<PAGE>

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

                                    FORM 10-Q

(Mark One)

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

                 For the quarterly period ended March 31, 2001

[ ]  Transition  report  pursuant  to  Section  13 or  15(d)  of the  Securities
     Exchange Act of 1934

               For the transition period from ________ to ________

                        Commission File Number 000-24503


                           WASHINGTON BANKING COMPANY
        (Exact name of small business issuer as specified in its charter)

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

                              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 May 10, 2001 was 4,055,250.


<PAGE>
                               Table of Contents

<TABLE>
<CAPTION>
                                                         PART I                                               Page
                                                                                                              ----
<S>                                                                                                           <C>
Item 1        Financial Statements
                  Condensed Consolidated Statements of Financial Condition -
                       March 31, 2001 and December 31, 2000                                                    1

                  Condensed Consolidated Statements of Income -
                       Three Months Ended March 31, 2001 and 2000                                              2

                  Condensed Consolidated Statements of Shareholders' Equity -
                       Three Months Ended March 31, 2001                                                       3

                  Condensed Consolidated Statements of Comprehensive Income -
                       Three Months Ended March 31, 2001 and 2000                                              3

                  Condensed Consolidated Statements of Cash Flows -
                       Three Months Ended March 31, 2001 and 2000                                              4

                  Notes to Condensed Consolidated Financial Statements                                         5

Item 2        Management's Discussion and Analysis of Financial Condition and Results of Operations            7

Item 3        Quantitative and Qualitative Disclosures about Market Risk                                      12

                                                         PART II
Item 6        Exhibits and Reports on Form 8-K                                                                13
                  Signatures
</TABLE>
                                        i
<PAGE>
                                     PART I
Item 1.  Financial Statements

                           WASHINGTON BANKING COMPANY
                                 AND SUBSIDIARY
            Condensed Consolidated Statements of Financial Condition
                      March 31, 2001 and December 31, 2000
                  (Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
                                                                                  March 31,         December 31,
                                  Assets                                            2001                2000
                                                                               ---------------    ----------------
                                                                                 (unaudited)
<S>                                                                          <C>                <C>
Cash and due from banks ($976 and $1,158, respectively, are restricted)      $        13,455    $        15,001
Interest-earning deposits                                                              4,223              1,428
Federal funds sold                                                                     7,400                750
                                                                               ---------------    ----------------
     Total cash and cash equivalents                                                  25,078             17,179
                                                                               ---------------    ----------------
Federal Home Loan Bank stock                                                             857                844
Deferred compensation plan                                                                77                 --
Investment securities available for sale                                               5,601              4,995
Investment securities held to maturity                                                19,881             21,491
                                                                               ---------------    ----------------
     Total investment securities                                                      26,416             27,330
                                                                               ---------------    ----------------
Loans receivable, net                                                                322,415            299,998
Premises and equipment, net                                                           13,790             13,730
Other real estate owned                                                                  124                124
Deferred tax asset                                                                       343                378
Other assets                                                                           2,837              2,906
                                                                               ---------------    ----------------
              Total assets                                                   $       391,003    $       361,645
                                                                               ===============    ================
                   Liabilities and Shareholders' Equity
Liabilities:
     Deposits                                                                $       356,562    $       317,776
     Other borrowed funds                                                                 --             10,000
     Other liabilities                                                                 2,312              2,368
                                                                               ---------------    ----------------
              Total liabilities                                                      358,874            330,144
                                                                               ---------------    ----------------
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 4,032,750 and 4,032,750
        shares at March 31, 2001 and December 31, 2000, respectively                  16,058             16,058
     Retained earnings                                                                16,029             15,470
     Accumulated other comprehensive income (loss), net                                   42                (27)
                                                                               ---------------    ----------------
              Total shareholders' equity                                              32,129             31,501
Commitments and contingencies                                                  ---------------    ----------------
              Total liabilities and shareholders' equity                     $       391,003    $       361,645
                                                                               ===============    ================
</TABLE>

See accompanying notes to condensed consolidated financial statements.

