##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
  þ
    
    Quarterly report pursuant to Section 13 or l5(d) of the Securities Exchange Act of 1934
 For the quarterly period ended March 31, 2008
 o
    
    Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For
the transition period from  to
 Commission File Number 000-24503
 WASHINGTON BANKING COMPANY
  Washington
    
    91-1725825(State or other jurisdiction of 
incorporation or organization)
    
    (I.R.S. Employer
Identification Number)
 450 SW Bayshore Drive
Oak Harbor, Washington 98277
 (360) 679-3121
  þ o
   o þ o o
  o þ




---



##### 



Table of Contents
 PagePART I  FINANCIAL INFORMATIONItem 1. Financial StatementsCondensed Consolidated Statements of Financial Condition -
March 31, 2008 and December 31, 2007
    
    
    1Condensed Consolidated Statements of Income -
Three Months Ended March 31, 2008 and 2007
    
    
    2Condensed Consolidated Statements of Shareholders Equity and
Comprehensive Income -
Three Months Ended March 31, 2008 and 2007
    
    
    3Condensed Consolidated Statements of Cash Flows -
Three Months Ended March 31, 2008 and 2007
    
    
    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
    
    
    18Item 4. Controls and Procedures
    
    
    18PART II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    19Item 1A. Risk Factors
    
    
    19Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    19Item 3. Defaults Upon Senior Securities
    
    
    19Item 4. Submission of Matters to a Vote of Security Holders
    
    
    19Item 5. Other InformationItem 6. Exhibits
    
    
    19Signatures
    
    
    20EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  i




---



##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 WASHINGTON BANKING COMPANY
AND SUBSIDIARIES
 
   March31,
    
    
    December31,2008
    
    
    2007AssetsCash and due from banks
    
    $
    21,377
    
    
    $
    18,795($1,956 and $3,496, respectively, are restricted)Interest-bearing deposits
    
    
    404
    
    
    
    257Federal funds sold
    
    
    2,415
    
    
    
    Total cash, restricted cash, and cash equivalents
    
    
    24,196
    
    
    
    19,052Investment securities available for sale
    
    
    12,494
    
    
    
    13,832Federal Home Loan Bank stock
    
    
    1,984
    
    
    
    1,984Loans held for sale
    
    
    453
    
    
    
    2,347Loans receivable
    
    
    814,993
    
    
    
    805,862Allowance for loan losses
    
    
    (11,404
    )
    
    
    (11,126
    )Total loans, net
    
    
    803,589
    
    
    
    794,736Premises and equipment, net
    
    
    24,906
    
    
    
    25,138Bank owned life insurance
    
    
    16,618
    
    
    
    16,517Other assets
    
    
    8,769
    
    
    
    8,683Total assets
    
    $
    893,009
    
    
    $
    882,289Liabilities and Shareholders EquityLiabilities:DepositsNoninterest-bearing
    
    $
    98,003
    
    
    $
    101,539Interest-bearing
    
    
    313,294
    
    
    
    315,298Time deposits
    
    
    334,449
    
    
    
    341,517Total deposits
    
    
    745,746
    
    
    
    758,354FHLB overnight borrowings
    
    
    11,500
    
    
    
    20,500Other borrowed funds
    
    
    30,000
    
    
    
    Junior subordinated debentures
    
    
    25,774
    
    
    
    25,774Other liabilities
    
    
    4,277
    
    
    
    4,091Total liabilities
    
    
    817,297
    
    
    
    808,719Commitments and contingencies
    
    
    
    
    
    
    Shareholders equity:Preferred
stock, no par value. Authorized 20,000 shares: no shares issued or outstanding
    
    
    
    
    
    
    Common
stock, no par value. Authorized 13,679,757 shares: issued and outstanding 9,476,360 at 3/31/2008 and
9,453,767 at 12/31/2007
    
    
    33,077
    
    
    
    32,812Retained earnings
    
    
    42,421
    
    
    
    40,652Accumulated other comprehensive loss
    
    
    214
    
    
    
    106Total shareholders equity
    
    
    75,712
    
    
    
