##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

|    |  |                                                                                          
|--- |  | -----------------------------------------------------------------------------------------
|[X] |  | Quarterly report pursuant to Section 13 or l5 (d) of the Securities 
Exchange Act of 1934

For the quarterly period ended June 30, 2002

|      |  |                                                                                         
|----- |  | ----------------------------------------------------------------------------------------
|[   ] |  | 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
(State or other jurisdiction of
incorporation or organization) |  | 91-1725825
(I.R.S. Employer
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   [   ]

The number of shares of the issuers Common Stock outstanding at August 9,
2002 was 4,077,750.





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TABLE OF CONTENTS



|             |                                                                                               |                                                                                    |  |  |  |  |  | 
|------------ | --------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------- |  |  |  |  |  | 
|PART I      
|             | Item 1. Financial Statements                                                                 
|             |                                                                                               | Condensed Consolidated Statements of Financial Condition                          
|             |                                                                                               | Condensed Consolidated Statements of Income                                       
|             |                                                                                               | Condensed Consolidated Statements of Shareholders Equity and Comprehensive Income
|             |                                                                                               | Condensed Consolidated Statements of Cash Flows                                   
|             |                                                                                               | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS                              
|             | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|             | Item 3. Quantitative and Qualitative Disclosures about Market Risk                           
|PART II     
|             | Item 4. Submission of Matters to a Vote of Security Holders                                  
|             | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES  
|EXHIBIT 99.1
|EXHIBIT 99.2



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##### Table of Contents



Table of Contents

|        |  |                                                                                                                              |  |     
|------- |  | ---------------------------------------------------------------------------------------------------------------------------- |  | ----
|        |  |                                                                                                                              |  | Page
|        |  |                                                                                                                              |  |     
|PART I 
|       
|Item 1. |  | Financial Statements                                                                                                         |  |     
|       
|        |  | Condensed Consolidated Statements of Financial Condition 
June 30, 2002 and December 31, 2001                               |  | 1   
|       
|        |  | Condensed Consolidated Statements of Income 
Three and Six Months Ended June 30, 2002 and 2001                              |  | 2   
|       
|        |  | Condensed Consolidated Statements of Shareholders Equity and Comprehensive Income 
Six Months Ended June 30, 2002 and 2001 |  | 3   
|       
|        |  | Condensed Consolidated Statements of Cash Flows 
Six Months Ended June 30, 2002 and 2001                                    |  | 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                                                                   |  | 16  
|       
|PART II
|       
|Item 4. |  | Submission of Matters to a Vote of Security Holders                                                                          |  | 17  
|       
|Item 6. |  | Exhibits and Reports on Form 8-K                                                                                             |  | 17  
|       
|        |  | Signatures                                                                                                                   |  |     





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##### Table of Contents






PART I




Item 1. Financial Statements




WASHINGTON BANKING COMPANY
AND SUBSIDIARY
Condensed Consolidated Statements of Financial Condition
June 30, 2002 and December 31, 2001
(Dollars in thousands, except per share data)

|                                                                        |                                                                                                                                                                      |   |         |                                            |  |             |         |              |  |   |         | 
|----------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------- | - | ------- | ------------------------------------------ |  | ----------- | ------- | ------------ |  | - | ------- | 
|                                                                        |                                                                                                                                                                      |   |         |                                            |  | June 30,    |         | December 31,
|                                                                        |                                                                                                                                                                      |   |         |                                            |  | 2002        |         | 2001        
|                                                                        |                                                                                                                                                                      |   |         |                                            |  |             |         |             
|                                                                        |                                                                                                                                                                      |   |         |                                            |  | (unaudited) |         | (audited)   
|Assets                                                                 
|Cash and due from banks ($943 and $4,096, respectively, are restricted) |                                                                                                                                                                      | $ | 18,252  |                                            |  | $           | 16,838  |             
|Interest-earning deposits                                               |                                                                                                                                                                      |   | 9,122   |                                            |  |             | 427     |             
|Federal funds sold                                                      |                                                                                                                                                                      |   | 2,000   |                                            |  |             | 2,500   |             
|                                                                        |                                                                                                                                                                      |   |         |                                            |  |             |         |             
|                                                                        | Total cash and cash equivalents                                                                                                                                      |   |         | 29,374                                     |  |             |         | 19,765       | 
|                                                                        |                                                                                                                                                                      |   |         |                                            |  |             |         |             
|Federal Home Loan Bank stock                                            |                                                                                                                                                                      |   | 2,090   |                                            |  |             | 2,029   |             
|Deferred compensation plan                                              |                                                                                                                                                                      |   | 233     |                                            |  |             | 132     |             
|Investment securities available for sale                                |                                                                                                                                                                      |   | 2,634   |                                            |  |             | 4,145   |             
|Investment securities held to maturity                                  |                                                                                                                                                                      |   | 16,971  |                                            |  |             | 18,401  |             
|                                                                        |                                                                                                                                                                      |   |         |                                            |  |             |         |             
|                                                                        | Total investment securities                                                                                                                                          |   |         | 21,928                                     |  |             |         | 24,707       | 
|                                                                        |                                                                                                                                                                      |   |         |                                            |  |             |         |             
|Loans receivable, net                                                   |                                                                                                                                                                      |   | 413,585 |                                            |  |             | 373,198 |             
|Premises and equipment, net                                             |                                                                                                                                                                      |   | 15,679  |                                            |  |             | 15,647  |             
|Other real estate owned                                                 |                                                                                                                                                                      |   | 409     |                                            |  |             | 473     |             
|Deferred tax assets                                                     |                                                                                                                                                                      |   | 834     |                                            |  |             | 812     |             
|Other assets                                                            |                                                                                                                                                                      |   | 3,374   |                                            |  |             | 3,084   |             
|                                                                        |                                                                                                                                                                      |   |         |                                            |  |             |         |             
|                                                                        |                                                                                                                                                                      |   |         | Total assets                               |  | $           | 485,183 |              |  | $ | 437,686 | 
|                                                                        |                                                                                                                                                                      |   |         |                                            |  |             |         |             
|Liabilities and Shareholders Equity                                   
|Liabilities:                                                            |                                                                                                                                                                      |   |         |                                            |  |             |         |             
|                                                                        | Deposits                                                                                                                                                             |   | $       | 408,535                                    |  |             | $       | 367,175      | 
|                                                                        | Other borrowed funds                                                                                                                                                 |   |         | 22,500                                     |  |             |         | 32,500       | 
|                                                                        | Deferred compensation plan                                                                                                                                           |   |         | 233                                        |  |             |         | 132          | 
|                                                                        | Other liabilities                                                                                                                                                    |   |         | 1,597                                      |  |             |         | 2,902        | 
|                                                                        | Trust preferred securities                                                                                                                                           |   |         | 15,000                                     |  |             |         |             | 
|                                                                        |                                                                                                                                                                      |   |         |                                            |  |             |         |             
|                                                                        |                                                                                                                                                                      |   |         | Total liabilities                          |  |             | 447,865 |              |  |   | 402,709 | 
|                                                                        |                                                                                                                                                                      |   |         |                                            |  |             |         |             
|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 4,077,750 and 4,055,250
shares at June 30, 2002 and December 31, 2001, respectively |   |         | 16,191                                     |  |             |         | 16,124       | 
|                                                                        | Retained earnings                                                                                                                                                    |   |         | 21,084                                     |  |             |         | 18,782       | 
|                                                                        | Accumulated other comprehensive income, net                                                                                                                          |   |         | 43                                         |  |             |         | 71           | 
|                                                                        |                                                                                                                                                                      |   |         |                                            |  |             |         |             
|                                                                        |                                                                                                                                                                      |   |         | Total shareholders equity                 |  |             | 37,318  |              |  |   | 34,977  | 
|                                                                        |                                                                                                                                                                      |   |         |                                            |  |             |         |             
|                                                                        |                                                                                                                                                                      |   |         | Total liabilities and shareholders equity |  | $           | 485,183 |              |  | $ | 437,686 | 
|                                                                        |                                                                                                                                                                      |   |         |                                            |  |             |         |             

See accompanying notes to condensed consolidated financial statements.

