10-Q

 UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2012

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

For the transition period from ________ to ________

Commission File Number 000-24503

WASHINGTON BANKING COMPANY

(Exact name of 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)

(360) 679-3121

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X]   No [   ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes [X]    No [  ]

Indicate by check mark if the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 Large accelerated filer [   ]  Accelerated filer [X]      Non-Accelerated filer [   ]         Smaller reporting company [   ]

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 [   ]  No [ X ]

The number of shares of the issuer’s Common Stock outstanding at November 1, 2012 was 15,453,497

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION
		Page
Item 1.	Financial Statements
	Condensed Consolidated Statements of Financial Condition (unaudited)
	September 30, 2012 and December 31, 2011		1
	Condensed Consolidated Statements of Income (unaudited)
	Three and Nine Months Ended September 30, 2012 and 2011		2
	Condensed Consolidated Statements of Comprehensive Income (unaudited)
	Three and Nine Months Ended September 30, 2012 and 2011		3
	Condensed Consolidated Statements of Shareholders' Equity (unaudited)
	Nine Months Ended September 30, 2012 and 2011		4
	Condensed Consolidated Statements of Cash Flows (unaudited)
	Nine Months Ended September 30, 2012 and 2011		5
	Notes to Condensed Consolidated Financial Statements		7
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations		38
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		58
Item 4.	Controls and Procedures		58
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings		59
Item 1A.	Risk Factors		59
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		59
Item 3.	Defaults Upon Senior Securities		59
Item 4.	Mine Safety Disclosures		59
Item 5.	Other Information		59
Item 6.	Exhibits		60
	Signatures		61

WASHINGTON BANKING COMPANY

AND SUBSIDIARY

Condensed Consolidated Statements of Financial Condition (unaudited)

(Dollars in thousands, except per share data)

	September 30,		December 31,
	2012		2011
Assets
Cash and due from banks	$	30,885	$	25,399
($13,960 and $653, respectively, are restricted)
Interest-bearing deposits		84,570		80,514
Federal funds sold		670		-
Total cash, restricted cash and cash equivalents		116,125		105,913
Investment securities available for sale, at fair value		353,881		295,955
Federal Home Loan Bank stock		7,509		7,576
Loans held for sale		15,139		22,421
Non-covered loans, net of allowance for loan losses		808,040		794,798
Covered loans, net of allowance for loan losses		231,517		268,211
Total loans		1,039,557		1,063,009
Premises and equipment, net		36,896		37,492
Bank owned life insurance		17,671		17,513
Goodwill and other intangible assets, net		6,156		6,539
Non-covered other real estate owned		4,080		1,976
Covered other real estate owned		18,811		26,622
FDIC indemnification asset		44,713		65,586
Other assets		19,588		20,080
Total assets	$	1,680,126	$	1,670,682
Liabilities and Shareholders' Equity
Liabilities:
Deposits
Noninterest-bearing demand	$	252,484	$	219,250
Interest-bearing		1,205,746		1,247,094
Total deposits		1,458,230		1,466,344
Junior subordinated debentures		25,774		25,774
Other liabilities		15,155		7,744
Total liabilities		1,499,159		1,499,862
Commitments and contingencies (See Note 12)
Shareholders' Equity:
Common stock, no par value; 35,000,000 shares authorized;
15,451,307 and 15,398,197 shares issued and outstanding
at September 30, 2012 and December 31, 2011, respectively		85,381		84,564
Retained earnings		89,966		83,107
Accumulated other comprehensive income		5,620		3,149
Total shareholders' equity		180,967		170,820
Total liabilities and shareholders' equity	$	1,680,126	$	1,670,682

See notes to condensed consolidated financial statements

-1-

WASHINGTON BANKING COMPANY

AND SUBSIDIARY

Condensed Consolidated Statements of Income (unaudited)

(Dollars in thousands, except per share data)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2012			2011			2012			2011
Interest income:
Interest and fees on non-covered loans	$	11,644		$	12,466		$	35,010		$	37,670
Interest and fees on covered loans		8,998			8,614			28,248			25,422
Interest on taxable investment securities		1,238			1,123			3,981			2,724
Interest on tax-exempt investment securities		311			220			842			649
Other		71			89			190			200
Total interest income		22,262			22,512			68,271			66,665
Interest expense:
Interest on deposits		1,575			2,310			5,124			7,449
Interest on junior subordinated debentures		135			120			404			361
Total interest expense		1,710			2,430			5,528			7,810
Net interest income		20,552			20,082			62,743			58,855
Provision for loan losses, non-covered loans		1,250			2,500			5,600			8,500
Provision (recovery) of loan losses, covered loans		-			-			398			(318	)
Net interest income after provision for loan losses		19,302			17,582			56,745			50,673
Noninterest income:
Service charges and fees		886			956			2,700			2,884
Electronic banking income		820			838			2,728			2,355
Investment products		335			230			1,064			835
Gain on sale of investment securities, net		345			-			687			-
Bank owned life insurance income		43			84			158			245
Income from the sale of mortgage loans		1,146			215			2,627			757
SBA premium income		126			103			318			375
Change in FDIC indemnification asset		(2,762	)		(2,586	)		(8,898	)		(5,630	)
Gain on disposition of covered assets		125			1,119			1,310			4,104
Other		294			472			949			1,860
Total noninterest income		1,358			1,431			3,643			7,785
Noninterest expense:
Salaries and benefits		7,741			7,310			22,317			21,038
Occupancy and equipment		1,738			1,660			5,126			4,898
Office supplies and printing		378			385			1,216			1,287
Data processing		539			446			1,603			1,418
Consulting and professional fees		194			202			710			847
Intangible amortization		129			160			383			475
Merger related expenses		-			70			-			324
FDIC premiums		314			319			967			1,469
FDIC clawback liability adjustment		247			-			1,385			-
Non-covered OREO and repossession expenses, net		398			559			1,511			1,199
Covered OREO and repossession expenses, net		122			501			1,274			1,620
Other		1,863			2,195			5,935			6,957
Total noninterest expense		13,663			13,807			42,427			41,532
Income before provision for income tax		6,997			5,206			17,961			16,926
Provision for income tax		2,359			1,581			5,703			5,213
Net income before preferred dividends		4,638			3,625			12,258			11,713
Preferred stock dividends and discount accretion		-			-			-			1,084
Net income available to common shareholders	$	4,638		$	3,625		$	12,258		$	10,629
Net income available per common share, basic	$	0.30		$	0.24		$	0.80		$	0.69
Net income available per common share, diluted	$	0.30		$	0.24		$	0.79		$	0.69
Average number of common shares outstanding, basic		15,413,000			15,343,000			15,418,000			15,339,000
Average number of common shares outstanding, diluted		15,446,000			15,391,000			15,453,000			15,421,000