    73,570Total liabilities and shareholders equity
    
    $
    893,009
    
    
    $
    882,289
  1




---



##### Table of Contents



WASHINGTON BANKING COMPANY
AND SUBSIDIARIES
 
 
 Three Months EndedMarch 31,2008
    
    
    2007Interest income:Interest and fees on loans
    
    $
    15,360
    
    
    $
    14,428Interest on taxable investment securities
    
    
    110
    
    
    
    133Interest on tax exempt investment securities
    
    
    51
    
    
    
    71Other
    
    
    5
    
    
    
    32Total interest income
    
    
    15,526
    
    
    
    14,664Interest expense:Interest on deposits
    
    
    5,295
    
    
    
    5,323Interest on other borrowings
    
    
    304
    
    
    
    34Interest on junior subordinated debentures
    
    
    405
    
    
    
    338Total interest expense
    
    
    6,004
    
    
    
    5,695Net interest income
    
    
    9,522
    
    
    
    8,969Provision for loan losses
    
    
    1,025
    
    
    
    550Net interest income after provision for loan losses
    
    
    8,497
    
    
    
    8,419Noninterest income:Service charges and fees
    
    
    726
    
    
    
    816Income from the sale of loans
    
    
    90
    
    
    
    155SBA premium income
    
    
    144
    
    
    
    138Other
    
    
    835
    
    
    
    695Total noninterest income
    
    
    1,795
    
    
    
    1,804Noninterest expense:Salaries and benefits
    
    
    3,990
    
    
    
    4,411Occupancy and equipment
    
    
    949
    
    
    
    956Office supplies and printing
    
    
    119
    
    
    
    130Data processing
    
    
    161
    
    
    
    141Merger related expense
    
    
    81
    
    
    
    Consulting and professional fees
    
    
    215
    
    
    
    171Other
    
    
    1,364
    
    
    
    1,115Total noninterest expense
    
    
    6,879
    
    
    
    6,924Income before provision for income taxes
    
    
    3,413
    
    
    
    3,299Provision for income taxes
    
    
    1,076
    
    
    
    1,032Net income
    
    $
    2,337
    
    
    $
    2,267Net income per share, basic
    
    $
    0.25
    
    
    $
    0.24Net income per share, diluted
    
    $
    0.25
    
    
    $
    0.24Average number of shares outstanding, basic
    
    
    9,432,000
    
    
    
    9,389,000Average number of shares outstanding, diluted
    
    
    9,514,000
    
    
    
    9,558,000
  2




---



##### Table of Contents



WASHINGTON BANKING COMPANY
AND SUBSIDIARIES
 
 
 Accumulatedother
    
    
    TotalCommon stock
    
    
    Retained
    
    
    comprehensive
    
    
    shareholdersShares
    
    
    Amount
    
    
    earnings
    
    
    income (loss)
    
    
    equityBalances at December 31, 2006
    
    
    9,389
    
    
    $
    33,016
    
    
    $
    33,422
    
    
    $
    (45
    )
    
    $
    66,393Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    2,267
    
    
    
    
    
    
    
    2,267Net unrealized gain on securities
available for sale, net of tax of
$12
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22
    
    
    
    22Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,289Cash dividend, $0.05 per share
    
    
    
    
    
    
    
    
    
    
    (472
    )
    
    
    
    
    
    
    (472
    )Stock based compensation expense
    
    
    
    
    
    
    142
    
    
    
    
    
    
    
    
    
    
    
    142Exercise of common stock- stock options
    
    
    55
    
    
    
    382
    
    
    
    
    
    
    
    
    
    
    
    382Issuance of restricted stock
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Tax benefit associated with stock awards
    
    
    
    
    
    
    47
    
    
    
    
    
    
    
    
    
    
    
    47Balances at March 31, 2007
    
    
    9,446
    
    
    $
    33,587
    
    
    $
    35,217
    
    
    $
    (23
    )
    
    $
    68,781Balances at December 31, 2007
    
    
    9,454
    
    
    $
    32,812
    
    
    $
    40,652
    
    
    $
    106
    
    
    $
    73,570Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    2,337
    
    
    
