##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
  þ
    
    Quarterly report pursuant to Section 13 or l5(d) of the Securities Exchange Act of 1934
 For the quarterly period ended September 30, 2005
 o
    
    Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the transition period from  to
 Commission
File Number 000-24503
 WASHINGTON BANKING COMPANY
  Washington
    
    91-1725825(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification Number)450 SW Bayshore DriveOak Harbor, Washington
    
    98277(Address of principal executive offices)
    
    (Zip Code)
 (360) 679-3121
  þ o
 o þ
 o þ




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Table of Contents
 PagePART I-FINANCIAL INFORMATIONItem 1.
Financial StatementsCondensed Consolidated Statements of Financial Condition  September 30, 2005 and December 31, 2004
    
    
    1Condensed Consolidated Statements of Income  Three and Nine Months Ended September 30, 2005 and 2004
    
    
    2Condensed Consolidated Statements of Shareholders Equity and Comprehensive Income  Nine Months Ended September 30, 2005 and 2004
    
    
    3Condensed Consolidated Statements of Cash Flows  Nine Months Ended September 30, 2005 and 2004
    
    
    4Notes to Condensed Consolidated Financial Statements
    
    
    5Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    10Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    21Item 4. Controls and Procedures
    
    
    21PART II-OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    22Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    22Item 3. Defaults Upon Senior Securities
    
    
    22Item 4. Submission of Matters to a Vote of Security Holders
    
    
    22Item 5. Other Information
    
    
    22Item 6. Exhibits
    
    
    22Signatures
    
    
    23EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Item 1.
Financial Statements
 WASHINGTON BANKING COMPANY
AND SUBSIDIARY
 
 
 September 30,
    
    
    December 31,2005
    
    
    2004AssetsCash and due from banks
    
    $
    22,442
    
    
    $
    16,814Interest-bearing deposits
    
    
    945
    
    
    
    1,119Federal funds sold
    
    
    27,915
    
    
    
    Total cash and cash equivalents
    
    
    51,302
    
    
    
    17,933Investment securities available for sale
    
    
    18,887
    
    
    
    19,304Federal Home Loan Bank stock
    
    
    1,984
    
    
    
    1,976Loans held for sale
    
    
    5,085
    
    
    
    8,311Loans receivable
    
    
    614,280
    
    
    
    579,980Allowance for loan losses
    
    
    (8,593
    )
    
    
    (7,903
    )Total loans, net
    
    
    605,687
    
    
    
    572,077Premises and equipment, net
    
    
    20,641
    
    
    
    20,375Bank owned life insurance
    
    
    10,472
    
    
    
    10,217Other assets
    
    
    8,078
    
    
    
    7,531Total assets
    
    $
    722,136
    
    
    $
    657,724Liabilities and Shareholders EquityLiabilities:DepositsNoninterest-bearing demand
    
    $
    105,960
    
    
    $
    77,820NOW accounts
    
    
    148,751
    
    
    
    127,385Money market accounts
    
    
    95,599
    
    
    
    91,872Savings
    
    
    57,838
    
    
    
    55,742Time deposits
    
    
    229,177
    
    
    
    210,182Total deposits
    
    
    637,325
    
    
    
    563,001Other borrowed funds
    
    
    10,000
    
    
    
    27,000Junior subordinated debentures
    
    
    15,007
    
    
    
    15,007Other liabilities
    
    
    4,072
    
    
    
    3,125Total liabilities
    
    
    666,404
    
    
    
    608,133Commitments and contingencies
    
    
    
    
    
    
    Shareholders equity:Preferred stock, no par value. Authorized 20,000 shares:no shares issued or outstanding
    
    
    
    
    
    
    Common stock, no par value. Authorized 11,822,706 shares:issued and outstanding 7,332,940 and 7,239,052 shares
at September 30, 2005 and December 31, 2004, respectively (1)
    
    
    32,339
    
    
    
    31,516Retained earnings
    
    
    23,796
    
    
    
    17,928Deferred compensation
    
    
    (416
    )
    
    
    Accumulated other comprehensive income
    
    
    13
    
    
    
    147Total shareholders equity
    
    
    55,732
    
    
    
    49,591Total liabilities and shareholders equity
    
    $
    722,136
    
    
    $
    657,724
 
 (1) Adjusted for the 4-for-3 stock split distributed May 17, 2005.  1




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##### Table of Contents



WASHINGTON BANKING COMPANY
AND SUBSIDIARY
 
 
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Interest income:Interest and fees on loans
    
    $
    11,386
    
    
    $
    9,630
    
    
    $
    32,423
    
    
    $
    27,494Interest on taxable investment securities
    
    
    91
    
    
    
    77
    
    
    
    259
    
    
    
    264Interest on tax exempt investment securities
    
    
    78
    
    
    
    92
    
    
    
    237
    
    
    
    394Other
    
    
    233
    
    
    
    62
    
    
    
    299
    
    
    
    155Total interest income
    
    
    11,788
    
    
    
    9,861
    
    
    
    33,218
    
    
    
    28,307Interest expense:Interest on deposits
    
    
    2,600
    
    
    
    1,954
    
    
    
    7,066
    
    
    