                                       1
<PAGE>
                           WASHINGTON BANKING COMPANY
                                 AND SUBSIDIARY
                   Condensed Consolidated Statements of Income
             Three months ended March 31, 2001 and 2000 (unaudited)
                  (Dollars in thousands, except per share data)

<TABLE>
<CAPTION>
                                                                                  Three Months Ended March 31,
                                                                                    2001               2000
                                                                               ---------------    ----------------
<S>                                                                          <C>                <C>
Interest income:
     Interest and fees on loans                                              $        7,440     $        5,485
     Interest on taxable investment securities                                          130                186
     Interest on tax-exempt investment securities                                       201                201
     Other                                                                               63                 80
                                                                               ---------------    ----------------
              Total interest income                                                   7,834              5,952
Interest expense                                                                      3,758              2,305
                                                                               ---------------    ----------------
              Net interest income                                                     4,076              3,647
Provision for loan losses                                                              (405)              (326)
                                                                               ---------------    ----------------
              Net interest income after provision for loan losses                     3,671              3,321
Noninterest income:
     Service charges and fees                                                           404                388
     Other                                                                              527                193
                                                                               ---------------    ----------------
              Total noninterest income                                                  931                581
Noninterest expense:
     Salaries and benefits                                                            2,121              1,789
     Occupancy                                                                          657                575
     Office supplies and printing                                                       124                139
     Data processing                                                                     83                 81
     Consulting and professional fees                                                    55                 41
     Other                                                                              464                431
                                                                               ---------------    ----------------
              Total noninterest expense                                               3,504              3,056
                                                                               ---------------    ----------------
              Income before income taxes                                              1,098                846
Provision for income taxes                                                             (297)              (229)
                                                                               ---------------    ----------------
              Net income                                                     $          801     $          617
                                                                               ===============    ================

Net income per share, basic                                                  $         0.20     $         0.15
                                                                               ===============    ================
Net income per share, diluted                                                $         0.19     $         0.14
                                                                               ===============    ================

Average number of shares outstanding, basic                                       4,032,750          4,063,900
Average number of shares outstanding, diluted                                     4,226,103          4,283,905
</TABLE>

See accompanying notes to condensed consolidated financial statements.

                                       2
<PAGE>
                           WASHINGTON BANKING COMPANY
                                 AND SUBSIDIARY
            Condensed Consolidated Statements of Shareholders' Equity
                  Three months ended March 31, 2001 (unaudited)
                  (Dollars in thousands, except per share data)

<TABLE>
<CAPTION>

                                                                                         Accumulated
                                                Common stock                                other               Total
                                          --------------------------    Retained        comprehensive       shareholders'
                                             Shares        Amount       earnings      income (loss), net       equity
                                          -------------  -----------   ------------   ------------------   ----------------
<S>                                           <C>      <C>           <C>            <C>                  <C>
Balances at December 31, 2000                 4,033    $    16,058   $    15,470    $         (27)       $      31,501
Net income                                       --             --           801               --                  801
Net change in unrealized gain (loss)
     on securities available for sale            --             --            --               69                   69
Cash dividend, $0.06 per share                   --             --          (242)              --                 (242)
                                          -------------  -----------   ------------   ------------------   ----------------
Balances at March 31, 2001                    4,033    $    16,058   $    16,029    $          42        $      32,129
                                          =============  ===========   ============   ==================   ================
</TABLE>

See accompanying notes to condensed consolidated financial statements.




