<PAGE> 1


    UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
                                    FORM 10-Q

 (Mark  One)
[X]  QUARTERLY  REPORT  PURSUANT  TO  SECTION  13 OR l5  (d)  OF THE
SECURITIES EXCHANGE  ACT OF 1934

For the  quarterly  period  ended  September 30, 1999

[ ]  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 small business issuer as specified in its charter)

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


                             1421 S.W. Barlow Street
                          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 [ ]

         The  number of shares  of the  issuer's  Common  Stock  outstanding  at
October 31, 1999 was 4,106,785.



<PAGE> 2




                                TABLE OF CONTENTS

<TABLE>
<CAPTION>


PART I -- FINANCIAL INFORMATION
                                                                                                                   Page
<S>                                                                                                                 <C>

Item 1.  Financial Statements

         Condensed Consolidated Statements of Financial Condition - September 30, 1999
         and December 31, 1998                                                                                        1

         Condensed Consolidated Statements of Income - Three and Nine months
         ended September 30, 1999 and 1998                                                                            2

         Condensed Consolidated Statements of Shareholders' Equity-
         Nine months ended September 30, 1999                                                                         3

         Condensed Consolidated Statements of Cash Flows -
         Nine months ended September 30, 1999 and 1998                                                                4

         Notes to Condensed Consolidated Financial Statements                                                         5

Item 2.  Management's Discussion and Analysis of Financial Condition
         and Results of Operations                                                                                   10

Item 3.  Quantitative and Qualitative Disclosures About Market Risk                                                  19



PART II -- OTHER INFORMATION


Item 6.  Exhibits and Reports on Form 8-K                                                                            20

                  Signatures                                                                                         20
</TABLE>


 <PAGE> 3
PART I
Item 1.  Financial Statements

                           WASHINGTON BANKING COMPANY
                                AND SUBSIDIARY
            Condensed Consolidated Statements of Financial Condition
                   September 30, 1999 and December 31, 1998
                (Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
                                                                                       September 30,       December 31,
                               Assets                                                      1999                1998
                                                                                       -------------      -------------
                                                                                        (unaudited)
<S>                                                                                      <C>                <C>
Cash and due from banks                                                                $   10,163             12,063
Interest bearing deposits                                                                   3,492              8,089
Federal funds sold                                                                             --              4,100
                                                                                       -------------      -------------
                         Total cash and cash equivalents                                   13,655             24,252

Federal Home Loan Bank stock                                                                  777                736
Investment securities, available-for-sale                                                  10,421             12,591
Investment securities, held-to-maturity                                                    24,481             24,875
                                                                                       -------------      -------------
                         Total investment securities                                       35,679             38,202

Loans receivable, net                                                                     201,081            147,872
Premises and equipment, net                                                                11,009              8,046
Other real estate owned                                                                        --                 --
Deferred tax asset                                                                            485                419
Other assets                                                                                2,231              1,702
                                                                                       -------------      -------------
                         Total assets                                                  $  264,140            220,493
                                                                                       =============      =============

                Liabilities and Shareholders' Equity
Liabilities:
    Deposits                                                                           $  228,163            189,698
    Federal funds borrowed                                                                  5,000                 --
    Other liabilities                                                                       1,258              1,104
                                                                                       -------------      -------------
                         Total liabilities                                                234,421            190,802
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 4,106,785 and 4,189,050 shares at September 30,
       1999 and December 31, 1998, respectively                                            16,839             17,836
    Retained earnings                                                                      12,958             11,805
    Accumulated other comprehensive income, net                                               (78)                50
                                                                                       -------------      -------------
                         Total shareholders' equity                                        29,719             29,691
                                                                                       -------------      -------------
                         Total liabilities and shareholders' equity                    $  264,140            220,493
                                                                                       =============      =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.

                                       1
<PAGE> 4
                           WASHINGTON BANKING COMPANY
                                 AND SUBSIDIARY
                    Condensed Consolidated Statements of Income
              Three and Nine months ended September 30, 1999 and 1998
                                   (unaudited)
               (Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
                                                                                   Three months ended         Nine months ended
                                                                                      September 30               September 30
                                                                                    1999         1998         1999         1998
                                                                                 ---------    ---------    ---------    ---------
<S>                                                                             <C>          <C>          <C>          <C>
Interest income:
    Interest and fees on loans                                                   $  4,439        3,354       11,892        9,429
    Interest on taxable investment securities                                         257          286          831          816
    Interest on tax-exempt investment securities                                      206          183          610          448
    Other                                                                              69          303          237          402
                                                                                 ---------    ---------    ---------    ---------
                         Total interest income                                      4,971        4,126       13,570       11,095
Interest expense                                                                    1,814        1,554        4,847        4,284
                                                                                 ---------    ---------    ---------    ---------
                         Net interest income                                        3,157        2,572        8,723        6,811
Provision for loan losses                                                             255          195          765          540
                                                                                 ---------    ---------    ---------    ---------
                         Net interest income after provision
                            for loan losses                                         2,902        2,377        7,958        6,271
Noninterest income:
    Service charges on deposits                                                       359          283        1,053          850
    Other                                                                             198          326          782          723
                                                                                 ---------    ---------    ---------    ---------
                         Total noninterest income                                     557          609        1,835        1,573
Noninterest expense:
    Salaries and benefits                                                           1,421        1,186        4,046        3,116
    Occupancy expense                                                                 582          402        1,526        1,033
    Office supplies and printing                                                      148          109          326          275
    Data processing                                                                    79           64          230          191
    Consulting and professional fees                                                   16           37           55           98
    Other                                                                             460          358        1,385        1,001
                                                                                 ---------    ---------    ---------    ----------
                         Total noninterest expense                                  2,706        2,156        7,568        5,714
                                                                                 ---------    ---------    ---------    ---------
                         Income before income taxes                                   753          830        2,225        2,130
Provision for income taxes                                                            209          217          572          581
                                                                                 ---------    ---------    ---------    ---------
                         Net income                                              $    544          613        1,653        1,549
                                                                                 =========    =========    =========    =========
Net income per share, basic                                                      $   0.13         0.15         0.40         0.47
                                                                                 =========    =========    =========    =========
Net income per share, diluted                                                    $   0.12         0.14         0.37         0.44
                                                                                 =========    =========    =========    =========
Average number of shares outstanding, basic                                      4,108,932    4,189,050    4,161,733    3,304,828
Average number of shares outstanding, diluted                                    4,361,093    4,487,518    4,408,329    3,544,084

</TABLE>
See accompanying notes to condensed consolidated financial statements.