    5,603Interest on other borrowings
    
    
    97
    
    
    
    93
    
    
    
    443
    
    
    
    340Interest on junior subordinated debentures
    
    
    278
    
    
    
    201
    
    
    
    775
    
    
    
    565Total interest expense
    
    
    2,975
    
    
    
    2,248
    
    
    
    8,284
    
    
    
    6,508Net interest income
    
    
    8,813
    
    
    
    7,613
    
    
    
    24,934
    
    
    
    21,799Provision for loan losses
    
    
    550
    
    
    
    725
    
    
    
    1,500
    
    
    
    2,325Net interest income after provision for loan losses
    
    
    8,263
    
    
    
    6,888
    
    
    
    23,434
    
    
    
    19,474Noninterest income:Service charges and fees
    
    
    836
    
    
    
    740
    
    
    
    2,306
    
    
    
    2,257(Loss) gain on sale of securities
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (50
    )
    
    
    144Income from the sale of loans
    
    
    280
    
    
    
    334
    
    
    
    664
    
    
    
    1,012SBA premium income
    
    
    212
    
    
    
    106
    
    
    
    503
    
    
    
    258Other
    
    
    663
    
    
    
    492
    
    
    
    2,111
    
    
    
    1,098Total noninterest income
    
    
    1,991
    
    
    
    1,672
    
    
    
    5,534
    
    
    
    4,769Noninterest expense:Salaries and benefits
    
    
    3,786
    
    
    
    3,418
    
    
    
    11,019
    
    
    
    10,324Occupancy and equipment
    
    
    881
    
    
    
    783
    
    
    
    2,533
    
    
    
    2,460Office supplies and printing
    
    
    147
    
    
    
    161
    
    
    
    503
    
    
    
    477Data processing
    
    
    138
    
    
    
    131
    
    
    
    394
    
    
    
    373Consulting and professional fees
    
    
    152
    
    
    
    280
    
    
    
    397
    
    
    
    583Other
    
    
    1,232
    
    
    
    1,016
    
    
    
    3,636
    
    
    
    3,183Total noninterest expense
    
    
    6,336
    
    
    
    5,789
    
    
    
    18,482
    
    
    
    17,400Income before income taxes and discontinued
operations
    
    
    3,918
    
    
    
    2,771
    
    
    
    10,486
    
    
    
    6,843Provision for income taxes
    
    
    1,239
    
    
    
    915
    
    
    
    3,415
    
    
    
    2,277Income from continuing operations
    
    
    2,679
    
    
    
    1,856
    
    
    
    7,071
    
    
    
    4,566Loss from discontinued operations, net of tax
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (370
    )Net income
    
    $
    2,679
    
    
    $
    1,856
    
    
    $
    7,071
    
    
    $
    4,196Earnings (loss) per common share, basic (1)Continuing operations
    
    $
    0.37
    
    
    $
    0.26
    
    
    $
    0.97
    
    
    $
    0.64Discontinued operations
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (0.05
    )Net income per share
    
    $
    0.37
    
    
    $
    0.26
    
    
    $
    0.97
    
    
    $
    0.59Earnings (loss) per common share, diluted (1)Continuing operations
    
    $
    0.35
    
    
    $
    0.25
    
    
    $
    0.94
    
    
    $
    0.61Discontinued operations
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (0.05
    )Net income
    
    $
    0.35
    
    
    $
    0.25
    
    
    $
    0.94
    
    
    $
    0.56Average number of shares outstanding, basic (1)
    
    
    7,291,568
    
    
    
    7,214,111
    
    
    
    7,268,935
    
    
    
    7,204,189Average number of shares outstanding, diluted (1)
    
    
    7,561,943
    
    
    
    7,470,423
    
    
    
    7,531,839
    
    
    
    7,469,143
 
 (1) Adjusted for the 4-for-3 stock split distributed May 17, 2005.  2




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WASHINGTON BANKING COMPANY
AND SUBSIDIARY
 
 
 Accumulatedother
    
    
    TotalCommon stock
    
    
    Retained
    
    
    Deferred
    
    
    comprehensive
    
    
    shareholdersShares
    
    
    Amount
    
    
    earnings
    
    
    compensation
    
    
    income (loss)
    
    
    equityBalances at December 31, 2003
    
    
    5,358
    
    
    $
    31,125
    
    
    $
    13,273
    
    
    $
    3⁄4
    
    
    $
    (38
    )
    
    $
    44,360Comprehensive income:
    
    
    
    
    
    
    
    
    
    
    3⁄4Net income
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    4,196
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    4,196Net change in unrealized gain (loss) on
securities available for sale, net of tax of $194
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    367
    
    
    
    367Less adjustment for gains included in net income,
net of income tax of $(47)
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (97
    )
    
    
    (97
    )Total comprehensive income (1)
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    4,466Cash dividend, $0.163 per share (2)
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (1,128
    )
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (1,128
    )Stock option compensation
    
    
    3⁄4
    
    
    
    17
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    17Stock options exercised
    
    
    55
    
    
    
    166
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    166Balances at September 30, 2004
    