1



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WASHINGTON BANKING COMPANY
AND SUBSIDIARY
Condensed Consolidated Statements of Income
Three and six months ended June 30, 2002 and 2001 (unaudited)
(Dollars in thousands, except per share data)

|                                              |                                              |                                                     |           |                             |       |                           |           |       |       |      |           |        |        |   |           |        |        | 
|--------------------------------------------- | -------------------------------------------- | --------------------------------------------------- | --------- | --------------------------- | ----- | ------------------------- | --------- | ----- | ----- | ---- | --------- | ------ | ------ | - | --------- | ------ | ------ | 
|                                              |                                              |                                                     |           | Three Months Ended June 30, |       | Six Months Ended June 30,
|                                              |                                              |                                                     |           |                             |       |                          
|                                              |                                              |                                                     |           | 2002                        |       | 2001                      |           | 2002  |       | 2001
|                                              |                                              |                                                     |           |                             |       |                           |           |       |       |     
|Interest income:                              |                                              |                                                     |           |                             |       |                           |           |       |       |      |           |        |        |   |           |       
|                                              | Interest and fees on loans                   |                                                     | $         | 8,453                       |       |                           | $         | 7,900 |       |      | $         | 16,582 |        |   | $         | 15,340 |       
|                                              | Interest on taxable investment securities    |                                                     |           | 68                          |       |                           |           | 115   |       |      |           | 150    |        |   |           | 245    |       
|                                              | Interest on tax-exempt investment securities |                                                     |           | 187                         |       |                           |           | 198   |       |      |           | 379    |        |   |           | 398    |       
|                                              | Other                                        |                                                     |           | 33                          |       |                           |           | 49    |       |      |           | 67     |        |   |           | 113    |       
|                                              |                                              |                                                     |           |                             |       |                           |           |       |       |      |           |        |        |   |           |       
|                                              |                                              | Total interest income                               |           |                             | 8,741 |                           |           |       | 8,262 |      |           |        | 17,178 |   |           |        | 16,096 | 
|Interest expense:                             |                                              |                                                     |           |                             |       |                           |           |       |       |      |           |        |        |   |           |       
|                                              | Interest deposits                            |                                                     |           | 2,569                       |       |                           |           | 3,593 |       |      |           | 5,151  |        |   |           | 7,351  |       
|                                              | Interest trust preferred securities          |                                                     |           | 7                           |       |                           |           |      |       |      |           | 7      |        |   |           |       |       
|                                              |                                              |                                                     |           |                             |       |                           |           |       |       |      |           |        |        |   |           |       
|                                              |                                              | Total interest expense                              |           |                             | 2,576 |                           |           |       | 3,593 |      |           |        | 5,158  |   |           |        | 7,351  | 
|                                              |                                              |                                                     |           |                             |       |                           |           |       |       |      |           |        |        |   |           |       
|                                              |                                              | Net interest income                                 |           |                             | 6,165 |                           |           |       | 4,669 |      |           |        | 12,020 |   |           |        | 8,745  | 
|Provision for loan losses                     |                                              |                                                     | (889      | )                           |       |                           | (655      | )     |       |      | (1,878    | )      |        |   | (1,060    | )     
|                                              |                                              |                                                     |           |                             |       |                           |           |       |       |      |           |        |        |   |           |       
|                                              |                                              | Net interest income after
provision for loan losses |           |                             | 5,276 |                           |           |       | 4,014 |      |           |        | 10,142 |   |           |        | 7,685  | 
|Noninterest income:                           |                                              |                                                     |           |                             |       |                           |           |       |       |      |           |        |        |   |           |       
|                                              | Service charges and fees                     |                                                     |           | 423                         |       |                           |           | 437   |       |      |           | 852    |        |   |           | 841    |       
|                                              | Other                                        |                                                     |           | 451                         |       |                           |           | 548   |       |      |           | 1,279  |        |   |           | 996    |       
|                                              |                                              |                                                     |           |                             |       |                           |           |       |       |      |           |        |        |   |           |        |       
|                                              |                                              | Total noninterest income                            |           |                             | 874   |                           |           |       | 985   |      |           |        | 2,131  |   |           |        | 1,837  | 
|Noninterest expense:                          |                                              |                                                     |           |                             |       |                           |           |       |       |      |           |        |        |   |           |       
|                                              | Salaries and benefits                        |                                                     |           | 2,403                       |       |                           |           | 2,004 |       |      |           | 4,722  |        |   |           | 4,046  |       
|                                              | Occupancy                                    |                                                     |           | 684                         |       |                           |           | 678   |       |      |           | 1,395  |        |   |           | 1,335  |       
|                                              | Office supplies and printing                 |                                                     |           | 127                         |       |                           |           | 138   |       |      |           | 247    |        |   |           | 263    |       
|                                              | Data processing                              |                                                     |           | 92                          |       |                           |           | 81    |       |      |           | 180    |        |   |           | 163    |       
|                                              | Consulting and professional fees             |                                                     |           | 65                          |       |                           |           | 67    |       |      |           | 121    |        |   |           | 122    |       
|                                              | Other                                        |                                                     |           | 711                         |       |                           |           | 547   |       |      |           | 1,343  |        |   |           | 1,011  |       
|                                              |                                              |                                                     |           |                             |       |                           |           |       |       |      |           |        |        |   |           |        |       
|                                              |                                              | Total noninterest expense                           |           |                             | 4,082 |                           |           |       | 3,515 |      |           |        | 8,008  |   |           |        | 6,940  | 
|                                              |                                              |                                                     |           |                             |       |                           |           |       |       |      |           |        |        |   |           |       
|                                              |                                              | Income before income taxes                          |           |                             | 2,068 |                           |           |       | 1,484 |      |           |        | 4,265  |   |           |        | 2,582  | 
|Provision for income taxes                    |                                              |                                                     | (676      | )                           |       |                           | (400      | )     |       |      | (1,436    | )      |        |   | (697      | )     
|                                              |                                              |                                                     |           |                             |       |                           |           |       |       |      |           |        |        |   |           |        |       
|                                              |                                              | Net income                                          |           | $                           | 1,392 |                           |           | $     | 1,084 |      |           | $      | 2,829  |   |           | $      | 1,885  | 
|                                              |                                              |                                                     |           |                             |       |                           |           |       |       |      |           |        |        |   |           |       
|Net income per share, basic                   |                                              | $                                                   | 0.34      |                             |       | $                         | 0.27      |       |       | $    | 0.70      |        |        | $ | 0.47      |       
|                                              |                                              |                                                     |           |                             |       |                           |           |       |       |      |           |        |        |   |           |       
|Net income per share, diluted                 |                                              | $                                                   | 0.32      |                             |       | $                         | 0.26      |       |       | $    | 0.66      |        |        | $ | 0.45      |       
|                                              |                                              |                                                     |           |                             |       |                           |           |       |       |      |           |        |        |   |           |       
|Average number of shares outstanding, basic   |                                              |                                                     | 4,061,185 |                             |       |                           | 4,047,097 |       |       |      | 4,058,233 |        |        |   | 4,040,043 |       
|Average number of shares outstanding, diluted |                                              |                                                     | 4,339,417 |                             |       |                           | 4,233,794 |       |       |      | 4,314,634 |        |        |   | 4,223,131 |       

See accompanying notes to condensed consolidated financial statements.

2



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##### Table of Contents






WASHINGTON BANKING COMPANY
AND SUBSIDIARY
Condensed Consolidated Statements of Shareholders Equity
and Comprehensive Income
Six months ended June 30, 2002 and 2001 (unaudited)
(Dollars in thousands, except per share data)

|                               |                                                                                          |                                |       |              |  |          |        |               |  |                  |        |        |  |   |     |             |   |   |        |       |       | 
|------------------------------ | ---------------------------------------------------------------------------------------- | ------------------------------ | ----- | ------------ |  | -------- | ------ | ------------- |  | ---------------- | ------ | ------ |  | - | --- | ----------- | - | - | ------ | ----- | ----- | 
|                               |                                                                                          |                                |       |              |  |          |        |               |  |                  |        |        |  |   |     | Accumulated |   |  
|                               |                                                                                          |                                |       | Common stock |  |          |        | other         |  | Total           
|                               |                                                                                          |                                |       |              |  | Retained |        | comprehensive |  | shareholders'   
|                               |                                                                                          |                                |       | Shares       |  | Amount   |        | earnings      |  | gain (loss), net |        | equity
|                               |                                                                                          |                                |       |              |  |          |        |               |  |                  |        |       
|Balances at December 31, 2000  |                                                                                          |                                | 4,033 |              |  | $        | 16,058 |               |  | $                | 15,470 |        |  | $ | (27 | )           |   | $ | 31,501 |      
|Comprehensive income:          |                                                                                          |                                |       |              |  |          |        |               |  |                  |        |        |  |   |     |             |   |   |        |      
|                               | Net income                                                                               |                                |       |             |  |          |        |              |  |                  |        | 1,885  |  |   |     |            |   |   |        | 1,885 |      
|                               | Net change in unrealized gain (loss)
on securities available for sale,
net of tax of $42 |                                |       |             |  |          |        |              |  |                  |        |       |  |   |     | 82          |   |   |        | 82    |      
|                               |                                                                                          |                                |       |              |  |          |        |               |  |                  |        |        |  |   |     |             |   |   |        |      
|                               |                                                                                          | Total comprehensive income (1) |       |              |  |          |        |               |  |                  |        |        |  |   |     |             |   |   |        |       | 1,967 | 
|Cash dividend, $0.12 per share |                                                                                          |                                |      |              |  |          |       |               |  |                  | (485   | )      |  |   |    |             |   |   | (485   | )    
|Stock options exercised        |                                                                                          |                                | 22    |              |  |          | 66     |               |  |                  |       |        |  |   |    |             |   |   | 66     |      
|                               |                                                                                          |                                |       |              |  |          |        |               |  |                  |        |        |  |   |     |             |   |   |        |      
|Balances at June 30, 2001      |                                                                                          |                                | 4,055 |              |  | $        | 16,124 |               |  | $                | 16,870 |        |  | $ | 55  |             |   | $ | 33,049 |      
|                               |                                                                                          |                                |       |              |  |          |        |               |  |                  |        |        |  |   |     |             |   |   |        |      
|Balances at December 31, 2001  |                                                                                          |                                | 4,055 |              |  | $        | 16,124 |               |  | $                | 18,782 |        |  | $ | 71  |             |   | $ | 34,977 |      
|Comprehensive income:          |                                                                                          |                                |       |              |  |          |        |               |  |                  |        |        |  |   |     |             |   |   |        |      
|                               | Net income                                                                               |                                |       |             |  |          |        |              |  |                  |        | 2,829  |  |   |     |            |   |   |        | 2,829 |      
|                               | Net change in unrealized gain (loss)
on securities available for sale,
net of tax of $14 |                                |       |             |  |          |        |              |  |                  |        |       |  |   |     | (28         | ) |   |        | (28   | )    
|                               |                                                                                          |                                |       |              |  |          |        |               |  |                  |        |        |  |   |     |             |   |   |        |      
|                               |                                                                                          | Total comprehensive income(1)  |       |              |  |          |        |               |  |                  |        |        |  |   |     |             |   |   |        |       | 2,801 | 
|Cash dividend, $0.13 per share |                                                                                          |                                |      |              |  |          |       |               |  |                  | (527   | )      |  |   |    |             |   |   | (527   | )    
|Stock options exercised        |                                                                                          |                                | 23    |              |  |          | 67     |               |  |                  |       |        |  |   |    |             |   |   | 67     |      
|                               |                                                                                          |                                |       |              |  |          |        |               |  |                  |        |        |  |   |     |             |   |   |        |      
|Balances at June 30, 2002      |                                                                                          |                                | 4,078 |              |  | $        | 16,191 |               |  | $                | 21,084 |        |  | $ | 43  |             |   | $ | 37,318 |      
|                               |                                                                                          |                                |       |              |  |          |        |               |  |                  |        |        |  |   |     |             |   |   |        |      



