Washington Banking 10K/A 2005 Annual report (amended)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K/A

(Mark One)

þ Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended December 31, 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 Number000-24503

Washington Banking Company

(Exact name of registrant as specified in its charter)


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

450 SW Bayshore Drive

Oak Harbor, Washington 98277

(Address of principal executive offices) (Zip Code)

Registrant’s Telephone Number, Including Area Code:(360) 679-3121

Securities Registered Pursuant to Section 12(b) of the Act:None

Securities Registered Pursuant to Section 12(g) of the Act:

Common Stock, No Par Value

(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and 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 þ No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (17 C.F.R. 229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy of information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. þ

Indicate by check mark if the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o Accelerated filer þ Non-Accelerated filer o

Indicate by check mark if the registrant is a shell company as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended. Yes o No þ

The aggregate market value of Common Stock held by non-affiliates of registrant at June 30, 2005 was approximately $98,822,374 based upon the closing price of the registrant’s common stock as quoted on the Nasdaq National Market on June 30, 2005 of $15.15.

The number of shares of registrant’s Common Stock outstanding at March 07, 2006 was 7,402,410.

Documents incorporated by reference and parts of Form 10-K into which incorporated:



Registrant’s definitive Proxy Statement dated March 24, 2006		Part III, except the reports of the audit and compensation committees

Explanatory Note

Washington Banking Company is amending Part II, Item 8 and Part IV, Item 15 of its Annual Report on Form 10-K for the year ended December 31, 2005 to include a change to the Report of Independent Registered Public Accounting Firm to provide the date of the Report which was inadvertently omitted and to Exhibits 31.1, 31.2, 32.1 and 32.2 to reference this amendment to the registrant’s Annual Report on Form 10-K. Part II, Item 8 and Part IV, Item 15 are included in their entireties, but no other changes have been made to Item 8 or Item 15 or any other exhibit.


Item 8.	Financial Statements and Supplementary Data

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


	Page

Management’s Report on Internal Control over Financial Reporting		3
Report of Independent Registered Public Accounting Firm		4
Consolidated Statements of Financial Condition at December 31, 2005 and 2004		6
Consolidated Statements of Income for the years ended December 31, 2005, 2004 and 2003		7
Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2005, 2004 and 2003		8
Consolidated Statements of Comprehensive Income for the years ended December 31, 2005, 2004 and 2003		9
Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2004 and 2003		10
Notes to Consolidated Financial Statements		11

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The Company’s management, including its Chief Executive Officer and its Chief Financial Officer, together with its consolidated subsidiary, is responsible for establishing, maintaining and assessing adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934). The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external reporting purposes in accordance with accounting principals generally accepted in the United States of America.

The Company’s internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; provide reasonable assurances that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principals generally accepted in the United States of America, and that receipts and expenditures are being made only in accordance with authorizations of management and the directors of the Company; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the Company’s financial statements.

Management recognizes that there are inherent limitations in the effectiveness of any system of internal control, and accordingly, even effective internal control can provide only reasonable assurance with respect to financial statement preparation and fair presentation. Further, because of changes in conditions, the effectiveness of internal control may vary over time.

The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2005. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in theInternal Control-Integrated Framework. Based on this assessment, management believes that, as of December 31, 2005, the Company’s internal control over financial reporting was effective based on those criteria.

The Company’s independent registered public accounting firm has audited management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2005, as stated in their report which expresses unqualified opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2005.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders

Washington Banking Company

We have audited the accompanying consolidated statement of financial condition of Washington Banking Company and subsidiaries (Company) as of December 31, 2005 and 2004, and the related consolidated statements of income, shareholders’ equity, comprehensive income and cash flows for each of the three years in the period ended December 31, 2005. We also have audited management’s assessment included in the accompanying Management’s Report on Internal Control over Financial Reporting that the Company maintained effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on these financial statements, an opinion on management’s assessment, and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audits.

We conducted our audits in accordance with auditing standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinion.

The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and Directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM-(CONTINUED)

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Washington Banking Company and subsidiaries as of December 31, 2005 and 2004, and the results of their operations and cash flows for each of the three years ended December 31, 2005, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, management’s assessment that Washington Banking Company maintained effective internal control over financial reporting as of December 31, 2005 is fairly stated, in all material respects, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Furthermore, in our opinion, Washington Banking Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005 based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

Bellingham, Washington

March 10, 2006

WASHINGTON BANKING COMPANY

AND SUBSIDIARIES

Consolidated Statements of Financial Condition

December 31, 2005 and 2004

(Dollars in thousands, except per share data)


					2005			2004

				Assets
Cash and due from banks					$	19,949		$	16,814
	($3,313 and $2,686, respectively, are restricted)
Interest-bearing deposits						983			1,119
Federal funds sold						21,095			—

				Total cash, restricted cash, and cash equivalents		42,027			17,933
Investment securities available for sale						19,077			19,304

				Total investment securities		19,077			19,304
Subsidiary investment in the Trust						247			295
Federal Home Loan Bank stock						1,984			1,976
Loans held for sale						2,829			8,311
Loans receivable						630,258			579,980
Allowance for loan losses						(8,810	)		(7,903	)

				Total loans, net		621,448			572,077
Premises and equipment, net						20,514			20,375
Bank owned life insurance						10,558			10,217
Other assets						7,292			7,236

				Total assets	$	725,976		$	657,724

				Liabilities and Shareholders’ Equity
Liabilities:
	Deposits
			Noninterest-bearing		$	105,365		$	77,820
			Interest-bearing			287,214			274,999
			Time deposits			244,910			210,182

				Total deposits		637,489			563,001
	Other borrowed funds					10,000			27,000
	Junior subordinated debentures					15,007			15,007
	Other liabilities					5,631			3,125

				Total liabilities		668,127			608,133
Commitments and contingencies (See Notes 16, 17 and 19)
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 7,382,210 and 7,239,052 shares in 2005 and 2004, respectively				32,106			31,516
	Retained earnings					25,789			17,928
	Accumulated other comprehensive income (loss), net					(46)			147

				Total shareholders’ equity		57,849			49,591

				Total liabilities and shareholders’ equity	$	725,976		$	657,724


See accompanying notes to consolidated financial statements.

WASHINGTON BANKING COMPANY

AND SUBSIDIARIES

Consolidated Statements of Income

Years Ended December 31, 2005, 2004 and 2003

(Dollars in thousands, except per share data)


				2005			2004			2003

Interest income:
	Interest and fees on loans			$	44,615		$	37,428		$	34,533
	Interest on taxable investment securities				357			345			324
	Interest on tax-exempt investment securities				310			482			675
	Other				508			209			381

		Total interest income			45,790			38,464			35,913
Interest expense:
	Interest on time deposits				7,024			5,632			5,380
	Interest on savings and money market deposits				1,995			1,369			1,353
	Interest on NOW deposits				938			623			650
	Interest on other borrowings				538			431			612
	Interest on junior subordinated debentures				1,071			782			—
	Interest on trust preferred securities				—			—			742

		Total interest expense			11,566			8,837			8,737

			Net interest income		34,224			29,627			27,176
Provision for loan losses					2,250			3,500			3,200

			Net interest income after provision for loan losses		31,974			26,127			23,976
Noninterest income:
	Service charges and fees				3,150			2,986			2,127
	Income from the sale of loans				773			1,183			2,117
	(Loss) Gain on sale of securities				(50	)		144			—
	Electronic banking income				764			612			446
	SBA premium income				757			559			515
	Other				1,905			1,187			654

		Total noninterest income			7,299			6,671			5,859

Noninterest expense:
	Salaries and benefits				15,086			13,744			12,274
	Occupancy and equipment				3,379			3,290			3,028
	Office supplies and printing				659			644			657
	Data processing				493			490			459
	Consulting and professional fees				617			793			637
	Other				4,991			4,306			3,959

		Total noninterest expense			25,225			23,267			21,014

		Income before income taxes and discontinued operations			14,048			9,531			8,821
Provision for income taxes					4,580			2,985			2,798

Income from continuing operations					9,468			6,546			6,023
Loss from discontinued operations, net of tax, of ($238) and ($69) for the years ended December 31, 2004 and 2003, respectively					—			(370	)		(56	)

			Net income	$	9,468		$	6,176		$	5,967

Earnings (loss) per common share, basic
	Continuing operations			$	1.30		$	0.91		$	0.85
	Discontinued operations				—			(0.05	)		(0.01	)

			Net income per share	$	1.30		$	0.86		$	0.84

Earnings (loss) per common share, diluted
	Continuing operations			$	1.26		$	0.88		$	0.82
	Discontinued operations				—			(0.05	)		(0.01	)

			Net income per share	$	1.26		$	0.83		$	0.81

Average number of shares outstanding, basic					7,278,486			7,209,349			7,121,948
Average number of shares outstanding, diluted					7,542,174			7,460,596			7,398,241

See accompanying notes to consolidated financial statements.