                                       2
<PAGE> 5



                           WASHINGTON BANKING COMPANY
                                AND SUBSIDIARY
         Condensed Consolidated Statements of Shareholders' Equity
                     Nine months ended September 30, 1999
                  (Amounts in thousands, except per share data)


<TABLE>
<CAPTION>
                                                                                                          Accumulated
                                                                                                         comprehensive    Total
                                                                          Common stock         Retained     income,   shareholders'
                                                                      Shares       Amount      earnings       net         equity
                                                                    ---------    ---------    ---------    ---------    ---------
<S>                                                                   <C>         <C>          <C>             <C>       <C>

Balances at December 31, 1998                                          4,189     $ 17,836       11,805           50       29,691
Cash dividend, $0.12 per share (unaudited)                                --           --         (500)          --         (500)
Net income for the nine months ended
    September 30, 1999 (unaudited)                                        --           --        1,653           --        1,653
Unrealized gains/losses for the nine months
    ended September 30, 1999, net of tax $40 (unaudited)                  --           --           --         (128)        (128)
Repurchase of common stock (unaudited)                                   (97)      (1,043)          --           --       (1,043)
Stock options exercised (unaudited)                                       15           46           --           --           46
                                                                    ---------    --------     ---------    ---------    ---------

Balances at September 30, 1999 (unaudited)                             4,107     $ 16,839       12,958          (78)      29,719
                                                                    =========    =========    =========    =========    =========

</TABLE>

See accompanying notes to condensed consolidated financial statements.

                                       3
<PAGE> 6
                           WASHINGTON BANKING COMPANY
                                 AND SUBSIDIARY
                 Condensed Consolidated Statements of Cash Flows
                  Nine months ended September 30, 1999 and 1998
                                   (unaudited)
                             (Dollars in thousands)
<TABLE>
<CAPTION>
                                                                                              Nine months ended
                                                                                                 September 30
                                                                                            1999               1998
                                                                                       -------------      -------------
<S>                                                                                        <C>                <C>
Cash flows from operating activities:
    Net income                                                                         $     1,653              1,549
    Adjustments to reconcile net income to net cash
       provided by operating activities:
          Federal Home Loan Bank stock dividends                                               (41)               (40)
          Amortization (accretion) of investment premiums (discounts), net                      48                (16)
          Provision for loan losses                                                            765                540
          Depreciation of premises and equipment                                               466                297
          Net increase in other assets                                                        (529)              (720)
          Net (decrease) / increase in other liabilities                                       154                341
                                                                                       -------------      -------------
                         Net cash provided by operating activities                           2,516              1,951
                                                                                       -------------      -------------
Cash flows from investing activities:
    Purchases of investment securities, available-for-sale                                  (1,033)            (6,000)
    Maturities of investment securities, available-for-sale                                  3,000              1,000
    Purchases of investment securities, held-to-maturity                                    (1,790)            (5,630)
    Maturities of investment securities, held-to-maturity                                    2,145              6,107
    Net increase in loans                                                                  (53,974)           (23,207)
    Proceeds from the sale of real estate owned                                                 --                 30
    Purchases of premises and equipment                                                     (3,429)            (2,911)
                                                                                       -------------      -------------
                         Net cash used in investing activities                             (55,081)           (30,611)
                                                                                       -------------      -------------
Cash flows from financing activities:
    Net increase in deposits                                                                38,465             36,120
    Federal funds borrowed                                                                   5,000                 --
    Dividends paid on common stock                                                            (500)              (335)
    Proceeds from stock options exercised                                                       46                 --
    Proceeds from stock issued                                                                  --             14,893
    Repurchase of common stock                                                              (1,043)                --
                                                                                       -------------      -------------
                         Net cash provided by financing activities                          41,968             50,678
                                                                                       -------------      -------------
                       Net (decrease) / increase in cash and cash equival                  (10,597)            22,018

 Cash and cash equivalents at beginning of period                                           24,252              8,013
                                                                                       -------------      -------------
Cash and cash equivalents at end of period                                             $    13,655             30,031
                                                                                       =============      =============
Supplemental information:
    Cash paid for interest                                                             $     4,739              4,220
    Cash paid for taxes                                                                        632                645
                                                                                       =============      =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.

                                       4
<PAGE> 7

                           WASHINGTON BANKING COMPANY
                                 AND SUBSIDIARY
              Notes to Condensed Consolidated Financial Statements
                  Nine months ended September 30, 1999 and 1998
                                   (unaudited)
                 (Dollars in thousands, except per share data)


(1)    Description of Business and Summary of Significant Accounting Policies

       Description of Business

       Washington  Banking  Company (WBCO or Company),  a Washington  State bank
       holding company,  was formed on April 30, 1996.  Whidbey Island Bank (WIB
       or  Bank),  the  principal  subsidiary  of WBCO,  is a  Washington  State
       commercial  bank.  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.  Although WIB has
       a  diversified  loan  portfolio  and its market area  currently  enjoys a
       stable economic climate, a substantial  portion of its borrowers' ability
       to repay their loans is dependent upon the economic conditions  affecting
       this  area  related  to  the  agricultural,  forestry  and  manufacturing
       industries,   and  the  large  military  base  presence  in  Oak  Harbor,
       Washington.