    
    5,413
    
    
    $
    31,308
    
    
    $
    16,341
    
    
    $
    3⁄4
    
    
    $
    232
    
    
    $
    47,881Balances at December 31, 2004
    
    
    5,429
    
    
    $
    31,516
    
    
    $
    17,928
    
    
    $
    3⁄4
    
    
    $
    147
    
    
    $
    49,591Comprehensive income:Net income
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    7,071
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    7,071Net change in unrealized gain (loss) on
securities available for sale, net of tax of ($96)
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (167
    )
    
    
    (167
    )Plus adjustment for losses included in net income,
net of income tax of $17
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    33
    
    
    
    33Total comprehensive income (1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,937Tax benefit associated with stock options
    
    
    3⁄4
    
    
    
    87
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    87Cash dividend, $0.164 per share (2)
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (1,203
    )
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (1,203
    )Stock option compensation
    
    
    3⁄4
    
    
    
    17
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    17Four-for-three stock split
    
    
    1,810
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4Stock options exercised (2)
    
    
    59
    
    
    
    236
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    236Issuance of Restricted Stock (2)
    
    
    35
    
    
    
    483
    
    
    
    3⁄4
    
    
    
    (483
    )
    
    
    3⁄4
    
    
    
    3⁄4Amortization of Restricted Stock (2)
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    67
    
    
    
    3⁄4
    
    
    
    67Balances at September 30, 2005
    
    
    7,333
    
    
    $
    32,339
    
    
    $
    23,796
    
    
    $
    (416
    )
    
    $
    13
    
    
    $
    55,732
 
 (1)
    
    Comprehensive income for the three months ended September 30, 2005 and 2004 was $2,668 and $1,985, respectively.(2)
    
    Adjusted for the 4-for-3 stock split distributed May 17, 2005.  3




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##### Table of Contents



WASHINGTON BANKING COMPANY
AND SUBSIDIARY
 
 
 Nine Months Ended September 30,2005
    
    
    2004Cash flows from operating activities:Net income from continuing operations
    
    $
    7,071
    
    
    $
    4,566Adjustments to reconcile net income to net cash
provided by operating activities:Federal Home Loan Bank stock dividends
    
    
    (8
    )
    
    
    (64
    )Amortization of investment premiums, net
    
    
    28
    
    
    
    37Net decrease (increase) in subsidiary investment
    
    
    61
    
    
    
    (300
    )Earnings on bank owned life insurance
    
    
    (255
    )
    
    
    (113
    )Provision for loan losses
    
    
    1,500
    
    
    
    2,325Net increase in loans held for sale
    
    
    3,226
    
    
    
    2,655Net loss (gain) on sale of securities
    
    
    50
    
    
    
    (144
    )Depreciation and amortization of premises and equipment
    
    
    1,213
    
    
    
    1,288Net (gain) loss on sale of premises and equipment
    
    
    (103
    )
    
    
    161Net (gain) loss on sale of other real estate
    
    
    (13
    )
    
    
    32Write-downs of other real estate
    
    
    229
    
    
    
    3⁄4Tax benefit associated with stock options
    
    
    (87
    )
    
    
    3⁄4Amortization of restricted stock
    
    
    67
    
    
    
    3⁄4Increase in other assets
    
    
    (461
    )
    
    
    (182
    )Increase in other liabilities
    
    
    463
    
    
    
    315Cash flows from continuing operating activities
    
    
    12,981
    
    
    
    10,576Loss from discontinued operations
    
    
    3⁄4
    
    
    
    (370
    )Cash flows from operating activities
    
    
    12,981
    
    
    
    10,206Cash flows from investing activities:Purchases of investment securities, available for sale
    
    
    (1,420
    )
    
    
    3⁄4Maturities/calls/principal payments of investment and
mortgage-backed securities available for sale
    
    
    1,091
    
    
    
    5,347Sale of investment securities, available for sale
    
    
    455
    
    
    
    5,799Maturities/calls of investment securities held to maturity
    
    
    3⁄4
    
    
    
    475Purchase of bank owned life insurance
    
    
    3⁄4
    
    
    
    (10,000
    )Net increase in loans
    
    
    (35,170
    )
    
    
    (54,354
    )FHLB stock redemptions
    
    
    3⁄4
    
    
    
    184Purchases of premises and equipment
    
    
    (1,828
    )
    
    
    (2,347
    )Proceeds from the sale of other real estate owned, premises and equipment
    
    
    903
    
    
    
    300Cash flows from investing activities
    
    
    (35,969
    )
    
    
    (54,596
    )Cash flows from financing activities:Net increase in deposits
    
    
    74,324
    
    
    
    87,463Net decrease in FHLB overnight borrowings
    
    
    (22,000
    )
    
    
    (5,000
    )Gross payments on other borrowed funds
    
    
    3⁄4
    
    
    
    (5,000
    )New borrowings on other borrowed funds
    
    
    5,000
    
    
    
    3⁄4Dividends paid on common stock
    
    
    (1,203
    )
    
    
    (1,128
    )Proceeds from stock options exercised
    
    
    236
    
    
    
    166Cash flows from financing activities
    
    
    56,357
    
    
    
    76,501Net change in cash and cash equivalents
    
    
    33,369
    
    
    
