys board.
 
 Item 6. Exhibits
  31.1
    
    Certification of Chief Executive Officer required by Rule 13a-14(b) or Rule
15d-14(a) and Section 302 of the Sarbanes Oxley Act of 200231.2
    
    Certification of Chief Financial Officer required by Rule 13a-14(b) or Rule
15d-14(a) and Section 302 of the Sarbanes Oxley Act of 200232.1
    
    Certification of Chief Executive Officer required by Rule 13a-14(b) or Rule
15d-14(b) and Section 906 of the Sarbanes Oxley Act of 2002, 18 U.S.C. Section 135032.2
    
    Certification of Chief Financial Officer required by Rule 13a-14(b) or Rule
15d-14(b) and Section 906 of the Sarbanes Oxley Act of 2002, 18 U.S.C. Section 1350
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##### Table of Contents



SIGNATURES
  WASHINGTON BANKING COMPANY
 Date: August 8, 2007
    
    By /s/ Michal D. CannMichal D. CannPresident andChief Executive OfficerDate: August 8, 2007
    
    By /s/ Richard A. ShieldsRichard A. ShieldsExecutive Vice President andChief Financial Officer
 22