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 March 31, 2003

           [ ] 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
             (Exact name of registrant as specified in its charter)

        Washington                                              91-1725825
(State or other jurisdiction of                              (I.R.S. Employer
incorporation or organization)                            Identification Number)

                              450 SW Bayshore Drive
                          Oak Harbor, Washington 98277
               (Address of principal executive offices) (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
                            May 8, 2003 was 4,656,378.


<PAGE>



                                Table of Contents

                                     PART I
<TABLE>
<S>                                                                                                          <C>
                                                                                                             Page

Item 1.       Financial Statements

                  Condensed Consolidated Statements of Financial Condition -
                       March 31, 2003 and December 31, 2002                                                    1

                  Condensed Consolidated Statements of Income -
                       Three Months Ended March 31, 2003 and 2002                                              2

                  Condensed Consolidated Statements of Shareholders' Equity and Comprehensive Income -
                       Three Months Ended March 31, 2003 and 2002                                              3

                  Condensed Consolidated Statements of Cash Flows -
                       Three Months Ended March 31, 2003 and 2002                                              4

                  Notes to Condensed Consolidated Financial Statements                                         5

Item 2.       Management's Discussion and Analysis of Financial Condition and Results of Operations            8
Item 3.       Quantitative and Qualitative Disclosures about Market Risk                                      19
Item 4.       Controls and Procedures                                                                         19
</TABLE>

                                     PART II
<TABLE>
<S>                                                                                                          <C>
Item 6.       Exhibits and Reports on Form 8-K                                                                19
                  Signatures                                                                                  20
                  Certification of Chief Executive Officer                                                    21
                  Certification of Chief Financial Officer                                                    22
</TABLE>








<PAGE>

                                     PART I
Item 1. Financial Statements

                           WASHINGTON BANKING COMPANY
                                AND SUBSIDIARIES
            Condensed Consolidated Statements of Financial Condition
                      March 31, 2003 and December 31, 2002
                  (Dollars in thousands, except per share data)
<TABLE>

                                                                                 March 31,         December 31,
                                  Assets                                            2003               2002
                                                                               ---------------    ----------------
                                                                                 (unaudited)
<S>                                                                          <C>                <C>
Cash and due from banks                                                      $        21,007    $        20,882
     ($2,641 and $1,316, respectively, are restricted)
Interest-earning deposits                                                             11,895             12,005
Federal funds sold                                                                    32,000             23,000
                                                                               ---------------    ----------------
     Total cash, restricted cash and cash equivalents                                 64,902             55,887
                                                                               ---------------    ----------------

Investment securities available for sale                                               7,578              9,102
Investment securities held to maturity                                                14,946             15,073
                                                                               ---------------    ----------------
     Total investment securities                                                      22,524             24,175
                                                                               ---------------    ----------------

Federal Home Loan Bank stock                                                           2,194              2,158

Loans held for sale                                                                    4,209              6,629
Loans receivable                                                                     448,148            430,074
Allowance for loan losses                                                             (5,875)            (5,514)
                                                                               ---------------    ----------------
     Total loans, net                                                                446,482            431,189
                                                                               ---------------    ----------------

Premises and equipment, net                                                           17,300             16,750
Other real estate owned                                                                  595                592
Deferred tax assets                                                                    1,205              1,207
Other assets                                                                           3,979              3,454
                                                                               ---------------    ----------------
              Total assets                                                   $       559,181    $       535,412
                                                                               ===============    ================
                   Liabilities and Shareholders' Equity
Liabilities:
     Deposits
          Noninterest-bearing                                                $        63,293    $        61,647
          Interest-bearing                                                           422,336            401,348
                                                                               ---------------    ----------------
              Total deposits                                                         485,629            462,995
                                                                               ---------------    ----------------

     Other borrowed funds                                                             15,000             15,000
     Trust preferred securities                                                       15,000             15,000
     Other liabilities                                                                 2,885              2,985
                                                                               ---------------    ----------------
              Total liabilities                                                      518,514            495,980
                                                                               ---------------    ----------------
Commitments 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 4,656,378 and 4,541,123
        shares at March 31, 2003 and December 31, 2002, respectively                  21,342             21,025
     Retained earnings                                                                19,278             18,363
     Accumulated other comprehensive income, net                                          47                 44
                                                                               ---------------    ----------------
              Total shareholders' equity                                              40,667             39,432
                                                                               ---------------    ----------------
              Total liabilities and shareholders' equity                     $       559,181    $       535,412
                                                                               ===============    ================
</TABLE>
See accompanying notes to condensed consolidated financial statements.

                                       1
<PAGE>
                           WASHINGTON BANKING COMPANY
                                AND SUBSIDIARIES
                   Condensed Consolidated Statements of Income
             Three months ended March 31, 2003 and 2002 (unaudited)
                  (Dollars in thousands, except per share data)
<TABLE>
                                                                                  Three Months Ended March 31
                                                                                    2003               2002
                                                                               ---------------    ----------------
<S>                                                                         <C>                <C>
Interest income:
     Interest and fees on loans                                              $        8,502     $        8,129
     Interest on taxable investment securities                                           76                 82
     Interest on tax-exempt investment securities                                       169                192
     Other                                                                              119                 34
                                                                               ---------------    ----------------
              Total interest income                                                   8,866              8,437

Interest expense:
     Interest on deposits                                                             1,995              2,413
     Interest on other borrowings                                                       156                169
     Interest on trust preferred securities                                             189                 --
                                                                               ---------------    ----------------
              Total interest expense                                                  2,340              2,582
                                                                               ---------------    ----------------
                    Net interest income                                               6,526              5,855
Provision for loan losses                                                              (763)              (989)
                                                                               ---------------    ----------------
              Net interest income after
                 provision for loan losses                                            5,763              4,866

Noninterest income:
     Service charges and fees                                                           477                429
     Gain on sale of loans                                                              458                271
     Secondary market fees                                                               69                 23
     Gain on sale of assets                                                              --                188
     Other                                                                              266                346
                                                                               ---------------    ----------------
              Total noninterest income                                                1,270              1,257
Noninterest expense:
     Salaries and benefits                                                            3,085              2,319
     Occupancy                                                                          850                711
     Office supplies and printing                                                       171                120
     Data processing                                                                    115                 88
     Consulting and professional fees                                                    63                 56
     Other                                                                              864                632
                                                                               ---------------    ----------------
              Total noninterest expense                                               5,148              3,926
                                                                               ---------------    ----------------
              Income before income taxes                                              1,885              2,197
Provision for income taxes                                                             (645)              (760)
                                                                               ---------------    ----------------
              Net income                                                     $        1,240     $        1,437
                                                                               ===============    ================

Net income per share, basic                                                  $         0.27     $         0.32
                                                                               ===============    ================
Net income per share, diluted                                                $         0.26     $         0.30
                                                                               ===============    ================

Average number of shares outstanding, basic                                       4,608,933          4,460,775
Average number of shares outstanding, diluted                                     4,760,690          4,726,069
</TABLE>
See accompanying notes to condensed consolidated financial statements.