       Basis of Presentation

       The accompanying  consolidated  interim financial  statements include the
       accounts of Washington  Banking Company and its wholly-owned  subsidiary,
       Whidbey  Island Bank. The  accompanying  condensed  consolidated  interim
       financial  statements  have been  prepared,  without  audit,  pursuant to
       generally  accepted  accounting  principles and instructions to Form 10-Q
       for interim financial information.  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
       Company's  December 1998 audited  consolidated  financial  statements and
       notes  thereto  included  in the  Company's  Form  10-K  filed  with  the
       Securities and Exchange  Commission.  In the opinion of  management,  all
       adjustments  (consisting  of  normal  recurring  adjustments)  considered
       necessary for a fair presentation  have been included.  Operating results
       for  the  three  and  nine  months  ended  September  30,  1999  are  not
       necessarily  indicative  of the results that may be expected for the year
       ending December 31, 1999.

       Certain  amounts in 1998 have been  reclassified to conform with the 1999
       financial statement presentation.

                                       5
<PAGE> 8

                            WASHINGTON BANKING COMPANY
                                 AND SUBSIDIARY
              Notes to Condensed Consolidated Financial Statements
                  Nine months ended September 30, 1999 and 1998
                                   (unaudited)
                  (Dollars in thousands, except per share data)

       Recently Issued Accounting Pronouncements

       In June of 1998, the Financial  Accounting  Standards Board (FASB) issued
       Statement of Financial  Accounting Standards (SFAS) No. 133 ("SFAS 133"),
       "Accounting  for  Derivative  Instruments  and Hedging  Activities."  The
       Statement is effective  for the Company in the year 2001 and requires all
       derivatives  to be  recorded  on the  balance  sheet  at fair  value  and
       establishes accounting standards for different types of hedging
       activities,  including fair value hedges,  cash flow hedges and hedges of
       foreign  currency  exposures.  The Company  currently  has no activity in
       derivative  instruments  and  hedging  activities  and  does  not  expect
       adoption of SFAS 133 to have a material impact on the Company's financial
       position or results of operations.

       In  October   1998,   the  FASB   issued   SFAS  134,   "Accounting   for
       Mortgage-Backed  Securities Retained After the Securitization of Mortgage
       Loans Held For Sale,"  (which  amended  SFAS 65  "Accounting  for Certain
       Mortgage  Banking  Activities").   Under  this  Statement,  any  retained
       mortgage-based  securities  (after the  securitization of a mortgage loan
       held for sale) will need to be classified as either  "available-for-sale"
       or "trading".  The  Statement  was  effective  for the Company  beginning
       January 1, 1999.  The Company  currently has no activity in  securitizing
       mortgage  loans held for sale. The adoption of the Statement did not have
       a  material  impact on the  Company's  financial  position  or results of
       operations.


                                       6
<PAGE> 9

                           WASHINGTON BANKING COMPANY
                                 AND SUBSIDIARY
              Notes to Condensed Consolidated Financial Statements
                  Nine months ended September 30, 1999 and 1998
                                   (unaudited)
                  (Dollars in thousands, except per share data)


(2)    Shareholders' Equity

       The  following  illustrates  the  reconciliation  of the  numerators  and
denominators of the basic and diluted EPS computations:
<TABLE>
<CAPTION>

                                                                                        Three months ended September 30, 1999
                                                                                  ------------------------------------------------
                                                                                                      Weighted         Per share
                                                                                      Income       average shares       amount
                                                                                  --------------   --------------   --------------
<S>                                                                                    <C>           <C>                   <C>
 Basic EPS
 Income available to common shareholders                                          $     544           4,108,932             0.13
 Effect of dilutive securities; stock options                                            __             252,161               __
                                                                                  --------------   --------------   --------------
 Diluted EPS                                                                      $     544           4,361,093             0.12
                                                                                  ==============   ==============   ==============
</TABLE>



<TABLE>
<CAPTION>
                                                                                        Three months ended September 30, 1998
                                                                                  ------------------------------------------------
                                                                                                      Weighted         Per share
                                                                                      Income       average shares       amount
                                                                                  --------------   --------------   --------------
<S>                                                                                    <C>           <C>                   <C>
 Basic EPS
 Income available to common shareholders                                         $     613           4,189,050             0.15
 Effect of dilutive securities; stock options                                           __             298,468               __
                                                                                  --------------   --------------   --------------
 Diluted EPS                                                                     $     613           4,487,518             0.14
                                                                                  ==============   ==============   ==============
</TABLE>


                                       7
<PAGE> 10

                           WASHINGTON BANKING COMPANY
                                 AND SUBSIDIARY
              Notes to Condensed Consolidated Financial Statements
                  Nine months ended September 30, 1999 and 1998
                                   (unaudited)
                  (Dollars in thousands, except per share data)


<TABLE>
<CAPTION>
                                                                                        Nine months ended September 30, 1999
                                                                                  ------------------------------------------------
                                                                                                      Weighted         Per share
                                                                                      Income       average shares       amount
                                                                                  --------------   --------------   --------------
<S>                                                                                  <C>             <C>                   <C>
 Basic EPS
 Income available to common shareholders                                          $    1,653          4,161,733             0.40
 Effect of dilutive securities; stock options                                             __            246,596               __
                                                                                  --------------   --------------   --------------
 Diluted EPS                                                                      $    1,653          4,408,329             0.37
                                                                                  ==============   ==============   ==============
</TABLE>