                           WASHINGTON BANKING COMPANY
                                 AND SUBSIDIARY
            Condensed Consolidated Statements of Comprehensive Income
             Three months ended March 31, 2001 and 2000 (unaudited)
                  (Dollars in thousands, except per share data)

<TABLE>
<CAPTION>
                                                                               Three Months Ended March 31,
                                                                                  2001              2000
                                                                              -----------       -----------
<S>                                                                         <C>               <C>
Net income                                                                  $      801        $      617
Increase (decrease) in unrealized gain (loss) on securities
     available for sale, net of tax $35 and $5, respectively                        69                (9)
                                                                              -----------       -----------
Comprehensive income                                                        $      870        $      608
                                                                              ===========       ===========
</TABLE>

See accompanying notes to condensed consolidated financial statements.

                                       3
<PAGE>
                           WASHINGTON BANKING COMPANY
                                 AND SUBSIDIARY
                 Condensed Consolidated Statements of Cash Flows
             Three months ended March 31, 2001 and 2000 (unaudited)
                  (Dollars in thousands, except per share data)

<TABLE>
<CAPTION>
                                                                                 Three Months Ended March 31,
                                                                                   2001                2000
                                                                              ---------------      --------------
<S>                                                                         <C>                  <C>
Cash flows from operating activities:
     Net income                                                             $         801        $         617
     Adjustments to reconcile net income to net cash
       provided by operating activities:
         Federal Home Loan Bank stock dividends                                       (13)                 (13)
         Amortization of investment premiums, net                                       8                   10
         Provision for loan losses                                                    405                  326
         Depreciation of premises and equipment                                       289                  259
         Net gains on sale of premises and equipment and real estate                   (8)                  --
         Net (increase) decrease in other assets                                       69                 (307)
         Net decrease in other liabilities                                            (56)                (317)
                                                                              ---------------      --------------
                  Net cash provided by operating activities                         1,495                  575
                                                                              ---------------      --------------
Cash flows from investing activities:
     Maturities of investment securities available for sale                           500                  500
     Maturities of investment securities held to maturity                             600                1,610
     Net increase in deferred compensation plan                                       (77)                  --
     Net increase in loans                                                        (22,822)             (17,815)
     Purchases of premises and equipment                                             (349)                (332)
     Proceeds from the sale of premises and equipment and real estate                   8                    1
                                                                              ---------------      --------------
                  Net cash used in investing activities                           (22,140)             (16,036)
                                                                              ---------------      --------------
Cash flows from financing activities:
     Net increase in deposits                                                      38,786                 (148)
     Net decrease in other borrowed funds                                         (10,000)                  --
     Net increase in federal funds purchased                                           --               11,200
     Dividends paid on common stock                                                  (242)                (203)
     Proceeds from stock options exercised                                             --                   22
     Repurchase of common stock                                                        --                 (135)
                                                                              ---------------      --------------
                  Net cash provided by financing activities                        28,544               10,736
                                                                              ---------------      --------------
                  Net increase (decrease) in cash and cash equivalents              7,899               (4,725)
Cash and cash equivalents at beginning of period                                   17,179               20,793
                                                                              ---------------      --------------
Cash and cash equivalents at end of period                                  $      25,078        $      16,068
                                                                              ===============      ==============

Supplemental information:
     Cash paid for interest                                                 $       3,689        $       2,422
     Cash paid for taxes                                                              150                  200
</TABLE>

See accompanying notes to condensed consolidated financial statements.

                                       4
<PAGE>

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three months ended March 31, 2001 and 2000 (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" or  "Company"),  a  Washington  State bank
holding  company  was formed on April 30,  1996.  Whidbey  Island Bank ("WIB" or
"Bank"),  the  principal  subsidiary  of WBCO,  is a Washington  state-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 and its market area  currently  enjoys a stable  economic  climate,  a
substantial  portion of its borrowers' ability to repay their loans is dependent
upon the economic  conditions  affecting this area related to the  agricultural,
forestry and manufacturing  industries,  and the large military base presence in
Oak Harbor, Washington.

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.