                                    2
<PAGE>
                           WASHINGTON BANKING COMPANY
                                AND SUBSIDIARIES
            Condensed Consolidated Statements of Shareholders' Equity
                            and Comprehensive Income
             Three months ended March 31, 2003 and 2002 (unaudited)
                        (Dollars and shares in thousands)

<TABLE>

                                                                                           Accumulated
                                                                                              other
                                                       Common stock                       comprehensive         Total
                                                   ----------------------   Retained         income         shareholders'
                                                     Shares      Amount     earnings       (loss), net         equity
                                                   ---------  -----------  -----------   ----------------  ----------------
<S>                                                   <C>    <C>         <C>           <C>               <C>
Balances at December 31, 2001                         4,055  $   16,124   $   18,782    $         71      $     34,977
Comprehensive income:
    Net income                                           --          --        1,437              --             1,437
    Net change in unrealized gain (loss)
     on securities available for sale,
     net of tax of $12                                   --          --           --             (24)              (24)
                                                                                                           ----------------
        Total comprehensive income                                                                               1,413
Cash dividend, $0.065 per share                          --          --         (264)             --              (264)
                                                   ---------  -----------  -----------   ----------------  ----------------
Balances at March 31, 2002                            4,055  $   16,124   $   19,955    $         47      $     36,126
                                                   =========  ===========  ===========   ================  ================


Balances at December 31, 2002                         4,541  $   21,025   $   18,363    $         44      $     39,432
Comprehensive income:
    Net income                                           --          --        1,240              --             1,240
    Net change in unrealized gain (loss)
     on securities available for sale,
     net of tax of $ (1)                                 --          --           --               3                 3
                                                                                                           ----------------
        Total comprehensive income                                                                               1,243
Cash dividend, $0.07 per share                           --          --         (325)             --              (325)
Stock option compensation                                --           6           --              --                 6

Stock options exercised                                 115         311           --              --               311
                                                   ---------  -----------  -----------   ----------------  ----------------
Balances at March 31, 2003                            4,656  $   21,342   $   19,278    $         47      $     40,667
                                                   =========  ===========  ===========   ================  ================
</TABLE>

See accompanying notes to condensed consolidated financial statements.







                                       3

<PAGE>
                           WASHINGTON BANKING COMPANY
                                AND SUBSIDIARIES
                 Condensed Consolidated Statements of Cash Flows
             Three months ended March 31, 2003 and 2002 (unaudited)
                  (Dollars in thousands, except per share data)

<TABLE>
                                                                                 Three Months Ended March 31
                                                                                    2003                2002
                                                                              ---------------      --------------
<S>                                                                        <C>                  <C>
Cash flows from operating activities:
     Net income                                                             $       1,240        $       1,437
     Adjustments to reconcile net income to net cash
       provided by operating activities:
         Federal Home Loan Bank stock dividends                                       (36)                 (30)
         Amortization (accretion) of investment premiums, net                          25                  (29)
         Provision for loan losses                                                    763                  989
         Net decrease in loans held for sale                                        2,420                  854
         Depreciation of premises and equipment                                       356                  318
         Net gains on sale of premises and equipment and real estate                   --                 (188)
         Net gains on sale of other real estate                                        (8)                  --
         Net increase in other assets                                                (525)                (469)
         Stock option compensation                                                      6                   --
         Net decrease in other liabilities                                           (100)                (459)
                                                                              ---------------      --------------
                  Net cash provided by operating activities                         4,141                2,423
                                                                              ---------------      --------------

Cash flows from investing activities:
     Purchases of investment securities available for sale                             --                 (500)
     Maturities/calls of investment securities available for sale                     500                   --
     Principal payments on mortgage-backed securities                               1,006                   --
     Maturities/calls of investment securities held to maturity                       125                1,000
     Net increase in loans                                                        (18,546)             (25,236)
     Purchases of premises and equipment                                             (906)                (339)
     Proceeds from the sale of premises and equipment                                  --                  271
     Proceeds from the sale of other real estate owned                                 75                   --
                                                                              ---------------      --------------
                  Net cash used in investing activities                           (17,746)             (24,804)
                                                                              ---------------      --------------

Cash flows from financing activities:
     Net increase in deposits                                                      22,634               24,076
     Net decrease in other borrowed funds                                              --              (15,000)
     Net increase in federal funds purchased                                           --               12,500
     Dividends paid on common stock                                                  (325)                (264)
     Proceeds from stock options exercised                                            311                   --
                                                                              ---------------      --------------
                  Net cash provided by financing activities                        22,620               21,312
                                                                              ---------------      --------------
                  Net increase (decrease) in cash and cash equivalents              9,015               (1,069)
Cash and cash equivalents at beginning of period                                   55,887               19,765
                                                                              ---------------      --------------
Cash and cash equivalents at end of period                                  $      64,902        $      18,696
                                                                              ===============      ==============
Supplemental information:
     Loans foreclosed and transferred to other real estate owned            $          70        $          --
     Loans made on bank-owned property sold                                            34                  224
     Cash paid for interest                                                         2,448                2,611
     Cash paid for taxes                                                               --                  425
</TABLE>
See accompanying notes to condensed consolidated financial statements.

                                       4
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three months ended March 31, 2003 and 2002 (unaudited)
(Dollars in thousands, except per share data)

(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 March 31, 2003, WBCO had three wholly-owned subsidiaries -
Whidbey Island Bank ("WIB" or the "Bank"),  the Company's principal  subsidiary;
Washington Banking Capital Trust I (the "Trust");  and Washington Funding Group,
Inc. ("WFG"). The business of the Bank, which is focused in the northern area of
Western  Washington,  consists primarily of attracting deposits from the general
public and originating  loans.  During the 1990s, the region  experienced strong
population growth and economic diversification. The region's economy has evolved
from one that was once heavily  dependent upon forestry,  fishing and farming to
an economy with a much more diverse blend of industries  including retail trade,
services,  manufacturing,  tourism and a large military base presence.  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,  the  second  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.