<TABLE>
<CAPTION>
                                                                                        Nine months ended September 30, 1998
                                                                                  ------------------------------------------------
                                                                                                      Weighted         Per share
                                                                                      Income       average shares       amount
                                                                                  --------------   --------------   --------------
<S>                                                                                  <C>             <C>                   <C>
 Basic EPS
 Income available to common shareholders                                          $    1,549          3,304,828             0.47
 Effect of dilutive securities; stock options                                             --            239,256               --
                                                                                  --------------   --------------   --------------
 Diluted EPS                                                                      $    1,549          3,544,084             0.44
                                                                                  ==============   ==============   ==============


</TABLE>

                                       8
<PAGE> 11

                           WASHINGTON BANKING COMPANY
                                 AND SUBSIDIARY
              Notes to Condensed Consolidated Financial Statements
                  Nine months ended September 30, 1999 and 1998
                                   (unaudited)
                  (Dollars in thousands, except per share data)



       For three and nine months ended  September 30, 1999 there were options to
       purchase   41,000  shares  of  common  stock   outstanding,   which  were
       antidilutive and therefore not included in the computation of diluted net
       income per share. There were 0 and 82,950 antidilutive shares outstanding
       for  the  three  and  nine  month  periods  ended   September  30,  1998,
       respectively.

       On April 29,  1999,  the Board of Directors  approved a stock  repurchase
       plan,  which allows the Company to repurchase up to 210,000 shares of the
       Company's  common  stock.  As of  September  30,  1999,  the  Company had
       repurchased 97,265 shares of the Company's common stock.

(3)   Comprehensive Income

       Comprehensive  income for the three and nine months ended  September  30,
       1999 was $526 and $1,525, respectively, and for the three and nine months
       ended  September  30,  1998  was  $661 and  $1,600,  respectively.  Total
       comprehensive  income for the three and nine months ended  September  30,
       1999 and 1998  consisted  of net income and the change in the  unrealized
       gain/loss on investments.



(4)   Subsequent Event

       On October  27,  1999,  the Board of  Directors  declared a cash
       dividend  of $0.04 per share to  shareholders  of record as of
       November 8, 1999.

                                       9
<PAGE> 12

Item 2.           Management's Discussion And Analysis Of Financial
                       Condition And Results Of Operations


Washington Banking Company

         This discussion contains certain forward-looking  statements within the
meaning of the federal securities laws. Actual results and the timing of certain
events  could differ  materially  from those  projected  in the  forward-looking
statements due to a number of factors.  Specific factors include,  among others,
the effect of interest rate changes,  risk associated with opening new branches,
controlling expenses and general economic conditions.  Readers are cautioned not
to place  undue  reliance  on forward  looking  statements  since  they  reflect
management's analysis only as of the date of the statement.



OVERVIEW

         The Bank began operations in 1961, with its headquarters at Coupeville,
Washington,  located on Whidbey Island. The Company was formed as a bank holding
company in April of 1996 and currently  holds all of the issued and  outstanding
common  stock of the Bank.  The  Company and the Bank are  headquartered  in Oak
Harbor, Washington. The Company's only significant business activity has been to
hold the common stock of the Bank and invest its  available  funds.  The Company
currently has twelve full service bank branches and two loan production  offices
located  in  Island,  Skagit,   Jefferson  and  Whatcom  counties  in  Northwest
Washington State.

         The   Company's   objective  is  to  continue  to  look  for  expansion
opportunities  in  communities  north  of  Seattle,   to  Vancouver,   BC  while
solidifying its market position in Island (Whidbey and Camano Islands),  Skagit,
Whatcom and Jefferson Counties.  Currently,  the geographical expansion has been
concentrated in the Burlington / Mt. Vernon and other areas of Skagit County and
the Bellingham area of Whatcom  County.  Additional  geographic  expansion areas
will be  considered  if they  meet the  Company's  criteria  which  include  the
availability of experienced managers, lending officers and branch personnel with
long-standing   presence  in  the  area  and  extensive  banking  relationships.
Requisite  customer demand must also exist. In pursuit of this growth  strategy,
during the first quarter of 1999, the Company relocated its Bellingham office to
a larger office and opened a residential  real estate loan production  office in
Port Townsend, Washington (Jefferson County). In the second quarter of 1999, the
Company  opened a full  service  office  in Sedro  Woolley,  Washington  (Skagit
County). Third quarter accomplishments included the consolidation of the Whidbey
City branch with the remaining three South Whidbey offices and the relocation of
the North  Whidbey  branch in Oak Harbor  (Island  County).  Such  expansion and
relocation  activity can be expected to require the  expenditure  of substantial
sums to purchase  or lease real  property  and  equipment  and hire  experienced
personnel.  New branch  offices are often not  profitable for at least the first
eighteen  months after opening and management  expects that any earnings will be
negatively affected as the Company pursues its growth strategy.  The Company has
added several  experienced  personnel,  branches and/or loan production  offices
since June 30,  1998.

                                       10
<PAGE> 13

In  addition,  the Company has started a Private  Banking
division,  increased its real estate mortgage  division  personnel and products,
added business cash management services,  including business sweep accounts, and
implemented an internet online banking system.


FINANCIAL CONDITION

         Total  assets  increased to $264.1  million at September  30, 1999 from
$220.5  million at December 31, 1998,  an increase of 19.8%.  Net loans  totaled
$201.1  million at September  30, 1999,  an increase of 36.0% from  December 31,
1998.  Deposits were $228.2  million at September 30, 1999, an increase of 20.3%
from December 31, 1998.

            The Company's shareholders' equity increased only slightly to $29.72
million at September  30, 1999 from $29.69  million at December  31,  1998.  The
primary  reasons for the slight  increase  were that the earnings were offset by
the repurchase of approximately 97,000 shares of common stock for $1,043,000 and
the payment of cash dividends of $500,000 during the first nine months of 1999.