    
    
    
    
    2,337Net unrealized gain on securities
available for sale, net of tax of
$58
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    108
    
    
    
    108Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,445Cash dividend, $0.06 per share
    
    
    
    
    
    
    
    
    
    
    (568
    )
    
    
    
    
    
    
    (568
    )Stock based compensation expense
    
    
    
    
    
    
    95
    
    
    
    
    
    
    
    
    
    
    
    95Exercise of common stock- stock options
    
    
    23
    
    
    
    129
    
    
    
    
    
    
    
    
    
    
    
    129Cancellation of restricted stock
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Tax benefit associated with stock awards
    
    
    
    
    
    
    41
    
    
    
    
    
    
    
    
    
    
    
    41Balances at March 31, 2008
    
    
    9,476
    
    
    $
    33,077
    
    
    $
    42,421
    
    
    $
    214
    
    
    $
    75,712
 3




---



##### Table of Contents



WASHINGTON BANKING COMPANY
AND SUBSIDIARIES
 
 
 Three Months EndedMarch 31,2008
    
    
    2007Cash flows from operating activities:Net income from operations
    
    $
    2,337
    
    
    $
    2,267Adjustments to reconcile net income to net cash
provided by operating activities:Accretion of investment discounts, net
    
    
    (4
    )
    
    
    Deferred income tax expense (benefit)
    
    
    (100
    )
    
    
    164Depreciation and amortization
    
    
    455
    
    
    
    443Earnings on bank owned life insurance
    
    
    (101
    )
    
    
    (87
    )Provision for loan losses
    
    
    1,025
    
    
    
    550Write-downs of other real estate
    
    
    150
    
    
    
    Excess tax benefits from stock based compensation
    
    
    (41
    )
    
    
    (47
    )Amortization of stock-based compensation
    
    
    95
    
    
    
    142Net change in assets and liabilities:Net (increase) decrease in loans held for sale
    
    
    1,894
    
    
    
    (2,259
    )Decrease (increase) in other assets
    
    
    447
    
    
    
    (325
    )Increase (decrease) in other liabilities
    
    
    186
    
    
    
    (575
    )Cash provided by operating activities
    
    
    6,343
    
    
    
    273Cash flows from investing activities:Purchases of investment securities, available for sale
    
    
    
    
    
    
    (928
    )Maturities/calls/principal payments of investment and
mortgage-backed securities, available for sale
    
    
    1,508
    
    
    
    1,005Net increase in loans
    
    
    (10,478
    )
    
    
    (12,701
    )Purchases of premises and equipment
    
    
    (223
    )
    
    
    (306
    )Proceeds from the sale of other real estate owned
    
    
    
    
    
    
    363Cash used by investing activities
    
    
    (9,193
    )
    
    
    (12,567
    )Cash flows from financing activities:Net increase (decrease) in deposits
    
    
    (12,608
    )
    
    
    22,606Net decrease in FHLB overnight borrowings
    
    
    (9,000
    )
    
    
    (3,075
    )Dividends paid on common stock
    
    
    (568
    )
    
    
    (472
    )Excess tax benefits from stock based compensation
    
    
    41
    
    
    
    47Proceeds from exercise of common stock- stock options
    
    
    129
    
    
    
    382Cash provided by financing activities
    
    
    7,994
    
    
    
    19,488Net change in cash and cash equivalents
    
    
    5,144
    
    
    
    7,194Cash and cash equivalents at beginning of period
    
    
    19,052
    
    
    
    19,745Cash and cash equivalents at end of period
    
    $
    24,196
    
    
    $
    26,939Supplemental information:Loans foreclosed and transferred to other real estate owned
    
    $
    600
    
    
    $
    Cash paid for interest
    
    
    5,941
    
    
    
    5,714Cash paid for income taxes
    
    
    200
    
    
    
    810
  4




---



##### Table of Contents



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




---



##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (3) Earnings Per Share
  Three Months EndedMarch 31,2008
    
    
    2007Weighted average shares-basic
    
    
    9,432,000
    
    
    
    9,389,000Effect of dilutive securities: stock awards
    
    
    82,000
    
    
    