WFG, the third subsidiary of WBCO, was formed in January 2003 for the purpose of
expanding the Bank's current wholesale mortgage real estate lending platform. In
addition to an existing office in Burlington,  Washington, WFG opened offices in
Bend,  Coos Bay and Portland,  Oregon during the first quarter of 2003. WFG will
underwrite loans  originated by mortgage  brokers in the Washington,  Oregon and
Idaho  markets,  and then  sell a large  majority  of them to  secondary  market
investors, including Freddie Mac and Fannie Mae.

  (b)   Basis of Presentation

The accompanying interim condensed consolidated financial statements include the
accounts  of  WBCO  and  its  subsidiaries   (together,   the  "Company").   The
accompanying  interim  condensed  consolidated  financial  statements  have been
prepared, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. 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, 2002 audited consolidated financial
statements  and notes thereto  included in the  Company's  Annual Report on Form
10-K filed with the  Securities  and Exchange  Commission  on March 20, 2003. In
management's   opinion,   all  adjustments   (consisting  of  normal   recurring
adjustments)  considered  necessary for a fair  presentation have been included.
Operating  results for the three months ended March 31, 2003 are not necessarily
indicative of the results that may be expected for the year ending  December 31,
2003.  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.

Certain  amounts in 2002 may have been  reclassified  to  conform  with the 2003
financial statement presentation.

  (c) Recent Financial Accounting Pronouncements

In November 2002 the Financial  Accounting  Standards Board ("FASB") issued FASB
Interpretation No. 45, "Guarantor's  Accounting and Disclosure  Requirements for
Guarantees,"  ("FIN 45").  FIN 45 requires that a liability be recognized at the

                                    5
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three months ended March 31, 2003 and 2002 (unaudited)
(Dollars in thousands, except per share data)

inception of certain guarantees for the fair value of the obligation,  including
the ongoing obligation to stand ready to perform over the term of the guarantee.
Guarantees,  as defined in FIN 45, include contracts that  contingently  require
the  Company  to make  payments  to a  guaranteed  party  based on changes in an
underlying  that is related to an asset,  liability  or equity  security  of the
guaranteed party, performance guarantees, indemnification agreements or indirect
guarantees  of  indebtedness  of others.  This new  accounting  is effective for
certain guarantees issued or modified after December 31, 2002. In addition,  FIN
45 requires  certain  additional  disclosures,  for interim and annual  periods,
which are located in Note 5. The Company  has adopted the  provisions  of FIN 45
and  has  properly  disclosed  their  affect  in the  current  period  financial
statements.

In January 2003, the FASB issued FASB  Interpretation No. 46,  "Consolidation of
Variable  Interest  Entities"  ("FIN 46"). This  interpretation  explains how to
identify variable interest entities and how an enterprise  assesses its interest
in a variable interest entity to decide whether to consolidate that entity. This
interpretation requires existing unconsolidated variable interest entities to be
consolidated by their primary  beneficiaries  if the entities do not effectively
disperse  risks  among  parties   involved.   Variable  interest  entities  that
effectively  disperse risks will not be consolidated unless a single party holds
an interest or combination of interest that  effectively  recombines  risks that
were previously dispersed.  This interpretation  applies immediately to variable
interest  entities  created  after  January 31, 2003,  and to variable  interest
entities in which an enterprise  obtains an interest after that date. It applies
in the first fiscal year or interim  period  beginning  after June 15, 2003,  to
variable interest entities in which an enterprise holds a variable interest that
it  acquired  before  February  1, 2003.  The  adoption of FIN 46 did not have a
material effect on the Bank's financial position or results of operations.

(2)   Earnings Per Share

The following  illustrates the reconciliation of the numerators and denominators
of the basic and diluted earnings per share ("EPS") computations:
<TABLE>
                                                               Three Months Ended March 31, 2003
                                                    ---------------------------------------------------------
                                                                            Weighted             Per share
                                                       Income            average shares            amount
                                                    --------------     --------------------     -------------
<S>                                              <C>                        <C>              <C>
Basic EPS
Income available to common shareholders           $    1,240                 4,608,933        $      0.27
Effect of dilutive securities: stock options              --                   151,757              (0.01)
                                                    --------------     --------------------     -------------
Diluted EPS                                       $    1,240                 4,760,690        $      0.26
                                                    ==============     ====================     =============

                                                               Three Months Ended March 31, 2002
                                                    ---------------------------------------------------------
                                                                            Weighted             Per share
                                                       Income            average shares            amount
                                                    --------------     --------------------     -------------
Basic EPS
Income available to common shareholders           $    1,437                 4,460,775        $      0.32
Effect of dilutive securities: stock options              --                   265,294              (0.02)
                                                    --------------     --------------------     -------------
Diluted EPS                                       $    1,437                 4,726,069        $      0.30
                                                    ==============     ====================     =============
</TABLE>

                                    6
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three months ended March 31, 2003 and 2002 (unaudited)
(Dollars in thousands, except per share data)

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  dividend.  At March 31, 2003 and 2002,  there were options to
purchase 364,789 and 498,561 shares of common stock  outstanding,  respectively,
of which 17,633 and 37,950 shares, respectively, were antidilutive and therefore
not included in the computation of diluted net income per share.

(3)   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  Financial   Accounting  Standards  Board  ("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  Bank'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 Bank'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  Statement  148,  "Accounting  for  Stock-Based
Compensation-Transition and Disclosure," to stock-based employee compensation.

                                            Three Months Ended March 31
                                             2003              2002
                                        ----------------  ----------------
Net income, as reported               $       1,240     $      1,437
Stock compensation recognized                     6               --
Additional compensation for
         fair value of stock options            (22)             (15)
                                        ----------------  ----------------
Pro forma net income                  $       1,224     $      1,422
                                        ================  ================
Basic earnings per share:
         As reported                  $        0.27      $      0.32
         Pro forma                             0.27             0.32
Diluted earnings per share:
         As reported                           0.26             0.30
         Pro forma                             0.26             0.30

(4)   Subsequent Event

On April 24, 2003, the Board of Directors  declared a cash dividend of $0.07 per
share to shareholders of record as of May 5, 2003 and payable on May 20, 2003.

(5)   Commitments

Standby  letters of credit and  financial  guarantees  written  are  conditional
commitments  issued by the Company to guarantee the performance of a customer to
a third party or payment by a customer to a third party.  Those  guarantees  are
primarily  issued  in  international  trade or to  support  public  and  private
borrowing arrangements,  including commercial paper, bond financing, and similar
transactions.   Except  for  certain  long-term  guarantees,   the  majority  of
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 March 31, 2003. 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 March 31, 2003.