   (b) Basis of Presentation

The accompanying interim condensed consolidated financial statements include the
accounts of Washington Banking Company and its wholly-owned subsidiary,  Whidbey
Island Bank  (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 consolidated  financial  statements should be read in conjunction with our
December 31, 2000 audited  consolidated  financial  statements and notes thereto
included in our Annual  Report on Form 10-K.  In our  opinion,  all  adjustments
(consisting of normal  recurring  adjustments)  considered  necessary for a fair
presentation  have been included.  Operating  results for the three months ended
March  31,  2001  are not  necessarily  indicative  of the  results  that may be
expected for the year ending  December 31, 2001. In preparing  the  consolidated
financial  statements,  we are required to make estimates and  assumptions  that
affect the  reported  amounts of assets,  liabilities,  revenues  and  expenses.
Actual results could differ from those estimates

   (c) Recently Issued Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
No. 133  ("SFAS  133"),  "Accounting  for  Derivative  Instruments  and  Hedging
Activities,"  which requires all derivatives to be recorded on the balance sheet
at fair  value and  establishes  accounting  standards  for  different  types of
hedging activities,  including fair value hedges, cash flow hedges and hedges of
foreign currency exposures.  In May 1999, the FASB delayed the effective date of
SFAS 133 to fiscal years  beginning  after June 15, 2000 with interim  reporting
required.  In June 2000,  the FASB issued SFAS  Statement  No. 138 ("SFAS 138"),
"Accounting for Certain Derivative  Instruments and Certain Hedging Activities,"
an amendment of FASB Statement No. 133, which makes minor  modifications to SFAS
133. The adoption of these  statements by the Company did not materially  affect
the results of  operations  or financial  condition  of the Company.  During the
first quarter of 2001, the Company  transferred  $1.0 million of securities from
held to maturity to available for sale.

                                      5
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three months ended March 31, 2001 and 2000 (unaudited)
(Dollars in thousands, except per share data)

In September 2000, FASB issued  Statement No. 140 ("SFAS 140"),  "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,"
which replaces SFAS 125 of the same title.  This statement revises the standards
for accounting for  securitizations  and other transfers of financial assets and
collateral and requires certain disclosures, but carries over most of SFAS 125's
provisions  without  reconsideration.  This statement is effective for transfers
and servicing of financial assets and  extinguishments of liabilities  occurring
after March 31, 2001 and is effective for  recognition and  reclassification  of
collateral  and for  disclosures  relating to  securitization  transactions  and
collateral for fiscal years ending after December 15, 2000. The adoption of this
statement by the Company did not materially  affect the results of operations or
financial condition of the Company.

(2)   Earnings Per Share

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

<TABLE>
<CAPTION>
                                                                      Three Months Ended March 31, 2001
                                                           ---------------------------------------------------------
                                                                                   Weighted             Per share
                                                              Income            average shares           amount
                                                           --------------    ---------------------    --------------
       <S>                                               <C>                       <C>              <C>
       Basic EPS
       Income available to common shareholders           $      801                4,032,750        $      0.20
       Effect of dilutive securities: stock options              --                  193,353                --
                                                           --------------    ---------------------    --------------
       Diluted EPS                                       $      801                4,226,103        $      0.19
                                                           ==============    =====================    ==============


                                                                      Three Months Ended March 31, 2000
                                                           ---------------------------------------------------------
                                                                                   Weighted             Per share
                                                              Income            average shares           amount
                                                           --------------    ---------------------    --------------
       Basic EPS
       Income available to common shareholders           $      617                4,063,900        $      0.15
       Effect of dilutive securities: stock options              --                  220,005                --
                                                           --------------    ---------------------    --------------
       Diluted EPS                                       $      617                4,283,905        $      0.14
                                                           ==============    =====================    ==============
</TABLE>

At March 31, 2001 and 2000 there were  options to  purchase  429,300 and 486,200
shares of common stock  outstanding,  respectively,  of which 98,550 and 123,950
were  antidilutive  and therefore not included in the computation of diluted net
income per share.