         The Company's  allowance for loan losses at September 30, 1999 was $2.2
million,  or 1.06% of total loans,  compared to $1.7 million,  or 1.17% of total
loans,  at  December  31,  1998.  Nonperforming  assets  amounted to $943,000 at
September 30, 1999,  or .36% of total  assets,  compared to $847,000 or 0.38% of
total assets, at December 31, 1998.


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 also generates  noninterest  income primarily  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 for the third quarter of 1999 decreased 11.3% to $544,000 or
$0.12 per diluted  share,  from $613,000,  or $0.14 per diluted  share,  for the
third quarter of 1998.  Net income for the nine months ended  September 30, 1999
increased 6.7% to $1,653,000,  or $0.37 per diluted share,  from $1,549,000,  or
$0.44 per  diluted  share,  for the same  period in 1998.  There were 24.4% more
diluted average shares  outstanding for the nine months ended September 30, 1999
compared to  September  30, 1998 due to the  Company's  public  offering of 1.38
million  shares in June 1998.  The third  quarter  net income  decline  reflects
expenses related to the Company's  expansion strategy of adding branches and key
personnel.  In addition,  noninterest income for the third quarter 1999 declined
$52,000 from the like period a year ago primarily due to decreased mortgage loan
fees.  The increase in net income for the nine month period was primarily due to
increased net interest income  (resulting from continued loan growth) which more
than offset the increase in noninterest expense.

                                       11
<PAGE> 14

NET INTEREST INCOME

         Net  interest  income for the third  quarter of 1999  increased to $3.2
million, or 22.7%, from $2.6 million in the third quarter of 1998. For the first
nine months of 1999, net interest  income  increased to $8.7 million,  or 28.1%,
from $6.8  million for the same  period in 1998.  The  increase in net  interest
income is largely due to the overall growth of the Company.


         Average  interest  earning  assets for the third  quarter  increased to
$229.4  million at September 30, 1999,  compared to $189.6  million at September
30,  1998,  a growth of $39.8  million,  or 21.0%,  while the  average  yield on
interest earning assets decreased to 8.79%, compared with 8.83% in third quarter
of the prior year. The slight  decrease in yield on interest  earning assets was
caused by a decline in yields on loans.  The average yield on loans decreased to
9.4% for the quarter  ended  September 30, 1999 from 9.96% for the quarter ended
September  30,  1998.  The average  cost of interest  bearing  liabilities  also
decreased in the third quarter of 1999 to 3.90% from 4.24% for the quarter ended
September  30,  1998.  Average  interest  bearing  liabilities  for the  quarter
increased to $186.0  million at September 30, 1999 compared to $146.6 million at
September 30, 1998, a growth of $39.4 million,  or 26.9%.  The overall result of
these  changes  was an  increase  in the net  interest  spread  to 4.89% for the
quarter ended  September 30, 1999 from 4.59% for the quarter ended September 30,
1998.

            Average  shareholders'  equity  increased  to $29.6  million for the
quarter ended September 30, 1999 from $29.0 million in the same period for 1998,
an increase of 2.1%,  which  positively  impacted  the  increase in net interest
income.  Net interest  margin (net interest  income divided by average  interest
earning  assets)  increased to 5.63% in the third  quarter of 1999 from 5.56% in
the third quarter of 1998.


NONINTEREST INCOME AND EXPENSE

                  Noninterest  income decreased  $52,000,  or 8.5%, in the third
quarter of 1999 compared to the same period 1998 reflecting the decrease in fees
received on third party  originated  real estate  loans due to a less  favorable
1999 mortgage loan market.  Noninterest income increased $262,000,  or 16.7% for
the first nine months of 1999 compared  with the same period in 1998,  primarily
due to increases in service charge income.

         Noninterest expense increased $550,000,  or 25.5%, in the third quarter
of 1999 and $1.9  million,  or 32.4%,  in the first nine months of 1999 compared
with the same  periods in 1998,  as the Company  pursued its  strategy of growth
through  branching and product  expansion.  Two major  components of noninterest
expense,  employee  compensation  and  occupancy,  increased  19.8%  and  44.8%,
respectively,  for the quarter  compared  with the same period in 1998 and 29.8%
and 47.7%,  respectively,  for the first nine months of 1999  compared  with the
same period in 1998. These increases reflect the Company's  geographic growth on
Whidbey and Camano Islands, Port Townsend, Anacortes, Burlington, Bellingham and
Sedro Woolley in  Northwestern  Washington  and the addition of new products and
services.  The efficiency ratio  (noninterest  expense divided by the sum of net
interest income plus noninterest income less non-recurring gains) was 72.86% for

                                       12
<PAGE> 15

the third  quarter  and 71.68% for the first nine  months of 1999  compared  to
67.78% and 68.15% for the same periods in 1998, respectively.


INCOME TAXES

         For the third  quarter  and first  nine  months  of 1999,  the  Company
recorded an income tax  provision  of $209 and $572,  respectively.  The overall
effective tax rate has  decreased  for the nine months ended  September 30, 1999
compared  to the same period in 1998 due to the  increase in interest  income on
tax-exempt investment securities.