                                       7
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three months ended March 31, 2003 and 2002 (unaudited)
(Dollars in thousands, except per share data)

As of March 31, 2003, the commitments under these agreements were as follows:

             Standby Letters of Credit and Financial Guarantees $623

Item 2. Management's  Discussion and Analysis of Financial Condition and Results
        of Operations
--------------------------------------------------------------------------------
Note  Regarding   Forward-Looking   Statements:   This  Form  10-Q  may  include
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  opening  or  acquiring  new  branches  are lower  than
expected;  (4)  greater  than  expected  costs or  difficulties  related  to the
integration of acquisitions;  (5) 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's  ability 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 three wholly-owned direct subsidiaries: Whidbey Island Bank
(the "Bank"),  Washington  Banking  Capital Trust I (the "Trust") and 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 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

                                    8
<PAGE>
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  Company  also  offers  nondeposit
investment products,  which are not FDIC insured, through the Bank's subsidiary,
WIB Financial Services, Inc.

The Trust 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 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,  is a Washington  State
corporation formed in January 2003. The purpose of this subsidiary is to provide
underwriting  service to mortgage  brokers  and others for real estate  mortgage
loans. The loans are originated and sold in the name of the Bank. In addition to
an existing office in Burlington,  Washington,  WFG opened offices in Bend, Coos
Bay and Portland,  Oregon during the first quarter of 2003. The Company  expects
WFG will  underwrite  loans  originated by mortgage  brokers in the  Washington,
Oregon and Idaho  markets,  and then sell a large  majority of them to secondary
market investors, including Freddie Mac and Fannie Mae.

Headquartered  in Oak Harbor,  the Company'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.  Acquisition of banks or branches may also be
used as a means of expansion if appropriate opportunities are presented.

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 providing 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.  The
Company's  primary  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.

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 market areas encompass  distinct  economies.  These economies have
evolved  from being  heavily  dependent  upon  forestry,  fishing and farming to
economies  with much more diverse blends of industries  including  retail trade,
services, manufacturing, tourism and a large military presence. While Washington
State's economy,  and particularly  that of the Puget Sound region,  experienced
strong growth during the 1990's,  those economies  slowed during recent years as
the commercial  airline and aerospace  industries began to contract in the Puget
Sound  region.  During 2002,  the  Company's  market area  continued to feel the
effects of the country's overall economic slowdown,  which appeared to have been
particularly pronounced in the Pacific Northwest,  including unemployment levels
above the national  average.  The recent military build-up appears to have had a
positive  economic  impact on the region due to the large military bases located
in the  area,  but  timing  of an  economic  recovery  for  Washington  State is
uncertain.

Financial Condition

Total Assets.  Total assets  increased to $559.2  million at March 31, 2003 from
$535.4 million at December 31, 2002, an increase of 4.4%. This increase resulted

                                       9
<PAGE>
from  short-term  investments in federal funds and growth in the loan portfolio,
which was funded by deposit growth, investment maturities and borrowings.

Total Loans.  Total loans were $452.4  million at March 31, 2003, an increase of
3.6% from $436.7  million at  December  31,  2002.  The  Company  increased  its
allowance for loan losses to $5.9 million at March 31, 2003  representing  1.30%
of total loans,  from $5.5  million or 1.26% at December 31, 2002,  to keep pace
with loan growth and prospective  losses  inherent in the loan portfolio,  while
remaining conservative and improving coverage.

Total Investment Securities.  Total investment securities were $22.5 million and
$24.2 million at March 31, 2003 and December 2002,  respectively,  a decrease of
6.8% due to the  maturity  of  investments.  The  continued  low  interest  rate
environment  and  anticipated  increase in loan demand  prompted  management  to
slowly purchase short-term  investments,  building the portfolio with "laddered"
(staggered  maturities)  securities that reflect the Company's investment policy
guidelines and help achieve the objectives of the business plan of the Company.

Premises and Equipment. Premises and equipment, net of depreciation,  were $17.3
million and $16.8 million at March 31, 2003 and December 31, 2002.  The increase
reflects the  construction  of a new building for the Camano  office and related
furniture and fixtures,  as well as remodeling  improvements  to the  Burlington
Financial Center completed during the first quarter of 2003.

The increase in premises and equipment is an  indication of future  expectations
as the Company continues its strategy of value-added growth.

Deposits.  Deposits  grew 4.9% to $485.6  million at March 31,  2003 from $463.0
million at December 31, 2002.  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 the customers'  financial
needs and providing  exceptional  service.  Management  attributes the Company's
successful  deposit growth to its  continuing  deposit  promotions,  cross-sales
efforts,  financial  planning and other means.  In addition,  many customers are
seeking  the  security  of  FDIC-insured   deposit  vehicles  given  the  recent
volatility of the investment market.

Average  noninterest-bearing  deposits  increased  20.0%, at March 31, 2003 from
March  31,  2002,  while  average  interest-bearing  deposits  increased  20.6%,
compared  to the like  period a year ago.  In  addition  to this  increase,  the
Company  experienced  a shift in the deposit mix.  Average  interest  demand and
money  market  deposits  represented  44.45% of total  average  interest-bearing
deposits at March 31, 2003 compared to 38.93% for the like period a year ago.

Average  savings  deposits  and  average  CDs  represented   8.02%  and  47.53%,
respectively,  of total  average  interest-bearing  deposits  at March 31,  2003
compared to 8.56% and 52.51%,  respectively  for the like period a year ago. All
deposit  product  averages  increased  during  2003  as  management  focused  on
attracting deposits and establishing customer relationships.

Shareholders' Equity. The Company's shareholders' equity increased 3.1% to $40.7
million at March 31, 2003 from $39.4 million at December 31, 2002.  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
three months of 2003.