    169,000Weighted average shares-diluted
    
    
    9,514,000
    
    
    
    9,558,000
  (4) Stock-Based Compensation
 (a) Stock Options:
 Three MonthsEndedMarch 31,2007Risk-free interest rate
    
    
    4.85
    %Dividend yield rate
    
    
    1.50
    %Price volatility
    
    
    33.00
    %Expected life of stock options
    
    5 years
   Weighted averageWeighted average
    
    remainingexercise price per
    
    contractual terms
    
    Aggregate intrinsicShares
    
    share
    
    (in years)
    
    valueOutstanding at January 1, 2008
    
    
    192,618
    
    
    $
    9.63Granted
    
    
    
    
    
    
    Exercised
    
    
    (23,352
    )
    
    
    5.52
    
    
    
    
    
    
    $
    226Forfeited, expired or cancelled
    
    
    (3,563
    )
    
    
    15.93Outstanding at March 31, 2008
    
    
    165,703
    
    
    $
    10.07
    
    
    
    6.08
    
    
    $
    965Exercisable at March 31, 2008
    
    
    95,009
    
    
    $
    5.91
    
    
    
    4.04
    
    
    $
    944
 6




---



##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  (b) Restricted Stock Awards:
  Weighted averageWeighted average
    
    remaininggrant price per
    
    contractual termsShares
    
    share
    
    (in years)Outstanding at January 1, 2008
    
    
    29,560
    
    
    $
    13.08Granted
    
    
    
    
    
    
    Vested
    
    
    (6,497
    )
    
    
    10.92Forfeited, expired or cancelled
    
    
    (758
    )
    
    
    14.52Outstanding at March 31, 2008
    
    
    22,305
    
    
    $
    13.66
    
    
    
    1.95
  (c) Restricted Stock Units:
  Weighted averageWeighted average
    
    remaininggrant price per
    
    contractual termsShares
    
    share
    
    (in years)Outstanding at January 1, 2008
    
    
    17,815
    
    
    $
    15.98Granted
    
    
    7,200
    
    
    
    15.95Vested
    
    
    
    
    
    
    Forfeited, expired or cancelled
    
    
    (717
    )
    
    
    15.98Outstanding at March 31, 2008
    
    
    24,298
    
    
    $
    15.97
    
    
    
    3.41
  7




---



##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (5) Fair Value Measurements
 Fair Value Measurements
  Level 1:
    
    Quoted prices for identical instruments in active markets.Level 2:
    
    Quoted prices for similar instruments in active markets; quoted prices for
identical or similar instruments in markets that are not active; and model-derived
valuations whose inputs are observable or whose significant value drives are
observable.Level 3:
    
    Significant inputs to the valuation model are unobservable.
  Investments in debt and equity securities
 Impaired loans :
 Other real estate owned :
  Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    TotalAssetsInvestment securities
    
    $
    
    
    
    $
    12,494
    
    
    $
    
    
    
    $
    12,494Total
    
    $
    
    
    
    $
    12,494
    
    
    $
    
    
    
    $
    12,494
 8




---



##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    TotalAssetsImpaired loans
    
    $
    
    
    
    $
    
    
    
    $
    1,373
    
    
    $
    1,373Other real estate owned
    
    
    
    
    
    
    
    
    
    
    932
    
    
    
    932Total
    
    $
    
    
    
    $
    
    
    
    $
    2,305
    
    
    $
    2,305
 Accounting by Creditors for Impairment of a Loan
 Accounting for the Impairment or Disposal of Long-Lived
Assets
 (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 EndedMarch 31, 2008
    
    
    March 31, 2007Average
    
    
    Interest
    
    
    Average
    
    
    Average
    
    
    Interest
    
    
    Average(Dollars in thousands)
    
    balance
    
    
    earned/paid
    
    
    yield
    
    
    balance
    
    
    earned/paid
    
    
    yieldAssetsLoans (1) (2)
    
    $
    811,128
    
    
    $
    15,490
    
    
    
    7.66
    %
    
    $
    723,735
    
    
    $
    14,562
    
    
    