See notes to condensed consolidated financial statements

-2-

WASHINGTON BANKING COMPANY

AND SUBSIDIARY

Condensed Consolidated Statements of Comprehensive Income (unaudited)

(Dollars in thousands)

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2012			2011		2012			2011
Net income before preferred dividends	$	4,638		$	3,625	$	12,258		$	11,713
Investment securities available for sale:
Unrealized gains arising in period		2,939			3,632		4,489			4,580
Reclassification adjustment for net gains realized in earnings		(345	)		-		(687	)		-
Other comprehensive income before income tax provision		2,594			3,632		3,802			4,580
Income tax provision		908			1,272		1,331			1,604
Other comprehensive income, net		1,686			2,360		2,471			2,976
Total comprehensive income	$	6,324		$	5,985	$	14,729		$	14,689

See notes to condensed consolidated financial statements

-3-

WASHINGTON BANKING COMPANY

AND SUBSIDIARY

Condensed Consolidated Statements of Shareholders’ Equity (unaudited)

(Dollars in thousands, except per share data)

												Accumulated
	Preferred											other		Total
	stock			Common stock					Retained			comprehensive		shareholders'
	amount			Shares		Amount			earnings			income		equity
Balance at December 31, 2010	$	25,334			15,321	$	85,264		$	71,307		$	193	$	182,098
Comprehensive income:
Net income		-			-		-			11,713			-		11,713
Other comprehensive income, net		-			-		-			-			2,976		2,976
Redemption of preferred stock
issued to U.S. Treasury		(26,380	)		-		-			-			-		(26,380	)
Repurchase of warrant issued
to U.S. Treasury		-			-		(1,625	)		-			-		(1,625	)
Preferred stock dividends and accretion		1,046			-		-			(1,084	)		-		(38	)
Cash dividends on common stock,
$0.15 per share		-			-		-			(2,300	)		-		(2,300	)
Stock-based compensation expense		-			-		453			-			-		453
Issuance of common stock under stock plans		-			36		113			-			-		113
Tax benefit associated with stock awards		-			-		4			-			-		4
Balance at September 30, 2011	$	-			15,357	$	84,209		$	79,636		$	3,169	$	167,014
Balance at December 31, 2011	$	-			15,398	$	84,564		$	83,107		$	3,149	$	170,820
Comprehensive income:
Net income		-			-		-			12,258			-		12,258
Other comprehensive income, net		-			-		-			-			2,471		2,471
Cash dividends on common stock,
$0.35 per share		-			-		-			(5,399	)		-		(5,399	)
Stock-based compensation expense		-			-		591			-			-		591
Issuance of common stock under stock plans		-			53		205			-			-		205
Tax benefit associated with stock awards		-			-		21			-			-		21
Balance at September 30, 2012	$	-			15,451	$	85,381		$	89,966		$	5,620	$	180,967

See notes to condensed consolidated financial statements

-4-

WASHINGTON BANKING COMPANY

AND SUBSIDIARY

Condensed Consolidated Statements of Cash Flows (unaudited)

(Dollars in thousands)

	Nine Months Ended
	September 30,
	2012			2011
Cash flows from operating activities:
Net income	$	12,258		$	11,713
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization of investment security premiums, net		1,721			560
Depreciation		1,795			1,534
Intangible amortization		383			475
Provision for loan losses, non-covered loans		5,600			8,500
Provision (recovery) of loan losses, covered loans		398			(318	)
Earnings on bank owned life insurance		(158	)		(245	)
Net gain on sale of investment securities		(687	)		-
Net loss (gain) on sale of premises and equipment		10			(81	)
Net loss (gain) on sale of non-covered other real estate owned		47			(76	)
Net gain on sale of covered other real estate owned		(2,367	)		(2,900	)
Net gain on sales of loans held for sale		(2,627	)		(757	)
Origination of loans held for sale		(146,063	)		(83,959	)
Proceeds from sales of loans held for sale		155,972			85,354
Valuation adjustment on non-covered other real estate owned		678			53
Valuation adjustment on covered other real estate owned		2,902			-
Deferred taxes		3,084			2,132
Change in FDIC indemnification asset		8,898			5,630
Stock-based compensation		591			453
Excess tax benefit from stock-based compensation		(21	)		(4	)
Net change in assets and liabilities:
Net decrease in other assets		3,904			13,298
Net increase in other liabilities		7,411			1,293
Net cash provided by operating activities		53,729			42,655
Cash flows from investing activities:
Purchases of investment securities, available for sale		(133,580	)		(144,976	)
Maturities/calls/principal payments of investment and
mortgage-backed securities available for sale		78,422			70,480
Redemption of Federal Home Loan Bank stock		67			-
Net decrease in non-covered loans and covered loans		8,849			77,859
Purchases of premises and equipment		(1,218	)		(1,277	)
Proceeds from the sale of premises and equipment		9			464
Proceeds from sale of non-covered other real estate owned		1,467			4,793
Proceeds from sale of covered other real estate owned		15,754			27,197
Capitalization of covered other real estate owned improvements		-			(746	)
Net cash (used in) provided by investing activities	$	(30,230	)	$	33,794