|(1) |  | Comprehensive income for the three months ended June 30, 2002 and 2001 was
$1,388 and $1,097, respectively.
|--- |  | -----------------------------------------------------------------------------------------------------------

See accompanying notes to condensed consolidated financial statements.

3



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WASHINGTON BANKING COMPANY
AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows
Six months ended June 30, 2002 and 2001 (unaudited)
(Dollars in thousands)

|                                                 |                                                                                   |                                                             |                                           |         |                           |         |        |         |       |         |  
|------------------------------------------------ | --------------------------------------------------------------------------------- | ----------------------------------------------------------- | ----------------------------------------- | ------- | ------------------------- | ------- | ------ | ------- | ----- | ------- | -
|                                                 |                                                                                   |                                                             |                                           |         | Six Months Ended June 30,
|                                                 |                                                                                   |                                                             |                                           |         |                          
|                                                 |                                                                                   |                                                             |                                           |         | 2002                      |         | 2001  
|                                                 |                                                                                   |                                                             |                                           |         |                           |         |       
|Cash flows from operating activities:            |                                                                                   |                                                             |                                           |         |                           |         |        |        
|                                                 | Net income                                                                        |                                                             | $                                         | 2,829   |                           |         | $      | 1,885   |      
|                                                 | Adjustments to reconcile net income to net cash
provided by operating activities: |                                                             |                                           |         |                           |         |        |         |      
|                                                 |                                                                                   | Federal Home Loan Bank stock dividends                      |                                           |         | (61                       | )       |        |         | (28   | )      
|                                                 |                                                                                   | Deferred income tax expense                                 |                                           |         | (8                        | )       |        |         |      |        
|                                                 |                                                                                   | Amortization of investment premiums, net                    |                                           |         | (21                       | )       |        |         | 16    |        
|                                                 |                                                                                   | Provision for loan losses                                   |                                           |         | 1,878                     |         |        |         | 1,060 |        
|                                                 |                                                                                   | Depreciation of premises and equipment                      |                                           |         | 625                       |         |        |         | 600   |        
|                                                 |                                                                                   | Net gains on sale of premises and equipment and real estate |                                           |         | (197                      | )       |        |         | (32   | )      
|                                                 |                                                                                   | Net (increase) decrease in other assets                     |                                           |         | (290                      | )       |        |         | 22    |        
|                                                 |                                                                                   | Net decrease in other liabilities                           |                                           |         | (1,305                    | )       |        |         | (386  | )      
|                                                 |                                                                                   |                                                             |                                           |         |                           |         |        |         |      
|                                                 |                                                                                   |                                                             | Net cash provided by operating activities |         |                           | 3,450   |        |         |       | 3,137   |  
|                                                 |                                                                                   |                                                             |                                           |         |                           |         |        |        
|Cash flows from investing activities:            |                                                                                   |                                                             |                                           |         |                           |         |        |        
|                                                 | Purchases of investment securities available for sale                             |                                                             |                                           | (500    | )                         |         |        |        |      
|                                                 | Maturities of investment securities available for sale                            |                                                             |                                           | 2,000   |                           |         |        | 1,500   |      
|                                                 | Maturities of investment securities held to maturity                              |                                                             |                                           | 1,420   |                           |         |        | 800     |      
|                                                 | Net increase in loans                                                             |                                                             |                                           | (42,265 | )                         |         |        | (46,834 | )    
|                                                 | Purchases of premises and equipment                                               |                                                             |                                           | (831    | )                         |         |        | (704    | )    
|                                                 | Proceeds from the sale of premises, equipment and real estate                     |                                                             |                                           | 435     |                           |         |        | 97      |      
|                                                 |                                                                                   |                                                             |                                           |         |                           |         |        |        
|                                                 |                                                                                   |                                                             | Net cash used in investing activities     |         |                           | (39,741 | )      |         |       | (45,141 | )
|                                                 |                                                                                   |                                                             |                                           |         |                           |         |        |        
|Cash flows from financing activities:            |                                                                                   |                                                             |                                           |         |                           |         |        |        
|                                                 | Net increase in deposits                                                          |                                                             |                                           | 41,360  |                           |         |        | 27,299  |      
|                                                 | Net decrease in Federal Home Loan Bank advances                                   |                                                             |                                           | (10,000 | )                         |         |        |        |      
|                                                 | Net increase in federal funds purchased                                           |                                                             |                                           |        |                           |         |        | 16,000  |      
|                                                 | Proceed from trust preferred securities                                           |                                                             |                                           | 15,000  |                           |         |        |        |      
|                                                 | Dividends paid on common stock                                                    |                                                             |                                           | (527    | )                         |         |        | (485    | )    
|                                                 | Proceeds from stock options exercised                                             |                                                             |                                           | 67      |                           |         |        | 66      |      
|                                                 |                                                                                   |                                                             |                                           |         |                           |         |        |         |      
|                                                 |                                                                                   |                                                             | Net cash provided by financing activities |         |                           | 45,900  |        |         |       | 42,880  |  
|                                                 |                                                                                   |                                                             |                                           |         |                           |         |        |        
|                                                 |                                                                                   |                                                             | Net increase in cash and cash equivalents |         |                           | 9,609   |        |         |       | 876     |  
|Cash and cash equivalents at beginning of period |                                                                                   |                                                             | 19,765                                    |         |                           |         | 17,179 |        
|                                                 |                                                                                   |                                                             |                                           |         |                           |         |        |         |      
|Cash and cash equivalents at end of period       |                                                                                   | $                                                           | 29,374                                    |         |                           | $       | 18,055 |        
|                                                 |                                                                                   |                                                             |                                           |         |                           |         |        |        
|Supplemental information:                        |                                                                                   |                                                             |                                           |         |                           |         |        |        
|                                                 | Cash paid for interest                                                            |                                                             | $                                         | 5,205   |                           |         | $      | 8,949   |      
|                                                 | Cash paid for taxes                                                               |                                                             |                                           | 2,251   |                           |         |        | 925     |      

See accompanying notes to condensed consolidated financial statements.

4



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##### Table of Contents






NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Six months ended June 30, 2002 and 2001 (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), a Washington State bank holding company
was formed on April 30, 1996. Whidbey Island Bank (the Bank), the principal
subsidiary of WBCO, is a Washington state-chartered 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 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 related to the retail and
service trades, tourism, agricultural and manufacturing industries, and the
large military base presence in Oak Harbor, Washington. The Bank also offers
nondeposit investment products for sale through its subsidiary, WIB Financial
Services, Inc. which are not FDIC insured.

Effective June 23, 1998, WBCO sold 1,380,000 shares of its common stock at a
price of $12 per share, resulting in net proceeds to the Company of $14,893.

Washington Banking Capital Trust I (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 $15.0 million in
proceeds to acquire junior subordinated debentures issued by WBCO.

(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, 2001
audited consolidated financial statements and notes thereto included in the
Companys Annual Report on Form 10-K. In managements opinion, all adjustments
(consisting of normal recurring adjustments) considered necessary for a fair
presentation have been included. Operating results for the six months ended
June 30, 2002 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2002. In preparing the consolidated
financial statements, estimates and assumptions that affect the reported
amounts of assets, liabilities, revenues and expenses are required. Actual
results could differ from those estimates.