    8.16
    %Federal funds sold
    
    
    266
    
    
    
    2
    
    
    
    2.89
    %
    
    
    1,771
    
    
    
    22
    
    
    
    4.97
    %Interest-earning cash
    
    
    282
    
    
    
    3
    
    
    
    3.69
    %
    
    
    770
    
    
    
    10
    
    
    
    5.27
    %Investments:Taxable
    
    
    9,717
    
    
    
    110
    
    
    
    4.54
    %
    
    
    12,393
    
    
    
    133
    
    
    
    4.36
    %Non-taxable (2)
    
    
    5,266
    
    
    
    75
    
    
    
    5.68
    %
    
    
    6,798
    
    
    
    104
    
    
    
    6.20
    %Interest-earning assets
    
    
    826,659
    
    
    
    15,680
    
    
    
    7.61
    %
    
    
    745,467
    
    
    
    14,831
    
    
    
    8.07
    %Noninterest-earning assets
    
    
    53,623
    
    
    
    
    
    
    
    
    
    
    
    51,717Total assets
    
    $
    880,282
    
    
    
    
    
    
    
    
    
    
    $
    797,184Liabilities and Shareholders EquityDeposits:Interest demand and
money market
    
    $
    271,268
    
    
    $
    1,351
    
    
    
    2.00
    %
    
    $
    252,937
    
    
    $
    1,583
    
    
    
    2.54
    %Savings
    
    
    41,928
    
    
    
    51
    
    
    
    0.49
    %
    
    
    49,176
    
    
    
    91
    
    
    
    0.75
    %Time deposits
    
    
    336,955
    
    
    
    3,893
    
    
    
    4.69
    %
    
    
    308,592
    
    
    
    3,649
    
    
    
    4.80
    %Interest-bearing deposits
    
    
    650,151
    
    
    
    5,295
    
    
    
    3.27
    %
    
    
    610,705
    
    
    
    5,323
    
    
    
    3.53
    %Federal funds purchased
    
    
    18,581
    
    
    
    176
    
    
    
    3.79
    %
    
    
    2,291
    
    
    
    33
    
    
    
    5.78
    %Junior subordinated debentures
    
    
    25,774
    
    
    
    405
    
    
    
    6.30
    %
    
    
    15,007
    
    
    
    339
    
    
    
    9.16
    %Other borrowed funds
    
    
    15,495
    
    
    
    129
    
    
    
    3.34
    %
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    0.00
    %Interest-bearing liabilities
    
    
    710,001
    
    
    
    6,005
    
    
    
    3.39
    %
    
    
    628,003
    
    
    
    5,695
    
    
    
    3.68
    %Noninterest-bearing deposits
    
    
    92,527
    
    
    
    
    
    
    
    
    
    
    
    96,097Other noninterest-bearing liabilities
    
    
    3,490
    
    
    
    
    
    
    
    
    
    
    
    5,920Total liabilities
    
    
    806,018
    
    
    
    
    
    
    
    
    
    
    
    730,020Shareholders equity
    
    
    74,264
    
    
    
    
    
    
    
    
    
    
    
    67,164Total liabilities and
shareholders equity
    
    $
    880,282
    
    
    
    
    
    
    
    
    
    
    $
    797,184Net interest income
    
    
    
    
    
    $
    9,675
    
    
    
    
    
    
    
    
    
    
    $
    9,136Net interest spread
    
    
    
    
    
    
    
    
    
    
    4.22
    %
    
    
    
    
    
    
    
    
    
    
    4.39
    %Net interest margin
    
    
    
    
    
    
    
    
    
    
    4.69
    %
    
    
    
    
    
    
    
    
    
    
    4.97
    %
 11




---



##### 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 35.0% and 35.0% in 2008 and 2007, respectively. These adjustments were $152 and $167 for the three months ended March
31, 2008 and 2007, respectively. Taxable-equivalent is a Non GAAP performance measurement that management believes provides investors
with a more accurate picture of the net interest margin and efficiency ratio for comparative purposes.   Three Months EndedMarch 312008 vs. 2007Increase (decrease) due to(2):Volume
    