WASHINGTON BANKING COMPANY

AND SUBSIDIARIES

Consolidated Statements of Shareholders’ Equity

Years Ended December 31, 2005, 2004 and 2003

(Dollars and shares in thousands, except per share data)


											Accumulated
	Common stock										other			Total
					Retained			Deferred			comprehensive			shareholders’
	Shares		Amount		earnings			compensation			income			equity

Balance at December 31, 2002⁽¹⁾		6,055	$	21,025	$	18,363		$	—		$	44		$	39,432
Net income		—		—		5,967						—			5,967
Net change in unrealized (loss) on securities available for sale		—		—		—						(82	)		(82	)
Cash dividend, $0.18 per share		—		—		(1,303	)					—			(1,303	)
Stock option compensation		—		23		—						—			23
Stock options exercised		157		323		—						—			323
15% stock dividend		932		9,754		(9,754	)					—			—

Balance at December 31, 2003		7,144		31,125		13,273			—			(38	)		44,360
Net income		—		—		6,176						—			6,176
Net change in unrealized gain on securities available for sale		—		—		—						282			282
Less: adjustment for gains included in net income, net of tax of $47		—		—		—						(97	)		(97	)
Tax benefit associated with stock options		—		160		—						—			160
Cash dividend, $0.22 per share		—		—		(1,521	)					—			(1,521	)
Stock option compensation		—		23		—						—			23
Stock options exercised		95		208		—						—			208

Balance at December 31, 2004		7,239		31,516		17,928			—			147			49,591
Net income		—		—		9,468						—			9,468
Net change in unrealized (loss) on securities available for sale		—		—		—						(226	)		(226	)
Plus adjustment for gains included in net income, net of tax of $17		—		—		—						33			33
Tax benefit associated with stock options		—		113		—						—			113
Cash dividend, $0.22 per share		—		—		(1,607	)					—			(1,607	)
Stock option compensation		—		23		—						—			23
Issuance of restricted stock		35		483		—			(483	)		—			—
Amortization of restricted stock		—		—		—			97			—			97
Stock options exercised		108		357		—						—			357

Balance at December 31, 2005		7,382	$	32,492	$	25,789		$	(386	)	$	(46	)	$	57,849


⁽¹⁾	Adjusted to reflect a 4-for-3 stock split distributed by the Company May 17, 2005.

See accompanying notes to consolidated financial statements.

WASHINGTON BANKING COMPANY

AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

Years Ended December 31, 2005, 2004 and 2003

(Dollars in thousands)


	2005		2004			2003
Comprehensive Income:
Net income	$	9,468	$	6,176		$	5,967
Increase (decrease) in unrealized gain on securities available for sale, net of tax, of ($85), ($106) and $43, for years ended 2005, 2004 and 2003, respectively		226		282			(82	)
Less: adjustment for gains (losses) included in net income, net of tax, of $17 and $47, for years ended 2005 and 2004, respectively		33		(97	)		—

Comprehensive income	$	9,727	$	6,361		$	5,885

See accompanying notes to consolidated financial statements.

WASHINGTON BANKING COMPANY

AND SUBSIDIARIES

Consolidated Statements of Cash Flows

Years Ended December 31, 2005, 2004 and 2003

(Dollars in thousands)


					2005			2004			2003

Cash flows from operating activities:
	Net income from continuing operations				$	9,468		$	6,546		$	6,023
	Adjustments to reconcile net income to net cash provided by operating activities:
		Federal Home Loan Bank stock dividends				(8	)		(64	)		(122	)
		Deferred income tax expense (benefit)				1,440			(630	)		(409	)
		Amortization of investment premiums, net				2			44			11
		Net (increase) decrease in subsidiary investment				81			(288	)		—
		Earnings on bank owned life insurance				(341	)		(217	)		—
		Provision for loan losses				2,250			3,500			3,200
		Net decrease (increase) in loans held for sale				5,482			(60	)		(1,622	)
		Depreciation and amortization of premises and equipment				1,605			1,682			1,610
		Net (gain) loss on sale of securities				50			(144	)		—
		Net (gain) loss on sale of premises and equipment				(103	)		152			6
		Net (gain) loss on sale of other real estate				(20	)		(136	)		(19	)
		Write downs on other real estate				254			34			—
		(Increase) decrease in other assets				(2,666	)		880			(1,205	)
		Stock option compensation				23			23			23
		Tax benefit associated with stock options				113			160			—
		Amortization of restricted stock				97			—			—
		Increase (decrease) in other liabilities				2,506			(311	)		399
			Cash flows from continuing operating activities			20,233			11,171			7,895
			Loss from discontinued operations, net of tax			—			(370	)		(56	)

				Cash flows from operations		20,233			10,801			7,839

Cash flows from investing activities:
	Purchases of investment securities available for sale					(6,110	)		(1,500	)		(17,500	)
	Maturities/calls/principal payments of investment and mortgage-backed securities available for sale					5,503			6,479			11,053
	Sale of investment securities available for sale					504			5,799			—
	Purchases of investment securities held to maturity					—			—			(1,870	)
	Maturities/calls of investment securities held to maturity					—			475			2,190
	Purchase of bank owned life insurance					—			(10,000	)		—
	Sale of Federal Home Loan Bank stock					—			368			—
	Net increase in loans					(51,681	)		(83,051	)		(73,000	)
	Purchases of premises and equipment					(2,112	)		(3,069	)		(4,680	)
	Proceeds from sale of other real estate owned and premises and equipment					1,519			1,335			664

				Cash flows from investing activities		(52,377	)		(83,164	)		(83,143	)

Cash flows from financing activities:
	Net increase in deposits					74,488			61,504			38,502
	Increase (decrease) in other borrowed funds					5,000			(7,500	)		5,000
	Increase (decrease) in overnight borrowings					(22,000	)		17,000			(2,500	)
	Dividends paid on common stock					(1,607	)		(1,521	)		(1,303	)
	Proceeds from stock options exercised					357			208			323

				Cash flows from financing activities		56,238			69,691			40,022

				Net change in cash and cash equivalents		24,094			(2,672	)		(35,282	)

Cash and cash equivalents at beginning of period						17,933			20,605			55,887

Cash and cash equivalents at end of period					$	42,027		$	17,933		$	20,605

Supplemental information:
	Loans foreclosed and transferred to other real estate owned				$	53		$	1,333		$	557
	Loans made on bank-owned property sold					—			272			94
	Cash paid for interest					11,221			8,759			8,959
	Cash paid for income taxes					4,170			2,992			2,960
	Transfer of investments from held to maturity to available for sale					—			14,267			—
	Deconsolidation of trust preferred securities					—			15,000			—

See accompanying notes to consolidated financial statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)


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


(a)	Description of Business

Washington Banking Company (the “Company”) is a registered bank holding company formed on April 30, 1996. At December 31, 2005, the Company had two wholly-owned subsidiaries – Whidbey Island Bank (the “Bank”), the Company’s principal subsidiary, and Washington Banking Capital Trust I (the “Trust”). The business of the Bank, which is focused in the northern area of Western Washington, consists primarily of attracting deposits from the general public and originating loans. During the past decade, the region experienced strong population growth and economic diversification. The region’s economy has evolved from one that was once heavily dependent upon forestry, fishing and farming to an economy with a much more diverse blend of industries including retail trade, services, manufacturing, tourism and a large military base presence. Although the Bank has a diversified loan portfolio, a substantial portion of its borrowers’ ability to repay their loans is dependent upon the economic conditions affecting this area.

The Trust, the second subsidiary of the Company, was formed in June 2002 for the exclusive purpose of issuing trust preferred securities and common securities and using the $15,000 in proceeds from the issuance to acquire junior subordinated debentures issued by the Company. In 2003, the Trust subsidiary was consolidated. In 2004, pursuant to Financial Accounting Standards Board (“FASB”) Financial Interpretation No. 46R (“FIN 46R”), the Company deconsolidated the Trust. See Note 8 – Trust Preferred Securities and Junior Subordinated Debentures.

