Washington Banking (WBCO) 8-K Results of Operations and Financial Condition

CONTACT: Michal D. Cann - President & CEO
Phyllis A. Hawkins - SVP & CFO
360.679.3121 CORPORATE INVESTOR RELATIONS
5333 - 15^THAVENUE SOUTH, SUITE 1500
SEATTLE, WA 98108
206.762.0993
www.stockvalues.com

NEWS RELEASE

WASHINGTON BANKING COMPANY HAS RECORD THIRD QUARTER PROFITS
FOLLOWING THE CLOSURE OF WASHINGTON FUNDING GROUP

OAK HARBOR, WA – October 28, 2004 – Washington Banking Company (Nasdaq: WBCO) today reported that increased loan and deposit volumes combined with noninterest income growth at its Whidbey Island Bank subsidiary led to record profits in the third quarter. Year-to-date results were impacted by the operating loss and closing costs associated with Washington Funding Group (WFG), a wholesale mortgage funding subsidiary that was shutdown in the second quarter. Net income was $1.9 million, or $0.33 per diluted share in the quarter ended September 30, 2004, compared to $1.8 million, or $0.31 per share in the third quarter last year. In the first nine months of 2004, net income was $4.2 million, or $0.75 per diluted share, versus $4.4 million, or $0.80 per diluted share in the same period last year. All per share data has been adjusted to reflect the 15% stock dividend issued February 26, 2004.

“Our Whidbey Island Bank subsidiary continues to perform well, posting record profits in the third quarter,” stated Michal Cann, President and CEO. “Loans and deposits are up 15% from a year ago, and our efforts to increase noninterest income led to good revenue growth despite a dramatic slowdown in mortgage refinance activity. Although WFG was a drag on profits in the first half of 2004, I still believe that our yearly profits should be roughly inline with those posted in 2003. In addition, we are currently consolidating our back office operations into one location, leaving us with two surplus commercial properties for sale.”

Third quarter highlights include:

• Strong balance sheet growth, with loans receivable and total deposits each up 15% from a year ago.
• Real estate construction loans have grown 53% and commercial real estate loans have grown by 33% over last year.
• Credit quality ratios improved, with nonperforming assets to total assets of 0.70% compared to 0.79% last year.
• Revenues grew 7% over last year, aided by a 54% increase in service charges and fees.
• Return on average equity was 15.93%, return on average assets was 1.16%.
• Noninterest expenses remained flat with second quarter.
• Sold $10 million of indirect dealer loans.

At the end of the third quarter, total loans (loans receivable plus loans held for sale) were $557.7 million, up from $491.1 million a year ago. As part of the on-going strategy to manage the diversity in the portfolio, the loan mix has shifted in the last year. Consumer loans represented 31% of total loans at quarter-end, compared to 34% at the end of the third quarter last year, reflecting the sale of $10 million of indirect dealer loans in September 2004, which resulted in a nominal gain. Real estate construction loans were 17% of loans at the end of the 2004 third quarter, compared to 13% a year earlier. Although commercial loans decreased to 15% of total loans, compared to 19% of loans at the end of September last year, this was offset by the increase in commercial real estate mortgages, which grew to 29% of the portfolio, compared to 25% a year ago. “As the economy continues to slowly strengthen, we are looking at ways to increase our commercial loans as a percentage of the portfolio,” said Cann.

“Funding for our loans is predominantly generated by consumer and business deposits,” said Phyllis Hawkins, Senior Vice President. “Although the competition for deposits is particularly fierce, we continue to focus on keeping our cost of funds low while growing core deposits.” Noninterest bearing deposits grew 8% from a year ago to $83.4 million, while low-cost interest-bearing deposits grew 18% to $291.1 million. Time deposits grew 15% to $214.5 million at the end of September 2004.

“Our net interest margin showed improvement over last quarter, although was slightly lower than a year ago,” Hawkins said. “Our strategy is to position our balance sheet to attain a nearly neutral posture to minimize our interest rate risk.” Net interest margin was 5.29% in the most recent quarter, compared to 5.09% in the second quarter this year and 5.33% in the third quarter a year ago.

Earlier this month, the company completed its search for a CFO with experience as a CPA, hiring Rick Shields, effective November 1, 2004. At that time, Ms. Hawkins will serve as Controller and will remain involved in shaping the bank’s strategies.