See notes to condensed consolidated financial statements

-5-

WASHINGTON BANKING COMPANY

AND SUBSIDIARY

Condensed Consolidated Statements of Cash Flows (continued) (unaudited)

(Dollars in thousands)

	Nine Months Ended
	September 30,
	2012			2011
Cash flows from financing activities:
Net decrease in deposits	$	(8,114	)	$	(12,072	)
Redemption of preferred stock		-			(26,380	)
Repurchase of common stock warrant		-			(1,625	)
Proceeds from exercise of stock options		205			113
Excess tax benefits from stock-based compensation		21			4
Dividends paid on preferred stock		-			(38	)
Dividends paid on common stock		(5,399	)		(2,300	)
Net cash used in financing activities		(13,287	)		(42,298	)
Net change in cash and cash equivalents		10,212			34,151
Cash, restricted cash and cash equivalents at beginning of period		105,913			81,687
Cash, restricted cash and cash equivalents at end of period	$	116,125		$	115,838
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$	5,742		$	7,973
Income taxes	$	1,000		$	5,900
Supplemental disclosures about noncash investing and financing activities:
Change in fair value of investment securities available for sale, net of taxes	$	2,471		$	2,976
Transfer of non-covered loans to non-covered other real estate owned	$	4,296		$	3,118
Transfer of covered loans to covered other real estate owned	$	8,478		$	19,558

See notes to condensed consolidated financial statements

-6-

WASHINGTON BANKING COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(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.

§   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 September 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 nine months ended September 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 to 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.

(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.

-7-

WASHINGTON BANKING COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(2)  Recent Financial Accounting Pronouncements

In April 2011, the FASB issued ASU No. 2011-03, Reconsideration of Effective Control for Repurchase Agreements. The ASU amends existing guidance to remove from the assessment of effective control, the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee and, as well as, the collateral maintenance implementation guidance related to that criterion. ASU No. 2011-03 is effective for the Company’s reporting period beginning on or after December 15, 2011. The guidance applies prospectively to transactions or modification of existing transactions that occur on or after the effective date and early adoption is not permitted. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

In April 2011, the FASB issued ASU No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The ASU amends existing guidance regarding the highest and best use and valuation premise by clarifying these concepts are only applicable to measuring the fair value of nonfinancial assets.  The ASU also clarifies that the fair value measurement of financial assets and financial liabilities which have offsetting market risks or counterparty credit risks that are managed on a portfolio basis, when several criteria are met, can be measured at the net risk position. Additional disclosures about Level 3 fair value measurements are required including a quantitative disclosure of the unobservable inputs and assumptions used in the measurement, a description of the valuation process in place, and discussion of the sensitivity of fair value changes in unobservable inputs and interrelationships about those inputs as well as disclosure of the level of the fair value of items that are not measured at fair value in the financial statements but disclosure of fair value is required. The provisions of ASU No. 2011-04 are effective for the Company’s reporting period beginning after December 15, 2011 and are applied prospectively. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

In June 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income. The ASU amends current guidance to allow a company the option of presenting the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The provisions do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The amendments do not change the option for a company to present components of other comprehensive income either net of related tax effects or before related tax effects, with one amount shown for the aggregate income tax expense (benefit) related to the total of other comprehensive income items. The amendments do not affect how earnings per share is calculated or presented.  The provisions of ASU No. 2011-05 are effective for the Company’s reporting period beginning after December 15, 2011 and are applied retrospectively. Early adoption was permitted and there are no required transition disclosures.  In December 2011, the FASB issued ASU No. 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. The ASU defers indefinitely the requirement to present reclassification adjustments and the effect of those reclassification adjustments on the face of the financial statements where net income is presented, by component of net income, and on the face of the financial statements where other comprehensive income is presented, by component of other comprehensive income.   The adoption of the ASUs did not have a material impact on the Company’s consolidated financial statements.

-8-

WASHINGTON BANKING COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(2)  Recent Financial Accounting Pronouncements (continued)

In September 2011, the FASB issued ASU No. 2011-08, Testing Goodwill for Impairment. With the ASU, a company testing goodwill for impairment now has the option of performing a qualitative assessment before calculating the fair value of the reporting unit (the first step of goodwill impairment test). If, on the basis of qualitative factors, the fair value of the reporting unit is more likely than not greater than the carrying amount, a quantitative calculation would not be needed.  Additionally, new examples of events and circumstances that an entity should consider in performing its qualitative assessment about whether to proceed to the first step of the goodwill impairment have been made to the guidance and replace the previous guidance for triggering events for interim impairment assessment. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

In December 2011, the FASB issued ASU No. 2011-11, Disclosures about Offsetting Assets and Liabilities. The ASU requires an entity to offset, and present as a single net amount, a recognized eligible asset and a recognized eligible liability when it has an unconditional and legally enforceable right of setoff and intends either to settle the asset and liability on a net basis or to realize the asset and settle the liability simultaneously. The ASU requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. The amendments are effective for annual and interim reporting periods beginning on or after January 1, 2013. The Company does not expect this ASU will have a material impact on the Company’s consolidated financial statements.