(c)  Recently Issued Accounting Pronouncements

In July 2001, Financial Accounting Standard Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) 141, Business Combinations and SFAS
142, Goodwill and Other Intangible Assets. SFAS 141 requires business
combinations initiated after June 30, 2001 to be accounted for using the
purchase method of accounting, and broadens the criteria for recording
intangible assets separate from goodwill. Recorded goodwill and intangibles
will be evaluated against this new criteria and may result in certain
intangibles being subsumed into goodwill, or alternatively, amounts initially
recorded as goodwill may be separately identified and recognized apart from
goodwill. SFAS 142 requires the use of a nonamortization approach to account
for purchased goodwill and certain intangibles. Under this nonamortization
approach, goodwill and certain intangibles will not be amortized into results
of operations, but instead will be reviewed for impairment and written down and
charged to results of operations only in the periods in which the recorded
value of goodwill and certain intangibles is more than this fair value. The
Company adopted the provisions of SFAS 142 on January 1, 2002 and it had no
material effect on its results of operations or financial position.

In June 2001, the FASB issued SFAS 143, Accounting for Asset Retirement
Obligations, which addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. The standard applies to legal
obligations associated with the retirement of long-lived assets that result
from the acquisition, construction, development and (or) normal use of the
asset. SFAS 143

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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Six months ended June 30, 2002 and 2001 (unaudited)
(Dollars in thousands, except per share data)

requires that the fair value of a liability for an asset retirement obligation
be recognized in the period in which it is incurred if a reasonable estimate of
fair value can be made. The fair value of the liability is added to the
carrying amount of the associated asset and this additional carrying amount is
depreciated over the life of the asset.

The liability is accreted at the end of each period through charges to
operating expense. If the obligation is settled for other than the carrying
amount of the liability, the Company will recognize a gain or loss on
settlement. The Company is required and plans to adopt the provisions of SFAS
143 for the quarter ending March 31, 2003. The Company is currently evaluating
the impact that this statement will have on their financial position and
results of operations, however, they do not expect such impact to be material.

On October 3, 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
While SFAS 144 supersedes SFAS 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, it retains many
of the fundamental provisions in that SFAS 144 also supersedes the accounting
and reporting provisions of APB Opinion No. 30, Reporting the Results of
OperationsReporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for
the disposal of a segment of a business. However, it retains the requirement
in Opinion No. 30 to report separately discontinued operations and extends that
reporting to a component of an entity that either has been disposed of (by
sale, abandonment, or in a distribution to owners) or is classified as held for
sale. The Company adopted the provisions of SFAS 144 on January 1, 2002 and it
had no material effect on its results of operations or financial position.

(2) Trust Preferred Securities

On June 27, 2002 Washington Banking Capital Trust I issued $15.0 million of
trust preferred securities with a 30-year maturity, callable after the fifth
year, at an initial rate of 5.51%. The rate adjusts quarterly based on LIBOR
(London Inter Bank Offered Rate). These securities are considered Tier I
capital for the purposes of regulatory capital requirements. The Trust, a
wholly-owned subsidiary of WBCO, is a statutory business trust created for the
exclusive purposes of issuing and selling capital securities and utilizing sale
proceeds to acquire junior subordinated debt issued by Washington Banking
Company. Accordingly, the junior subordinated debentures are the sole assets
of the Trust, and payments under the junior subordinated debentures will be the
sole revenues of the Trust. All of the common securities of the Trust are
owned by WBCO. Washington Banking Company has fully and unconditionally
guaranteed the capital securities along with all obligations of the Trust under
the trust agreements. The trust preferred securities are included with
borrowings as a separate line item in the consolidated balance sheet and
distributions payable are treated as interest expense in the consolidated
statement of operations.

6



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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Six months ended June 30, 2002 and 2001 (unaudited)
(Dollars in thousands, except per share data)

(3) Earnings Per Share

The following illustrates the reconciliation of the numerators and denominators
of the basic and diluted earnings per share (EPS) computations:

|                                             |  |                                  |       |                |  |          |           |           |  |   |       |  
|-------------------------------------------- |  | -------------------------------- | ----- | -------------- |  | -------- | --------- | --------- |  | - | ----- | -
|                                             |  | Three Months Ended June 30, 2002
|                                             |  |                                 
|                                             |  |                                  |       |                |  | Weighted |           | Per share
|                                             |  | Income                           |       | average shares |  | amount  
|                                             |  |                                  |       |                |  |         
|Basic EPS                                    |  |                                  |       |                |  |          |           |           |  |   |       |  
|Income available to common shareholders      |  | $                                | 1,392 |                |  |          | 4,061,185 |           |  | $ | 0.34  |  
|Effect of dilutive securities: stock options |  |                                  |      |                |  |          | 278,232   |           |  |   | (0.02 | )
|                                             |  |                                  |       |                |  |          |           |           |  |   |       |  
|Diluted EPS                                  |  | $                                | 1,392 |                |  |          | 4,339,417 |           |  | $ | 0.32  |  
|                                             |  |                                  |       |                |  |          |           |           |  |   |       |  

|                                             |  |                                  |       |                |  |          |           |           |  |   |       |  
|-------------------------------------------- |  | -------------------------------- | ----- | -------------- |  | -------- | --------- | --------- |  | - | ----- | -
|                                             |  | Three Months Ended June 30, 2001
|                                             |  |                                 
|                                             |  |                                  |       |                |  | Weighted |           | Per share
|                                             |  | Income                           |       | average shares |  | amount  
|                                             |  |                                  |       |                |  |         
|Basic EPS                                    |  |                                  |       |                |  |          |           |           |  |   |       |  
|Income available to common shareholders      |  | $                                | 1,084 |                |  |          | 4,047,097 |           |  | $ | 0.27  |  
|Effect of dilutive securities: stock options |  |                                  |      |                |  |          | 186,697   |           |  |   | (0.01 | )
|                                             |  |                                  |       |                |  |          |           |           |  |   |       |  
|Diluted EPS                                  |  | $                                | 1,084 |                |  |          | 4,233,794 |           |  | $ | 0.26  |  
|                                             |  |                                  |       |                |  |          |           |           |  |   |       |  

|                                             |  |                                |       |                |  |          |           |           |  |   |       |  
|-------------------------------------------- |  | ------------------------------ | ----- | -------------- |  | -------- | --------- | --------- |  | - | ----- | -
|                                             |  | Six Months Ended June 30, 2002
|                                             |  |                               
|                                             |  |                                |       |                |  | Weighted |           | Per share
|                                             |  | Income                         |       | average shares |  | amount  
|                                             |  |                                |       |                |  |         
|Basic EPS                                    |  |                                |       |                |  |          |           |           |  |   |       |  
|Income available to common shareholders      |  | $                              | 2,829 |                |  |          | 4,058,233 |           |  | $ | 0.70  |  
|Effect of dilutive securities: stock options |  |                                |      |                |  |          | 256,401   |           |  |   | (0.04 | )
|                                             |  |                                |       |                |  |          |           |           |  |   |       |  
|Diluted EPS                                  |  | $                              | 2,829 |                |  |          | 4,314,634 |           |  | $ | 0.66  |  
|                                             |  |                                |       |                |  |          |           |           |  |   |       |  

|                                             |  |                                |       |                |  |          |           |           |  |   |       |  
|-------------------------------------------- |  | ------------------------------ | ----- | -------------- |  | -------- | --------- | --------- |  | - | ----- | -
|                                             |  | Six Months Ended June 30, 2001
|                                             |  |                               
|                                             |  |                                |       |                |  | Weighted |           | Per share
|                                             |  | Income                         |       | average shares |  | amount  
|                                             |  |                                |       |                |  |         
|Basic EPS                                    |  |                                |       |                |  |          |           |           |  |   |       |  
|Income available to common shareholders      |  | $                              | 1,885 |                |  |          | 4,040,043 |           |  | $ | 0.47  |  
|Effect of dilutive securities: stock options |  |                                |      |                |  |          | 183,088   |           |  |   | (0.02 | )
|                                             |  |                                |       |                |  |          |           |           |  |   |       |  
|Diluted EPS                                  |  | $                              | 1,885 |                |  |          | 4,223,131 |           |  | $ | 0.45  |  
|                                             |  |                                |       |                |  |          |           |           |  |   |       |  

At June 30, 2002 and 2001 there were options to purchase 448,737 and 406,800
shares of common stock outstanding, respectively. For the quarters ended June
30, 2002 and 2001, options to purchase 0 and 98,550 shares of common stock,
respectively, were antidilutive and, therefore, not included in computation of
diluted net income per share. For the six months ended June 30, 2002 and 2001,
options to purchase 0 and 98,550 shares of common stock, respectively, were
antidilutive and, therefore, not included in computation of diluted net income
per share.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Six months ended June 30, 2002 and 2001 (unaudited)
(Dollars in thousands, except per share data)

(4) Subsequent Event

On July 18, 2002, the Board of Directors declared a cash dividend of $0.065 per
share to shareholders of record as of July 30, 2002 and payable on August 14,
2002.




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

Note Regarding Forward-Looking Statements: This Form 10-Q includes
forward-looking statements, which management believes are a benefit to
shareholders. These forward-looking statements describe Washington Banking
Companys 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 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 impact of the events of September 11, 2001
and any further similar events, are less favorable than expected or have a more
direct and pronounced effect on the Company than expected 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 and negatively affect funding
sources; (3) projected business increases following strategic expansion or
opening or acquiring new branches are lower than expected; (4) costs or
difficulties related to the integration of acquisitions are greater than
expected; (5) competitive pressure among financial institutions increases
significantly; (6) legislation or regulatory requirements or changes adversely
affect the banking and financial services sector; and (7) Washington Banking
Companys ability to realize the efficiencies it expects to receive from its
investment in personnel and infrastructure.