Washington Funding Group (“the Group”), a wholesale mortgage real estate lending company, was a Washington State corporation formed in January 2003. The primary purpose of this subsidiary was to provide a loan-funding source for brokers of mortgage loans. The loans were originated and sold in the name of the Bank. During the second quarter of 2004, the Company decided to concentrate corporate resources toward the Bank’s retail operations and close the Group’s operations effective June 30, 2004. Although the wholesale business enhanced the Company’s noninterest income during 2003 and 2004, the operation of those offices did not provide a satisfactory financial return. The cash flow from the Group’s operations in 2003 and 2004 came entirely from operating activities.


(b)	Basis of Presentation

The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries as described above. The consolidated financial statements of the Company have been prepared in conformity with accounting principles generally accepted in the United States of America. All significant intercompany balances and transactions have been eliminated in consolidation. In preparing the consolidated financial statements, in conformity with generally accepted accounting principles, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expense during the reported periods. Actual results could differ from these estimates. Management considers the estimates used in developing the allowance for loan losses to be particularly sensitive estimates that may be subject to revision in the near term.


(c)	Segments

Pursuant to Statement of Financial Accounting Standards (“SFAS”) No. 131,Disclosure about Segments of an Enterprise and Related Information, the Company has evaluated the requirements of this standard and had identified two reportable segments: Whidbey Island Bank and the discontinued operations of Washington Funding Group, Inc., both wholly-owned subsidiaries of Washington Banking Company. Due

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in thousands, except per share data)

to the discontinuation of the Group in the second quarter of 2004, the Company currently has only one segment, Whidbey Island Bank, and is not required to disclose segment reporting by this standard.


(d)	Recent Financial Accounting Pronouncements

In May 2005, FASB issued SFAS No. 154,Accounting Changes and Error Corrections, which replaces APB Opinion No. 20,Accounting Changes, and SFAS No. 3,Reporting Accounting Changes in Interim Financial Statements. SFAS No. 154 changed the requirements for the accounting for and reporting of a change in accounting principle and applies to all voluntary changes in accounting principle. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. When a pronouncement includes specific transition provisions, those provisions should be followed.

APB Opinion No. 20 required most voluntary changes in accounting principle be recognized by including in net income of the period of the change the cumulative effect of changing to the new accounting principle. The issuance of SFAS No. 154 now requires restating prior periods’ financial statements to reflect any changes in accounting principle, unless the Company is not able to determine either the period-specific effects or the cumulative effect of the change. The adoption of SFAS No. 154 did not have a material impact on the Company’s result of operations and overall financial position.

In December 2004, FASB issued SFAS No. 123R,Shared Based Payment, which is a revision of SFAS No. 123,Accounting for Stock-Based Compensation. Statement No. 123R supersedes APB No. 25,Accounting for Stock Issued to Employees, and amends SFAS No. 95,Statement of Cash Flows.

As permitted by SFAS No. 123, the Company currently accounts for share-based payments to employees using APB 25 intrinsic value method and, as such, generally recognizes no compensation cost for employee stock options. The adoption of SFAS No. 123R’s fair value method will have an impact on the Company’s result of operations, although it will have no impact on the overall financial position. The impact of adoption of SFAS No. 123R cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had the Company adopted SFAS No. 123R in prior periods, the impact of that standard would have approximated the impact of SFAS No. 123. Also, SFAS No. 123R requires the benefit of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption.

The SEC recently announced the adoption of a new rule that amends the compliance dates for SFAS No. 123R for public companies. Under the Statement as issued by the FASB, fair-value accounting would have been mandatory for the first interim or annual reporting period beginning after June 15, 2005, for public companies that were not small business issuers; all other companies, including all nonpublic companies, were to begin using the new rules for reporting periods after December 15, 2005. The SEC’s new rule allows public companies to implement SFAS No. 123R at the beginning of the next fiscal year, instead of the next reporting period, after June 15 or December 15, 2005, as applicable. The SEC’s new rule does not change the accounting required by SFAS No. 123R, only the compliance deadlines have been altered. With the recent extension, the Company will adopt SFAS No. 123R on January 1, 2006. The Company has evaluated SFAS No. 123R and believes the adoption of the standard will not have a material impact on the financial statements.


(e)	Cash and Cash Equivalents

For purposes of reporting cash flows, cash and cash equivalents include cash on hand and due from banks, interest-earning deposits and federal funds sold, all of which have original maturities of three months or less.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in thousands, except per share data)


(f)	Federal Home Loan Bank Stock

The Bank’s investment in FHLB stock is carried at par value, which approximates its fair value. As a member of the FHLB system, the Bank is required to maintain a minimum level of investment in FHLB stock based on specific percentages of the Bank’s outstanding mortgages, total assets or FHLB advances. At December 31, 2005, the Bank’s minimum required investment was approximately $1,203. Amounts in excess of the required minimum for FHLB membership may be redeemed at par at FHLB’s discretion, which is subject to their capital plan, bank policies, and regulatory requirements, which may be amended or revised periodically.


(g)	Investment Securities

Investment securities available for sale include securities that management intends to use as part of its overall asset/liability management strategy and that may be sold in response to changes in interest rates and resultant prepayment risk and other related factors. Securities available for sale are carried at market value, and unrealized gains and losses (net of related tax effects) are excluded from net income but are included as a separate component of comprehensive income. Upon realization, such gains and losses will be included in net income using the specific identification method.

Investment securities held to maturity are comprised of debt securities for which the Company has positive intent and ability to hold to maturity and are carried at cost, adjusted for amortization of premiums and accretion of discounts using the interest method over the estimated lives of the securities.

Management determines the appropriate classification of investment securities at the purchase date in accordance with SFAS No. 115,Accounting for Certain Investments in Debt and Equity Securities.


(h)	Loans Held for Sale

Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated market value in the aggregate. Net unrealized losses are recognized through a valuation allowance by charges to income. When a loan is sold, the gain is recognized in the consolidated statement of income as the proceeds less the book value of the loan including unamortized fees and capitalized direct costs.


(i)	Loans Receivable, Net

Loans receivable, net, are stated at the unpaid principal balance, net of: premiums, unearned discounts, net deferred loan origination fees, and the allowance for loan losses.

Interest on loans is calculated using the simple interest method based on the daily balance of the principal amount outstanding and is credited to income as earned.

Loans are placed on nonaccrual status when collection of principal or interest is considered doubtful (generally, loans 90 days or more past due).

A loan is considered impaired when, based upon currently known information, it is deemed probable that the Company will be unable to collect all amounts due as scheduled according to the original terms of the agreement. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or, as a practical expedient, based on the loan’s observable market price or the fair value of collateral, if the loan is collateral dependent.

Interest income previously accrued on nonaccrual loans, but not yet received, is reversed in the period the loan is placed on nonaccrual status. Payments received are generally applied to principal. However, based on management’s assessment of the ultimate collectibility of an impaired or nonaccrual loan, interest income may be recognized on a cash basis. Nonaccrual loans are returned to an accrual status when

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in thousands, except per share data)

management determines the circumstances have improved to the extent that there has been a sustained period of repayment performance and both principal and interest are deemed collectible.

Loan fees and certain direct loan origination costs are deferred and the net fee or cost is recognized in interest income using the interest method over the estimated life of the individual loans, adjusted for actual prepayments.


(j)	Allowance for Loan Losses

The allowance for loan losses is based upon the Company’s estimates. The Company determines the adequacy of the allowance for loan losses based on evaluations of the loan portfolio, recent loss experience and other factors, including economic and market conditions. The Company determines the amount of the allowance for loan losses required for certain sectors based on relative risk characteristics of the loan portfolio. Actual losses may vary from current estimates. These estimates are reviewed periodically and as adjustments become necessary, are reported in earnings in the periods in which they become known. The allowance for loan losses is increased by expensing to the provisions for loan losses. Losses are charged to the allowance and recoveries are credited to the allowance.


(k)	Premises and Equipment

Premises and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets. The estimated useful lives used to compute depreciation and amortization include buildings and building improvements, 15 to 40 years; land improvements, 15 to 25 years; furniture, fixtures and equipment, 3 to 7 years; and leasehold improvements, lesser of useful life or life of the lease.


(l)	Bank Owned Life Insurance

During the second quarter of 2004, the Bank made a $10,000 investment in bank owned life insurance (“BOLI”). These policies insure the lives of officers of the Bank, and name the Bank as beneficiary. Noninterest income is generated tax-free (subject to certain limitations) from the increase in the policies’ underlying investments made by the insurance company. The Bank is capitalizing on the ability to partially offset costs associated with employee compensation and benefit programs with the BOLI.