    
    Rate
    
    
    TotalAssets:Loans (1) (3)
    
    $
    1,884
    
    
    $
    (956
    )
    
    $
    928Federal funds sold
    
    
    (13
    )
    
    
    (7
    )
    
    
    (20
    )Interest-bearing cash
    
    
    (5
    )
    
    
    (2
    )
    
    
    (7
    )Investments (1)
    
    
    (50
    )
    
    
    (2
    )
    
    
    (52
    )Total interest earning assets
    
    
    1,816
    
    
    
    (967
    )
    
    
    849Liabilities:Deposits:Interest demand and money market
    
    
    120
    
    
    
    (352
    )
    
    
    (232
    )Savings
    
    
    (12
    )
    
    
    (28
    )
    
    
    (40
    )Time deposits
    
    
    385
    
    
    
    (141
    )
    
    
    244Interest on other borrowed funds
    
    
    150
    
    
    
    (7
    )
    
    
    143Junior subordinated debentures
    
    
    118
    
    
    
    (51
    )
    
    
    67Other interest-bearing liabilities
    
    
    128
    
    
    
    3⁄4
    
    
    
    128Total interest-bearing liabilities
    
    
    889
    
    
    
    (579
    )
    
    
    310Total increase (decrease) in net interest income
    
    $
    927
    
    
    $
    (388
    )
    
    $
    539
 
 (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. Noninterest Income:
 12




---



##### Table of Contents



Noninterest Expense:
 Income Taxes:
 Financial Condition Overview
  Loans:
  Loan Portfolio Composition as of:March 31, 2008
    
    
    December 31, 2007
    
    
    Change(Dollars in thousands)
    
    Balance
    
    
    % of total
    
    
    Balance
    
    
    % of total
    
    
    2008 vs. 2007Commercial
    
    $
    105,641
    
    
    
    13.0
    %
    
    $
    102,284
    
    
    
    12.7
    %
    
    $
    3,357Real estate mortgages:One-to-four family residential
    
    
    55,129
    
    
    
    6.8
    %
    
    
    56,636
    
    
    
    7.0
    %
    
    
    (1,507
    )Commercial
    
    
    311,188
    
    
    
    38.3
    %
    
    
    296,902
    
    
    
    37.0
    %
    
    
    14,286Total real estate mortgages
    
    
    366,316
    
    
    
    45.1
    %
    
    
    353,538
    
    
    
    44.0
    %
    
    
    12,778Real estate construction:One-to-four family residential
    
    
    102,742
    
    
    
    12.6
    %
    
    
    101,912
    
    
    
    12.7
    %
    
    
    830Multi-family and commercial
    
    
    41,335
    
    
    
    5.1
    %
    
    
    44,735
    
    
    
    5.6
    %
    
    
    (3,400
    )Total real estate construction
    
    
    144,077
    
    
    
    17.7
    %
    
    
    146,647
    
    
    
    18.3
    %
    
    
    (2,570
    )Consumer:Indirect
    
    
    112,351
    
    
    
    13.8
    %
    
    
    114,271
    
    
    
    14.2
    %
    
    
    (1,920
    )Direct
    
    
    84,053
    
    
    
    10.3
    %
    
    
    86,716
    
    
    
    10.8
    %
    
    
    (2,663
    )Total consumer
    
    
    196,404
    
    
    
    24.2
    %
    
    
    200,987
    
    
    
    25.0
    %
    
    
    (4,583
    )Subtotal
    
    
    812,438
    
    
    
    100.0
    %
    
    
    803,456
    
    
    
    100.0
    %
    
    
    8,982Deferred loan fees, net
    
    
    2,555
    
    
    
    
    
    
    
    2,406
    
    
    
    
    
    
    
    149Total loans, net
    
    $
    814,993
    
    
    
    
    
    
    $
    805,862
    
    
    
    
    
    
    $
    9,131
 13




---



##### Table of Contents



Allowance for Loan Losses:
  Three Months EndedMarch 31,(Dollars in thousands)
    