    32,111Cash and cash equivalents at beginning of period
    
    
    17,933
    
    
    
    20,605Cash and cash equivalents at end of period
    
    $
    51,302
    
    
    $
    52,716Supplemental information:Loans foreclosed and transferred to other real estate owned
    
    $
    53
    
    
    $
    1,210Cash paid for interest
    
    
    8,153
    
    
    
    6,407Cash paid for income taxes
    
    
    3,140
    
    
    
    2,105Transfer of investments from HTM to AFS
    
    
    3⁄4
    
    
    
    14,267Deconsolidation of trust preferred securities
    
    
    3⁄4
    
    
    
    15,000
  4




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 (1) Description of Business and Summary of Significant Accounting Policies
        Disclosure about
Segments of an Enterprise and Related Information,
   5




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (2) Recent Financial Accounting Pronouncements
 Accounting Changes and Error Corrections, Accounting Changes, Reporting Accounting Changes in
Interim Financial Statements.
  Shared Based Payment, Accounting for Stock-Based Compensation. Accounting for Stock Issued to Employees Statement of Cash Flows
   (3) Earnings Per Share
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Weighted average shares, basic
    
    
    7,291,568
    
    
    
    7,214,111
    
    
    
    7,268,935
    
    
    
    7,204,189Dilutive effect of stock options and
restricted stock
    
    
    270,375
    
    
    
    256,312
    
    
    
    262,904
    
    
    
    264,954Weighted average shares, diluted
    
    
    7,561,943
    
    
    
    7,470,423
    
    
    
    7,531,839
    
    
    
    7,469,143
  6




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  (4) Junior Subordinated Debentures
    (5) Stock-Based Compensation
 Accounting for Stock Issued
to Employees Accounting for Certain Transactions
Involving Stock Compensation.
 Accounting for Stock-Based
Compensation,
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net income, as reported
    
    $
    2,679
    
    
    $
    1,856
    
    
    $
    7,071
    
    
    $
    4,196Stock compensation recognized, net of tax
    
    
    4
    
    
    
    4
    
    
    
    12
    
    
    
    12Additional compensation for
fair value of stock options, net of tax
    
    
    (15
    )
    
    
    (15
    )
    
    
    (44
    )
    
    
    (44
    )Pro forma net income
    
    $
    2,668
    
    
    $
    1,845
    
    
    $
    7,039
    
    
    $
    4,164Basic earnings per share:As reportedIncome from continuing operations
    
    $
    0.37
    
    
    $
    0.26
    
    
    $
    0.97
    
    
    $
    0.64Loss from discontinued operations
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (0.05
    )Net income
    
    $
    0.37
    
    
    $
    0.26
    
    
    $
    0.97
    
    
    $
    0.59
 7




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Basic earnings per share:Pro formaIncome from continuing operations
    
    $
    0.37
    
    
    $
    0.26
    
    
    $
    0.97
    
    
    $
    0.63Loss from discontinued operations
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (0.05
    )Net income
    
    $
    0.37
    
    
    $
    0.26
    
    
    $
    0.97
    
    
    $
    0.58Diluted earnings per share:As reportedIncome from continuing operations
    
    $
    0.35
    
    
    $
    0.25
    
    
    $
    0.94
    
    
    $
    0.61Loss from discontinued operations
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (0.05
    )Net income
    
    $
    0.35
    
    
    $
    0.25
    
    
    $
    0.94
    
    
    $
    0.56Pro formaIncome from continuing operations
    
    $
    0.35
    
    
    $
    0.25
    
    
    $
    0.94
    
    
    $
    0.61Loss from discontinued operations
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (0.05
    )Net income
    
    $
    0.35
    
    
    $
    0.25
    
    
    $
    0.94
    
    
    $
    0.56
  (6) Subsequent Event
  (7) Commitments
     (8) Investment Securities
  8




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
   9




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  Note Regarding Forward-Looking Statements
  Overview
    10




---



##### Table of Contents



Financial Highlights
    11




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##### Table of Contents



Consolidated Average Balance Sheet and Analysis of Net Interest Income and Expense
  Three Months Ended September 30, 2005
    
    
    Three Months Ended September 30, 2004Average
    
    
    Interest
    
    
    Average
    
    
    Average
    
    
    Interest
    
    
    Average(Dollars in thousands)
    
    balance
    
    
    earned/paid
    
    
    yield
    
    
    balance
    
    
    earned/paid
    
    
    yieldAssetsLoans (1)(2)
    
    $
    618,042
    
    
    $
    11,410
    
    
    
    7.32
    %
    
    $
    557,911
    
    
    $
    9,648
    
    
    
    6.88
    %Federal funds sold
    
    
    24,964
    
    
    
    217
    
    
    
    3.45
    %
    
    
    9,308
    
    
    
    35
    
    
    
    1.50
    %Interest-bearing cash
    
    
    816
    
    
    
    7
    
    
    
    3.40
    %
    
    
    596
    
    
    
    2
    
    
    
    1.33
    %Investments:Taxable
    
    
    14,180
    
    
    
    100
    
    
    
    2.80
    %
    
    
    13,166
    
    
    
    102
    
    
    
    3.08
    %Non-taxable (2)
    