(3) Subsequent Event

On April 26, 2001, the Board of Directors  declared a cash dividend of $0.06 per
share to shareholders of record as of May 10, 2001.

                                        6
<PAGE>

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  the   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  style of banking  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  by such  forward-looking  statements  include,  among others,  the
following possibilities:  (1) local and national general and economic conditions
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  businesses  in which the  Company is engaged.
--------------------------------------------------------------------------------

Overview

Washington   Banking   Company  is  a  registered  bank  holding  company  whose
wholly-owned subsidiary,  Whidbey Island Bank, conducts a full-service community
commercial banking business. The Bank is a Washington  state-chartered bank. Its
deposits  are insured by the Federal  Deposit  Insurance  Corporation  ("FDIC").
Headquartered  in  Oak  Harbor,   the  Company's  primary  market  area  is  the
fast-growing, increasingly diversified region located between Vancouver, BC, and
Seattle in northwestern  Washington.  WBCO's business includes  commercial loan,
real estate loan and construction loan portfolios.  The Company is active in the
consumer  banking  field  and  provides  personal  and  consumer-oriented   loan
programs.  WBCO also provides a wide range of deposit  services 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.  WBCO offers
nondeposit  investment  products  for sale  through the Bank's  subsidiary,  WIB
Financial Services, Inc.

The  Company   continued  its  strategy  of  growth  and  enhancing  its  market
penetration  throughout  2000.  This  resulted in the addition of two offices in
Mount  Vernon  (Skagit  County)--a grocery  store  branch and a real estate loan
production  office--as  well as a  full-service  temporary  branch  on a future
building site in the Bakerview area of Bellingham (Whatcom County).

Following the  relocations of two branch offices and some recent  administrative
consolidations,  the Company has three vacant  properties  for sale.  Management
expects these changes will lower occupancy expenses.

                                       7
<PAGE>

With its  primary  geographic  expansion  completed,  the Company has turned its
focus  to  improving  profitability.  Management  has  placed  its  emphasis  on
improving  efficiencies and controlling  overhead  expenses,  while  maintaining
asset quality and providing high caliber customer service.

Financial Condition

Total assets  increased to $391.0  million at March 31, 2001 from $361.6 million
at December 31, 2000, an increase of 8.1%.  Net loans totaled  $322.4 million at
March 31,  2001,  an increase of 7.5% from $300.0  million at December 31, 2000.
Deposits increased 12.2% to $356.6 million at March 31, 2001 from $317.8 million
at December 31, 2000.

The Company's  shareholders' equity increased to $32.1 million at March 31, 2001
from $31.5 million at December 31, 2000.  The small increase  reflects  earnings
offset by the  payment of cash  dividends  of  $242,000  during the first  three
months of 2000.

The  Company's  allowance for loan losses was $3.0 million at March 31, 2001 and
$2.7 million at December 31, 2000,  representing 0.92% and 0.88% of total loans,
respectively.  Nonperforming  assets amounted to $2.2 million at March 31, 2001,
or 0.56% of total  assets,  compared to $1.4  million or 0.37% at  December  31,
2000.


Results of Operations

The  Company's  results of  operations  are  dependent  to a large degree on net
interest income. Interest income and cost of funds are affected significantly by
general economic conditions,  particularly changes in market interest rates, and
by government  policies and the actions of regulatory  authorities.  The Company
also generates noninterest income primarily through service charges and fees and
other  sources.   The  Company's   noninterest  expenses  consist  primarily  of
compensation and employee benefit expense, and occupancy expense.

Net income for the first  quarter of 2001  increased  29.8% to $801,000 or $0.19
per diluted  share,  from $617,000,  or $0.14 per diluted  share,  for the first
quarter of 2000.  The increase  was  primarily  due to net  interest  income and
secondary market fees.

Net Interest Income

Net  interest  income  for the first  quarter  of 2001  increased  11.8% to $4.1
million  from $3.6  million for the first  quarter of 2000.  The increase in net
interest income is largely due to the overall growth of the Company.