    2008
    
    
    2007Balance at beginning of period
    
    $
    11,126
    
    
    $
    10,048Charge-offs:Commercial
    
    
    (449
    )
    
    
    (370
    )Real estate
    
    
    (20
    )
    
    
    3⁄4Consumer:Direct
    
    
    (191
    )
    
    
    (88
    )Indirect
    
    
    (362
    )
    
    
    (135
    )Total charge-offs
    
    
    (1,022
    )
    
    
    (593
    )Recoveries:Commercial
    
    
    55
    
    
    
    48Real estate
    
    
    2
    
    
    
    71Consumer:Direct
    
    
    47
    
    
    
    34Indirect
    
    
    171
    
    
    
    54Total recoveries
    
    
    275
    
    
    
    207Net charge-offs
    
    
    (747
    )
    
    
    (386
    )Provision for loan losses
    
    
    1,025
    
    
    
    550Balance at end of period
    
    $
    11,404
    
    
    $
    10,212Indirect net charge-offs to average indirect loans (1)
    
    
    0.67
    %
    
    
    0.31
    %Other net charge-offs to average other loans (1)
    
    
    0.32
    %
    
    
    0.20
    %Net charge-offs to average loans (1)
    
    
    0.37
    %
    
    
    0.21
    %
 
 (1)
    
    Excludes loans held for sale.   14




---



##### Table of Contents



Allocation of the Allowance for Loan Losses as of:March 31, 2008
    
    
    December 31, 2007
    
    
    March 31, 2007% 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
    
    $
    1,065
    
    
    
    9.3
    %
    
    
    13.0
    %
    
    $
    976
    
    
    
    8.8
    %
    
    
    12.8
    %
    
    $
    813
    
    
    
    8.0
    %
    
    
    12.2
    %Real estate mortgage
    
    
    4,371
    
    
    
    38.3
    %
    
    
    45.1
    %
    
    
    3,928
    
    
    
    35.3
    %
    
    
    44.0
    %
    
    
    3,220
    
    
    
    31.5
    %
    
    
    41.7
    %Real estate construction
    
    
    1,871
    
    
    
    16.4
    %
    
    
    17.7
    %
    
    
    1,812
    
    
    
    16.3
    %
    
    
    18.3
    %
    
    
    1,761
    
    
    
    17.2
    %
    
    
    19.8
    %Consumer
    
    
    2,886
    
    
    
    25.3
    %
    
    
    24.2
    %
    
    
    2,773
    
    
    
    24.9
    %
    
    
    24.9
    %
    
    
    2,578
    
    
    
    25.2
    %
    
    
    26.3
    %Unallocated
    
    
    1,211
    
    
    
    10.7
    %
    
    
    N/A
    
    
    
    1,637
    
    
    
    14.7
    %
    
    
    N/A
    
    
    
    1,840
    
    
    
    18.1
    %
    
    
    N/ATotal
    
    $
    11,404
    
    
    
    100
    %
    
    
    100
    %
    
    $
    11,126
    
    
    
    100
    %
    
    
    100
    %
    
    $
    10,212
    
    
    
    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.
 Nonperforming Assets:
 Nonperforming Assets as of:March 31,
    
    
    December 31,(Dollars in thousands)
    
    2008
    
    
    2007Nonaccrual loans
    
    $
    1,373
    
    
    $
    2,839Restructured loans
    
    
    
    
    
    
    Total nonperforming loans
    
    
    1,373
    
    
    
    2,839Other real estate owned
    
    
    1,890
    
    
    
    1,440Total nonperforming assets
    
    $
    3,263
    
    
    $
    4,279Total impaired loans
    
    $
    1,373
    
    
    $
    2,839Accruing
loans past due 3  90 days
    
    
    
    
    
    
    Potential problem loans
    
    
    
    
    
    
    Allowance for loan losses
    
    $
    11,404
    
    
    $
    11,126Interest foregone on nonaccrual loans
    
    
    
    
    