(m)	Other Real Estate Owned

Other real estate owned includes properties acquired through foreclosure. These properties are recorded at the lower of cost or estimated fair value. Losses arising from the acquisition of property, in full or partial satisfaction of loans, are charged to the allowance for loan losses.

Subsequent to the transfer to other real estate owned, these assets continue to be recorded at the lower of cost or fair value (less estimated cost to sell), based on periodic evaluations. Generally, legal and professional fees associated with foreclosures are expensed as incurred. However, in no event are recorded costs allowed to exceed fair value. Subsequent gains, losses or expenses recognized on the sale of these properties are included in noninterest income or expense.


(n)	Federal Income Taxes

The Company files a consolidated federal income tax return. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the periods in which

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in thousands, except per share data)

those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rate is recognized in income in the period that includes the enactment date.


(o)	Stock-Based Compensation

The Company recognizes the financial effects of stock-based employee compensation based on the intrinsic value method of accounting prescribed by APB 25,Accounting for Stock Issued to Employees and FASB Interpretation No. 44 (“FIN 44”),Accounting for Certain Transactions Involving Stock Compensation. Generally, stock options are issued at a price equal to the fair value of the Company’s stock as of the grant date. Under APB 25, options issued in this manner do not result in the recognition of employee compensation in the Company’s financial statements.

The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value provisions of FASB Statement No. 123,Accounting for Stock-Based Compensation, to stock-based employee compensation:


		Years Ended December 31

		2005		2004		2003

Net income, as reported		$	9,468	$	6,176	$	5,967
Stock compensation recognized, net of tax			15		15		15
Additional compensation for fair value of stock options, net of tax			(21)		(59)		(59)

Pro forma net income		$	9,462	$	6,132	$	5,923

*Basic earnings per share⁽¹⁾:*
	As reported
Income from continuing operations		$	1.30	$	0.91	$	0.85
Loss from discontinued operations			—		(0.05)		(0.01)

Net income		$	1.30	$	0.86	$	0.84

	Pro forma
Income from continuing operations		$	1.30	$	0.90	$	0.84
Loss from discontinued operations			—		(0.05)		(0.01)

Net income		$	1.30	$	0.85	$	0.83

*Diluted earnings per share⁽¹⁾:*
	As reported
Income from continuing operations		$	1.26	$	0.87	$	0.82
Loss from discontinued operations			—		(0.05)		(0.01)

Net income		$	1.26	$	0.82	$	0.81

	Pro forma
Income from continuing operations		$	1.25	$	0.87	$	0.81
Loss from discontinued operations			—		(0.05)		(0.01)

Net income		$	1.25	$	0.82	$	0.80


⁽¹⁾	Adjusted to reflect a4-for-3 stock split distributed by the Company May 17, 2005.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in thousands, except per share data)

The remaining unrecognized compensation for fair value stock options was approximately $63 as of December 31, 2005.

The pro forma information recognizes, as compensation, the value of stock options granted using an option valuation model known as the Black Scholes model. Pro forma earnings per share amounts also reflect an adjustment for an assumed purchase of treasury stock from proceeds deemed obtained from the issuance of stock options. There were no options issued in 2004 or 2005. The following are the weighted averages of the assumptions used to estimate the fair value of the options:


	2003

Risk-free interest rate		1.17%
Dividend yield rate		3.23%
Price volatility		40.87%
Expected life of options		8 years

Management believes that the assumptions used in the option-pricing model are highly subjective and represent only one estimate of possible value, as there is no active market for the options granted. The fair value of the options granted will be allocated to pro forma earnings over the vesting period of the options.


(p)	Reclassifications

Certain amounts in previous years may have been reclassified to conform to the 2005 financial statement presentation.


(2)	Restrictions on Cash Balance

The Company is required to maintain an average reserve balance with the Federal Reserve Bank or maintain such reserve balance in the form of cash. The amount of the required reserve balance on December 31, 2005 and 2004 was $3,313 and $2,686, respectively, and was met by holding cash with the Federal Reserve Bank.


(3)	Investment Securities

The amortized costs and market values of investment securities at December 31, 2005 and 2004 are as summarized:


							Gross		Gross
							unrealized		unrealized
					Gross		losses		losses
			Amortized		unrealized		less than		greater than		Market
			cost		gains		12 months		12 months		value
December 31, 2005:

Investments available for sale:
	U.S. government agency securities		$	10,494	$	—	$	(43)	$	(90)	$	10,361
	Pass-through securities			126		1		—		—		127
	Corporate obligations			999		—		(12)		—		987
	State and political subdivisions			7,529		81		—		(8)		7,602

		Total investment securities available for sale	$	19,148	$	82	$	(55)	$	(98)	$	19,077

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in thousands, except per share data)

(Continued)


							Gross		Gross
							unrealized		unrealized
					Gross		losses		losses
			Amortized		unrealized		less than		greater than		Market
			cost		gains		12 months		12 months		value
December 31, 2004:

Investments available for sale:
	U.S. government agency securities		$	10,535	$	9	$	(15)	$	(47)	$	10,482
	Pass-through securities			214		6		—		—		220
	Corporate obligations			999		—		—		(12)		987
	Preferred stock			504		—		—		—		504

	State and political subdivisions			6,819		292		—		—		7,111

		Total investment securities available for sale	$	19,071	$	307	$	(15)	$	(59)	$	19,304

Certain investment securities shown in the preceding table currently have fair values less than amortized cost and therefore contain unrealized losses. As of December 31, 2005 and 2004, the Company had 12 investment securities for both periods that were in an unrealized loss position. The Company has evaluated these securities and has determined that the decline in value is temporary and is related to the change in market interest rates since purchase. The decline in value is not related to any company or industry specific event.

In 2005, the Company sold $504 available for sale securities, which had an amortized cost of $454. The gross realized loss was ($50).

In 2004, the Company transferred all of the municipal securities from held to maturity to available for sale as a result of management’s review of the Company’s liquidity needs, the asset/liability position, the scheduled maturities and the rate environment trends. The amortized cost of the transferred securities was $14,267 with a fair market value of $14,679 and a related net unrealized gain of $412. The Company sold $5,799 of available for sale securities, which had an amortized cost of $5,661. The gross realized gain was $195 and the gross realized loss was ($51).

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in thousands, except per share data)

The amortized cost and market value of investment securities by contractual maturity at December 31, 2005 are as follows:


				Dates of Maturities

				Under		1-5		5-10		Over
				1 year		years		years		10 years		Total

Investments available for sale:
	U.S. government agency securities:
		Amortized cost		$	3,500	$	6,994	$	—	$	—	$	10,494
		Market value			3,457		6,904		—		—		10,361
	Pass-through securities:
		Amortized cost			126		—		—		—		126
		Market value			127		—		—		—		127
	Corporate obligations:
		Amortized cost			999		—		—		—		999
		Market value			987		—		—		—		987
	State and political subdivisions:
		Amortized cost			1,327		4,170		2,032		—		7,529
		Market value			1,343		4,226		2,033		—		7,602

			Total amortized cost		5,952		11,164		2,032		—		19,148
			Total market value	$	5,914	$	11,130	$	2,033	$	—	$	19,077

At December 31, 2005 and 2004, investment securities with recorded values of $5,910 and $9,262, respectively, were pledged to secure public deposits and for other purposes as required or permitted by law.


(4)	Loans and Allowance for Loan Losses

The loan portfolio composition, based upon the purpose and primary source of repayment of the loans, was as follows:


		December 31

		2005		2004

Commercial loans		$	79,341	$	80,927
Real estate mortgages			263,538		219,522
Real estate construction loans			113,661		105,940
Consumer loans			173,676		173,216

	Subtotal		630,216		579,605
Less:
Allowance for loan losses			(8,810)		(7,903)
Deferred loan fees, net			42		375

	Net loans	$	621,448	$	572,077

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in thousands, except per share data)

The following is an analysis of the changes in the allowance for loan losses:


		December 31

		2005			2004			2003

Beginning balance		$	7,903		$	6,116		$	5,514
Provision for loan losses			2,250			3,500			3,200
Recoveries			873			628			597
Charge-offs			(2,216	)		(2,341	)		(3,195	)

	Ending balance	$	8,810		$	7,903		$	6,116

The Company had impaired loans which consisted of nonaccrual and accrual loans. As of December 31, 2005, the Company had no commitments to extend additional credit on these impaired loans. Impaired loans and their related reserve for loan losses were as follows:


			December 31

			2005		2004		2003

Impaired loans
	Nonaccrual loans		$	2,159	$	2,812	$	4,158
	Accrual loans			—		605		2,563

		Total impaired loans	$	2,159	$	3,417	$	6,721

Reserve for loan losses
	Nonaccrual loans		$	239	$	477	$	417
	Accrual loans			—		394		—

		Total reserve for loan losses	$	239	$	871	$	417

The average balance on impaired loans was as follows:


		December 31

		2005		2004		2003

Average balance impaired loans
Nonaccrual loans		$	2,521	$	3,902	$	3,587
Accrual loans			—		135		639

	Ending balance	$	2,521	$	4,037	$	4,226

The following table details the interest income which would have been recognized if the loans had accrued interest, in accordance with their original terms, and the interest actually recognized.


