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

(a) Description of Business: Washington Banking Company (the "Company") was formed on April 30, 1996 and is a registered bank holding company whose primary business is conducted by its wholly-owned subsidiary, Whidbey Island Bank (the "Bank"). The business of the Bank, which is focused in the northern area of Western Washington, consists primarily of attracting deposits from the general public and originating loans. The Company and the Bank have formed several subsidiaries for various purposes as follows:

•	Washington Banking Master Trust (the "Master Trust") is a wholly-owned subsidiary of the Company. The Master Trust was formed in April 2007 for the exclusive purpose of issuing trust preferred securities.

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Rural One, LLC ("Rural One") is a majority-owned subsidiary of the Bank and is certified as a Community Development Entity by the Community Development Financial Institutions Fund of the United States Department of Treasury. Rural One was formed in September 2006 for the exclusive purpose of investing in Federal tax credits related to the New Markets Tax Credit program.

(b) Basis of Presentation: The accompanying interim condensed consolidated financial statements include the accounts of the Company and its subsidiaries described above. The accompanying interim condensed consolidated financial statements have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles in the United States of America for complete financial statements. These condensed consolidated financial statements should be read in conjunction with the December 31, 2011 audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K filed with the SEC.

In preparing these financial statements, the Company has evaluated events and transactions subsequent to June 30, 2012 for potential recognition or disclosure. In management's opinion, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 2012, are not necessarily indicative of the results that may be expected for the year ending December 31, 2012. In preparing the condensed consolidated financial statements, estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses are required. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change relate the allowance for loan losses, acquired loans, the FDIC indemnification asset and stock-based compensation.

(c) Reclassifications: Certain amounts in prior year's financial statements may have been reclassified to conform to the 2012 presentation. These reclassifications had no significant impact on the Company's financial position or results of operations.

During the second quarter of 2012, the Company recorded an adjustment to its financial records and statements related to the initial accounting for the assets acquired and the liabilities assumed related to its April 16, 2010 acquisition of City Bank. In accordance with the requirements of FASB ASC 805, Business Combinations, the assets acquired and liabilities assumed were recorded at their estimated fair values, as of the acquisition date, and included Visa Class B common stock ("Visa stock") with an estimated fair value of $2.0 million. During the period ended June 30, 2012, the Bank discovered that the Visa stock, was not included in the assets transferred to the Bank and, therefore, was an asset retained by the FDIC. The FDIC has subsequently offered to sell the Visa stock to the Bank but the Bank has opted not to purchase the Visa stock and considers the original recording an error. The correction of the error resulted in a reduction of investment securities available for sale of $2.2 million, additional goodwill of $1.3 million, additional deferred tax assets of $753 thousand and a $99 thousand reduction of accumulated other comprehensive income at June 30, 2012. At December 31, 2011, investment securities available for sale were reduced by $1.9 million, goodwill increased by $1.3 million, deferred tax assets increased by $663 thousand and accumulated other comprehensive income increased by $69 thousand. The Company has deemed these adjustments to be a correction of an error that was immaterial to the financial statements as there was no impact on the Consolidated Statements of Income for the three and six months ended June 30, 2012 and 2011 and the impact to the Statements of Financial Condition were insignificant.

(d) Significant Accounting Policies: The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect amounts reported in the consolidated financial statements and the accompanying notes. Changes in these estimates and assumptions are considered reasonably possible and may have a material impact on the consolidated financial statements and thus actual results could differ from the amounts reported and disclosed herein. A more detailed description of the Company's significant accounting policies are described in Note (1) of the Notes to Consolidated Financial Statements for the year ended December 31, 2011, as filed on Form 10-K.