Overview

Washington Banking Company (the Company) is a registered bank holding company
with two wholly-owned subsidiaries  Whidbey Island Bank (the Bank), the
Companys principal subsidiary, and Washington Banking Capital Trust I (the
Trust). The Bank, is a Washington state-chartered bank that conducts a
full-service community commercial banking business. Its business includes
commercial loan, real estate loan 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 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 for sale through the Banks subsidiary, WIB Financial
Services, Inc., which are not FDIC insured.

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.

Headquartered in Oak Harbor, the Companys primary market area is located in
northwestern Washington state between Seattle and the Canadian border. In
recent years, the region has 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.

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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, increase market penetration in areas currently served, and to
continue an expansion strategy in appropriate market areas.

Continuing the strategy of expanding into appropriate market areas, the Company
plans to open two new full-service branches and a Loan Production Office (LPO),
and to relocate its Camano Island branch during 2002. Construction of two
buildings is currently underway for the relocation of the Camano branch and the
new branch in Stanwood. Office space will be leased for the new full-service
branch in the Fairhaven neighborhood of Bellingham as well as the LPO in Smokey
Point/Arlington. The addition of these new offices will extend the company
into its fourth county, Snohomish. Management believes these locations will
enhance customer service by providing easier branch access and more convenient
availability of services to new and existing Bank customers.

Financial Condition

Total Assets.Total assets increased to $485.2 million at June 30, 2002 from
$437.7 million at December 31, 2001, an increase of 10.9%. This increase
resulted primarily from growth in the loan portfolio, which was funded by
deposit growth, investment maturities, borrowings and the proceeds from a
non-dilutive private placement of trust preferred securities in June 2002.

Loans.Net loans totaled $413.6 million at June 30, 2002, an increase of
10.8%, from $373.2 million at December 31, 2001. The Company increased its
allowance for loan losses to $5.6 million at June 30, 2002 representing 1.33%
of total loans, from $4.3 million or 1.14% at December 31, 2001, in an effort
to remain conservative and improve coverage. See Lending Activities 
Provision and Allowance for Loan Losses, below.

Total Investment Securities.Total investment securities were $21.7 million
and $24.6 million at June 30, 2002 and December 2001, respectively. The
decrease of 11.7% was due to the maturity of investments. The availability of
excess funds for long-term investment purchases was significantly reduced by
the need for funding the loan demand. Management plans to use a portion of the
proceeds of the trust preferred securities to purchase additional securities
that reflect the Companys investment policy guidelines and that help achieve
the business plan of the Company.

Premises and Equipment.Premises and equipment, net, were $15.7 million and
$15.6 million at June 30, 2002 and December 31, 2001, respectively. The
balance remained fairly flat due to the construction of new branch offices and
related furniture and fixtures, offset by the sale of the North Whidbey branch
property during first quarter 2002. However, the minor net change to Premises
and Equipment is not an indication of future expectations as the Company
continues its strategy of increasing market penetration and expansion.
Acquisition of banks or branches may also be used as a means of expansion if
appropriate opportunities arise.

Deposits. Deposits grew 11.3 % to $408.5 million at June 30, 2002 from $367.2
million at December 31, 2001. The Companys philosophy is to develop long-term
customer relationships. Management believes that the best way to establish
customer loyalty is by placing emphasis on meeting the customers financial
needs and providing exceptional service. The Company attributes its successful
deposit growth to its continuing efforts to meet these objectives through
various deposit promotions, cross-sales efforts, financial planning and other
means. Average noninterest-bearing deposits increased 23.3%, at June 30, 2002
from June 30, 2001, while average interest-bearing deposits increased 13.5%,
compared to the like period a year ago. See  Deposits, below.

Shareholders Equity.The Companys shareholders equity increased 6.7% to
$37.3 million at June 30, 2002 from $35.0 million at December 31, 2001. The
increase reflects earnings and proceeds from stock options exercised, offset by
the payment of cash dividends and the decrease in unrealized gain on
available-for-sale securities, net of tax, during the first six months of 2002.

9



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##### Table of Contents



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:

|                                                |                                            |                                      |         |         |                                  |          |                                  |         |          |      |         |           |         |   |         |         |  |   |          |       |  |  |      |      |   |  | 
|----------------------------------------------- | ------------------------------------------ | ------------------------------------ | ------- | ------- | -------------------------------- | -------- | -------------------------------- | ------- | -------- | ---- | ------- | --------- | ------- | - | ------- | ------- |  | - | -------- | ----- |  |  | ---- | ---- | - |  | 
|                                                |                                            |                                      |         |         | Three Months Ended June 30, 2002 |          | Three Months Ended June 30, 2001
|                                                |                                            |                                      |         |         |                                  |          |                                 
|                                                |                                            |                                      |         |         |                                  |          |                                  |         | Interest |      |         |           |         |   |         |         |  |   | Interest |       |  |  |     
|                                                |                                            |                                      |         |         | Average                          |          | earned/                          |         | Average  |      | Average |           | earned/ |   | Average
|(Dollars in thousands)                          |                                            | balance                              |         | paid    |                                  | yield(1) |                                  | balance |          | paid |         | yield (1)
|                                                |                                            |                                      |         |         |                                  |          |                                  |         |          |      |         |          
|                                                |                                            |                                      | Assets  |         |                                  |          |                                  |         |          |      |         |           |         |   |         |         |  |   |          |       |  |  |      |      |   |  | 
|Loans (2)                                       |                                            | $                                    | 413,443 |         |                                  | $        | 8,453                            |         |          |      | 8.18    | %         |         | $ | 337,524 |         |  | $ | 7,900    |       |  |  | 9.36 | %   
|Federal funds sold                              |                                            |                                      | 209     |         |                                  |          | 1                                |         |          |      | 1.91    | %         |         |   | 1,244   |         |  |   | 17       |       |  |  | 5.47 | %   
|Interest-earning cash                           |                                            |                                      | 396     |         |                                  |          | 1                                |         |          |      | 1.01    | %         |         |   | 1,618   |         |  |   | 18       |       |  |  | 4.45 | %   
|Investments:                                    |                                            |                                      |         |         |                                  |          |                                  |         |          |      |         |           |         |   |         |         |  |   |          |       |  |  |      |     
|                                                | Taxable                                    |                                      |         | 7,036   |                                  |          |                                  | 99      |          |      |         | 5.63      | %       |   |         | 8,637   |  |   |          | 130   |  |  |      | 6.02 | %
|                                                | Non-taxable (3)                            |                                      |         | 15,971  |                                  |          |                                  | 251     |          |      |         | 6.29      | %       |   |         | 16,927  |  |   |          | 265   |  |  |      | 6.26 | %
|Deferred comp plan                              |                                            |                                      | 232     |         |                                  |          |                                 |         |          |      |        |           |         |   | 92      |         |  |   |         |       |  |  |     |     
|                                                |                                            |                                      |         |         |                                  |          |                                  |         |          |      |         |           |         |   |         |         |  |   |          |       |  |  |      |     
|Interest-earning assets                         |                                            |                                      | 437,287 |         |                                  |          | 8,805                            |         |          |      | 8.05    | %         |         |   | 366,042 |         |  |   | 8,330    |       |  |  | 9.10 | %   
|Noninterest-earning assets                      |                                            |                                      | 31,894  |         |                                  |          |                                  |         |          |      |         |           |         |   | 30,516  |         |  |   |          |       |  |  |      |     
|                                                |                                            |                                      |         |         |                                  |          |                                  |         |          |      |         |           |         |   |         |         |  |   |          |       |  |  |      |     
|                                                | Total assets                               |                                      | $       | 469,181 |                                  |          |                                  |         |          |      |         |           |         |   | $       | 396,558 |  |   |          |       |  |  |      |      |  
|                                                |                                            |                                      |         |         |                                  |          |                                  |         |          |      |         |           |         |   |         |         |  |   |          |       |  |  |      |     
|                                                |                                            | Liabilities and
Shareholders equity |         |         |                                  |          |                                  |         |          |      |         |           |         |   |         |         |  |   |          |       |  |  |      |      |   | 
|Deposits:                                       |                                            |                                      |         |         |                                  |          |                                  |         |          |      |         |           |         |   |         |         |  |   |          |       |  |  |      |     
|                                                | Interest demand and
money market           |                                      | $       | 138,433 |                                  |          | $                                | 601     |          |      |         | 1.74      | %       |   | $       | 108,068 |  |   | $        | 741   |  |  |      | 2.74 | %
|                                                | Savings                                    |                                      |         | 28,399  |                                  |          |                                  | 106     |          |      |         | 1.49      | %       |   |         | 24,958  |  |   |          | 123   |  |  |      | 1.97 | %
|                                                | CDs                                        |                                      |         | 176,677 |                                  |          |                                  | 1,625   |          |      |         | 3.68      | %       |   |         | 169,638 |  |   |          | 2,570 |  |  |      | 6.06 | %
|                                                |                                            |                                      |         |         |                                  |          |                                  |         |          |      |         |           |         |   |         |         |  |   |          |       |  |  |      |     
|Interest-bearing deposits                       |                                            |                                      | 343,509 |         |                                  |          | 2,332                            |         |          |      | 2.72    | %         |         |   | 302,664 |         |  |   | 3,434    |       |  |  | 4.54 | %   
|Federal funds purchased                         |                                            |                                      | 12,303  |         |                                  |          | 66                               |         |          |      | 2.15    | %         |         |   | 8,131   |         |  |   | 90       |       |  |  | 4.43 | %   
|Trust preferred securities                      |                                            |                                      | 495     |         |                                  |          | 7                                |         |          |      | 5.66    | %         |         |   |        |         |  |   |         |       |  |  |     |     
|Borrowings & other
interest-bearing liabilities |                                            |                                      | 21,557  |         |                                  |          | 171                              |         |          |      | 3.17    | %         |         |   | 6,799   |         |  |   | 69       |       |  |  | 4.06 | %   
|                                                |                                            |                                      |         |         |                                  |          |                                  |         |          |      |         |           |         |   |         |         |  |   |          |       |  |  |      |     
|Interest-bearing liabilities                    |                                            |                                      | 377,864 |         |                                  |          | 2,576                            |         |          |      | 2.73    | %         |         |   | 317,594 |         |  |   | 3,593    |       |  |  | 4.53 | %   
|Noninterest-bearing deposits                    |                                            |                                      | 52,759  |         |                                  |          |                                  |         |          |      |         |           |         |   | 42,788  |         |  |   |          |       |  |  |      |     
|Other noninterest-bearing
liabilities           |                                            |                                      | 1,935   |         |                                  |          |                                  |         |          |      |         |           |         |   | 2,272   |         |  |   |          |       |  |  |      |     
|                                                |                                            |                                      |         |         |                                  |          |                                  |         |          |      |         |           |         |   |         |         |  |   |          |       |  |  |      |     
|Total liabilities                               |                                            |                                      | 432,558 |         |                                  |          |                                  |         |          |      |         |           |         |   | 362,654 |         |  |   |          |       |  |  |      |     
|Shareholders equity                            |                                            |                                      | 36,623  |         |                                  |          |                                  |         |          |      |         |           |         |   | 33,904  |         |  |   |          |       |  |  |      |     
|                                                |                                            |                                      |         |         |                                  |          |                                  |         |          |      |         |           |         |   |         |         |  |   |          |       |  |  |      |     
|                                                | Total liabilities and
shareholders equity |                                      | $       | 469,181 |                                  |          |                                  |         |          |      |         |           |         |   | $       | 396,558 |  |   |          |       |  |  |      |      |  
|                                                |                                            |                                      |         |         |                                  |          |                                  |         |          |      |         |           |         |   |         |         |  |   |          |       |  |  |      |     
|Net interest income (3)                         |                                            |                                      |         |         |                                  | $        | 6,229                            |         |          |      |         |           |         |   |         |         |  | $ | 4,737    |       |  |  |      |     
|                                                |                                            |                                      |         |         |                                  |          |                                  |         |          |      |         |           |         |   |         |         |  |   |          |       |  |  |      |     
|Net interest spread (1)                         |                                            |                                      |         |         |                                  |          |                                  |         |          |      | 5.32    | %         |         |   |         |         |  |   |          |       |  |  | 4.57 | %   
|                                                |                                            |                                      |         |         |                                  |          |                                  |         |          |      |         |           |         |   |         |         |  |   |          |       |  |  |      |     
|Net interest margin (1)                         |                                            |                                      |         |         |                                  |          |                                  |         |          |      | 5.70    | %         |         |   |         |         |  |   |          |       |  |  | 5.18 | %   
|                                                |                                            |                                      |         |         |                                  |          |                                  |         |          |      |         |           |         |   |         |         |  |   |          |       |  |  |      |     