In July 2012, the FASB issued ASU No. 2012-2, Testing Indefinite-Lived Intangible Assets for Impairment.  This ASU states that an entity has the option to first assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, an entity concludes that it is not more likely than not that the indefinite-lived intangible asset is impaired, then the entity is not required to take further action. However, if an entity concludes otherwise, it is required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test by comparing the fair value with the carrying amount, in accordance with Codification Subtopic 350-30, Intangibles—Goodwill and Other, General Intangibles Other than Goodwill. Under guidance in this ASU, an entity also has the option to bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to performing the quantitative impairment test. An entity will be able to resume performing the qualitative assessment in any subsequent period. The amendments in this ASU are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted, including for annual and interim impairment tests performed as of a date before July 27, 2012, if a public entity’s financial statements for the most recent annual or interim period have not yet been issued. The Company is currently in the process of evaluating the ASU but does not expect it will have a material impact on the Company’s consolidated financial statements.

In October 2012, the FASB issued ASU No. 2012-06, Subsequent Accounting for an Indemnification Asset Recognized at the Acquisition Date as a Result of a Government-Assisted Acquisition of a Financial Institution.  The ASU clarifies that when an entity recognizes an indemnification asset as a result of a government-assisted acquisition of a financial institution and subsequently, a change in the cash flows expected to be collected on the indemnification asset occurs, as a result of a change in cash flows expected to be collected on the assets subject to indemnification, the reporting entity should subsequently account for the change in the measurement of the indemnification asset on the same basis as the change in the assets subject to indemnification. Any amortization of changes in value should be limited to the contractual term of the indemnification agreement. The amendments are effective for annual and interim reporting periods beginning on or after December 15, 2012. The adoption of this ASU will not have a material impact on the Company’s consolidated financial statements.

-9-

WASHINGTON BANKING COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(3)  Investment Securities

The following table presents the amortized cost, unrealized gains, unrealized losses and fair value of investment securities available for sale at September 30, 2012 and December 31, 2011.  At September 30, 2012 and December 31, 2011, there were no investment securities classified as held to maturity or trading.

(dollars in thousands)	September 30, 2012
	Amortized cost		Unrealized gains		Unrealized losses			Fair value
U.S. government agencies	$	73,984	$	1,538	$	(17	)	$	75,505
U.S. Treasuries		9,999		14		-			10,013
Residential pass-through securities		169,840		4,277		-			174,117
Taxable state and political subdivisions		5,779		778		-			6,557
Tax exempt state and political subdivisions		53,067		2,476		(33	)		55,510
Corporate obligations		11,000		-		(515	)		10,485
Agency-issued collateralized mortgage obligations		14,409		102		-			14,511
Asset-backed securities		5,131		36		-			5,167
Investments in mutual funds and other equities		2,018		-		(2	)		2,016
Total investment securities available for sale	$	345,227	$	9,221	$	(567	)	$	353,881

(dollars in thousands)	December 31, 2011
	Amortized cost		Unrealized gains		Unrealized losses			Fair value
U.S. government agencies	$	75,383	$	1,207	$	(16	)	$	76,574
U.S. Treasuries		42,077		520		-			42,597
Residential pass-through securities		116,219		1,295		(116	)		117,398
Taxable state and political subdivisions		9,143		615		-			9,758
Tax exempt state and political subdivisions		35,263		2,100		(28	)		37,335
Corporate obligations		11,000		-		(713	)		10,287
Investments in mutual funds and other equities		2,018		-		(12	)		2,006
Total investment securities available for sale	$	291,103	$	5,737	$	(885	)	$	295,955

-10-

WASHINGTON BANKING COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(3)  Investment Securities (continued)

Investment securities that were in an unrealized loss position at September 30, 2012 and December 31, 2011, are presented in the following tables, based on the length of time individual securities have been in an unrealized loss position. In the opinion of management, these securities are considered only temporarily impaired due to changes in market interest rates or the widening of market spreads subsequent to the initial purchase of the securities, and not due to concerns regarding the underlying credit of the issuers or the underlying collateral.

(dollars in thousands)	September 30, 2012
	Less than 12 Months					12 Months or Longer					Total
	Fair value		Unrealized losses			Fair value		Unrealized losses			Fair value		Unrealized losses
U.S. government agencies	$	2,032	$	(17	)	$	-	$	-		$	2,032	$	(17	)
Tax exempt state and political subdivisions		6,018		(33	)		-		-			6,018		(33	)
Corporate obligations		-		-			10,485		(515	)		10,485		(515	)
Investments in mutual funds and other equities		-		-			2,018		(2	)		2,018		(2	)
Total investment securities available for sale	$	8,050	$	(50	)	$	12,503	$	(517	)	$	20,553	$	(567	)

(dollars in thousands)	December 31, 2011
	Less than 12 Months					12 Months or Longer					Total
	Fair value		Unrealized losses			Fair value		Unrealized losses			Fair value		Unrealized losses
U.S. government agencies	$	10,499	$	(16	)	$	-	$	-		$	10,499	$	(16	)
Residential pass-through securities		29,838		(116	)		-		-			29,838		(116	)
Tax exempt state and political subdivisions		1,255		(28	)		-		-			1,255		(28	)
Corporate obligations		10,287		(713	)		-		-			10,287		(713	)
Investments in mutual funds and other equities		-		-			2,006		(12	)		2,006		(12	)
Total investment securities available for sale	$	51,879	$	(873	)	$	2,006	$	(12	)	$	53,885	$	(885	)

At September 30, 2012 and December 31, 2011, there were 12 and 10 investment securities in unrealized loss positions, respectively.  For each security in an unrealized loss position, the Company assesses whether it intends to sell the security, or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. For debt securities that are considered other-than-temporarily impaired and that the Company does not intend to sell and will not be required to sell prior to recovery of its amortized cost basis, the Company will separate the amount of the impairment into the amount that is credit related (credit loss component) and the amount due to all other factors. The credit loss component is recognized in earnings and is calculated as the difference between the security’s amortized cost basis and the present value of its expected future cash flows. The remaining difference between the security’s fair value and the present value of future expected cash flows is deemed to be due to factors that are not credit related and is recognized in other comprehensive income.