                                       10
<PAGE>
Consolidated  Average  Balance  Sheet and  Analysis of Net  Interest  Income and
Expense

The following table sets forth at the dates indicated the Company's consolidated
average balance sheet and analysis of net interest income and expense:

<TABLE>
                                  Three Months Ended March 31, 2003          Three Months Ended March 31, 2002
                                 Average       Interest     Average          Average      Interest      Average
(Dollars in thousands)           balance      earned/paid  yield (1)         balance     earned/paid   yield (1)
                                -----------   -----------  -----------     ------------  ------------ ------------
           Assets
<S>                            <C>           <C>              <C>        <C>           <C>              <C>
Loans (2)                      $  441,424    $   8,502        7.70%       $  389,600    $   8,129        8.35%
Federal funds sold                 18,401           50        1.09%              869            3        1.38%
Interest-earning cash              11,952           33        1.10%              291            1        1.37%
Investments:
     Taxable                       11,046          112        4.06%            7,908          112        5.67%
     Non-taxable (3)               14,447          226        6.26%           16,394          257        6.27%
                                -----------   -----------  -----------     ------------  ------------ ------------
Interest-earning assets           497,270        8,923        7.18%          415,062        8,502        8.19%
Noninterest-earning assets         35,342                                     31,458
                                -----------                                ------------
     Total assets              $  532,612                                 $  446,520
                                ===========                                ============

       Liabilities and
    Shareholders' equity
Deposits:
     Interest demand and
      money market             $  177,617    $     514        1.16%       $  128,933    $     548        1.70%
     Savings                       32,028           69        0.86%           28,365          106        1.49%
     CDs                          189,913        1,412        2.97%          173,921        1,759        4.05%
                                -----------   -----------  -----------     ------------  ------------ ------------
Interest-bearing deposits         399,558        1,995        2.00%          331,219        2,413        2.91%
Federal funds purchased                --           --        0.00%            5,339           25        1.87%
Trust preferred securities         15,000          189        5.04%               --           --        0.00%
Other interest-bearing
liabilites                         15,121          156        4.13%           21,853          144        2.64%
                                -----------   -----------  -----------     ------------  ------------ ------------
Interest-bearing liabilities      429,679        2,340        2.18%          358,411        2,582        2.88%
Noninterest-bearing deposits       60,757                                     50,620
Other noninterest-bearing
liabilities                         2,401                                      2,000
                                -----------                                ------------
Total liabilities                 492,837                                    411,031
Shareholders' equity               39,775                                     35,489
                                -----------                                ------------
     Total liabilities and
       shareholders' equity    $  532,612                                 $  446,520
                                ===========                                ============

Net interest income (3)                      $   6,583                                  $   5,920
                                              ===========                                ============
Net interest spread (1)                                       5.00%                                      5.31%
                                                           ===========                                ============
Net interest margin (1)                                       5.30%                                      5.71%
                                                           ===========                                ============

(1) Annualized
(2) Includes loan fees of $358 and $280 for the three months ended March 31,2003 and 2002, 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 $57 and $65 for the three months ended March 30, 2003 and 2002, respectively.
</TABLE>
                                       11
<PAGE>
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 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 first  quarter of 2003  decreased  $197,000,  or
13.7%,  to $1.2 million or $0.26 per diluted  share,  from $1.4 million or $0.30
per diluted share, for the first quarter of 2002. The decrease was due to a $1.2
million  increase in  noninterest  expense in the first  quarter of 2003 coupled
with the  $187,000  gain on sale of assets  from the sale of the  vacated  North
Whidbey branch property in the first quarter 2002.

Net Interest Income. Net interest income for the first quarter of 2003 increased
11.5% to $6.5  million  from $5.9  million  for the first  quarter of 2002.  The
increase is largely due to interest  income from increased  average loan volume,
combined  with a  decrease  in  the  cost  of  funds.  The  continued  low  rate
environment  has  improved  our  cost of  funds  and  helped  offset  the  lower
interest-earning asset yield.

Average  interest-earning  assets  for the  first  quarter  increased  to $497.3
million at March 31,  2003,  compared  to $415.1  million at March 31,  2002,  a
growth of 19.8%, while the average yield on interest-earning assets decreased to
7.18% compared to 8.19% in first quarter of the prior year. The average yield on
loans decreased to 7.70% for the quarter ended March 31, 2003 from 8.35% for the
quarter ended March 31, 2002.

The average cost of interest-bearing  liabilities decreased in the first quarter
of 2003 to 2.18%  from  2.88% for the  quarter  ended  March 31,  2002.  Average
interest-bearing  liabilities  for the quarter  increased  to $429.7  million at
March 31, 2003 compared to $358.4 million at March 31, 2002, a growth of 19.9%.

The overall result of these changes was a decrease in the net interest spread to
5.00% for the quarter  ended  March 31,  2003 from 5.31% for the  quarter  ended
March 31, 2002.  Net interest  margin (net  interest  income  divided by average
interest-earning  assets)  decreased to 5.30% in the first  quarter of 2003 from
5.71% in the first quarter of 2002.

Noninterest Income.  Noninterest income increased $13,000, or 1.0%, in the first
quarter of 2003  compared to the same period in 2002.  This slight  increase was
due to an increase in the gain on sale of loans and  secondary  market fees from
the sale of real  estate  loans in the  first  quarter  of 2003,  offset  by the
$187,000 gain on sale of the vacated North Whidbey branch  property in the first
quarter of 2002.

The $23,000 net loss from WIB Financial  Services,  Inc., the Bank's subsidiary,
which  offers  nondeposit  investment  products  to  customers,   also  impacted
noninterest  income.  Management is not satisfied  with the  performance  of the
subsidiary  and  its  product   delivery   system.   The  Company  is  reviewing
alternatives  that will  provide  customers  with a means to achieve a balanced,
diversified,  managed portfolio while improving noninterest income for the Bank.
This review process is near  completion and the Company  expects to announce its
new program within the next few weeks.

Noninterest  Expense.  Noninterest  expense increased $1.2 million, or 31.1%, in
the first  quarter of 2003.  Three  major  components  of  noninterest  expense,
employee compensation,  occupancy and other noninterest expense increased 33.0%,
19.5% and 36.7%  respectively,  for the quarter compared with the like period in
2002.
                                       12
<PAGE>
The majority of these expenses reflect costs associated with the Company's newly
formed wholesale mortgage real estate lending company,  WFG and the expansion of
Bank branches.  The Company moved into Stanwood,  Fairhaven and Smokey Point and
relocated its Camano Island  branch.  In addition to the cost of staffing  these
new areas, the Company experienced a cost increase in employee benefits.

The increase in other noninterest expense consisted of increased expenditures in
education, including recent corporate governance education for directors and ATM
expense.  Donations  also  increased as the Company has  committed to supporting
additional   organizations  in  its  new  market  areas.  The  efficiency  ratio
(noninterest  expense divided by the sum of net interest income plus noninterest
income less non-recurring  gains) was 66.03% for the first quarter 2003 compared
to 55.2% for the like period in 2002.

Income Taxes.  For the first quarter of 2003, the Company recorded an income tax
provision of $645,000.  The overall effective tax rate was approximately 34% for
both the three months ended March 31, 2003 and 2002.