    
    6,854
    
    
    
    118
    
    
    
    6.83
    %
    
    
    8,273
    
    
    
    137
    
    
    
    6.59
    %Interest-earning assets
    
    
    664,856
    
    
    
    11,852
    
    
    
    7.07
    %
    
    
    589,254
    
    
    
    9,924
    
    
    
    6.70
    %Noninterest-earning assets
    
    
    50,494
    
    
    
    
    
    
    
    
    
    
    
    51,228Total assets
    
    $
    715,350
    
    
    
    
    
    
    
    
    
    
    $
    640,482Liabilities and
Shareholders EquityDeposits:Interest demand and
money market
    
    $
    241,386
    
    
    $
    653
    
    
    
    1.07
    %
    
    $
    222,840
    
    
    $
    422
    
    
    
    0.75
    %Savings
    
    
    56,857
    
    
    
    112
    
    
    
    0.78
    %
    
    
    50,296
    
    
    
    100
    
    
    
    0.79
    %CDs
    
    
    229,491
    
    
    
    1,835
    
    
    
    3.17
    %
    
    
    212,503
    
    
    
    1,432
    
    
    
    2.68
    %Interest-bearing deposits
    
    
    527,734
    
    
    
    2,600
    
    
    
    1.95
    %
    
    
    485,639
    
    
    
    1,954
    
    
    
    1.60
    %Federal funds purchased
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    2,244
    
    
    
    9
    
    
    
    1.60
    %Junior subordinated debentures
    
    
    15,007
    
    
    
    278
    
    
    
    7.35
    %
    
    
    15,007
    
    
    
    201
    
    
    
    5.33
    %Other borrowed funds
    
    
    10,043
    
    
    
    97
    
    
    
    3.83
    %
    
    
    7,577
    
    
    
    84
    
    
    
    4.41
    %Interest-bearing liabilities
    
    
    552,784
    
    
    
    2,975
    
    
    
    2.14
    %
    
    
    510,467
    
    
    
    2,248
    
    
    
    1.75
    %Noninterest-bearing deposits
    
    
    103,346
    
    
    
    
    
    
    
    
    
    
    
    80,085Other noninterest-bearing liabilities
    
    
    5,163
    
    
    
    
    
    
    
    
    
    
    
    3,333Total liabilities
    
    
    661,293
    
    
    
    
    
    
    
    
    
    
    
    593,885Shareholders equity
    
    
    54,057
    
    
    
    
    
    
    
    
    
    
    
    46,597Total liabilities and
shareholders equity
    
    $
    715,350
    
    
    
    
    
    
    
    
    
    
    $
    640,482Net interest income
    
    
    
    
    
    $
    8,877
    
    
    
    
    
    
    
    
    
    
    $
    7,676Net interest spread
    
    
    
    
    
    
    
    
    
    
    4.93
    %
    
    
    
    
    
    
    
    
    
    
    4.95
    %Net interest margin
    
    
    
    
    
    
    
    
    
    
    5.30
    %
    
    
    
    
    
    
    
    
    
    
    5.18
    %
 
 (1)
    
    Average balance includes nonaccrual loans; Interest earned includes loan fees of $327 and $288 for the three months ended September 30,
2005 and 2004, respectively.(2)
    
    Interest income on non-taxable investments and loans is presented on a fully tax-equivalent basis using the federal statutory rate of 34.3%
and 34% for the three months ended September 30, 2005 and 2004, respectively. These adjustments were $64 and $63 for the three months
ended September 30, 2005 and 2004, respectively. Fully tax-equivalent is a non-GAAP performance measurement that management believes provides investors with a more
accurate picture of the net interest margin and efficiency ratio for comparative purposes. The calculation involves grossing up interest income on tax-exempt loans
and investments by an amount that makes it comparable to taxable income. 12




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##### Table of Contents



Nine Months Ended September 30, 2005
    
    
    Nine Months Ended September 30, 2004Average
    
    
    Interest
    
    
    Average
    
    
    Average
    
    
    Interest
    
    
    Average(Dollars in thousands)
    
    balance
    
    
    earned/paid
    
    
    yield
    
    
    balance
    
    
    earned/paid
    
    
    yieldAssetsLoans (1)(2)
    
    $
    604,471
    
    
    $
    32,488
    
    
    
    7.19
    %
    
    $
    539,745
    
    
    $
    27,558
    
    
    
    6.82
    %Federal funds sold
    
    
    9,994
    
    
    
    249
    
    
    
    3.33
    %
    
    
    7,785
    
    
    
    68
    
    
    
    1.17
    %Interest-bearing cash
    
    
    887
    
    
    
    18
    
    
    
    2.71
    %
    
    
    649
    
    
    
    5
    
    
    
    1.03
    %Investments:Taxable
    
    
    14,210
    
    
    
    291
    
    
    
    2.74
    %
    
    
    14,751
    
    
    
    346
    
    
    
    3.13
    %Non-taxable (2)
    
    
    6,942
    
    
    
    357
    
    
    
    6.88
    %
    
    
    11,773
    
    
    
    585
    
    
    
    6.64
    %Interest-earning assets
    
    
    636,504
    
    
    