|(1) |  | Annualized                                                                                                                                                                                                                              
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(2) |  | Includes loan fees of $236 and $220 for the three months ended June 30, 2002 and 2001, 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 $64 and $68 for the three months ended June 30, 2002 and 2001, respectively.

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.

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Net Income.Net income for the second quarter of 2002 increased 28.4% to $1.4
million, or $0.32 per diluted share, from $1.1 million, or $0.26 per diluted
share, for the second quarter of 2001. Net income for the six months ended
June 30, 2002 increased 50.1% to $2.8 million, or $0.66 per diluted share, from
$1.9 million, or $0.45 per diluted share, for the six months ended June 30,
2001. The improvement was primarily due to increased net interest income and a
first quarter 2002 gain on sale of assets.

Net Interest Income. Net interest income for the second quarter of 2002
increased 32.0% to $6.2 million from $4.7 million for the second quarter of
2001. For the first six months of 2002, net interest income increased 37.4% to
$12.0 million from $8.7 million for the like period in 2001. The increase in
net interest income is largely due to the consistent growth rate, repricing,
and changing maturities of both our loan portfolio and our deposits.

Average interest-earning assets for the second quarter increased to $437.3
million at June 30, 2002, compared to $366.0 million at June 30, 2001, a growth
of 19.5%, while the average yield on interest-earning assets decreased to 8.05%
compared to 9.10% in second quarter of the prior year.

The average yield on loans decreased to 8.18% for the quarter ended June 30,
2002 from 9.36% for the quarter ended June 30, 2001.

The average cost of interest-bearing liabilities decreased in the second
quarter of 2002 to 2.73% from 4.53% for the quarter ended June 30, 2001.
Average interest-bearing liabilities for the quarter increased to $377.9
million at June 30, 2002 compared to $317.6 million at June 30, 2001, a growth
of 19.0%.

The overall result of these changes was an increase in the net interest spread
to 5.32% for the quarter ended June 30, 2002 from 4.57% for the quarter ended
June 30, 2001. Net interest margin (net interest income divided by average
interest-earning assets) increased to 5.70% in the second quarter of 2002 from
5.18% in the second quarter of 2001.

Noninterest Income.Noninterest income decreased $111,000, or 11.3%, in the
second quarter of 2002 compared to the like period last year. This decrease
reflects less income on gain on sale of assets and secondary real estate market
activity compared to the second quarter of 2001.

For the first six months of 2002, noninterest income increased $294,000, or
16.0% compared to the like period a year ago. This increase was primarily due
to the gain on sale of assets from the sale of the vacated North Whidbey branch
property and strong annuity and mutual fund sales in the first quarter of 2002.

Noninterest Expense.Noninterest expense increased $567,000, or 16.1%, in the
second quarter of 2002. A major component of noninterest expense, employee
compensation, increased 19.9%, for the quarter compared with the like period in
2001. For the first six months of 2002, noninterest expense rose to $8.0
million from $6.9 million one year ago, a 15.4% increase. Employee
compensation increased 16.7% for the six months ended June 30, 2002. These
increases were mainly due to additional costs for salaries and employee
benefits, reflecting the growth of the Company. The efficiency ratio
(noninterest expense divided by the sum of net interest income plus noninterest
income less non-recurring gains) improved to 57.99% for the second quarter 2002
compared to 62.17% for the like period in 2001. For the first six months of
2002 and 2001, the efficiency ratio was 56.59% and 65.58%, respectively.

Income Taxes.For the second quarters of 2002 and 2001, the Company recorded
income tax provisions of $676,000 and $400,000, respectively. For the first
six months of 2002 and 2001, the Company recorded income tax provisions of $1.4
million and $697,000, respectively. The overall year-to-date effective tax
rate was approximately 34% and 27%, respectively, for June 30, 2002 and 2001.
The higher tax rate is in anticipation of the Companys increased tax base due
to the decrease in tax-exempt interest income as a percentage of income.

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##### Table of Contents



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:

|                                 |                                                |                             |         |               |         |                   |      |            |      |   |         |         |         |  |      |       |      |  
|-------------------------------- | ---------------------------------------------- | --------------------------- | ------- | ------------- | ------- | ----------------- | ---- | ---------- | ---- | - | ------- | ------- | ------- |  | ---- | ----- | ---- | -
|                                 |                                                |                             |         | June 30, 2002 |         | December 31, 2001
|                                 |                                                |                             |         |               |         |                  
|(Dollars in thousands)           |                                                | Balance                     |         | % of total    |         | Balance           |      | % of total
|                                 |                                                |                             |         |               |         |                   |      |           
|Commercial                       |                                                | $                           | 108,933 |               |         |                   | 26.0 | %          |      | $ | 109,867 |         |         |  | 29.1 | %    
|Real estate mortgages:           |                                                |                             |         |               |         |                   |      |            |      |   |         |         |         |  |      |      
|                                 | One-to-four family residential                 |                             |         | 41,050        |         |                   |      | 9.8        | %    |   |         | 42,850  |         |  |      | 11.4  | %   
|                                 | Five-or-more family
residential and commercial |                             |         | 86,480        |         |                   |      | 20.6       | %    |   |         | 65,782  |         |  |      | 17.4  | %   
|                                 |                                                |                             |         |               |         |                   |      |            |      |   |         |         |         |  |      |      
|                                 |                                                | Total real estate mortgages |         |               | 127,530 |                   |      |            | 30.4 | % |         |         | 108,632 |  |      |       | 28.8 | %
|Real estate construction         |                                                |                             | 31,103  |               |         |                   | 7.4  | %          |      |   | 26,917  |         |         |  | 7.1  | %    
|Consumer                         |                                                |                             | 151,496 |               |         |                   | 36.2 | %          |      |   | 132,067 |         |         |  | 35.0 | %    
|                                 |                                                |                             |         |               |         |                   |      |            |      |   |         |         |         |  |      |      
|                                 | Subtotal                                       |                             |         | 419,062       |         |                   |      | 100.0      | %    |   |         | 377,483 |         |  |      | 100.0 | %   
|                                 |                                                |                             |         |               |         |                   |      |            |      |   |         |         |         |  |      |      
|Less: allowance for loans losses |                                                |                             | (5,569  | )             |         |                   |      |            |      |   | (4,308  | )       |         |  |      |      
|Deferred loan fees, net          |                                                |                             | 92      |               |         |                   |      |            |      |   | 23      |         |         |  |      |      
|                                 |                                                |                             |         |               |         |                   |      |            |      |   |         |         |         |  |      |      
|Loans, net                       |                                                | $                           | 413,585 |               |         |                   |      |            |      | $ | 373,198 |         |         |  |      |      
|                                 |                                                |                             |         |               |         |                   |      |            |      |   |         |         |         |  |      |      