The Company does not intend to sell the securities that are temporarily impaired, and it is more likely than not that the Company will not have to sell those securities before recovery of the cost basis. Additionally, the Company has evaluated the credit ratings of its investment securities and their issuers and/or insurers, as applicable. Based on the Company’s evaluation, management has determined that no investment security in the Company’s investment portfolio was other-than-temporarily impaired at September 30, 2012 or December 31, 2011.

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WASHINGTON BANKING COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(3)  Investment Securities (continued)

The amortized cost and fair value of investment securities, by maturity, are shown in the table below.  The amortized cost and fair value of residential pass-through securities, agency-issued collateralized mortgage obligations and asset-backed securities are presented by expected average life, rather than contractual maturity.  Expected maturities may differ from contractual maturities because issuers of the securities may have the right to call or prepay obligations with or without call or prepayment penalties.

(dollars in thousands)	September 30, 2012
	Amortized cost		Fair value
Three months or less	$	13,548	$	13,574
Over three months to one year		12,135		12,185
After one year through three years		204,262		209,384
After three years through five years		56,508		57,221
After five years through ten years		26,662		27,614
After ten years		32,112		33,903
Total	$	345,227	$	353,881

The following table presents investment securities which were pledged to secure borrowings and public deposits as permitted or required by law:

(dollars in thousands)	September 30, 2012
	Amortized cost		Fair value
To state and local governments to secure public deposits	$	68,705	$	71,260
To Federal Reserve Bank to secure borrowings		17,201		17,877
To Federal Home Loan Bank to secure borrowings		572		600
Other securities pledged, principally to secure deposits		15,872		16,573
Total pledged investment securities	$	102,350	$	106,310

The following table presents the gross realized gains and gross realized losses on the sale of investment securities available for sale for the three and nine months ended September 30, 2012 and 2011:

(dollars in thousands)	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2012		2011		2012			2011
Gross realized gains		345		-		689			-
Gross realized losses		-		-		(2	)		-
Gain on sale of investment securities, net	$	345	$	-	$	687		$	-

-12-

WASHINGTON BANKING COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(4)  Non-Covered Loans

The following table presents the major types of non-covered loans at September 30, 2012 and December 31, 2011.  The classification of non-covered loan balances presented is reported in accordance with regulatory reporting requirements.

(dollars in thousands)	September 30, 2012			December 31, 2011
Commercial	$	155,208		$	150,386
Real estate mortgage		432,140			411,113
Real estate construction		77,996			90,356
Consumer		157,407			159,122
		822,751			810,977
Deferred loan costs, net		1,859			1,853
Allowance for loan losses		(16,570	)		(18,032	)
Total non-covered loans, net	$	808,040		$	794,798

(5)  Allowance for Non-Covered Loan Losses and Credit Quality

Activity in the Allowance for Non-Covered Loan Losses

The following table summarizes activity related to the allowance for loan losses on non-covered loans, by portfolio segment, for the three and nine months ended September 30, 2012 and 2011:

(dollars in thousands)	Three Months Ended September 30, 2012
	Commercial			Real estate mortgage			Real estate construction			Consumer			Total
Beginning balance	$	4,471		$	5,844		$	3,983		$	3,267		$	17,565
Provision		63			901			142			144			1,250
Charge-offs		(258	)		(655	)		(1,308	)		(278	)		(2,499	)
Recoveries		81			68			7			98			254
Ending Balance	$	4,357		$	6,158		$	2,824		$	3,231		$	16,570

(dollars in thousands)	Three Months Ended September 30, 2011
	Commercial			Real estate mortgage			Real estate construction			Consumer			Total
Beginning balance	$	4,638		$	5,921		$	5,788		$	3,060		$	19,407
Provision		(318	)		785			1,211			822			2,500
Charge-offs		(163	)		(732	)		(2,216	)		(467	)		(3,578	)
Recoveries		58			424			1			124			607
Ending Balance	$	4,215		$	6,398		$	4,784		$	3,539		$	18,936

-13-

WASHINGTON BANKING COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(5)  Allowance for Non-Covered Loan Losses and Credit Quality (continued)

(dollars in thousands)	Nine Months Ended September 30, 2012
	Commercial			Real estate mortgage			Real estate construction			Consumer			Total
Beginning balance	$	4,034		$	6,500		$	4,046		$	3,452		$	18,032
Provision		1,443			2,766			809			582			5,600
Charge-offs		(1,234	)		(3,220	)		(2,041	)		(1,192	)		(7,687	)
Recoveries		114			112			10			389			625
Ending Balance	$	4,357		$	6,158		$	2,824		$	3,231		$	16,570

(dollars in thousands)	Nine Months Ended September 30, 2011
	Commercial			Real estate mortgage			Real estate construction			Consumer			Total
Beginning balance	$	3,915		$	6,507		$	4,947		$	3,443		$	18,812
Provision		1,374			1,692			3,904			1,530			8,500
Charge-offs		(1,320	)		(2,351	)		(4,070	)		(2,004	)		(9,745	)
Recoveries		246			550			3			570			1,369
Ending Balance	$	4,215		$	6,398		$	4,784		$	3,539		$	18,936

-14-

WASHINGTON BANKING COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(5)  Allowance for Non-Covered Loan Losses and Credit Quality (continued)