Credit quality ratios improved. Non-performing loans (NPLs) improved to 0.58% of total loans, compared to 0.89% in the previous quarter and 0.86% for the third quarter last year. Nonperforming assets declined to 0.70% of total assets at the end of the third quarter, from 0.83% at the end of June 2004 and 0.79% a year ago. Coverage ratios increased as the allowance for loan losses grew 18% from a year ago to $7.5 million, representing 1.36% of loans (excluding loans held for sale), compared to 1.32% a year earlier. The allowance for loan losses to nonperforming assets increased to 161% from 137% last year, and to 235% of nonperforming loans, compared to 154% a year ago.

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WBCO – 3Q04 Profits up 6%
October 28, 2004
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“Real Estate Owned increased substantially to $1.5 million, primarily as a result of foreclosure on two large commercial real estate properties,” Cann said. “We do not anticipate any losses associated with these parcels as they are very saleable properties. In fact, we have sold a portion of one of the properties already.” Potential problem loans of $120,000 are current and well secured, and management does not expect any related losses. Impaired loans were $191,000 at the end of the quarter.

Return on average equity (ROE) was 15.93% and return on average assets (ROA) was 1.16% in the third quarter of 2004, compared to 10.95% and 0.80%, respectively, in the preceding quarter. In the third quarter a year ago, ROE was 16.93% and ROA was 1.20%. For the nine-month period ended September 30, 2004, ROE was 12.29% and ROA was 0.90%, from 14.45% and 1.05%, respectively, for the like period in 2003.

Revenues (net interest income before the provision for loan losses plus non-interest income) for the 2004 third quarter were $9.3 million, up 7% from $8.7 million a year ago. For the nine-month period, revenues grew by 8% to $26.6 million, from $24.7 million in the first nine months of 2003, reflecting growth in both net interest and noninterest income. Net interest income for the 2004 third quarter grew 7% to $7.8 million, compared to $7.2 million in the third quarter last year, as interest income growth outpaced the increased interest expense. Net interest income for the nine-month period increased 7% to $22.2 million, compared to $20.7 million last year.

Increased service charge and fee income helped boost noninterest income 6% to $1.5 million for the third quarter 2004, from $1.4 million a year ago, despite a sizable decrease in gain on sale of loans resulting from the mortgage refinance slow down. Noninterest income grew 10% to $4.4 million year-to-date, from $4.0 million a year ago. Third quarter noninterest expense was flat from the 2004 second quarter, but rose 9% to $5.8 million, compared to $5.3 million in the third quarter last year, as compensation and employee benefits and consulting and professional fees have increased. Noninterest expense was up 12% to $17.4 million for the nine month period, from $15.5 million last year.

Washington Banking Company’s efficiency ratio was 62.35% in the third quarter, improving from 66.25% in the second quarter and off slightly from 61.14% a year ago. For the first nine months of the year, the efficiency ratio was 65.49%, compared to 62.85% for the same period last year.

Shareholders’ equity increased 11% to $47.9 million at the end of September, and book value per share grew to $8.85 at quarter-end, from $8.05 a year ago.

Management will host a conference call today, October 28, at 10:00 am PDT (1:00 pm EDT) to discuss results for the third quarter and first nine months of 2004. Investment professionals and all current and prospective shareholders are invited to access the live call by dialing (303) 262-2130, or to listen to the call live from the Investor Relations page of Whidbey Island Bank’s website,www.wibank.com. Shortly after the call concludes, the replay will be archived for three weeks at (303) 590-3000, using access code 11010049#.

Washington Banking Company is a bank holding company based in Oak Harbor, Washington that operates Whidbey Island Bank, a state-chartered full-service commercial bank. Founded in 1961, Whidbey Island Bank provides various deposit, loan and investment services to meet customers’ financial needs. Whidbey Island Bank operates 18 full-service branches located in Island, Skagit, Whatcom and Snohomish counties in Northwestern Washington.

www.wibank.com

This news release may contain forward-looking statements that are subject to risks and uncertainties. These forward-looking statements describe management’s expectations regarding future events and developments such as future operating results, growth in loans and deposits, and continued success of the Company’s business plan. Readers should not place undue reliance on forward-looking statements, which reflect management’s views only as of the date hereof. The words “expect,” “should,” “will,” “anticipate,” “believe” and words of similar meaning are intended in part to help identify forward-looking statements. Future events are difficult to predict, and the expectations described above are subject to risk and uncertainty that may cause actual results to differ materially. In addition to discussions about risks and uncertainties set forth from time to time in the Company’s filings with the Securities and Exchange Commission, factors that may cause actual results to differ materially from those contemplated in these forward-looking statements include, among others: (1) local and national general and economic condition; (2) unexpected changes in interest rates and their impact on net interest margin; (3) competitive pressure among financial institutions; (4) legislation or regulatory requirement; and (5) the ability to realize the efficiencies expected from investment in personnel and infrastructure. Washington Banking Company does not undertake to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements were made. Any such statements are made in reliance on the safe harbor protections provided under the Securities Exchange Act of 1934, as amended.