    33,403
    
    
    
    7.02
    %
    
    
    574,703
    
    
    
    28,562
    
    
    
    6.64
    %Noninterest-earning assets
    
    
    50,647
    
    
    
    
    
    
    
    
    
    
    
    44,051Total assets
    
    $
    687,151
    
    
    
    
    
    
    
    
    
    
    $
    618,754Liabilities and
Shareholders EquityDeposits:Interest demand and
money market
    
    $
    228,526
    
    
    $
    1,741
    
    
    
    1.02
    %
    
    $
    208,157
    
    
    $
    1,176
    
    
    
    0.75
    %Savings
    
    
    56,298
    
    
    
    331
    
    
    
    0.79
    %
    
    
    46,299
    
    
    
    273
    
    
    
    0.79
    %CDs
    
    
    219,799
    
    
    
    4,994
    
    
    
    3.04
    %
    
    
    207,864
    
    
    
    4,154
    
    
    
    2.67
    %Interest-bearing deposits
    
    
    504,623
    
    
    
    7,066
    
    
    
    1.87
    %
    
    
    462,320
    
    
    
    5,603
    
    
    
    1.62
    %Federal funds purchased
    
    
    7,675
    
    
    
    159
    
    
    
    2.77
    %
    
    
    3,098
    
    
    
    28
    
    
    
    1.21
    %Junior subordinated debentures
    
    
    15,007
    
    
    
    775
    
    
    
    6.90
    %
    
    
    15,007
    
    
    
    565
    
    
    
    5.03
    %Other borrowed funds
    
    
    9,781
    
    
    
    284
    
    
    
    3.88
    %
    
    
    9,701
    
    
    
    312
    
    
    
    4.30
    %Interest-bearing liabilities
    
    
    537,086
    
    
    
    8,284
    
    
    
    2.06
    %
    
    
    490,126
    
    
    
    6,508
    
    
    
    1.77
    %Noninterest-bearing deposits
    
    
    94,233
    
    
    
    
    
    
    
    
    
    
    
    80,124Other noninterest-bearing
liabilities
    
    
    3,945
    
    
    
    
    
    
    
    
    
    
    
    2,978Total liabilities
    
    
    635,264
    
    
    
    
    
    
    
    
    
    
    
    573,228Shareholders equity
    
    
    51,887
    
    
    
    
    
    
    
    
    
    
    
    45,526Total liabilities and
shareholders equity
    
    $
    687,151
    
    
    
    
    
    
    
    
    
    
    $
    618,754Net interest income
    
    
    
    
    
    $
    25,119
    
    
    
    
    
    
    
    
    
    
    $
    22,054Net interest spread
    
    
    
    
    
    
    
    
    
    
    4.96
    %
    
    
    
    
    
    
    
    
    
    
    4.87
    %Net interest margin
    
    
    
    
    
    
    
    
    
    
    5.28
    %
    
    
    
    
    
    
    
    
    
    
    5.13
    %
 
 (1)
    
    Average balance includes nonaccrual loans; Interest earned includes loan fees of $984 and $729 for the nine months ended
September 30, 2005 and 2004, respectively.(2)
    
    Interest income on non-taxable investments and loans is presented on a fully tax-equivalent basis using the federal
statutory rate of 34.3% and 34% for the nine months ended September 30, 2005 and 2004, respectively. These adjustments were $185 and $255 for the
nine months ended September 30, 2005 and 2004, respectively. Fully tax-equivalent is a non-GAAP performance measurement that management believes
provides investors with a more accurate picture of the net interest margin and efficiency ratio for comparative purposes. The calculation
involves grossing up interest income on tax-exempt loans and investments by an amount that makes it comparable to taxable income. 13




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##### Table of Contents



Three Months Ended September 30
    
    
    Nine Months Ended September 302005 vs. 2004
    
    
    2005 vs. 2004Increase (decrease) due to:
    
    
    Increase (decrease) due to:Volume
    
    
    Rate
    
    
    Total
    
    
    Volume
    
    
    Rate
    
    
    TotalAssetsLoans (1)
    
    $
    1,083
    
    
    $
    679
    
    
    $
    1,762
    
    
    $
    3,426
    
    
    $
    1,504
    
    
    $
    4,930Federal funds sold
    
    
    102
    
    
    
    80
    
    
    
    182
    
    
    
    24
    
    
    
    157
    
    
    
    181Interest-bearing cash
    
    
    1
    
    
    
    4
    
    
    
    5
    
    
    
    2
    
    
    
    11
    
    
    
    13Investments (1)
    
    
    (4
    )
    
    
    (17
    )
    
    
    (21
    )
    
    
    (174
    )
    
    
    (109
    )
    
    
    (283
    )Total interest-earning assets
    
    $
    1,182
    
    
    $
    746
    
    
    $
    1,928
    
    
    $
    3,278
    
    
    $
    1,563
    
    
    $
    4,841LiabilitiesDeposits:Interest demand and money market
    
    $
    37
    
    
    $
    193
    
    
    $
    230
    
    
    $
    124
    
    
    $
    441
    
    
    $
    565Savings
    
    
    13
    
    
    
    (1
    )
    