	December 31

	2005		2004		2003

Interest income not recognized on impaired loans	$	185	$	204	$	224
Interest income recognized on impaired loans	$	—	$	42	$	227

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in thousands, except per share data)

(5) Premises and Equipment

Premises and equipment consisted of the following:


		December 31

		2005			2004

Land and buildings		$	17,513		$	16,892
Furniture and equipment			8,547			7,999
Land improvements			2,101			1,998
Computer software			1,743			1,660
Construction in progress			257			486

	Subtotal		30,161			29,035
Less: accumulated depreciation			(9,647	)		(8,660	)

	Total	$	20,514		$	20,375

(6) Deposits

Deposits are summarized as follows:


		December 31

		2005		2004

CDs		$	244,910	$	210,182
Savings			59,635		55,742
Money market			84,537		91,872
Negotiable orders of withdrawal (“NOWs”)			143,042		127,385
Noninterest-bearing demand			105,365		77,820

	Total	$	637,489	$	563,001

Certificates of deposit mature as follows:


		December 31, 2005

		Less than
		1 year		1-2 years		2-3 years		3-4 years		4-5 years		Over 5 years		Total

CDs of $100,000 or more		$	81,055	$	15,213	$	14,793	$	4,561	$	1,171	$	—	$	116,793
All other CDs			85,296		18,674		13,733		9,655		759		—		128,117

	Total	$	166,351	$	33,887	$	28,526	$	14,216	$	1,930	$	—	$	244,910

(7) FHLB Advances and Stock

The Bank is required to maintain an investment in the stock of FHLB. The requirement is based on the following components:


	•	3.5% of the average daily balance of advances outstanding during the most recent quarter; plus

	•	the greater of $500 or 0.75% of mortgage loans and pass-through securities; or

	•	5.0% of the outstanding balance of loans sold to the FHLB minus the membership requirement.

During 2005, the FHLB suspended payment of dividends. The Company evaluated this suspension and has determined that the suspension of dividends is temporary and that the stock is not considered impaired as of December 31, 2005.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in thousands, except per share data)

A credit line has been established by FHLB for Whidbey Island Bank. At December 31, 2005, the line of credit available to the Bank was $95,100. The Bank may borrow from the FHLB in amounts up to 15% of its total assets. Advances on the line are collateralized by securities pledged and held in safekeeping by the FHLB, as well as supported by eligible real estate loans. As of December 31, 2005, collateral consisted entirely of eligible real estate loans in the amount of $140,759.

The Bank’s FHLB advances mature as follows:


		December 31, 2005				December 31, 2004

				Weighted				Weighted
				average interest				average interest
Date of maturity		Amount		rate		Amount		rate

	2005	$	—		—	$	5,000		4.38%
	2006		10,000		3.76%		—		—

	Total	$	10,000			$	5,000


	December 31

	2005		2004

Average balance	$	5,586	$	8,839
Maximum amount outstanding at any month end		30,000		12,500

The Bank had no overnight borrowings outstanding as of December 31, 2005. At December 31, 2004 the Bank had $22,000 of overnight borrowings outstanding.

(8) Trust Preferred Securities and Junior Subordinated Debentures

Washington Banking Capital Trust I, a statutory business trust, is a wholly-owned subsidiary of the Company created for the exclusive purposes of issuing and selling capital securities and utilizing sale proceeds to acquire junior subordinated debt issued by the Company. On June 27, 2002, the Trust issued $15,000 of trust preferred securities with a30-year maturity, callable after the fifth year by Washington Banking Company. The rate adjusts quarterly based on Three-Month LIBOR plus 3.65%. On December 31, 2005 the rate was 7.80%. These securities, within certain limitations, are considered Tier I capital for the purposes of regulatory capital requirements.

The junior subordinated debentures are the sole assets of the Trust, and payments under the junior subordinated debentures are the sole revenues of the Trust. All of the common securities of the Trust are owned by the Company. Washington Banking Company has fully and unconditionally guaranteed the capital securities along with all obligations of the Trust under the trust agreements.

Pursuant to FIN 46R, the Company deconsolidated the trust beginning first quarter of 2004 and began to report the junior subordinated debentures within the liabilities section of the statement of financial condition. Prior to deconsolidation, the Trust and the related trust preferred securities were included within borrowings as a separate line item in the Company’s statement of financial condition.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in thousands, except per share data)

(9) Income Taxes

Income tax expense (benefit) consisted of the following:


			December 31

			2005		2004		2003

Federal:
	Current tax expense		$	3,140	$	3,615	$	3,173
	Deferred tax expense (benefit)			1,440		(630)		(409	)
State current tax expense				—		—		34

		Total	$	4,580	$	2,985	$	2,798

The following table presents major components of the net deferred federal income tax asset resulting from differences between financial reporting and tax basis:


			December 31

			2005		2004

Deferred tax assets:
	Loan loss allowances		$	3,022	$	2,549
	Deferred compensation			310		248
	Deferred loan fees			—		145
	Other			61		62
	Market value adjustment of investment securities available for sale			25		—

		Total deferred tax assets		3,418		3,004
Deferred tax liabilities:
	Deferred loan fees			1,799		—
	Premises and equipment			505		526
	FHLB stock			149		210
	Prepaid expenses			111		—
	Market value adjustment of investment securities available for sale			—		79

		Total deferred tax liabilities		2,564		815

		Deferred tax assets, net	$	854	$	2,189

Reconciliation between the statutory federal income tax rate and the effective tax rate is as follows:


		December 31

		2005					2004					2003

Income tax expense at federal statutory rate		$	4,857		34.3%		$	3,241		34%		$	3,014		34%
Interest income on tax-exempt securities			(285	)	(1.9%	)		(297	)	(3%	)		(241	)	(3%	)
Other, net			8		—			41		—			(9)		—
State tax, net of federal tax benefit			—		—			—		—			34		—

	Total	$	4,580		32.4%		$	2,985		31%		$	2,798		31%

There was no valuation allowance for deferred tax assets as of December 31, 2005 or 2004. The Company has determined that it is not required to establish a valuation allowance for the deferred tax assets as

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in thousands, except per share data)

management believes it is more likely than not that the deferred tax asset of $3,418 and $3,004 at December 31, 2005 and 2004, respectively, will be realized in the normal course of business.


(10)	Earnings Per Share

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


	Year Ended December 31, 2005

	Income		Weighted average shares		Per share amount

Basic EPS
Income available to common shareholders	$	9,468		7,278,486	$	1.30
Effect of dilutive securities: stock options		—		263,688		(0.04	)

Diluted EPS	$	9,468		7,542,174	$	1.26


	Year Ended December 31, 2004

	Income		Weighted average shares		Per share amount

Basic EPS
Income available to common shareholders	$	6,176		7,209,349	$	0.86
Effect of dilutive securities: stock options		—		251,247		(0.03	)

Diluted EPS	$	6,176		7,460,596	$	0.83


	Year Ended December 31, 2003

	Income		Weighted average shares		Per share amount

Basic EPS
Income available to common shareholders	$	5,967		7,121,948	$	0.84
Effect of dilutive securities: stock options		—		276,293		(0.03	)

Diluted EPS	$	5,967		7,398,241	$	0.81

On May 17, 2005, the Board of Directors issued a 4-for-3 stock split to shareholders of record as of May 2, 2005. On February 26, 2004, the Board of Directors issued a 15% stock dividend to shareholders of record as of February 10, 2004. All periods presented have been restated to reflect the stock split and dividend.