The following table provides a summary of the allowance for non-covered loan losses and related non-covered loans, by portfolio segment, at September 30, 2012 and December 31, 2011:

(dollars in thousands)	September 30, 2012
	Commercial		Real estate mortgage		Real estate construction		Consumer		Total
Allowance for non-covered loan losses:
Individually evaluated for impairment	$	1,465	$	943	$	1,053	$	54	$	3,515
Collectively evaluated for impairment		2,892		5,215		1,771		3,177		13,055
Total allowance for non-covered loan losses	$	4,357	$	6,158	$	2,824	$	3,231	$	16,570
Non-covered loans:
Individually evaluated for impairment	$	9,904	$	13,382	$	21,224	$	975	$	45,485
Collectively evaluated for impairment		145,304		418,758		56,772		156,432		777,266
Total non-covered loans (1)	$	155,208	$	432,140	$	77,996	$	157,407	$	822,751
(1) Total non-covered loans excludes deferred loan costs of $1.9 million.

(dollars in thousands)	December 31, 2011
	Commercial		Real estate mortgage		Real estate construction		Consumer		Total
Allowance for non-covered loan losses:
Individually evaluated for impairment	$	588	$	1,212	$	1,869	$	79	$	3,748
Collectively evaluated for impairment		3,446		5,288		2,177		3,373		14,284
Total allowance for non-covered loan losses	$	4,034	$	6,500	$	4,046	$	3,452	$	18,032
Non-covered loans:
Individually evaluated for impairment	$	6,525	$	14,032	$	27,483	$	553	$	48,593
Collectively evaluated for impairment		143,861		397,081		62,873		158,569		762,384
Total non-covered loans (1)	$	150,386	$	411,113	$	90,356	$	159,122	$	810,977
(1) Total non-covered loans excludes deferred loan costs of $1.9 million.

Credit Quality and Nonperforming Non-Covered Loans

The Company manages credit quality and controls its credit risk through lending limits, credit review, approval policies and extensive, ongoing internal monitoring. Through this monitoring process, nonperforming loans are identified. Non-covered nonperforming loans consist of non-covered nonaccrual loans.  Non-covered nonperforming loans are assessed for potential loss exposure on an individual or homogeneous group basis.

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.

-15-

WASHINGTON BANKING COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(5)  Allowance for Non-Covered Loan Losses and Credit Quality (continued)

Loans are placed on nonaccrual status when collection of principal or interest is considered doubtful (generally when loans are 90 days or more past due).   Loans placed on nonaccrual will typically remain on nonaccrual status until all principal and interest payments are brought current and the prospects for future payments, in accordance with the loan agreement, appear relatively certain.

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 collectability of an impaired or nonaccrual loan, interest income may be recognized on a cash basis. Nonaccrual loans are returned to an accrual status when 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.

Non-Covered Impaired Loans

At September 30, 2012 and December 31, 2011, the Company had non-covered impaired loans which consisted of nonaccrual loans and restructured loans.  As of September 30, 2012, the Company had no commitments to extend additional credit on these non-covered impaired loans.  Non-covered impaired loans and the related allowance for loan losses at September 30, 2012 and December 31, 2011 were as follows:

(dollars in thousands)	September 30, 2012				December 31, 2011
	Recorded investment		Allowance		Recorded investment		Allowance
With no related allowance recorded
Nonaccrual loans	$	13,272	$	-	$	18,744	$	-
Restructured loans		9,870		-		11,208		-
Total with no related allowance	$	23,142	$	-	$	29,952	$	-
With an allowance recorded
Nonaccrual loans	$	4,370	$	184	$	3,356	$	262
Restructured loans		17,973		3,331		15,285		3,486
Total with an allowance recorded		22,343		3,515		18,641		3,748
Total	$	45,485	$	3,515	$	48,593	$	3,748

-16-

WASHINGTON BANKING COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(5)  Allowance for Non-Covered Loan Losses and Credit Quality (continued)

The following table further summarizes impaired non-covered loans, by class, at September 30, 2012 and December 31, 2011:

(dollars in thousands)	September 30, 2012						December 31, 2011
	Recorded investment		Unpaid principal balance		Related allowance		Recorded investment		Unpaid principal balance		Related allowance
With no related allowance recorded
Commercial	$	2,973	$	3,251	$	-	$	3,801	$	5,692	$	-
Real estate mortgages:
One-to-four family residential		1,234		1,346		-		1,557		3,217		-
Multi-family and commercial		5,285		6,430		-		7,062		8,791		-
Total real estate mortgages		6,519		7,776		-		8,619		12,008		-
Real estate construction:
One-to-four family residential		13,009		16,828		-		16,932		21,803		-
Multi-family and commercial		-		-		-		387		387		-
Total real estate construction		13,009		16,828		-		17,319		22,190		-
Consumer:
Direct		641		815		-		213		900		-
Total consumer		641		815		-		213		900		-
Total with no related allowance recorded	$	23,142	$	28,670	$	-	$	29,952	$	40,790	$	-
With an allowance recorded
Commercial	$	6,931	$	7,117	$	1,465	$	2,724	$	3,128	$	588
Real estate mortgages:
One-to-four family residential		526		526		52		174		190		13
Multi-family and commercial		6,337		6,337		891		5,238		5,238		1,199
Total real estate mortgages		6,863		6,863		943		5,412		5,428		1,212
Real estate construction:
One-to-four family residential		7,950		11,260		1,026		10,164		10,845		1,869
Multi-family and commercial		265		265		27		-		-		-
Total real estate construction		8,215		11,525		1,053		10,164		10,845		1,869
Consumer:
Direct		334		334		54		341		341		79
Total consumer		334		334		54		341		341		79
Total with an allowance recorded		22,343		25,839		3,515		18,641		19,742		3,748
Total impaired non-covered loans	$	45,485	$	54,509	$	3,515	$	48,593	$	60,532	$	3,748

The average recorded investment in non-covered impaired loans was $47.2 million and $47.0 million for the three and nine months ended September 30, 2012, respectively, compared to $52.4 million and $49.9 million for the same periods a year ago.  For the three and nine months ended September 30, 2012, the Company recognized interest income on non-covered impaired loans of $202 thousand and $406 thousand, respectively.  Additional interest income of $282 thousand and $514 thousand would have been recognized had the non-covered impaired loans accrued interest, in accordance with their original terms, for the three and nine months ended September 30, 2012.