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WBCO – 3Q04 Profits up 6%
October 28, 2004
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CONSOLIDATED BALANCE SHEETS (unaudited) (in thousands except per share data)	September 30, 2004			December 31, 2003			September 30, 2003
Assets
Cash and Due from Banks	$	20,047		$	15,454		$	22,063
Interest-Earning Deposits with Banks		719			356			470
Fed Funds Sold		31,950			4,795			21,590
Total Cash and Cash Equivalents		52,716			20,605			44,123
Securities Available for Sale		19,069			15,421			15,076
Securities Held to Maturity		—			14,745			16,061
Total Securities		19,069			30,166			31,137
Subsidiary Investment		307			—			—
FHLB Stock		2,160			2,280			2,252
Loans Held for Sale		5,596			8,251			12,322
Loans Receivable		552,128			499,919			478,749
Less: Allowance for Loan Losses		(7,506	)		(6,116	)		(6,342	)
Loans, Net		550,218			502,054			484,729
Premises and Equipment, Net		20,636			19,814			18,364
Bank Owned Life Insurance		10,113			—			—
Other Real Estate Owned		1,458			504			504
Deferred Tax Assets		1,517			1,659			1,256
Other Assets		4,836			4,659			4,819
Total Assets	$	663,030		$	581,741		$	587,184
Liabilities and Shareholders Equity
Deposits:
Noninterest-Bearing	$	83,393		$	75,756		$	77,040
Interest-Bearing		291,054			238,180			246,715
Time Deposits		214,513			187,561			187,150
Total Deposits		588,960			501,497			510,905
Fed Funds Purchased		—			5,000			—
Other Borrowed Funds		7,500			12,500			15,000
Junior Subordinated Debentures(1)		15,007			—			—
Trust Preferred Securities		—			15,000			15,000
Other Liabilities		3,682			3,384			3,167
Total Liabilities		615,149			537,381			544,072
Shareholders' Equity:
Preferred Stock (no par value)
Authorized 20,000 Shares:
None Outstanding		—			—			—
Common Stock (no par value)
Authorized 10,000,000 Shares:
Issued and Outstanding 5,413,161 at 9/30/04,
5,357,880 at 12/31/03 and 4,656,378 at 9/30/03		31,308			31,125			21,353
Retained Earnings		16,341			13,273			21,796
Unrealized Gain (Loss) on Securities Available
for Sale, Net of Tax		232			(38	)		(37	)
Total Shareholders' Equity		47,881			44,360			43,112
Total Liabilities and Shareholders' Equity	$	663,030		$	581,741		$	587,184

(1) The Financial Accounting Standards Board issued Interpretation No. 46R which calls for the deconsolidation
of trust preferred securities.

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WBCO – 3Q04 Profits up 6%
October 28, 2004
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CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)	Three Months Ended September 30,						Nine Months Ended September 30,
($ in thousands, except per share data)	2004			2003			2004			2003
Interest Income
Loans	$	9,788		$	9,031		$	27,898		$	26,357
Taxable Investment Securities		77			74			264			215
Tax Exempt Securities		92			165			394			500
Other		62			95			155			313
Total Interest Income		10,019			9,365			28,711			27,385
Interest Expense
Deposits		1,967			1,796			5,634			5,696
Other Borrowings		93			155			340			465
Junior Subordinated Debentures(1)		201			—			565			—
Trust Preferred Securities		—			182			—			560
Total Interest Expense		2,261			2,133			6,539			6,721
Net Interest Income		7,758			7,232			22,172			20,664
Provision for Loan Losses		(725	)		(838	)		(2,325	)		(2,438	)
Net Interest Income after Provision for Loan Losses		7,033			6,394			19,847			18,226
Noninterest Income
Service Charges and Fees		740			482			2,257			1,476
Gain on Sale of Securities		—			—			144			—
Gain on Sale of Loans		315			650			939			1,612
Secondary Market Income		19			75			73			208
ATM Income		165			117			445			333
Other Income		288			118			538			385
Total Noninterest Income		1,527			1,442			4,396			4,014
Noninterest Expense
Compensation and Employee Benefits		3,418			3,122			10,324			9,158
Occupancy		945			914			2,907			2,625
Office Supplies and Printing		161			149			477			477
Data Processing		131			123			373			345
Consulting and Professional Fees		280			204			583			409
Other		854			791			2,736			2,497
Total Noninterest Expense		5,789			5,303			17,400			15,511
Income before Income Taxes		2,771			2,533			6,843			6,729
Provision for Income Taxes		(915	)		(869	)		(2,277	)		(2,324	)
Income from Continuing Operations		1,856			1,664			4,566			4,405
Income (Loss) from Discontinued Operations, Net of Tax		—			86			(370	)		5
Net Income	$	1,856		$	1,750		$	4,196		$	4,410
Net Income per Common Share(2)
Basic
Continuing Operations	$	0.34		$	0.31		$	0.85		$	0.83
Discontinued Operations		—			0.02			(0.07	)		—
Net Income Per Share, Basic	$	0.34		$	0.33		$	0.78		$	0.83
Diluted
Continuing Operations	$	0.33		$	0.30		$	0.82		$	0.80
Discontinued Operations		—			0.01			(0.07	)		—
Net Income Per Share, Diluted	$	0.33		$	0.31		$	0.75		$	0.80
Average Number of Common Shares Outstanding(2)		5,410,583			5,354,835			5,403,142			5,336,846
Fully Diluted Average Common and Common Equivalent Shares Outstanding(2)		5,602,817			5,574,219			5,601,857			5,538,321