(11) Employee Benefit Plans

(a) 401(k) and Profit Sharing Plan:

During 1993, the Board of Directors approved a defined contribution plan (“the Plan”). The Plan covers substantially all full-time employees and many part-time employees once they meet the age and length of service requirements. The Plan allows for a voluntary salary reduction, under which eligible employees are permitted to defer a portion of their salaries, with the Company contributing a percentage of the employee’s contribution to the employee’s account. Employees are fully vested in their elected and employer matching contributions at all times. At the discretion of the Board of Directors, an annual profit sharing contribution may be made to eligible employees. Profit sharing contributions vest over a six-year period.

The Company’s contributions for the years ended December 31, 2005, 2004 and 2003 under the employee matching feature of the plan were $215, $196 and $176, respectively. This represents a match of the participating employees’ salary deferral of 50% of the first 5% of the compensation deferred. There were no contributions under the profit sharing portion of the plan for the years presented.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in thousands, except per share data)

(b) Deferred Compensation Plan:

In December 2000, the Bank approved the adoption of an Executive Deferred Compensation Plan (“Comp Plan”) to take effect January 2001, under which select participants may elect to defer receipt of a portion of eligible compensation. The following is a summary of the principal provisions of the Compensation Plan:


	Purpose: The purpose of the Comp Plan is to (1) provide a deferred compensation arrangement for a select group of management or highly compensated employees within the meaning of Sections 201(2) and 301(a)(3) of ERISA and directors of the Bank, and (2) attract and retain the best available personnel for positions of responsibility with the Bank and its subsidiaries. The Comp Plan is intended to be an unfunded deferred compensation agreement. Participation in the Comp Plan is voluntary.

	Source of Benefits: Benefits under the Comp Plan are payable solely by the Bank. To enable the Bank to meet its financial commitment under the Comp Plan, assets may be set aside in a corporate-owned vehicle. These assets are available to all general creditors of the Bank in the event of the Bank’s insolvency. Participants of the Comp Plan are unsecured general creditors of the Bank with respect to the Comp Plan benefits. Deferrals under the Comp Plan may reduce compensation used to calculate benefits under the Bank’s 401(k) Plan.

During the second quarter of 2004, the Bank made a $10,000 investment in BOLI. These policies insure the lives of officers of the Bank, and name the Bank as beneficiary. Noninterest income is generated tax-free (subject to certain limitation) from the increase in the policies’ underlying investments made by the insurance company.

(12) Stock Incentive Plans

The Company adopted the 2005 Stock Incentive Plan (“2005 Plan”) following stockholder’s approval at the 2005 Annual Meeting of Stockholders. The Company had 336,493 options outstanding under prior plans as of December 31, 2005. Subsequent to the adoption of the 2005 Plan, no additional grants may be issued under the prior plan.

The 2005 Plan provides grants of up to 666,666 shares, which includes any remaining shares subject to stock awards under the prior plan for future awards, or which have been forfeited, cancelled or expire. Grants from the 2005 Plan may take any of the following forms: incentive stock options, nonqualified stock options, restricted stock, restricted unit, performance shares, performance units, stock appreciation rights or dividend equivalent rights. As of December 31, 2005, the Company had 665,666 shares available for grant.

(a) Stock Options:

Under the terms of the 2005 Plan, the exercise price of each incentive stock option must be greater than or equal to the market price of the Company’s stock on the date of the grant. The plan further provides that no stock option granted to a single grantee may exceed $100 in aggregate fair market value in a single calendar year. Stock options vest over a period of no greater than five years from the date of grant. Additionally, the right to exercise the option terminates ten years from the date of grant.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in thousands, except per share data)

The following table summarizes the stock option activity of qualified shares:


	Years Ended December 31

	2005					2004					2003

				Weighted					Weighted					Weighted
				average option					average option					average option
	Shares			price per share		Shares			price per share		Shares			price per share

Balance at beginning of year		343,908		$	5.16		427,715		$	4.67		503,361		$	3.66
Grants		—			—		—			—		48,214			7.74
Exercised		(81,982	)		2.93		(76,530	)		2.28		(123,860	)		1.79
Expired, cancelled or forfeited		(4,630	)		6.60		(7,277	)		6.29		—			—

Balance at end of year		257,296		$	5.85		343,908		$	5.16		427,715		$	4.67

Financial data pertaining to outstanding stock option activity of qualified shares:


December 31, 2005

				Exercise price
Total shares		Vested shares		per share		Expiration

	6,325		6,325		$2.51	April 1, 2006
	37,950		37,950		3.18	December 31, 2006
	59,718		59,718		5.49	December 31, 2007
	58,190		58,190		7.11	December 31, 2008
	52,368		31,420		5.63	January 1, 2012
	2,310		1,386		7.69	February 29, 2012
	35,478		14,191		7.69	January 2, 2013
	4,957		1,983		8.18	February 19, 2013

	257,296		211,163

The following table summarizes stock option activity of the nonqualified shares:


	Years Ended December 31

	2005					2004					2003

				Weighted					Weighted					Weighted
				average option					average option					average option
	Shares			price per share		Shares			price per share		Shares			price per share

Balance at beginning of year		108,607		$	5.79		127,581		$	5.20		162,426		$	3.59
Grants		—			—		—			—		22,080			8.18
Exercised		(26,404	)		4.44		(18,975	)		1.82		(56,925	)		1.78
Expired, cancelled or forfeited		(3,006	)		7.04		—			—		—			—

Balance at end of year		79,197		$	6.19		108,607		$	5.79		127,581		$	5.20

Financial data pertaining to outstanding nonqualified stock options:


December 31, 2005

				Exercise price
Total shares		Vested shares		per share		Expiration

	32,890		32,890		$ 5.48	December 31, 2007
	26,987		16,192		5.63	May 16, 2012
	19,320		7,728		8.18	February 19, 2013

	79,197		56,810

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in thousands, except per share data)

Pro forma information regarding net income and earnings per share, as required by SFAS No. 123,Accounting for Stock-Based Compensation,is included in Note 1(o) of Notes to Consolidated Financial Statements.

(b) Restricted Stock Awards:

During 2005, the Company issued 34,959 (net of forfeited) shares of restricted stock, with an average grant price of $13.65. Restricted stock awards vest over a period of three to five years from date of grant.


(13)	Regulatory Capital Matters

The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about risk components, asset risk weighting and other factors.

Risk-based capital guidelines issued by the FDIC establish a risk-adjusted ratio relating capital to different categories of assets and off-balance sheet exposures for banks. The Bank’s Tier 1 capital is comprised primarily of common equity and trust preferred securities, and excludes the equity impact of adjusting available-for-sale securities to fair value. Total capital also includes a portion of the allowance for loan losses, as defined according to regulatory guidelines.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the following table) of total and Tier 1 capital to risk-weighted assets (as defined in the regulations), and of Tier 1 capital to average assets (as defined in the regulations). As of December 31, 2005, the Bank met the minimum capital requirements to which it is subject and is considered to be “well-capitalized.”

The following tables describe the Company’s and Bank’s regulatory capital and threshold requirements for the 2005 and 2004 periods, respectively:


										To be well-capitalized
						For capital				under prompt corrective
		Actual				adequacy purposes				action provisions

								Minimum				Minimum
		Amount		Ratio		Amount		ratio		Amount		ratio

December 31, 2005:
Total risk-based capital (to risk-weighted assets)
	Consolidated	$	81,689		11.52%	$	56,722		8.00%	$	N/A
	Whidbey Island Bank		79,277		11.21%		56,591		8.00%		70,739		10.00%
Tier 1 capital (to risk-weighted assets)
	Consolidated		72,879		10.28%		28,361		4.00%		N/A
	Whidbey Island Bank		70,467		9.96%		28,296		4.00%		42,444		6.00%
Tier 1 capital (to average assets)
	Consolidated		72,879		10.26%		28,423		4.00%		N/A
	Whidbey Island Bank		70,467		9.93%		28,375		4.00%		35,469		5.00%

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in thousands, except per share data)


										To be well-capitalized
						For capital				under prompt corrective
		Actual				adequacy purposes				action provisions

								Minimum				Minimum
		Amount		Ratio		Amount		ratio		Amount		ratio

December 31, 2004:
Total risk-based capital (to risk-weighted assets)
	Consolidated	$	72,346		11.40%	$	50,771		8.00%	$	N/A
	Whidbey Island Bank		69,913		11.03%		50,694		8.00%		63,368		10.00%
Tier 1 capital (to risk-weighted assets)
	Consolidated		64,443		10.15%		25,386		4.00%		N/A
	Whidbey Island Bank		62,010		9.79%		25,347		4.00%		38,021		6.00%
Tier 1 capital (to average assets)
	Consolidated		64,443		9.87%		26,119		4.00%		N/A
	Whidbey Island Bank		62,010		9.51%		26,079		4.00%		32,599		5.00%

In addition, under Washington State banking regulations, the Bank is limited as to the ability to declare or pay dividends to the Company up to the amount of the Bank’s retained earnings then on hand.