LENDING ACTIVITIES

         The Company  originates a wide variety of loans  including  commercial,
real estate and  consumer  loans.  The  following  table sets forth at the dates
indicated the Company's loan portfolio composition by type of loan:
<TABLE>
<CAPTION>

(amounts in thousands)                           September 30,                             December 31,
                                                     1999              % of Total              1998           % of Total
                                                ---------------       ------------        --------------     ------------
<S>                                                <C>                 <C>                  <C>                  <C>
Commercial                                      $    89,160              43.9%            $   65,564               43.8%
Real estate mortgages:
      One to four family residential                 20,320              10.0%                17,052               11.4%
      5 or more family residential and
      commercial                                     22,941              11.3%                12,146                8.1%
                                                ---------------       ------------        --------------     ------------
Total real estate mortgages                          43,261              21.3%                29,198               19.5%
Real estate construction                             12,911               6.4%                14,139                9.5%
Consumer                                             57,910              28.5%                40,750               27.2%
                                                ---------------       ------------        --------------     ------------
Subtotal                                            203,242             100.0%               149,651              100.0%
                                                                      ============                           ============
    Less: allowance for loan losses                  (2,161)                                  (1,745)
    Less: deferred loan fees and other                    0                                      (34)
                                                ===============                           ==============
Total loans, net                                   $201,081                                 $147,872
                                                ===============                           ==============
</TABLE>



         Total loans,  net,  increased to $201.1  million at September 30, 1999,
representing a 36.0% increase from year-end 1998. Total commercial,  real estate
mortgage, and consumer loans increased 36.0%, 48.2%, and 42.1%, respectively, at
September  30, 1999 from year-end  1998.  Total real estate  construction  loans
decreased 8.7% for the same period. These changes reflect continuing  commercial
and real  estate  loan  growth,  seasonal  trends,  the  Company's  geographical
expansion and increased average loan size.

                                       13
<PAGE> 16

NONPERFORMING ASSETS

         The  following  table sets forth at the dates  indicated an analysis of
the composition of the Company's nonperforming assets:
<TABLE>
<CAPTION>

(amounts in thousands)                                  September 30, 1999         December 31, 1998
                                                       --------------------       -------------------
<S>                                                            <C>                        <C>

Nonaccrual loans                                                   $891                       $639
Restructured loans                                                   52                        208
                                                       --------------------       -------------------
         Total nonperforming loans                                 $943                       $847
Real estate owned                                                    --                       --
                                                       --------------------       -------------------
         Total nonperforming assets                                $943                       $847

Accruing loans past due => 90  days                               $  --                      $  32

Potential problem loans                                              --                        215
Allowance for loan losses                                         2,161                      1,745

Nonperforming loans to loans                                       .46%                      0.57%
Allowance for loan losses to loans                                1.06%                      1.17%
Allowance for loan losses to nonperforming loans                229.16%                    206.02%
Nonperforming assets to total assets                              0.36%                      0.38%
</TABLE>

         Nonperforming  loans increased to $943,000,  or .46% of total loans, at
September 30, 1999 from $847,000 at December 31, 1998.


PROVISION AND ALLOWANCE FOR LOAN LOSSES

         The Company recorded a $255,000 provision for loan losses for the third
quarter of 1999,  compared with  $195,000 for the same period a year ago.  There
were $114,000 in net loan charge-offs during the third quarter of 1999, compared
to $28,000 in net charge-offs for the same period in 1998.

         The  allowance  for loan losses  increased to $2.2 million at September
30, 1999 from $1.7 million at December 31, 1998,  or 1.06% of total  outstanding
loans and 229.16% of nonperforming loans at the end of the third quarter 1999 as
compared to 1.17% of total loans and 206.02% of nonperforming  loans at December
31, 1998.

         For the nine months ended  September  30, 1999,  the provision for loan
losses was  $765,000  compared  to  $540,000  for the same  period in 1998.  Net
charge-offs  for the first nine  months of 1999  totaled  $349,000  compared  to
$143,000 for the same period of 1998.

         The allowance  for loan losses is  maintained at a level  considered by
management  to be  adequate  to  provide  for  possible  loan  losses  based  on
management's  assessment of various factors affecting the loan portfolio.  These
factors  include  the quality of the loan  portfolio,  problem  loans,  business
conditions, loss experience, and underlying collateral.

                                       14
<PAGE> 17

         The  following  table sets forth at the dates  indicated the changes in
the Company's allowance for loan losses:
<TABLE>
 <CAPTION>
    (amounts in thousands)
                                                       For the three month       For the three month
                                                           period ended               period ended
                                                        September 30, 1999        September 30, 1998
                                                       --------------------       -------------------
<S>                                                              <C>                       <C>
    Balance at beginning of period                     $          2,020           $          1,526
    Charge offs:
             Commercial                                             (52)                        --
             Real estate                                             --                         --
             Consumer                                               (69)                       (49)
                                                       --------------------       -------------------
             Total charge offs                                     (121)                       (49)
    Recoveries:
             Commercial                                               1                          1
             Real estate                                             --                         --
             Consumer                                                 6                         20
                                                       --------------------       -------------------
             Total recoveries                                         7                         21

    Net charge-offs                                                (114)                       (28)
    Provision for loan losses                                       255                        195
                                                       --------------------       -------------------
    Balance at end of period                           $          2,161           $          1,693
                                                       ====================       ===================
</TABLE>
<TABLE>
<CAPTION>
    (amounts in thousands)
                                                        For the nine month         For the nine month
                                                           period ended               period ended
                                                        September 30, 1999         September 30,1998
                                                       --------------------       -------------------
<S>                                                              <C>                       <C>

    Balance at beginning of period                     $          1,745           $          1,296
    Charge offs:
             Commercial                                            (169)                       (52)
             Real estate                                             (6)                        --
             Consumer                                              (195)                      (114)
                                                       --------------------       -------------------
             Total charge offs                                     (370)                      (166)
    Recoveries:
             Commercial                                               8                          1
             Real estate                                             --                         --
             Consumer                                                13                         22
                                                       --------------------       -------------------
             Total recoveries                                        21                         23

    Net charge-offs                                                (349)                      (143)
    Provision for loan losses                                       765                        540
                                                       --------------------       -------------------
    Balance at end of period                           $          2,161                     $1,693
                                                       ====================       ===================
</TABLE>
                                       15
<PAGE> 18

LIQUIDITY AND SOURCES OF FUNDS

         The Company's sources of funds are customer  deposits,  cash and demand
balances due from other banks,  federal funds sold,  short-term  investments and
investment  securities  available-for-sale.  These  funds,  together  with  loan
repayments,  are  used  to make  loans  and to fund  continuing  operations.  In
addition, at September 30, 1999, the Company has unused lines of credit with the
Federal Home Loan Bank of Seattle (FHLB) of $39.1 million,  the Federal  Reserve
Bank of San Francisco of $6.7 million and correspondent  financial  institutions
in the amount of $12 million.  As of September 30, 1999, there were $5.0 million
in advances from the financial institutions on these lines of credit.