(1) The Financial Accounting Standards Board issued Interpretation No. 46R which calls for the deconsolidation
of trust preferred securities.
(2) Adjusted for 15% stock dividend distributed 2/26/04.

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October 28, 2004
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FINANCIAL STATISTICS (unaudited) ($ in thousands, except per share data)	Three Months Ended September 30,						Nine Months Ended September 30,
	2004			2003			2004			2003
Revenues(1)	$	9,285		$	8,674		$	26,568		$	24,678
Averages
Total Assets	$	640,482		$	583,788		$	618,754		$	557,896
Loans	$	557,911		$	492,789		$	539,745		$	468,116
Interest Earning Assets	$	589,254		$	547,100		$	574,703		$	521,856
Deposits	$	565,724		$	509,277		$	542,444		$	484,373
Shareholders' Equity	$	46,597		$	41,358		$	45,526		$	40,697
Financial Ratios
Return on Average Assets, Annualized		1.16	%		1.20	%		0.90	%		1.05	%
Return on Average Equity, Annualized		15.93	%		16.93	%		12.29	%		14.45	%
Average Equity to Average Assets		7.28	%		7.08	%		7.36	%		7.29	%
Efficiency Ratio(2)		62.35	%		61.14	%		65.49	%		62.85	%
Net Interest Margin		5.29	%		5.33	%		5.18	%		5.32	%
Net Interest Spread		5.05	%		5.03	%		4.91	%		5.03	%

Period End	September 30, 2004			December 31, 2003			September 30, 2003
Book Value Per Share(3)	$	8.85		$	8.28		$	8.05
Nonperforming Assets
Nonaccrual Loans	$	3,197		$	4,158		$	4,122
Restructured Loans		—			—			—
Total Nonperforming Loans		3,197			4,158			4,122
Real Estate Owned		1,458			504			504
Total Nonperforming Assets	$	4,655		$	4,662		$	4,626
Potential Problem Loans	$	120		$	314			—
Impaired Loans		191			2,563			—
Nonperforming Loans to Loans(4)		0.58	%		0.83	%		0.86	%
Nonperforming Assets to Assets		0.70	%		0.80	%		0.79	%
Allowance for Loan Losses to Nonperforming Loans		234.78	%		147.09	%		153.86	%
Allowance for Loan Losses to Nonperforming Assets		161.25	%		131.19	%		137.09	%
Allowance for Loan Losses to Loans(4)		1.36	%		1.22	%		1.32	%
Loan Portfolio
Commercial	$	81,703		$	87,371		$	90,918
Real Estate Mortgages
1 – 4 Family Residential		46,081			43,460			49,532
Commercial		163,735			133,539			123,146
Real Estate Construction		94,137			70,974			61,570
Consumer		171,740			172,406			165,512
Deferred Fees		328			420			393
Total Loans	$	557,724		$	508,170		$	491,071

(1) Revenues is net interest income before provision for loan losses plus noninterest income.
(2) Efficiency ratio is noninterest expense divided by the sum of net interest income and noninterest income.
(3) Adjusted for 15% stock dividend distributed on 2/26/04.
(4) Excludes loans held for sale.

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NOTE: Transmitted on Business Wire at 5:00 a.m. PDT, October 28, 2004.