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 at the dates
indicated:

<TABLE>
                                               March 31, 2003                    December 31, 2002
                                       -------------------------------     -------------------------------
(Dollars in thousands)                    Balance        % of total           Balance        % of total
                                       ---------------  --------------     ---------------  --------------
<S>                                   <C>                    <C>          <C>                    <C>
Commercial                            $      90,364          20.0%        $     91,816           21.0%
Real estate mortgages:
  One-to-four family residential             41,179           9.1%              46,806           10.7%
  Five-or-more family
    residential and commercial              107,425          23.8%              94,404           21.6%
                                       ---------------  --------------     -------------------------------
     Total real estate mortgages            148,604          32.9%             141,210           32.4%

Real estate construction                     49,689          11.0%              40,112            9.2%
Consumer                                    163,428          36.1%             163,368           37.4%
                                       ---------------  --------------     -------------------------------
  Subtotal                                  452,085         100.0%             436,506          100.0%
                                                        ==============                      ==============
Less: allowance for loan losses              (5,875)                            (5,514)
Deferred loan fees, net                         272                                197
                                       ---------------                     ---------------
Loans, net                            $     446,482                       $    431,189
                                       ===============                     ===============
</TABLE>

Total loans, net, increased to $446.5 million at March 31, 2003,  representing a
3.5%  increase  from  year-end  2002.  Real  estate  mortgage  and  real  estate
construction loans increased 5.2% and 23.9%  respectively,  while consumer loans
remained flat and total  commercial  loans decreased 1.6% at March 31, 2003 from
year-end  2002.  Indirect  dealer  loans were  $101.7  million,  or 62.2% of the
consumer  loan  portfolio at March 31, 2003,  as compared to $94.2  million,  or
57.6%,  at December  31,  2002.  The  commercial  loan  decrease  reflects  some
weakening  in the local  economy,  with real estate  loan  growth  driven by the
favorable interest rate environment.

                                       13
<PAGE>
Nonperforming  Assets.  The  following  table  sets  forth  an  analysis  of the
composition of the Company's nonperforming assets at the dates indicated:

<TABLE>

    (Dollars in thousands)                                           March 31, 2003           December 31, 2002
                                                                  ----------------------    -----------------------
    <S>                                                         <C>                       <C>
    Nonaccrual loans                                            $            3,062        $            3,222
    Restructured loans                                                          --                        --
                                                                  ----------------------    -----------------------
       Total nonperforming loans                                             3,062                     3,222
    Real estate owned                                                          595                       592
                                                                  ----------------------    -----------------------
       Total nonperforming assets                               $            3,657        $            3,814
                                                                  ======================    =======================

    Accruing loans past due >= 90 days                          $               --                   $    --
    Potential problem loans                                                    120                        --
    Allowance for loan losses                                                5,875                     5,514

    Nonperforming loans to loans                                             0.68%                     0.74%
    Allowance for loan losses to loans                                       1.30%                     1.26%
    Allowance for loan losses to nonperforming loans                       191.87%                   171.14%
    Nonperforming assets to total assets                                     0.65%                     0.71%
</TABLE>

Nonperforming loans decreased to $3.1 million, or 0.68% of total loans, at March
31, 2003 from $3.2 million,  or 0.74% of total loans,  at December 31, 2002. The
current loan loss reserve of $5.9 million  represents  191.87% of  nonperforming
loans as compared to 171.14% of  nonperforming  loans at December 31, 2002.  The
loan loss reserve is 1.30% of total loans at March 31, 2003 as compared to 1.26%
at December 31, 2002.

Provision  and  Allowance  for Loan  Losses.  The  Company  recorded  a $763,000
provision for loan losses for the first quarter of 2003,  compared with $989,000
for the like period a year ago. Net loan  charge-offs  were $402,000  during the
first  quarter of 2003,  compared to $277,000 for the like period last year.  In
addition to timing  issues,  the increase in  charge-offs  is  attributed  to an
aggressive  stance on  consumer  delinquencies  and a  tightening  of the Bank's
consumer lending standards.

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  vehicle 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 has limited its
indirect automobile 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.

Net  loan  charge-offs  attributed  to  indirect  dealer  loans  were  $196,000,
representing  0.20% of average  indirect  dealer  loans  during the first  three
months of 2003, compared to $183,000,  or 0.24% of average indirect dealer loans
for the like period in 2002. Management has tightened consumer lending standards
over the last year and established  additional  guidelines and limits on lending
to certain industries in order to mitigate risk.

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

                                       14
<PAGE>
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.  The allowance is reviewed  quarterly by management.
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 at the dates  indicated.  The  allocation  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:
<TABLE>
                                                  Three Months Ended March 31
(Dollars in thousands)                           2003                     2002
                                           -----------------        -----------------
<S>                                     <C>                      <C>
Balance at beginning of period          $       5,514            $       4,308
Charge-offs:
      Commercial                                  (71)                     (28)
      Real estate                                 (30)                       -
      Consumer                                   (377)                    (296)
                                           -----------------        -----------------
      Total charge-offs                 $        (478)           $        (324)

Recoveries:
      Commercial                                    4                        1
      Real estate                                   -                        -
      Consumer                                     72                       46
                                           -----------------        -----------------
      Total recoveries                  $          76            $          47
                                           -----------------        -----------------
Net charge-offs                                  (402)                    (277)
Provision for loan losses                         763                      989
                                           -----------------        -----------------
Balance at end of period                $       5,875            $       5,020
                                           =================        =================

Net charge-offs to average loans                0.09%                    0.07%

</TABLE>
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,  coupled with credit  weakness that could
occur as a result of a slowdown in the local  economy may require  increases  in
the provisions to the allowance for loan losses during the year 2003.

Deposits

The Company provides a range 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   relations   to  attract  core   deposits  in
noninterest-bearing transactional accounts and thus reduce its costs of funds.



                                       15
<PAGE>
The  following  table sets forth the average  balances  outstanding  and average
interest rates for each major category of deposits:

<TABLE>
                                                  Three Months Ended March 31
                                      ----------------------------------------------------
                                                2003                      2002
                                      ------------------------- --------------------------
                                        Average     Average        Average     Average
(Dollars in thousands)                  balance       rate         balance       rate
                                      ------------------------- --------------------------
<S>                                  <C>              <C>      <C>               <C>
Interest-bearing demand and
   money market deposits             $  177,617       1.16%    $  128,933        1.70%
Savings deposits                         32,028       0.86%        28,365        1.49%
CDs                                     189,913       2.97%       173,921        4.05%
                                      ------------------------- --------------------------
     Total interest-bearing deposits    399,558       2.00%       331,219        2.91%
Demand and other
   noninterest-bearing deposits          60,757                    50,620
                                      -----------               ------------
     Total average deposits          $  460,315                $  381,839
                                      ===========               ============
</TABLE>
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 sold,  short-term  investments and investment securities available
for  sale.  These  funds  are  used  to  fund  loan   originations  and  deposit
withdrawals,  satisfy  other  financial  commitments  and to support  continuing
operations.  The Bank 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.