(14)	Fair Value of Financial Instruments

Because broadly traded markets do not exist for most of the Company’s financial instruments, the fair value calculations attempt to incorporate the effect of current market conditions at a specific time. Fair valuations are management’s estimates of values. These calculations are subjective in nature, involve uncertainties and matters of significant judgment and do not include tax ramifications, therefore, the results cannot be determined with precision, substantiated by comparison to independent markets and may not be realized in an actual sale or immediate settlement of the instruments. There may be inherent weaknesses in any calculation technique, and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, which could significantly affect the results. For all of these reasons, the aggregation of the fair value calculations presented herein do not represent, and should not be construed to represent, the underlying value of the Company.

When possible, quoted market prices are used to determine fair value. In cases where a quoted market price is not available, the fair value of financial instruments is estimated using the present value of future cash flows or other valuation methods.

(a) Cash and Cash Equivalents:

The carrying value of cash and cash equivalent instruments approximates fair value.

(b) Interest-earning Deposits:

The carrying values of interest-earning deposits maturing within ninety days approximate their fair values. Fair values of other interest-earning deposits are estimated using discounted cash flow analyses based on current rates for similar types of deposits.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in thousands, except per share data)

The carrying value of federal funds sold approximates fair value.

(d) Securities:

The fair value of all investment securities, excluding FHLB stock, is based upon quoted market prices. FHLB stock is not publicly traded, however, it may be redeemed on a dollar-for-dollar basis for any amount the Bank is not required to hold. The fair value is therefore equal to the carrying value.

(e) Loans:

The loan portfolio is composed of commercial, consumer, real estate construction and real estate loans. The carrying value of variable rate loans approximates their fair value. The fair value of fixed rate loans is estimated by discounting the estimated future cash flows of loans, sorted by type and security, by the weighted average rate of such loans and rising rates currently offered by the Bank for similar loans.

(f) Deposits:

For deposits with no contractual maturity such as checking accounts, money market accounts and savings accounts, fair values approximate book values. The fair value of certificates of deposit are based on discounted cash flows using the difference between the actual deposit rate and an alternative cost of funds rate, currently offered by the Bank for similar types of deposits.

(g) Trust Preferred Securities/ Junior Subordinated Debentures:

The fair value of trust preferred securities is estimated at their recorded value due to the cost of the instrument re-pricing on a quarterly basis.

(h) Other Borrowed Funds:

Other borrowed funds consist of FHLB advances. The carrying amount of FHLB advances is estimated using discounted cash flow analyses based on the Company’s current incremental borrowing rates of similar types of borrowing arrangements.

(i) Off-Balance Sheet Items:

Commitments to extend credit represent the principal category of off-balance sheet financial instruments (see Note 16). The fair value of these commitments is not material since they are for relatively short periods of time and are subject to customary credit terms, which would not include terms that would expose the Company to significant gains or losses.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in thousands, except per share data)

The table below presents the carrying value amount of the Company’s financial instruments and their corresponding fair values:


			December 31

			2005				2004

			Carrying		Fair		Carrying		Fair
			value		value		value		value

Financial assets:
	Cash and cash equivalents		$	19,949	$	19,949	$	16,814	$	16,814
	Interest-earning deposits			983		983		1,119		1,119
	Federal funds sold			21,095		21,095		—		—
	FHLB stock			1,984		1,984		1,976		1,976
	Investment securities:
		Available for sale		19,077		19,077		19,304		19,304
	Loans held for sale			2,829		2,829		8,311		8,311
	Loans			630,258		623,698		579,980		578,048
Financial liabilities:
	Deposits			637,489		636,676		563,001		562,507
	FHLB overnight borrowings			—		—		22,000		22,000
	Junior subordinated debentures			15,007		15,007		15,007		15,007
	Other borrowed funds			10,000		10,000		5,000		5,000

(15) Washington Banking Company Information

The summarized condensed financial statements for Washington Banking Company (parent company only) are presented in the following table:


			December 31

			2005			2004
Condensed Balance Sheets
Assets:
	Cash and cash equivalents		$	895		$	1,343
	Other assets			1,277			477
	Investment in subsidiaries			70,684			62,778

		Total assets	$	72,856		$	64,598


Liabilities:
	Junior subordinated debentures		$	15,007		$	15,007
Shareholders’ equity:
	Common stock			32,106			31,516
	Retained earnings			25,789			17,928
	Accumulated other comprehensive income, net			(46	)		147

		Total shareholders’ equity		57,849			49,591

		Total liabilities and shareholders’ equity	$	72,856		$	64,598

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in thousands, except per share data)


			Years Ended December 31

			2005			2004			2003
Condensed Statements of Income
Interest income:
	Interest-earning deposits		$	18		$	5		$	1
	Common securities			33			24			23

		Total interest income		51			29			24
Interest expense:
	Junior subordinated debentures			1,071			782			742

		Net interest income (loss)		(1,020	)		(753	)		(718	)
	Noninterest expense			600			503			591

Loss before income tax benefit and undistributed earnings of subsidiaries				(1,620	)		(1,256	)		(1,309	)
Income tax benefit				556			479			445

Loss before undistributed earnings of subsidiaries				(1,064	)		(777	)		(864	)
Undistributed earnings of subsidiaries				8,182			4,173			3,880
Dividend income from the Bank				2,350			3,150			3,007
Loss from discontinued operations				—			(370	)		(56	)

		Net income	$	9,468		$	6,176		$	5,967


			Years Ended December 31

			2005			2004			2003
Condensed Statements of Cash Flows
Operating activities:
	Net income from continuing operations		$	9,468		$	6,546		$	6,023
	Adjustments to reconcile net income to net cash used in operating activities:
	Equity in undistributed earnings of subsidiaries			(8,182	)		(4,173	)		(3,880	)
	Stock option compensation			24			23			23
	Other assets			(801	)		375			(451	)

		Cash flows provided by operating activities		509			2,771			1,715

Investing activities:
	Investment in subsidiaries			(293	)		(247	)		(773	)
Financing activities:
	Dividends paid to shareholders			(1,607	)		(1,521	)		(1,303	)
	Proceeds from exercise of stock options and stock issuances			357			208			323
		Cash flows provided by financing activities		(1,250	)		(1,313	)		(980	)

		Net increase (decrease) in cash and cash equivalents		(488	)		1,211			(38	)
Cash and cash equivalents at beginning of year				1,343			132			170

Cash and cash equivalents at end of year			$	895		$	1,343		$	132

(16) Commitments


(a)	Leasing Arrangements:

The Company is obligated under a number of noncancelable operating leases for land and buildings. The majority of these leases have renewal options. In addition, some of the leases contain escalation clauses tied to the consumer price index with caps.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in thousands, except per share data)

The Company’s future minimum rental payments required under land, buildings and equipment operating leases that have initial or remaining noncancelable lease terms of one year or more are as follows:


	December 31, 2005

2006	$	364
2007		319
2008		238
2009		176
2010		92
Thereafter		712

Total	$	1,901

Rent expense applicable to operating leases for the years ended December 31, 2005, 2004 and 2003 was $345, $336 and $357, respectively.

(b) Commitments to Extend Credit:

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if it is deemed necessary by the Bank upon extension of credit, is based on management’s credit evaluation of the counterparty. Collateral held varies, but may include: property, plant and equipment; accounts receivable; inventory; and income-producing commercial properties.

Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. Except for certain long-term guarantees, the majority of guarantees expire in one year. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Collateral supporting those commitments, for which collateral is deemed necessary, generally amounts to one hundred percent of the commitment amount at December 31, 2005.

The Bank has not been required to perform on any financial guarantees and did not incur any losses on its commitments in 2005 and 2004.