Average  interest-earning  assets  for the  first  quarter  increased  to $342.4
million at March 31,  2001,  compared  to $264.0  million at March 31,  2000,  a
growth of 29.7%, while the average yield on interest-earning assets increased to
9.23% compared to 9.12% in first quarter of the prior year. The average yield on
loans decreased to 9.57% for the quarter ended March 31, 2001 from 9.59% for the
quarter ended March 31, 2000. The average cost of  interest-bearing  liabilities
increased in the first quarter of 2001 to 5.06% from 4.19% for the quarter ended
March 31, 2000. Average  interest-bearing  liabilities for the quarter increased
to $297.0  million at March 31,  2001  compared  to $220.0  million at March 31,
2000, a growth of 34.9%.  The overall  result of these changes was a decrease in
the net interest spread to 4.17% for the quarter ended March 31, 2001 from 4.93%
for the quarter ended March 31, 2000.

Net interest  margin (net interest  income  divided by average  interest-earning
assets)  decreased to 4.84% in the first quarter of 2001 from 5.63% in the first
quarter of 2000.

                                       8
<PAGE>

Noninterest Income and Expense

Noninterest  income increased  $350,000,  or 60.2%, in the first quarter of 2001
compared to the same period in 2000, reflecting the increase in fees received on
real estate loans  originated  for third  parties due to a more  favorable  2001
mortgage loan market.

Noninterest expense increased $448,000,  or 14.7%, in the first quarter of 2001.
Two  major  components  of  noninterest  expense,   employee   compensation  and
occupancy, increased 18.6% and 14.3% respectively, for the quarter compared with
the same period in 2000. The efficiency  ratio  (noninterest  expense divided by
the sum of net interest income plus noninterest income less non-recurring gains)
improved to 69.98% for the first  quarter  2001  compared to 72.28% for the same
period in 2000.

Income Taxes

For the first quarter of 2001,  the Company  recorded an income tax provision of
$297. The overall  effective tax rate is approximately  27% for the three months
ended March 31, 2001 and 2000.  The  difference  between  the  expected  federal
statutory rate of 34% and the actual  effective tax rate of 27% is primarily due
to tax-exempt interest income from municipal investments.

Lending Activities

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

<TABLE>
<CAPTION>
                                               March 31, 2001                    December 31, 2000
                                       -------------------------------     -------------------------------
(Dollars in thousands)                    Balance        % of total           Balance        % of total
                                       ---------------  --------------     ---------------  --------------
<S>                                   <C>                    <C>          <C>                    <C>
Commercial                            $     110,810          34.0%        $    105,410           34.8%
Real estate mortgages:
  One-to-four family residential             35,034          10.8%              31,766           10.5%
  Five-or-more family
    residential and commercial               41,318          12.7%              39,300           13.0%
                                       ---------------  --------------     -------------------------------
     Total real estate mortgage       $      76,352          23.5%        $     71,066           23.5%

Real estate construction                     31,025           9.5%              28,036            9.3%
Consumer                                    107,224          33.0%              98,172           32.4%
                                       ---------------  --------------     -------------------------------
  Subtotal                            $     325,411         100.0%        $    302,684          100.0%
                                                        ==============                      ==============
Less: allowance for loans losses             (3,004)                            (2,664)
Deferred loan fees                                8                                (22)
                                       ---------------                     ---------------
Loans, net                            $     322,415                       $    299,998
                                       ===============                     ===============
</TABLE>
                                        9
<PAGE>

Total loans, net, increased to $322.4 million at March 31, 2001,  representing a
7.5% increase from year-end 2000. Total commercial,  real estate mortgage,  real
estate  construction  and consumer loans increased 5.1%,  7.4%,  10.7% and 9.2%,
respectively,  at March 31,  2001 from  year-end  2000.  These  changes  reflect
seasonal trends, the Company's geographical expansion and increased average loan
size  resulting  in solid growth from its various  market areas and  diversified
customer base.