Deposits.  Total deposits  increased 4.9%, to $485.6 million,  at March 31, 2003
from $463.0  million at December  31,  2002.  The  Company,  by policy,  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 significant amount
of its deposits as they mature.

The Company's  deposits are expected to fluctuate  according to the level of the
Company's  deposit  market  share,   economic  conditions  and  normal  seasonal
variations,  among other  things.  Certificates  of deposit are the only deposit
group that has stated  maturity dates. At March 31, 2003, the Company had $197.5
million in CDs of which approximately $130.8 million, or 66.2%, are scheduled to
mature within one year.  Declining  interest rate markets and uncertain economic
conditions  may cause some  customers  to choose to move funds into core deposit
accounts  or  withdraw  funds,  rather  than  renew  CDs as  they  mature.  That

                                       16
<PAGE>
notwithstanding,   management   anticipates   that  a  substantial   portion  of
outstanding CDs will renew upon maturity.

Borrowings.  At March 31, 2003 the Company had a line of credit with the FHLB of
$83.7 million, of which $15.0 million was advanced in long-term borrowings.  The
Company also had unused lines of credit with  correspondent  banks in the amount
of $14.0 million at March 31, 2003.

Investments.  The Company's total portfolio of investment  securities  decreased
6.8% to $22.5 million at March 31, 2003 from $24.2 million at December 31, 2002.
The investment portfolio consists of government agency securities,  pass-through
securities,  collateralized mortgaged obligations ("CMO"), municipal securities,
preferred  stock and corporate  obligations.  No  investment  exceeds 10% of the
shareholders'  equity.  The following  table  summarizes  the amortized cost and
recorded  and  market  values  of  securities  in  the  Company's  portfolio  by
contractual maturity groups:
<TABLE>
                                                         March 31, 2003
                                     --------------------------------------------------------
 (Dollars in thousands)                Amortized cost      Market value      Recorded value
                                      -----------------  -----------------  -----------------
 <S>                                 <C>                <C>                <C>
 Amounts maturing:
 Within one year                     $       3,665      $       3,726      $       3,685
 One to five years                          12,092             12,707             12,122
 Six to ten years                            5,698              6,087              5,716
 Over ten years                                998              1,009              1,001
                                      -----------------  -----------------  -----------------
        Total                        $      22,453      $      23,529      $      22,524
                                      =================  =================  =================
</TABLE>
At March  31,  2003,  the  Company's  investment  portfolio  consisted  of $14.9
million,  or  66.36% in  held-to-maturity  investments  at  carrying  value,  as
compared to $15.1 million, or 62.35%, at December 31, 2002, and $7.6 million, or
33.64%, in available-for-sale  securities at carrying value, as compared to $9.1
million, or 37.65%, at December 31, 2002. For liquidity purposes,  the Company's
future security purchases will primarily be designated as available-for-sale and
will increase as a percent of total investment securities at carrying value.

Capital and Capital Ratios

The Company's  shareholders' equity increased to $40.7 million at March 31, 2003
from $39.4  million at December 31, 2002.  This increase is due to net income of
$1.2 million,  proceeds from stock options  exercised in the amount of $311,000,
stock  option  compensation  of $6,000,  and an increase in  unrealized  gain on
available-for-sale  securities,  net of tax of $3,000,  offset by the payment of
cash dividends of $325,000  during the first three months of 2003.  Total assets
increased  to $559.2  million at March 31, 2003 from $535.4  million at December
31, 2002, an increase of 4.4%.  Shareholders' equity to total assets was 7.3% at
March 31, 2003 compared to 7.4% at December 31, 2002.

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.

                                       17

<PAGE>
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 March 31, 2003 and December 31,
2002:

<TABLE>
                                               FDIC Requirements                          Actual Ratios
                                      ------------------------------------------  --------------------------------
                                        Adequately-             Well-              March 31,       December 31,
                                        capitalized          capitalized             2003              2002
                                      -------------          -------------------  ---------      -----------------
<S>                                          <C>                   <C>              <C>                <C>
Total risk-based capital ratio
    Consolidated                             8%                    10%              12.54%             12.80%
    Whidbey Island Bank                      8%                    10%              12.31%             12.61%
Tier 1 risk-based capital ratio
    Consolidated                             4%                     6%              11.05%             11.22%
    Whidbey Island Bank                      4%                     6%              11.11%             11.43%
Leverage ratio
    Consolidated                             4%                     5%              10.16%              9.89%
    Whidbey Island Bank                      4%                     5%              10.22%             10.07%
</TABLE>

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 had no material capital  expenditures or commitments for the quarter
ended March 31, 2003.

Significant Accounting Policies

See "Notes to Condensed Consolidated Financial Statements."

2003 Anticipated Financial Performance

In March 2003,  the Company  announced  targets  for 2003  including  10% to 15%
earnings  growth,  10% to 15% loan growth,  5% to 10% deposit growth.  Long-term
targets include ROE in excess of 18%, an efficiency  ratio in the mid-50% range,
earnings per share  growth rate of at least 10%  annually and cash  dividend per
share  increases of 8% per year.  The Company  believes  that these goals can be
attained through continuing its basic banking strategy of building core deposits
and building a conservative loan portfolio.

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.  One  of  the  areas  subject  to
uncertainty  is economic  stability.  Although  there are  concerns  regarding a
slowdown  in  the  economy,   management  expects  growth  to  continue  in  the
northwestern   Washington  region  and  believes  that  the  Company  will  have
opportunities to participate in that growth. These opportunities will be pursued
while  applying  rigorous  credit  discipline  and  thorough  analysis to ensure
quality growth.

Management expects the net interest margin will be squeezed and anticipates some
fluctuation  during 2003 as deposit repricing slows. Total loans are expected to
increase in volume and rates are expected to decrease  slightly  during the year
due to increased  competition.  However,  the above performance goals anticipate
the Company's  overall loan and deposit  interest  rates to have minimal  change
throughout 2003. Should rates increase, the Company could be negatively impacted
due to its current  slightly  liability  sensitive  position.  Other  unexpected

                                       18
<PAGE>
changes,  such as  significant  declines  in the economy or  substantial  credit
deterioration, could further reduce the anticipated performance of the Company.