Commitments to extend credit were as follows:


		December 31, 2005

Loan commitments
	Fixed rate	$	38,554
	Variable rate		140,477
Standby letters of credit			1,573


(17)	Mortgage Loan Commitments and Loans Held for Sale

The Company was exposed to market risk on outstanding mortgage loan commitments and unsold residential mortgage loans held-for-sale during the first six months of 2004. As part of its risk management processes, the Company executed a program to limit portions of this risk through the use of derivative financial instruments, principally forward sales of mortgage-backed securities, and mandatory delivery contracts. The Company held open forward contracts to deliver Fannie Mae and Ginnie Mae mortgage-

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in thousands, except per share data)

backed securities at a future date which, in conjunction with uncommitted mortgage loans held-for-sale, eliminated a portion of the market risk for a specified price. Pursuant to the requirements of SFAS No. 133, the estimated value of these derivative contracts were recognized in the accompanying financial statements at their estimated fair value. The Company did not use hedge accounting for this program because the estimated benefits from applying hedge accounting were not significant. Since the discontinuation of the Group in the second quarter of 2004, the Company has not used derivative financial instruments as a hedge against market risk on outstanding mortgage loan commitments nor unsold residential mortgage loansheld-for-sale.

The following table summarizes the Company’s open positions and related gains and losses at December 31, 2003:


	2003

	Notional		Fair
	amount		value
(Dollars in thousands)
Interest-rate-locked loan commitments	$	6,744	$	2
Forward sales of loans and mortgage-backed securities		6,000		(46	)


(18)	Related Party Transactions

As of December 31, 2005 and 2004, the Bank had loans to persons serving as directors and executive officers, and to entities related to such individuals aggregating $6,141 and $7,213, respectively. All loans were made on essentially the same terms and conditions as comparable transactions with other persons, and do not involve more than the normal risk of collectibility. During the year ended December 31, 2005, total principal additions were $11,902 and total principal payments were $12,716.

Deposits from related parties held by the Bank at December 31, 2005 and 2004 totaled $5,635 and $5,086, respectively.


(19)	Contingencies

The Company and its subsidiaries are from time to time defendants in and are threatened with various legal proceedings arising from regular business activities. Management believes the ultimate liability, if any, arising from such claims or contingencies will not have a material adverse effect on the Company’s results of operations or financial condition.


(20)	Subsequent Events

On January 26, 2006, the Board of Directors declared a cash dividend of $0.0625 per share to shareholders of record as of February 13, 2006, payable on February 28, 2006.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in thousands, except per share data)


(21)	Selected Quarterly Financial Data (Unaudited)

Results of operations on a quarterly basis were as follows:


		Year Ended December 31, 2005

		First		Second		Third		Fourth
		quarter⁽¹⁾		quarter		quarter		quarter

Interest income		$	10,293	$	11,137	$	11,788	$	12,572
Interest expense			2,513		2,796		2,975		3,282

	Net interest income		7,780		8,341		8,813		9,290
Provision for loan losses			425		525		550		750

	Net interest income after provision for loan losses		7,355		7,816		8,263		8,540
Noninterest income			1,651		1,892		1,991		1,765
Noninterest expense			5,987		6,159		6,336		6,743

	Income before provision for income taxes		3,019		3,549		3,918		3,562

Provision for income taxes			976		1,200		1,239		1,165

	Net income	$	2,043	$	2,349	$	2,679	$	2,397

Basic earnings per share		$	0.28	$	0.32	$	0.37	$	0.33
Diluted earnings per share		$	0.27	$	0.31	$	0.35	$	0.32
Cash dividends declared per share		$	0.054	$	0.055	$	0.055	$	0.055

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in thousands, except per share data)


			Year Ended December 31, 2004⁽¹⁾

			First			Second			Third			Fourth
			quarter			quarter			quarter			quarter

Interest income			$	9,085		$	9,361		$	9,861		$	10,157
Interest expense				2,094			2,166			2,248			2,329

		Net interest income		6,991			7,195			7,613			7,828
Provision for loan losses				825			775			725			1,175

		Net interest income after provision for loan losses		6,166			6,420			6,888			6,653
Noninterest income				1,377			1,720			1,672			1,902
Noninterest expense				5,705			5,906			5,789			5,867

		Income before provision for income taxes		1,838			2,234			2,771			2,688

Provision for income taxes				620			742			915			708
		Income from continuing operations, net of tax		1,218			1,492			1,856			1,980
		Income (loss) from discontinued operations, net of tax		(123	)		(247	)		—			—

		Net income	$	1,095		$	1,245		$	1,856		$	1,980

Basic earnings per share
	Continuing operations		$	0.15		$	0.17		$	0.26		$	0.27
	Discontinued operations			(0.02	)		(0.05	)		—			—

Net basic earnings per share			$	0.13		$	0.12		$	0.26		$	0.27

Diluted earnings per share
	Continuing operations		$	0.15		$	0.17		$	0.25		$	0.26
	Discontinued operations			(0.02	)		(0.04	)		—			—

Net diluted earnings per share			$	0.13		$	0.13		$	0.25		$	0.26

Cash dividends declared per share			$	0.04	7	$	0.05	4	$	0.05	4	$	0.05	4


⁽¹⁾	Per share information adjusted to reflect a 4-for-3 stock split distributed by the Company May 17, 2005.

PART IV

Item 15. Exhibits, Financial Statement Schedules

(a)

(1) Financial Statements:The financial statements and related documents listed in the index set forth in Item 8 of this report are filed as part of this report.

(2) Financial Statements Schedules:All other schedules to the consolidated financial statements are omitted because they are not applicable or not material or because the information is included in the consolidated financial statements or related notes in Item 8 above.

(3) Exhibits:The exhibits filed as part of this report and exhibits incorporated herein by reference to other documents are listed in the Index of Exhibits to this amended annual report on page 38.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 16 of March, 2006.


		WASHINGTON BANKING COMPANY (Registrant)

		By/s/ Michal D. Cann

		Michal D. Cann President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities indicated, on the 16 of March, 2006.


		Principal Executive Officer:

		By/s/ Michal D. Cann

		Michal D. Cann President and Chief Executive Officer

		Principal Financial and Accounting Officer:

		By/s/ Richard A. Shields

		Richard A. Shields Senior Vice President and Chief Financial Officer

Michal D. Cann, pursuant to a power of attorney which is being filed with the Company’s Annual Report on Form 10-K, previously filed with the Commisison on March 13, 2006, has signed this report on March 16, 2006, as attorney-in-fact for the following directors who constitute a majority of the board of directors.

Jerry C. Chambers

Jay T. Lien

Robert B. Olson

Anthony B. Pickering

Edward J. Wallgren


		By		/s/ Michal D. Cann

				Michal D. Cann
				Attorney-in-fact
				March 16, 2006

INDEX TO EXHIBITS


Exhibit No.		Exhibit Description

	3.1	Articles of Amendment to Articles of Incorporation of the Company (1)
	3.2	Amended and Restated Articles of Incorporation of the Company (1)
	3.3	Articles of Amendment to the Amended and Restated Articles of Incorporation of the Company (6)
	3.4	Bylaws of the Company (1)

	4.1	Form of Common Stock Certificate (1)
	4.2	Stock Repurchase Plan (3)
	4.3	Pursuant to Section 601(b)(4)(iii)(A) of Regulation S-K, copies of instruments defining the rights of holders of long-term debt and preferred securities are not filed. The Company agrees to furnish a copy thereof to the Securities and Exchange Commission upon request.

	10.1	1992 Employee Stock Option Plan (1)

	10.2	1993 Director Stock Option Plan (1)
	10.3	1998 Stock Option and Restricted Stock Award Plan (2)
	10.4	Form of Severance Agreement (1)
	10.5	Executive Employment Agreements (4)
	10.6	2005 Stock Incentive Plan(5)

	21	Subsidiaries of the Registrant(7)

	23	Consent of Moss Adams LLP(7)

	24	Power of Attorney(7)

	31.1	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 2002
	31.2	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 2002
	32.1	Certification of Chief Executive 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
	32.2	Certification of 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


(1)		Incorporated by reference to the Form SB-2 (Registration No. 333-49925) previously filed by the Company, declared effective on June 22, 1998.

(2)		Incorporated by reference to the definitive proxy statement dated August 19, 1998 for the Annual Meeting of Shareholders held September 24, 1998.

(3)		Incorporated by reference to the Form 8-K dated April 30, 1999, previously filed by the Company.

(4)		Incorporated by reference to Forms 8-K dated May 12, 2005 and September 30, 2005, previously filed by the Company.

(5)		Incorporated by reference to Form S-8 dated November 10, 2005, previously filed by the Company.

(6)		Incorporated by reference to Form 8-K dated July 14, 2005, previously filed by the Company.

(7)		Incorporated by reference to the Form 10-K dated March 13, 2006, previously filed by the Company.

Washington Banking (WBCO) Inactive 10-K/A2005 FY Annual report (amended)