Total loans, net, increased to $413.6 million at June 30, 2002, representing a
10.8% increase from year-end 2001. Total commercial loans decreased 0.9%,
while real estate mortgage, real estate construction and consumer loans
increased 17.4%, 15.6% and 14.7%, respectively, at June 30, 2002 from year-end
2001. At June 30, 2002, indirect dealer loans were $87.9 million, or 58.0% of
the consumer loan portfolio, as compared to $73.0 million, or 55.3%, at
December 31, 2001. Loan growth was driven by the favorable interest rate
environment.

Nonperforming Assets.The following table sets forth an analysis of the
composition of the Companys nonperforming assets (NPAs) at the dates
indicated:

|                                                 |                            |               |        |                   |  |   |        |       | 
|------------------------------------------------ | -------------------------- | ------------- | ------ | ----------------- |  | - | ------ | ----- | 
|(Dollars in thousands)                           |                            | June 30, 2002 |        | December 31, 2001
|                                                 |                            |               |        |                  
|Nonaccrual loans                                 |                            | $             | 3,542  |                   |  | $ | 2,094  |      
|Restructured loans                               |                            |               |       |                   |  |   |       |      
|                                                 |                            |               |        |                   |  |   |        |      
|                                                 | Total nonperforming loans  |               |        | 3,542             |  |   |        | 2,094 | 
|Real estate owned                                |                            |               | 409    |                   |  |   | 473    |      
|                                                 |                            |               |        |                   |  |   |        |      
|                                                 | Total nonperforming assets |               | $      | 3,951             |  |   | $      | 2,567 | 
|                                                 |                            |               |        |                   |  |   |        |      
|Accruing loans past due > 90 days                |                            | $             | 16     |                   |  | $ |       |      
|Potential problem loans                          |                            |               |       |                   |  |   |       |      
|Allowance for loan losses                        |                            |               | 5,569  |                   |  |   | 4,308  |      
|Nonperforming loans to loans                     |                            |               | 0.85   | %                 |  |   | 0.55   | %    
|Allowance for loan losses to loans               |                            |               | 1.33   | %                 |  |   | 1.14   | %    
|Allowance for loan losses to nonperforming loans |                            |               | 157.23 | %                 |  |   | 205.73 | %    
|Nonperforming assets to total assets             |                            |               | 0.81   | %                 |  |   | 0.59   | %    

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Nonperforming loans increased to $3.5 million, or 0.85% of total loans, at June
30, 2002 from $2.1 million, or 0.55% of total loans, at December 31, 2001. The
current loan loss reserve of $5.6 million represents 157.23% of nonperforming
loans as compared to 205.73% of nonperforming loans at December 31, 2001. The
loan loss reserve is 1.33% of total loans at June 30, 2002 as compared to 1.14%
at December 31, 2001. A significant portion of the increase in NPAs reflects
one credit tied to the telecommunications industry.

In general, underwriting standards have been strengthened to mitigate risk
associated with the potential softening of the economy and management remains
confident in its asset quality. NPAs continue to be better than state and
national FDIC peer group averages.

Provision and Allowance for Loan Losses.The Company recorded a $889,000
provision for loan losses for the second quarter of 2002, compared with
$655,000 for the like period a year ago. Though the local economy remained
stable during the first half of 2002, there were limited indications of
weakening in a few markets. Management determined that this addition to the
provision was warranted to remain conservative and improve coverage, in
response to a potential economic softening. There were $340,000 in net loan
charge-offs during the second quarter of 2002, compared to $265,000 in the
previous year, representing 0.08% of the loan portfolio for both periods.

For the six months ended June 30, 2002, the Company recorded a $1.9 million
provision for loan losses, compared with $1.1 million for the like period a
year ago. The Company recorded $617,000 in net loan charge-offs, representing
0.15% of average loans during the first six months of 2002, compared to
$330,000, or 0.08%, of average loans in net charge-offs for the like period in
2001. The increase in charge-offs is attributed to a more aggressive stance on
consumer delinquencies and to certain loans to the construction trades.
Management has tightened consumer lending standards over the last year and
established additional guidelines and limits on lending to certain industries
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
review of problem loans, general business and economic conditions, seasoning of
the loan portfolio, bank regulatory examination results and finding 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:

|                               |             |                    |       |                  |      |      |       |      |      |      |       |      |      |   |       |      |      |  
|------------------------------ | ----------- | ------------------ | ----- | ---------------- | ---- | ---- | ----- | ---- | ---- | ---- | ----- | ---- | ---- | - | ----- | ---- | ---- | -
|(Dollars in thousands)         |             | Three Months Ended |       | Six Months Ended
|                               |             | June 30,           |       | June 30,        
|                               |             |                    |       |                  |      |     
|                               |             |                    |       | 2002             |      | 2001 |       | 2002 |      | 2001
|                               |             |                    |       |                  |      |      |       |      |      |     
|Balance at beginning of period |             | $                  | 5,020 |                  |      | $    | 3,004 |      |      | $    | 4,308 |      |      | $ | 2,664 |     
|Charge-offs:                   |             |                    |       |                  |      |      |       |      |      |      |       |      |      |   |       |     
|                               | Commercial  |                    |       | (246             | )    |      |       | (58  | )    |      |       | (274 | )    |   |       | (84  | )   
|                               | Real estate |                    |       | (10              | )    |      |       |     |      |      |       | (10  | )    |   |       | (15  | )   
|                               | Consumer    |                    |       | (162             | )    |      |       | (276 | )    |      |       | (458 | )    |   |       | (338 | )   
|                               |             |                    |       |                  |      |      |       |      |      |      |       |      |      |   |       |     
|                               |             | Total charge-offs  |       |                  | (418 | )    |       |      | (334 | )    |       |      | (742 | ) |       |      | (437 | )
|Recoveries:                    |             |                    |       |                  |      |      |       |      |      |      |       |      |      |   |       |     
|                               | Commercial  |                    |       | 8                |      |      |       | 35   |      |      |       | 9    |      |   |       | 66   |     
|                               | Real estate |                    |       |                 |      |      |       |     |      |      |       |     |      |   |       |     |     
|                               | Consumer    |                    |       | 70               |      |      |       | 34   |      |      |       | 116  |      |   |       | 41   |     
|                               |             |                    |       |                  |      |      |       |      |      |      |       |      |      |   |       |     
|                               |             | Total recoveries   |       |                  | 78   |      |       |      | 69   |      |       |      | 125  |   |       |      | 107  |  
|Net charge-offs                |             |                    | (340  | )                |      |      | (265  | )    |      |      | (617  | )    |      |   | (330  | )   
|Provision for loan losses      |             |                    | 889   |                  |      |      | 655   |      |      |      | 1,878 |      |      |   | 1,060 |     
|                               |             |                    |       |                  |      |      |       |      |      |      |       |      |      |   |       |     
|Balance at end of period       |             | $                  | 5,569 |                  |      | $    | 3,394 |      |      | $    | 5,569 |      |      | $ | 3,394 |     
|                               |             |                    |       |                  |      |      |       |      |      |      |       |      |      |   |       |     

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For the three-month period ended June 30, 2002, net charge-offs attributed to
indirect dealer loans were $79,000, or 85.9%, of net consumer charge-offs as
compared to $80,000, or 41.7%, for the second quarter 2001. Year-to-date, net
charge-offs attributed to indirect dealer loans were $262,000, or 76.6%, of net
consumer charge-offs, as compared to $120,000, or 48.6%, for the like period in
2001.

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
continued increases in the provisions to the allowance for loan losses during
the year 2002.

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.