    
    12
    
    
    
    59
    
    
    
    (1
    )
    
    
    58Time deposits
    
    
    121
    
    
    
    282
    
    
    
    403
    
    
    
    248
    
    
    
    592
    
    
    
    840Interest on other borrowed funds
    
    
    (4
    )
    
    
    (4
    )
    
    
    (8
    )
    
    
    70
    
    
    
    61
    
    
    
    131Junior subordinated debentures
    
    
    3⁄4
    
    
    
    77
    
    
    
    77
    
    
    
    3⁄4
    
    
    
    210
    
    
    
    210Other interest-bearing liabilities
    
    
    21
    
    
    
    (8
    )
    
    
    13
    
    
    
    3
    
    
    
    (31
    )
    
    
    (28
    )Total interest-bearing liabilities
    
    $
    188
    
    
    $
    539
    
    
    $
    727
    
    
    $
    504
    
    
    $
    1,272
    
    
    $
    1,776
 
 (1)
    
    Interest on loans and investments is presented on a fully tax-equivalent basis. Fully tax-equivalent is a non-GAAP performance measurement that
management believes provides investors with a more accurate picture of the net interest margin and efficiency ratio for comparative purposes. The calculation
involves grossing up interest income on tax-exempt loans and investments by an amount that makes it comparable to taxable income. Results of Operations
 Net Interest Income.
    14




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##### Table of Contents



Provision for Loan Losses. Managements
Discussion and Analysis of Financial Condition and Results of Operations.
  Noninterest Income.
 Noninterest Expense.
 15




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##### Table of Contents



Income Taxes.
 Financial Condition
 Total Assets.
 Investment Securities.
 Total Loans.
 16




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##### Table of Contents



Loan Portfolio Composition.
 September 30, 2005
    
    
    December 31, 2004(Dollars in thousands)
    
    Balance
    
    
    % of total
    
    
    Balance
    
    
    % of totalCommercial
    
    $
    81,646
    
    
    
    13.3
    %
    
    $
    80,927
    
    
    
    14.0
    %Real estate mortgages:One-to-four family residential (1)
    
    
    43,571
    
    
    
    7.1
    %
    
    
    46,242
    
    
    
    8.0
    %Commercial
    
    
    210,549
    
    
    
    34.3
    %
    
    
    173,280
    
    
    
    29.9
    %Total real estate mortgages
    
    
    254,120
    
    
    
    41.4
    %
    
    
    219,522
    
    
    
    37.9
    %Real estate construction:One-to-four family residential
    
    
    70,395
    
    
    
    11.5
    %
    
    
    65,190
    
    
    
    11.2
    %Commercial
    
    
    34,979
    
    
    
    5.7
    %
    
    
    40,750
    
    
    
    7.0
    %Total real estate construction
    
    
    105,374
    
    
    
    17.2
    %
    
    
    105,940
    
    
    
    18.2
    %Consumer:Indirect (1)
    
    
    92,469
    
    
    
    15.0
    %
    
    
    97,856
    
    
    
    16.9
    %Direct
    
    
    80,706
    
    
    
    13.1
    %
    
    
    75,360
    
    
    
    13.0
    %Total consumer
    
    
    173,175
    
    
    
    28.1
    %
    
    
    173,216
    
    
    
    29.9
    %Subtotal
    
    
    614,315
    
    
    
    100.0
    %
    
    
    579,605
    
    
    
    100.0
    %Less: allowance for loan losses
    
    
    (8,593
    )
    
    
    
    
    
    
    (7,903
    )Deferred loan fees, net
    
    
    (35
    )
    
    
    
    
    
    
    375Total loans, net
    
    $
    605,687
    
    
    
    
    
    
    $
    572,077
 
 (1)
    
    Excludes loans held for sale. Allowance for Loan Losses.
 17




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##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(Dollars in thousands)
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004Balance at beginning of period
    
    $
    8,554
    
    
    $
    6,926
    
    
    $
    7,903
    
    
    $
    6,116Charge-offs:Commercial
    
    
    (145
    )
    
    
    (41
    )
    
    
    (285
    )
    
    
    (240
    )Real estate
    
    
    (1
    )
    
    
    (15
    )
    
    
    (29
    )
    
    
    (37
    )Consumer:Direct
    
    
    (158
    )
    
    
    (51
    )
    
    
    (343
    )
    
    
    (295
    )Indirect
    
    
    (329
    )
    
    
    (196
    )
    
    
    (764
    )
    
    
    (894
    )Total charge-offs
    
    $
    (633
    )
    
    $
    (303
    )
    
    $
    (1,421
    )
    
    $
    (1,466
    )Recoveries:Commercial
    
    
    56
    
    
    
    44
    
    
    
    160
    
    
    
    184Real estate
    
    
    3⁄4
    
    
    
    36
    
    
    
    131
    
    
    
    54Consumer:Direct
    
    
    20
    
    
    
    22
    
    
    
    72
    
    
    
    74Indirect
    
    
    46
    
    
    
    56
    
    
    
    248
    
    
    
    219Total recoveries
    
    $
    122
    
    
    $
    158
    
    
    $
    611
    
    
    $
    531Net charge-offs
    
    
    (511
    )
    