Nonperforming Assets

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

<TABLE>
<CAPTION>

    (Dollars in thousands)                                           March 31, 2001           December 31, 2000
                                                                  ----------------------    -----------------------
    <S>                                                         <C>                       <C>
    Nonaccrual loans                                            $            2,005        $            1,152
    Restructured loans                                                          77                        77
                                                                  ----------------------    -----------------------
     Total nonperforming loans                                               2,082                     1,229
    Real estate owned                                                          124                       124
                                                                  ----------------------    -----------------------
     Total nonperforming assets                                              2,206                     1,353
                                                                  ======================    =======================

    Accruing loans past due => 90 days                                          --                        --
    Potential problem loans                                                     --                        --
    Allowance for loan losses                                                3,004                     2,664

    Nonperforming loans to loans                                             0.64%                     0.41%
    Allowance for loan losses to loans                                       0.92%                     0.88%
    Allowance for loan losses to nonperforming loans                       144.28%                   216.76%
    Nonperforming assets to total assets                                     0.56%                     0.37%
</TABLE>

Nonperforming loans increased to $2.1 million, or 0.64% of total loans, at March
31, 2001 from $1.2 million or 0.41% of total loans,  at December 31, 2000 due to
a small number of borrowing  relationships  that were added to nonaccrual loans.
The  current  loan  loss  reserve  of  $3.0   million   represents   144.28%  of
nonperforming  loans as compared to 216.76% of  nonperforming  loans at December
31,  2000.  The loan loss  reserve is 0.92% of total  loans at March 31, 2001 as
compared to 0.88% at December 31, 2001.

Provision and Allowance for Loan Losses

The Company recorded a $405,000  provision for loan losses for the first quarter
of 2001,  compared  with  $326,000  for the same  period a year ago.  There were
$65,000 in net loan  charge-offs  during the first quarter of 2001,  compared to
$146,000 in net charge-offs for the same period in 2000.

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,  including a review
of  problem  loans,  business  conditions  and loss  experience,  and an overall
evaluation  of the  quality  of the  underlying  collateral.  The  allowance  is
increased by provisions  charged to operations and reduced by loans charged off,
net of recoveries.

                                       10
<PAGE>

The following  table sets forth the changes in the Company's  allowance for loan
losses at the dates indicated:

                                             Three Months Ended March 31
(Dollars in thousands)                      2001                     2000
                                       ---------------        -----------------

Balance at beginning of period      $       2,664           $       2,182
Charge-offs:
      Commercial                              (26)                    (86)
      Real estate                             (15)                     --
      Consumer                                (62)                    (85)
                                      ----------------        -----------------
      Total charge-offs             $        (103)          $        (171)

Recoveries:
      Commercial                               31                       2
      Real estate                              --                      --
      Consumer                                  7                      23
                                      ----------------        -----------------
      Total recoveries              $          38           $          25
                                      ----------------        -----------------
Net charge-offs                               (65)                   (146)
Provision for loan losses                     405                     326
                                      ----------------        -----------------
Balance at end of period            $       3,004           $       2,362
                                      ================        =================

Liquidity and Sources of Funds

The Company's sources of funds are customer  deposits,  cash and demand balances
due from other banks, federal funds sold, short-term  investments and investment
securities available for sale. These funds,  together with loan repayments,  are
used to make loans and to fund continuing operations.  In addition, at March 31,
2001 the Company had a line of credit with the Federal  Home Loan Bank  ("FHLB")
of $58.5 million and lines of credit with financial  institutions  in the amount
of $12.1 million, with no advances on these lines of credit at March 31, 2001.

Total deposits  increased  12.2% to $356.6 million at March 31, 2001 from $317.8
million at December 31, 2000. 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.

Management  anticipates  that the  Company  will rely  primarily  upon  customer
deposits, loan repayments and current earnings to provide liquidity. The Company
also expects to continue to use FHLB advances to supplement funding sources.