Management  expects  earnings in the first two quarters of 2003 to be negatively
impacted in the range of  approximately  $300,000  due to start up costs of WFG.
However, management expects WFG to be profitable by year-end 2003.

Readers should not construe these goals 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 March 31, 2003, 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, 2002.  For  additional
information,  refer to the Company's  Form 10-K for year ended December 31, 2002
filed with the SEC on March 20, 2003.

Item 4.  Controls and Procedures

Within  90 days  prior  to the date of 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.

                                     PART II

Item 6.  Exhibits and Reports on Form 8-K

(a)      Exhibits

         99.1     Section 906 Certification of Chief Executive Officer
         99.2     Section 906 Certification of Chief Financial Officer

(b) Reports on Form 8-K

         None.


                                       19
<PAGE>
                                   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: May 12, 2003                                By   /s/  Michal D. Cann
                                                       -------------------

                                                       Michal D. Cann
                                                       President and
                                                  Chief Executive Officer


Date: May 12, 2003                               By   /s/ Phyllis A. Hawkins
                                                      ----------------------

                                                     Phyllis A. Hawkins
                                                  Senior Vice President and
                                                   Chief Financial Officer



























                                       20
<PAGE>
                   CERTIFICATION OF CHIEF EXECUTIVE OFFICER

     I,   Michal D. Cann, certify that:

1.   I have reviewed this  quarterly  report on Form 10-Q of Washington  Banking
     Company;

2.   Based on my knowledge,  this  quarterly  report does not contain any untrue
     statement of a material fact or omit to state a material fact  necessary to
     make the statements  made, in light of the  circumstances  under which such
     statements  were made, not misleading with respect to the period covered by
     this annual report;

3.   Based on my  knowledge,  the  financial  statements,  and  other  financial
     information  included  in this  quarterly  report,  fairly  present  in all
     material respects the financial  condition,  results of operations and cash
     flows of the  registrant  as of, and for,  the  periods  presented  in this
     report;

4.   The  registrant's  other  certifying  officer  and  I are  responsible  for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

     a)   Designed  such  disclosure  controls  and  procedures,  or caused such
          disclosure  and  controls  and  procedures  to be  designed  under our
          supervision,  to ensure  that  material  information  relating  to the
          registrant,  including its consolidated subsidiaries, is made known to
          us by others within those entities,  particularly during the period in
          which this report is being prepared;

     b)   Evaluated the  effectiveness of the registrant's  disclosure  controls
          and procedures as of a date within 90 days prior to the filing date of
          this report (the "Evaluation Date"); and

     c)   Presented in this report our conclusions  about the  effectiveness  of
          the disclosure  controls and procedures  based on our evaluation as of
          the Evaluation Date;

5.   The registrant's  other certifying  officer and I have disclosed,  based on
     our most recent  evaluation,  to the  registrant's  auditors  and the audit
     committee of  registrant's  board of directors (or persons  performing  the
     equivalent function):

     a)   All  significant  deficiencies  in the design or operation of internal
          controls  which could  adversely  affect the  registrant's  ability to
          record,  process,   summarize  and  report  financial  data  and  have
          identified for the  registrant's  auditors any material  weaknesses in
          internal controls; and

     b)   Any fraud, whether or not material,  that involves management or other
          employees who have a  significant  role in the  registrant's  internal
          controls; and

6.   The  registrant's  other  certifying  officer and I have  indicated in this
     quarterly report whether or not there were significant  changes in internal
     controls  or in other  factors  that could  significantly  affect  internal
     controls  subsequent to the date of our most recent  evaluation,  including
     any corrective actions with regard to significant deficiencies and material
     weaknesses.

Date: May 12, 2003                                  By /s/ Michal D. Cann
                                                       -------------------
                                                       Michal D. Cann
                                                       President and
                                                  Chief Executive Officer
                                       21
<PAGE>
                    CERTIFICATION OF CHIEF FINANCIAL OFFICER

     I,   Phyllis A. Hawkins, certify that:

1.   I have reviewed this  quarterly  report on Form 10-Q of Washington  Banking
     Company;

2.   Based on my knowledge,  this  quarterly  report does not contain any untrue
     statement of a material fact or omit to state a material fact  necessary to
     make the statements  made, in light of the  circumstances  under which such
     statements  were made, not misleading with respect to the period covered by
     this annual report;

3.   Based on my  knowledge,  the  financial  statements,  and  other  financial
     information  included  in this  quarterly  report,  fairly  present  in all
     material respects the financial  condition,  results of operations and cash
     flows of the  registrant  as of, and for,  the  periods  presented  in this
     report;

4.   The  registrant's  other  certifying  officer  and  I are  responsible  for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

     a)   Designed  such  disclosure  controls  and  procedures,  or caused such
          disclosure  and  controls  and  procedures  to be  designed  under our
          supervision,  to ensure  that  material  information  relating  to the
          registrant,  including its consolidated subsidiaries, is made known to
          us by others within those entities,  particularly during the period in
          which this report is being prepared;

     b)   Evaluated the  effectiveness of the registrant's  disclosure  controls
          and procedures as of a date within 90 days prior to the filing date of
          this report (the "Evaluation Date"); and

     c)   Presented in this report our conclusions  about the  effectiveness  of
          the disclosure  controls and procedures  based on our evaluation as of
          the Evaluation Date;

5.   The registrant's  other certifying  officer and I have disclosed,  based on
     our most recent  evaluation,  to the  registrant's  auditors  and the audit
     committee of  registrant's  board of directors (or persons  performing  the
     equivalent function):

     a)   All  significant  deficiencies  in the design or operation of internal
          controls  which could  adversely  affect the  registrant's  ability to
          record,  process,   summarize  and  report  financial  data  and  have
          identified for the  registrant's  auditors any material  weaknesses in
          internal controls; and

     b)   Any fraud, whether or not material,  that involves management or other
          employees who have a  significant  role in the  registrant's  internal
          controls; and

6.   The  registrant's  other  certifying  officer and I have  indicated in this
     quarterly report whether or not there were significant  changes in internal
     controls  or in other  factors  that could  significantly  affect  internal
     controls  subsequent to the date of our most recent  evaluation,  including
     any corrective actions with regard to significant deficiencies and material
     weaknesses.

Date: May 12, 2003                              By /s/ Phyllis A. Hawkins
                                                   ----------------------
                                                   Phyllis A. Hawkins
                                                Senior Vice President and
                                                 Chief Financial Officer
                                      22