         Total deposits  increased 25.0% to $228.2 million at September 30, 1999
from $182.5  million at September  30, 1998.  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.  In addition,  the Company has been able to retain a significant amount
of its deposits as they mature.

         Management  anticipates  that the  Company  will  rely  primarily  upon
customer  deposits,  loan repayments and current earnings to provide  liquidity,
and will use such  funds  primarily  to make loans and to  purchase  securities,
primarily issued by the federal government and state and local  governments.  In
addition,  the  Company may use Federal  Home Loan Bank  advances to  supplement
funding sources.


CAPITAL

         The Company's shareholders' equity increased slightly to $29.72 million
at September  30, 1999 from $29.69  million at December  31, 1998.  On April 29,
1999  the  Company's  Board  of  Directors  approved  the  repurchase  of  up to
approximately  5% or 210,000  shares of  outstanding  company  stock.  The Board
deemed this action  prudent given the Company's  strong equity ratios and market
conditions.  During the nine months  ended  September  30,  1999,  approximately
97,000  shares have been  repurchased  for  $1,043,000.  Management  anticipates
continued  repurchases  of  company  stock  as it  deems  appropriate  up to the
approximate 5% level previously  approved.  The Company also paid cash dividends
of  $500,000  during the first nine  months  ended  September  30,  1999.  These
actions,  along  with  $128,000  in  unrealized  losses  on  available  for sale
securities,  were  the  primary  reasons  for  the  Company's  nearly  unchanged
shareholders'  equity at September  30, 1999.  Total assets  increased to $264.1
million at  September  30, 1999 from $220.5  million at December  31,  1998,  an
increase of 19.8%.  The result of these  changes was a  shareholders'  equity to
total assets ratio of 11.3% at September  30, 1999 compared to 13.5% at December
31, 1998.

         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 3%. At September 30, 1999,  the Company's  leverage ratio was
10.52%,  compared  with  11.67% at  December  31,  1998.  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

                                       16
 <PAGE> 19

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.  Regulatory  minimum
risk-based  capital  guidelines  require  Tier I capital of 4% of  risk-adjusted
assets and total capital (combined Tier I and Tier II) of 8%. The Company's Tier
I and total capital  ratios were 12.40% and 13.42%,  respectively,  at September
30,1999, compared with 14.93% and 15.99%, respectively, at December 31, 1998.

           The Federal Deposit  Insurance  Corporation (the "FDIC")  established
the  qualifications  necessary to be  classified as a  "well-capitalized"  bank,
primarily  for  assignment  of FDIC  insurance  premium  rates.  To  qualify  as
"well-capitalized,"  banks must have a Tier I risk-adjusted  capital ratio of at
least 6%, a total  risk-adjusted  capital  ratio of at least 10%, and a leverage
ratio of at least 5%.  Whidbey Island Bank  qualified as  "well-capitalized"  at
September 30, 1999.


IMPACT OF THE YEAR 2000 ISSUE (Y2K)

         The  Company,  like  all  financial  institutions,  is  faced  with the
challenges  that the year  2000  brings.  The Year  2000  issue  relates  to the
inability  of many  computer  systems to  recognize  dates for the year 2000 and
beyond.  Computers  programmed  with a two-digit  field for identifying the year
interpret "99", as "1999",  but may interpret "00" as "1900" rather than "2000",
resulting in incorrect  calculations in date sensitive programs.  The failure of
any of these systems to recognize the Year 2000 could have a material  effect on
the Company's business,  results of operations and financial condition. In order
to meet these challenges,  the Company is going through a multi-phase program to
assure a state of readiness for Year 2000.

The Company's State of Readiness

     Awareness Phase
     The Company  began the  awareness  phase of its Year 2000  program in early
     1997. The Board of Directors  formed a readiness team in consultation  with
     senior  management.  This team has the  responsibility  for identifying all
     systems,  application software and supporting equipment for information and
     non-information  technology that might have an impact on the Company from a
     Year 2000 perspective.  The Company has also developed a customer awareness
     program  that  provides  information  on its Y2K  readiness  efforts.  This
     program  includes  training  staff to address  customer  concerns about Y2K
     issues.  Communications have been promoted through public meetings, mailing
     informational  brochures and the Company's Year 2000  Readiness  Disclosure
     statements.

     Assessment Phase
     This phase involves the process of identifying and  prioritizing  providers
     and vendors using a "business  critical"  methodology.  The readiness  team
     began the assessment phase of the program early in 1997. The team completed
     its assessment of all the Company's computer systems,  hardware,  software,
     networks,  telecommunications,  ATMs, and property and equipment that could
     potentially be impacted by the Year 2000.  The Company  continues to assess
     and monitor,  on an ongoing basis,  systems,  software and equipment as the
     Company  makes  purchases  or  changes in these  areas to assure  Year 2000
     readiness.

                                       17
 <PAGE> 20

     The Company  does not have  in-house  programs  and relies upon third party
     vendors to provide  software  applications  used.  The team  contacted  the
     Company's  service  providers  and  software/hardware   vendors  identified
     through the awareness  phase to determine  their  approach to the Year 2000
     issue and to receive  commitment  dates for the delivery of their readiness
     plans and/or compliant releases of software packages.