The following table sets forth the average balances outstanding and average
interest rates for each major category of deposits at the dates indicated:

|                                                  |                                 |         |                             |         |         |         |         |      |         |   |         |         |  |  |      |      |  
|------------------------------------------------- | ------------------------------- | ------- | --------------------------- | ------- | ------- | ------- | ------- | ---- | ------- | - | ------- | ------- |  |  | ---- | ---- | -
|                                                  |                                 |         | Three Months Ended June 30,
|                                                  |                                 |         |                            
|                                                  |                                 |         | 2002                        |         | 2001   
|                                                  |                                 |         |                             |         |        
|                                                  |                                 |         | Average                     |         | Average |         | Average |      | Average
|(Dollars in thousands)                            |                                 | balance |                             | rate    |         | Balance |         | rate
|                                                  |                                 |         |                             |         |         |         |         |     
|Interest-bearing demand and
money market deposits |                                 | $       | 138,433                     |         |         |         | 1.74    | %    |         | $ | 108,068 |         |  |  | 2.74 | %   
|Savings deposits                                  |                                 |         | 28,399                      |         |         |         | 1.49    | %    |         |   | 24,958  |         |  |  | 1.97 | %   
|CDs                                               |                                 |         | 176,677                     |         |         |         | 3.68    | %    |         |   | 169,638 |         |  |  | 6.06 | %   
|                                                  |                                 |         |                             |         |         |         |         |      |         |   |         |         |  |  |      |     
|                                                  | Total interest-bearing deposits |         |                             | 343,509 |         |         |         | 2.72 | %       |   |         | 302,664 |  |  |      | 4.54 | %
|Demand and other
noninterest-bearing deposits     |                                 |         | 52,759                      |         |         |         |         |      |         |   | 42,788  |         |  |  |      |     
|                                                  |                                 |         |                             |         |         |         |         |      |         |   |         |         |  |  |      |     
|                                                  | Total average deposits          |         | $                           | 396,268 |         |         |         |      |         |   | $       | 345,452 |  |  |      |      |  
|                                                  |                                 |         |                             |         |         |         |         |      |         |   |         |         |  |  |      |     

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 make loans 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) lines of credit, which the Company expects to use to
supplement funding sources. Due to the Companys strong asset growth, capital
ratios were trending downward. 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 thus diluting earnings
per share.

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Deposits. Total deposits increased 11.3%, to $408.5 million, at June 30, 2002
from $367.2 million at December 31, 2001. 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 June 30, 2002, the Company had $180.7
million in CDs of which approximately $166.5 million, or 92.1%, are scheduled
to mature within one year. Uncertain market and 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. However, based on prior
experience, the Company anticipates that a substantial portion of outstanding
CDs will renew upon maturity.

Borrowings. At June 30, 2002 the Company had a $72.7 million line of credit
with the FHLB, of which $22.5 million was advanced, and lines of credit with
financial institutions in the amount of $13.0 million, with no advances on
these lines of credit as of that date.

The Company has $15 million of trust preferred obligations at a quarterly
adjusted floating rate based on the 3-month LIBOR plus 3.65% with a 30-year
maturity, and an option to redeem at par anytime after the fifth year. At June
30, 2002 the rate on the Companys trust preferred obligations was 5.51%.

Investments.The Companys total portfolio of investment securities decreased
11.7% to $21.7 million at June 30, 2002 from $24.6 million at December 31,
2001. The investment portfolio consists of government agency securities,
municipal securities, FHLB stock, and corporate obligations. No investment
exceeds 10% of the shareholders equity. The following table summarizes the
amortized cost, market value and recorded value of securities in the Companys
portfolio by contractual maturity groups:

|                       |       |           |               |        |  |          |       |        |  |   |       |        | 
|---------------------- | ----- | --------- | ------------- | ------ |  | -------- | ----- | ------ |  | - | ----- | ------ | 
|                       |       |           | June 30, 2002
|                       |       |           |              
|(Dollars in thousands) |       | Amortized |               | Market |  | Recorded
|                       |       | cost      |               | value  |  | value   
|                       |       |           |               |        |  |          |      
|Amounts maturing:      |       |           |               |        |  |          |       |        |  |   |       |       
|Within one year        |       | $         | 6,259         |        |  | $        | 6,343 |        |  | $ | 6,302 |       
|One to five years      |       |           | 8,717         |        |  |          | 9,083 |        |  |   | 8,740 |       
|Six to ten years       |       |           | 5,784         |        |  |          | 6,026 |        |  |   | 5,784 |       
|Over ten years         |       |           | 869           |        |  |          | 911   |        |  |   | 869   |       
|                       |       |           |               |        |  |          |       |        |  |   |       |       
|                       | Total |           | $             | 21,629 |  |          | $     | 22,363 |  |   | $     | 21,695 | 
|                       |       |           |               |        |  |          |       |        |  |   |       |       

At June 30, 2002, the investment portfolio consisted of 78.23% held-to-maturity
investments at carrying value, up from 74.88% at December 31, 2001, and 21.77%
available-for-sale securities at carrying value, down from 25.12% at December
31, 2001. The Company expects in the future that available-for-sale securities
would increase as a percent of total investment securities at carrying value.

Capital and Capital Ratios

The Companys shareholders equity increased to $37.3 million at June 30, 2002
from $35.0 million at December 31, 2001. This increase is due to net income of
$2.8 million and $67,000 proceeds from stock options exercised offset by the
payment of cash dividends of $527,000 and a decrease in unrealized gain on
available-for-sale securities of $28,000, net of tax, during the six months
ended June 30, 2002. Total assets increased to $485.2 million at June 30, 2002
from $437.7 million at December 31, 2001, an increase of 10.9%. Shareholders
equity to total assets was 7.7% at June 30, 2002 compared to 8.0% at December
31, 2001.

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

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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.

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 June 30, 2002:

|                                |  |                   |   |                |  |          |    |              |  |  |       |   |  |  |      |  
|------------------------------- |  | ----------------- | - | -------------- |  | -------- | -- | ------------ |  |  | ----- | - |  |  | ---- | -
|                                |  | FDIC Requirements |   | Company Ratios
|                                |  |                   |   |               
|                                |  | Adequately-       |   | Well-          |  | June 30, |    | December 31,
|                                |  | capitalized       |   | capitalized    |  | 2002     |    | 2001        
|                                |  |                   |   |                |  |          |    |             
|Total risk-based capital ratio  |  |                   | 8 | %              |  |          | 10 | %            |  |  | 12.78 | % |  |  | 9.64 | %
|Tier 1 risk-based capital ratio |  |                   | 4 | %              |  |          | 6  | %            |  |  | 11.54 | % |  |  | 8.57 | %
|Leverage ratio                  |  |                   | 4 | %              |  |          | 5  | %            |  |  | 10.98 | % |  |  | 8.03 | %

There can be no assurance that additional capital will not be required in the
future due to greater-than-expected growth, or otherwise.

Capital Expenditures and Commitments.

The Company had no material capital expenditures or commitments for the quarter
ended June 30, 2002.

Significant Accounting Policies

SeeNotes to Condensed Consolidated Financial Statements.

2002 Anticipated Financial Performance

In February 2002, the Company announced targets for 2002 including 20% to 25%
earnings growth, 15% to 20% loan growth, 10% to 15% deposit growth, ROE of at
least 13%, and an efficiency ratio in the low sixties. 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. Although
it appears that the Company is on track to exceed its 2002 performance goals at
mid-year, targets have not been moved up as management expects the bottom line
to reflect the costs of expanding the branch network over the next several
months.




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 June 30, 2002, 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, 2001. For additional information, refer to the
Companys Form 10-K for the year ended December 31, 2001.

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##### Table of Contents






PART II




Item 4. Submission of Matters to a Vote of Security Holders

The annual meeting of shareholders was held at Oak Harbor, Washington at 3:00
p.m. on April 25, 2002. 2,996,550 shares of common stock were represented in
person or by proxy at the meeting. This represented 74% of the 4,055,250
shares held by shareholders as of March 1, 2002 and entitled to vote at the
meeting. The following issue came before the shareholders for vote:

| |                                                                                                                                                                                                                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Election of directors to serve on the Board of Directors until the
Annual meeting of shareholders in the year 2005, or until their
successors are duly elected and qualified  three of the nine
director position terms had expired and were open for election.
The nominees for these positions were Jay T. Lien, Alvin J.
Sherman and Edward J. Wallgren, who were each elected with the
following vote totals:

|                   |  |     |           |         |  |          |   |  |  |  |         | 
|------------------ |  | --- | --------- | ------- |  | -------- | - |  |  |  | ------- | 
|                   |  | For |           | Against |  | Withheld
|                   |  |     |           |         |  |         
|Jay T. Lien        |  |     | 2,977,967 |         |  |          | 0 |  |  |  | 18,583  | 
|Alvin J. Sherman   |  |     | 2,977,967 |         |  |          | 0 |  |  |  | 18,583  | 
|Edward J. Wallgren |  |     | 2,893,967 |         |  |          | 0 |  |  |  | 102,583 | 

The other six directors who continue in office are: Michal D. Cann; Jerry C.
Chambers; Marlen L. Knutson; Karl C. Krieg, III; Robert B. Olson; and Anthony
B. Pickering.




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

| |                                                                                                                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On April 1, 2002, the Company filed Amendment No.2 to Current Report on
Form 8-K/A, amending its Form 8-K/A filed on November 29, 2001 regarding
the change in the Companys certifying accountants to Moss Adams LLP to
replace KPMG LLP.




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:
August 13, 2002 |  | By                                                   |  | /s/ Michal D. Cann                                                  
|                      |  |                                                      |  |                                                                     
|                      |  | Michal D. Cann
President and
Chief Executive Officer
|                     
|                     
|Date:
August 13, 2002 |  | By                                                   |  | /s/ Phyllis A. Hawkins                                              
|                      |  |                                                      |  |                                                                     
|                      |  |                                                      |  | Phyllis A. Hawkins
Senior Vice President and
Chief Financial Officer

17