Capital

The Company's  shareholders' equity increased to $32.1 million at March 31, 2001
from $31.5  million at December 31, 2000.  This increase is due to net income of
$801,000 and an increase in unrealized gain on available-for-sale  securities of
$69,000,  net of tax, offset by the payment of cash dividends of $242,000 during
the first three months ended March 31,  2001.  Total assets  increased to $391.0
million at March 31, 2001 from $361.6  million at December 31, 2000, an increase
of 8.1%.  Shareholders'  equity  to total  assets  was  8.2% at March  31,  2001
compared to 8.7% at December 31, 2000.

                                       11
<PAGE>

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%. At March 31, 2001, the Company's  leverage  ratio was 8.31%,  compared
with 8.54% at December 31, 2000. In addition,  banking  regulators  have adopted
risk-based  capital  guidelines,  under which risk  percentages  are assigned to
various  categories  of  assets  and  off-balance  sheet  items to  calculate  a
risk-adjusted  capital  ratio.  Tier I  capital  generally  consists  of  common
shareholders'  equity  (which  does not include  unrealized  gains and losses on
securities),  less goodwill and certain  identifiable  intangible assets,  while
Tier II capital  includes the  allowance for loan losses and  subordinated  debt
both  subject to certain  limitations.  Regulatory  minimum  risk-based  capital
guidelines  require  Tier I  capital  of 4% of  risk-adjusted  assets  and total
capital  (combined  Tier I and Tier II) of 8%.  The  Company's  Tier I and total
capital ratios were 9.07% and 9.96%,  respectively,  at March 31, 2001, compared
with 9.47% and 10.31%, respectively, at December 31, 2000.

The  FDIC  established  the  qualifications  necessary  to  be  classified  as a
"well-capitalized"  bank,  primarily for  assignment of FDIC  insurance  premium
rates. To qualify as "well-capitalized,"  banks must have a Tier I risk-adjusted
capital  ratio of at least 6%, a total  risk-adjusted  capital ratio of at least
10%,  and a leverage  ratio of at least 5%.  Whidbey  Island Bank  qualified  as
"well-capitalized" at March 31, 2001.

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

A number  of  measures  are used to  monitor  and  manage  interest  rate  risk,
including income simulations and interest sensitivity (gap) analyses.  An income
simulation  model is the primary tool used to assess the direction and magnitude
of changes in net interest income  resulting from changes in interest rates. Key
assumptions in the model include prepayment speeds on  mortgage-related  assets,
cash flows and  maturities  of other  investment  securities,  loan and  deposit
volumes and  pricing.  These  assumptions  are  inherently  uncertain  and, as a
result,  the model cannot  precisely  estimate net interest  income or precisely
predict the impact of higher or lower  interest  rates on net  interest  income.
Actual results will differ from simulated  results due to timing,  magnitude and
frequency of interest rate changes,  changes in market conditions and management
strategies,  among other factors.  At March 31, 2001, based on the measures used
to monitor and manage  interest rate risk,  there has not been a material change
in the Company's  interest  rate risk since  December 31, 2000.  For  additional
information, refer to the Company's Form 10-K for year ended December 31, 2000.

                                       12
<PAGE>


                                     PART II


Item 6.  Exhibits and Reports on Form 8-K

(a)      Exhibits

         None

(b)      Reports on Form 8-K

         None

                                   SIGNATURES

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


                           WASHINGTON BANKING COMPANY



Date: May 11, 2001                                   By   /s/  Michal D. Cann
                                                         --------------------
                                                           Michal D. Cann
                                                            President and
                                                      Chief Executive Officer


Date: May 11, 2001                                   By   /s/ Phyllis A. Hawkins
                                                         -----------------------
                                                          Phyllis A. Hawkins
                                                      Senior Vice President and
                                                       Chief Financial Officer

                                       13