     In  addition,  the Company  analyzed the extent that Year 2000 issues could
     adversely  impact its  borrowers'  business  operations,  particularly  its
     high-balance  commercial  borrowers.   The  Company  performed  an  initial
     assessment of each major borrower and established an ongoing  assessment as
     part of the  Company's  credit  granting  and  loan  review  process.  On a
     quarterly  basis these customers are reviewed and classified as having low,
     medium or high Year 2000 risk. This analysis is then  incorporated into the
     Bank's quarterly loan loss reserve analysis.  As of September 30, 1999, the
     Company has no evidence of potential  Y2K loss as related to its  borrowing
     customers. Tracking and monitoring the progress of these providers, vendors
     and  high-balance  customers  is  coordinated  by the  team  and  regularly
     reported to the Company's Board of Directors.

     Renovation Phase
     This phase  involved  upgrading and replacing  mission-critical  systems if
     needed.  As of  March  31,  1999,  renovation  had been  completed  for all
     systems,  software and hardware that have been deemed "business  critical."
     The Company's  renovation of non "business critical" systems is expected to
     be completed by November 15, 1999.

     Validation and Testing Phase
     This phase  involved  verifying and  validating  that systems and equipment
     will  operate  correctly  and that  calculations  regarding  dates  will be
     accurate  even if the  dates  occur  during  or after  the year  2000.  The
     validation  and testing phase of the program  emphasized the Company's most
     critical  third party vendors - those that provide the  mainframe  software
     and  hardware.  These  vendors  have  assured  the  Company  that they have
     successfully  completed their Year 2000 internal testing. The Company chose
     to test the software and hardware via group testing.  Software and hardware
     from other third party providers were tested  internally or externally with
     oversight by members of the team.  Internal testing included  creation of a
     test  environment   specifically  dedicated  to  Year  2000  testing.  This
     environment  allowed  simulation  of the Year  2000  change  in each of our
     critical  systems by rolling dates forward to validate vendor testing prior
     to the actual  Year 2000 date  change.  External  testing  strategies  were
     determined by the type of  interfaces  with  providers.  The Company had an
     independent,  external audit performed in late 1998 to evaluate the testing
     and overall readiness on Year 2000. An additional independent review of the
     Company's test results and contingency planning was completed in May, 1999.
     No significant findings were noted in either review.

     Implementation Phase
     The  implementation  phase is ongoing and  incorporates  the development of
     contingency plans for ongoing business operations. The Company is preparing
     contingency plans to minimize disruption to its operations due to Year 2000
     issues.  The plans prescribe  alternative  processes to mitigate  potential
     problems  should  critical  systems  fail despite the  Company's  extensive

                                       18
 <PAGE> 21

     preparations.  Such processes  will be augmented by the Company's  existing
     disaster  recovery  plan,  which  enables  it  to  function  under  unusual
     circumstances.  In addition, the Plan includes management's preparations to
     accommodate  the liquidity and cash needs of the Company  during the fourth
     quarter of 1999.

     Contingency  plans are  complete  and testing is in the final  stages as of
     September 30, 1999.  Although the Company has taken  precautions  to assure
     its  technology is Year 2000 ready,  it will  continue to address  possible
     emergency  scenarios.  Review and  validation  of these plans will continue
     through  the  remainder  of 1999.  The Company  has  determined  to further
     mitigate  potential  business  disruption  resulting  from  possible  power
     interruptions  by  installing  generators  in its hub  branches  during the
     second and third quarters of 1999.

     The Costs to Address the Company's Year 2000 Issues

         The Company has expended  approximately $134,500 in addressing the Year
     2000 issue.  The  majority  of these costs have been spent on managing  the
     Year 2000 project and  educating  employees  and  customers of the Company.
     Remaining estimated costs for completion of the Year 2000 readiness project
     are estimated at  approximately  $59,300.  Costs related to renovating  and
     testing  will  be  expensed  in  the  period  incurred.  Costs  related  to
     addressing Year 2000 issues are not anticipated to be material.

     The Risks of the Company's Year 2000 Issues

         The Company purchases systems,  equipment and data processing  services
     from  vendors  and  suppliers.  It also  depends on many other  vendors for
     various  services  needed for day-to-day  operations.  Although the Company
     can, and will, prepare its operations for the century change,  there can be
     no assurance that forces beyond its control will not impact its operations.
     The  Company's  customers  could also be impacted  adversely by the century
     change and thereby  impact the  financial  performance  of the Company.  In
     spite  of  the  Company's   diligent  efforts  in  confirming  its  outside
     suppliers,  vendors  and  customers  are Year 2000  ready,  there can be no
     assurance that when the century changes,  certain  systems,  technology and
     equipment  of the  Company,  its  vendors  and its  customers  will  not be
     impacted and consequently impact the operations of the Company.


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) analysis.  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.

                                       19
<PAGE> 22

Actual results will differ from simulated  results due to timing,  magnitude and
frequency of interest rate changes,  changes in market conditions and management
strategies,  among other factors.  At September 30, 1999,  based on the measures
used to monitor  and manage  interest  rate risk,  there has not been a material
change in the  Company's  interest  rate  risk  since  December  31,  1998.  For
additional information, refer to the Company's Form 10-K for year ended December
31, 1998.



PART II


Item 6.    Exhibits And Reports On Form 8-K

(a)      Exhibits

         Exhibit 27 - Financial Data Schedule

(b)      Reports on Form 8-K

         None

                                   SIGNATURES

         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
the  registrant  has duly  caused  this report to be signed on its behalf by the
undersigned, thereunto duly authorized.


                                    WASHINGTON BANKING COMPANY



Date     November 12, 1999                      By     /s/  Michal D. Cann
                                                       --------------------

                                                       Michal D. Cann
                                                       President and Chief
                                                       Executive Officer


Date     November 12, 1999                      By     /s/ Phyllis A. Hawkins
                                                       -----------------------

                                                       Phyllis A. Hawkins
                                                       Senior Vice President and
                                                       Chief Financial Officer


                                       20