-17-

WASHINGTON BANKING COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(5)  Allowance for Non-Covered Loan Losses and Credit Quality (continued)

Troubled Debt Restructurings

A troubled debt restructured loan is classified as a restructuring when the Company grants a concession(s) to a borrower experiencing financial difficulties that it would not otherwise consider. Examples of such concessions include forgiveness of principal or accrued interest, extending the maturity date(s) or providing a lower interest rate than would be normally available for a transaction of similar risk. As a result of these concessions, restructured loans are considered impaired as the Company will not collect all amounts due, both principal and interest, in accordance with the terms of the original loan agreement.

Troubled debt restructurings at September 30, 2012 and December 31, 2011 were as follows:

(dollars in thousands)	September 30, 2012						December 31, 2011
	Accrual status		Nonaccrual status		Total modifications		Accrual status		Nonaccrual status		Total modifications
Troubled debt restructurings:
Commercial	$	7,986	$	993	$	8,979	$	3,341	$	-	$	3,341
Real estate mortgages:
One-to-four family residential		575		-		575		-		933		933
Multi-family and commercial		8,045		2,008		10,053		9,420		937		10,357
Total real estate mortgage		8,620		2,008		10,628		9,420		1,870		11,290
Real estate construction:
One-to-four family residential		10,638		10,121		20,759		13,391		13,283		26,674
Multi-family and commercial		264		-		264		-		387		387
Total real estate construction		10,902		10,121		21,023		13,391		13,670		27,061
Consumer:
Direct		335		22		357		341		-		341
Total consumer		335		22		357		341		-		341
Total restructured loans	$	27,843	$	13,144	$	40,987	$	26,493	$	15,540	$	42,033

The Company’s policy is that loans placed on nonaccrual will typically remain on nonaccrual status until all principal and interest payments are brought current and the prospect for future payment in accordance with the loan agreement appear relatively certain.  The Company’s policy generally refers to nine months of payment performance as sufficient to warrant a return to accrual status.

-18-

WASHINGTON BANKING COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(5)  Allowance for Non-Covered Loan Losses and Credit Quality (continued)

Troubled Debt Restructurings Modification Terms

The Company offers a variety of modifications to borrowers. In restructuring a loan with a borrower, the Company normally employs several types of modifications terms. The modification terms offered by the Company are as follows:

Rate Modification: A modification in which the interest rate is changed.

Term Modification: A modification in which the maturity date, the timing of payments, or frequency of payments is changed.

Interest Only Modification: A modification in which the loan is converted to interest only payments for a period of time.

Payment Modification: A modification in which the dollar amount of the payment is changed, other than an interest only modification described above.

Combination Modification: Any other type of modification, including the use of multiple terms above.

-19-

WASHINGTON BANKING COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(5)  Allowance for Non-Covered Loan Losses and Credit Quality (continued)

The following tables present loans restructured during the three and nine months ended September 30, 2012 and 2011. During the periods presented, all modification terms were a combination of terms employed by the Company.

(dollars in thousands)	For the Three Months Ended September 30, 2012
	Number of contracts		Pre-modification recorded investment		Post-modification recorded investment
Troubled debt restructurings:
Commercial		1	$	181	$	181
Real estate mortgages:
One-to-four family residential		1		49		49
Total real estate mortgage		1		49		49
Real estate construction:
One-to-four family residential		1		441		441
Total real estate construction		1		441		441
Total restructured loans		3	$	671	$	671

(dollars in thousands)	For the Three Months Ended September 30, 2011
	Number of contracts		Pre-modification recorded investment		Post-modification recorded investment
Troubled debt restructurings:
Commercial		1	$	628	$	628
Real estate mortgages:
Multi-family and commercial		3		1,687		1,667
Total real estate mortgage		3		1,687		1,667
Real estate construction:
One-to-four family residential		5		3,712		3,591
Total real estate construction		5		3,712		3,591
Consumer:
Direct		1		342		342
Total consumer		1		342		342
Total restructured loans		10	$	6,369	$	6,228

-20-

WASHINGTON BANKING COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(5)  Allowance for Non-Covered Loan Losses and Credit Quality (continued)

(dollars in thousands)	For the Nine Months Ended September 30, 2012
	Number of contracts		Pre-modification recorded investment		Post-modification recorded investment
Troubled debt restructurings:
Commercial		13	$	5,042	$	4,884
Real estate mortgages:
One-to-four family residential		2		221		221
Multi-family and commercial		1		374		374
Total real estate mortgage		3		595		595
Real estate construction:
One-to-four family residential		2		1,070		947
Multi-family and commercial		1		265		265
Total real estate construction		3		1,335		1,212
Total restructured loans		19	$	6,972	$	6,691

(dollars in thousands)	For the Nine Months Ended September 30, 2011
	Number of contracts		Pre-modification recorded investment		Post-modification recorded investment
Troubled debt restructurings:
Commercial		5	$	2,804	$	2,804
Real estate mortgages:
Multi-family and commercial		10		6,110		6,083
Total real estate mortgage		10		6,110		6,083
Real estate construction:
One-to-four family residential		8		7,116		6,995
Total real estate construction		8		7,116		6,995
Consumer:
Direct		1		342		342
Total consumer		1		342		342
Total restructured loans		24	$	16,372	$	16,224

For the three and nine months ended September 30, 2012, there was a $37 thousand commercial loan that had been restructured within the previous 12 months that subsequently defaulted.  For the same periods a year ago, there was a $163 thousand real estate mortgage multi-family and commercial loan that had been restructured within the previous 12 months that subsequently defaulted.