    
    (145
    )
    
    
    (810
    )
    
    
    (935
    )Provision for loan losses
    
    
    550
    
    
    
    725
    
    
    
    1,500
    
    
    
    2,325Balance at end of period
    
    $
    8,593
    
    
    $
    7,506
    
    
    $
    8,593
    
    
    $
    7,506Indirect net charge-offs to average indirect loans
(1)
    
    
    1.20
    %
    
    
    0.54
    %
    
    
    0.72
    %
    
    
    0.86
    %Other net charge-offs to average other loans (1)
    
    
    0.18
    %
    
    
    0.00
    %
    
    
    0.08
    %
    
    
    0.08
    %Net charge-offs to average loans (1)
    
    
    0.33
    %
    
    
    0.10
    %
    
    
    0.18
    %
    
    
    0.23
    %
 
 (1)
    
    Excludes loans held for sale    Nonperforming Assets.
 18




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##### Table of Contents



(Dollars in thousands)
    
    September 30, 2005
    
    
    December 31, 2004Nonaccrual loans
    
    $
    2,692
    
    
    $
    2,812Restructured loans
    
    
    
    
    
    
    Total nonperforming loans
    
    
    2,692
    
    
    
    2,812Other real estate owned
    
    
    622
    
    
    
    1,222Total nonperforming assets
    
    $
    3,314
    
    
    $
    4,034Impaired loans (1)
    
    
    2,692
    
    
    
    2,812Accruing
loans past due 3 90  days
    
    
    
    
    
    
    Potential problem loans
    
    
    1,054
    
    
    
    356Allowance for loan losses
    
    
    8,593
    
    
    
    7,903Nonperforming loans to loans (2)
    
    
    0.44%
    
    
    
    0.48%Allowance for loan losses to loans (2)
    
    
    1.40%
    
    
    
    1.36%Allowance for loan losses to nonperforming loans
    
    
    319.21%
    
    
    
    281.05%Allowance for loan losses to nonperforming assets
    
    
    259.295
    
    
    
    195.91%Nonperforming assets to total assets
    
    
    0.46%
    
    
    
    0.61%
 
 (1)
    
    Certain non-accrual loans outstanding as of December 31, 2004 were
reclassified as impaired loans in accordance with FASB Statement No. 114to conform to the
current presentation.(2)
    
    Excludes loans held for sale. Premises and Equipment.
  Other Assets.
 Deposits.
   19




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##### Table of Contents



Other Borrowings
 Off-Balance Sheet Items.
 Shareholders Equity.
 Liquidity and Sources of Funds
 Sources of Funds.
 Capital and Capital Ratios
  20




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##### Table of Contents



Regulatory Requirements
    
    
    Actual RatiosAdequately-
    
    
    Well-
    
    
    September 30,
    
    
    December 31,capitalized
    
    
    capitalized
    
    
    2005
    
    
    2004Total risk-based capital ratioConsolidated
    
    
    8
    %
    
    
    N/A
    
    
    
    11.38
    %
    
    
    11.40
    %Whidbey Island Bank
    
    
    8
    %
    
    
    10
    %
    
    
    11.10
    %
    
    
    11.03
    %Tier 1 risk-based capital ratioConsolidated
    
    
    4
    %
    
    
    N/A
    
    
    
    10.15
    %
    
    
    10.15
    %Whidbey Island Bank
    
    
    4
    %
    
    
    6
    %
    
    
    9.87
    %
    
    
    9.79
    %Leverage ratioConsolidated
    
    
    4
    %
    
    
    N/A
    
    
    
    9.89
    %
    
    
    9.87
    %Whidbey Island Bank
    
    
    4
    %
    
    
    5
    %
    
    
    9.60
    %
    
    
    9.51
    %
  Capital Expenditures and Commitments
  Significant Accounting Policies
 Notes to Condensed Consolidated Financial Statements.
 
 Item 3. Quantitative and Qualitative Disclosures about Market Risk
  
 Item 4. Controls and Procedures
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##### Table of Contents



PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
 (a)
    
    Not applicable.(b)
    
    There have been no material changes in the procedures for shareholders to
nominate directors to the Companys board.
 
 Item 6. Exhibits
 Exhibits31.1
    
    Certification of Chief Executive Officer required by Rule 13a-14(b) or Rule
15d-14(a) and Section 302 of the Sarbanes Oxley Act of 200231.2
    
    Certification of Chief Financial Officer required by Rule 13a-14(b) or Rule
15d-14(a) and Section 302 of the Sarbanes Oxley Act of 200232
    
    Certification of Chief Executive Officer and Chief Financial Officer required
by Rule 13a-14(b) or Rule 15d-14(b) and Section 906 of the Sarbanes Oxley Act of 2002,
18 U.S.C. Section 1350
 22




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##### Table of Contents



SIGNATURES
  WASHINGTON BANKING COMPANY
 Date: November 14, 2005
    
    By
    
    /s/ Michal D. CannMichal D. CannPresident andChief Executive OfficerDate: November 14, 2005
    
    By
    
    /s/ Richard A. ShieldsRichard A. ShieldsSenior Vice President andChief Financial Officer
 23