    
    164Nonperforming loans to loans
    
    
    0.17
    %
    
    
    0.35
    %Allowance for loan losses to loans
    
    
    1.40
    %
    
    
    1.38
    %Allowance for loan losses to nonperforming loans
    
    
    830.59
    %
    
    
    395.41
    %Allowance for loan losses to nonperforming assets
    
    
    349.49
    %
    
    
    262.34
    %Nonperforming assets to total assets
    
    
    0.37
    %
    
    
    0.49
    %
 Deposits:
 15




---



##### Table of Contents



Deposit Composition as of:March 31, 2008
    
    
    December 31, 2007
    
    
    Change(Dollars in thousands)
    
    Balance
    
    
    % of total
    
    
    Balance
    
    
    % of total
    
    
    2008 vs. 2007Noninterest-bearing demand
    
    $
    98,003
    
    
    
    13.1
    %
    
    $
    101,539
    
    
    
    13.4
    %
    
    $
    (3,536
    )NOW accounts
    
    
    140,568
    
    
    
    18.8
    %
    
    
    140,145
    
    
    
    18.5
    %
    
    
    423Money market
    
    
    130,044
    
    
    
    17.4
    %
    
    
    133,265
    
    
    
    17.6
    %
    
    
    (3,221
    )Savings
    
    
    42,682
    
    
    
    6.0
    %
    
    
    41,888
    
    
    
    5.5
    %
    
    
    794Time deposits
    
    
    334,449
    
    
    
    44.7
    %
    
    
    341,517
    
    
    
    45.0
    %
    
    
    (7,068
    )Total deposits
    
    $
    745,746
    
    
    
    100
    %
    
    $
    758,354
    
    
    
    100
    %
    
    $
    (12,608
    )
 Other Borrowed Funds:
 §
    
    $10.0 million advance with a fixed interest rate of 3.64%, maturing in January 2009.§
    
    $20.0 million advance with a fixed interest rate of 3.02%, maturing in August 2008.
 Capital
 Shareholders Equity:
 Regulatory Capital Requirements:
  Regulatory Requirements
    
    Actual RatiosAdequately-
    
    Well-
    
    March 31,
    
    December 31,capitalized
    
    capitalized
    
    2008
    
    2007Total risk-based capital ratioCompany (consolidated)
    
    
    8
    %
    
    
    N/A
    
    
    
    12.63
    %
    
    
    12.45
    %Whidbey Island Bank
    
    
    8
    %
    
    
    10
    %
    
    
    12.29
    %
    
    
    12.03
    %Tier 1 risk-based capital ratioCompany (consolidated)
    
    
    4
    %
    
    
    N/A
    
    
    
    11.38
    %
    
    
    11.14
    %Whidbey Island Bank
    
    
    4
    %
    
    
    6
    %
    
    
    11.04
    %
    
    
    10.78
    %Leverage ratioCompany (consolidated)
    
    
    4
    %
    
    
    N/A
    
    
    
    11.43
    %
    
    
    11.29
    %Whidbey Island Bank
    
    
    4
    %
    
    
    5
    %
    
    
    11.08
    %
    
    
    10.92
    %
  16




---



##### Table of Contents



Liquidity and Cash Flows
 Liquidity:
  Consolidated Cash Flows: Condensed Consolidated Statements of Cash Flows
 Capital Resources:
 Off-Balance Sheet Items:
 17




---



##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures about Market Risk
  
 Item 4. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Control over Disclosure and Reporting
  18




---



##### Table of Contents



PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  Merger with Frontier Financial Corporations
 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
    For
    
    
    Against
    
    
    AbstainApproval of the Agreement
    
    
    6,931,296
    
    
    
    316,676
    
    
    
    5,007
 
 Item 5. Other Information
  19




---



##### Table of Contents



(b)
    
    There have been no material changes in the procedures for shareholders to
nominate directors to the Companys board.
 
 Item 6. Exhibits
  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
 20




---



##### Table of Contents



SIGNATURES
  WASHINGTON BANKING COMPANY
 Date: May 9, 2008
    
    By
    
    /s/ Michal D. CannMichal D. CannPresident and Chief Executive OfficerDate: May 9, 2008
    
    By
    
    /s/ Richard A. ShieldsRichard A. ShieldsExecutive Vice President and Chief Financial Officer
 21