-21-

WASHINGTON BANKING COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(5)  Allowance for Non-Covered Loan Losses and Credit Quality (continued)

Non-Covered Nonaccrual Loans and Loans Past Due

The following table summarizes non-covered nonaccrual loans and past due loans, by class, as of September 30, 2012 and December 31, 2011:

(dollars in thousands)	September 30, 2012
	30 - 59 Days past due		60 - 89 Days past due		Greater than 90 days and accruing		Total past due		Nonaccrual		Current		Total non-covered loans
Commercial	$	683	$	61	$	-	$	744	$	1,918	$	152,546	$	155,208
Real estate mortgages:
One-to-four family residential		54		-		-		54		1,185		36,023		37,262
Multi-family and commercial		415		-		-		415		3,577		390,886		394,878
Total real estate mortgages		469		-		-		469		4,762		426,909		432,140
Real estate construction:
One-to-four family residential		-		-		-		-		10,321		34,571		44,892
Multi-family and commercial		-		-		-		-		-		33,104		33,104
Total real estate construction		-		-		-		-		10,321		67,675		77,996
Consumer:
Indirect		1,124		128		-		1,252		-		78,396		79,648
Direct		641		65		-		706		641		76,412		77,759
Total consumer		1,765		193		-		1,958		641		154,808		157,407
Total	$	2,917	$	254	$	-	$	3,171	$	17,642	$	801,938		822,751
Deferred loan costs, net														1,859
Total non-covered loans													$	824,610

(dollars in thousands)	December 31, 2011
	30 - 59 Days past due		60 - 89 Days past due		Greater than 90 days and accruing		Total past due		Nonaccrual		Current		Total non-covered loans
Commercial	$	1,482	$	4	$	-	$	1,486	$	3,183	$	145,717	$	150,386
Real estate mortgages:
One-to-four family residential		53		154		-		207		1,732		38,392		40,331
Multi-family and commercial		1,687		484		-		2,171		2,881		365,730		370,782
Total real estate mortgages		1,740		638		-		2,378		4,613		404,122		411,113
Real estate construction:
One-to-four family residential		27		-		-		27		13,705		45,078		58,810
Multi-family and commercial		100		-		-		100		387		31,059		31,546
Total real estate construction		127		-		-		127		14,092		76,137		90,356
Consumer:
Indirect		1,288		198		-		1,486		-		78,910		80,396
Direct		1,023		294		-		1,317		212		77,197		78,726
Total consumer		2,311		492		-		2,803		212		156,107		159,122
Total	$	5,660	$	1,134	$	-	$	6,794	$	22,100	$	782,083		810,977
Deferred loan costs, net														1,853
Total non-covered loans													$	812,830

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WASHINGTON BANKING COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(5)  Allowance for Non-Covered Loan Losses and Credit Quality (continued)

Non-Covered Credit Quality Indicators

The Company’s internal risk rating methodology assigns risk ratings from 1 to 9, where a higher rating represents higher risk.  The nine risk ratings can be generally described by the following groups:

Pass/Watch: Pass/watch loans, risk rated 1 through 5, range from minimal credit risk to lower than average, but still acceptable, credit risk.

Special Mention:  Special mention loans, risk rated 6,are loans that present certain potential weaknesses that require management’s attention.  Those weaknesses, if left uncorrected, may result in deterioration of the borrower’s repayment ability or the Company’s credit position in the future.

Substandard:  Substandard loans, risk rated 7, are inadequately protected by the current worth and paying capacity of the borrower or of the collateral pledged, if any.  There are well-defined weaknesses that may jeopardize the repayment of debt.  Such weaknesses include deteriorated financial condition of the borrower resulting from insufficient income, excessive expenses or other factors that result in inadequate cash flows to meet all scheduled obligations.

Doubtful/Loss:  Doubtful/loss loans are risk rated 8 and 9.  Loans assigned as doubtful have all the weaknesses inherent with substandard loans, with the added characteristic that the weaknesses make collection in full, on the basis of currently existing facts, conditions and values, highly questionable.  The possibility of loss is high, but because of certain important and reasonably specific pending factors that may work to the advantage of, and strengthen the credit, its classification as an estimated loss is deferred until a more exact status may be determined.  The Company charges off loans that would otherwise be classified loss.

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WASHINGTON BANKING COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(5)  Allowance for Non-Covered Loan Losses and Credit Quality (continued)

The following table summarizes our internal risk rating, by class, as of September 30, 2012 and December 31, 2011:

(dollars in thousands)	September 30, 2012
	Pass/Watch		Special mention		Substandard		Doubtful/Loss		Total
Commercial	$	131,097	$	6,123	$	17,988	$	-	$	155,208
Real estate mortgages:
One-to-four family residential		31,600		1,150		4,512		-		37,262
Multi-family and commercial		339,858		30,652		24,368		-		394,878
Total real estate mortgages		371,458		31,802		28,880		-		432,140
Real estate construction:
One-to-four family residential		22,248		783		21,861		-		44,892
Multi-family and commercial		29,066		1,738		2,300		-		33,104
Total real estate construction		51,314		2,521		24,161		-		77,996
Consumer:
Indirect		77,962		19		1,667		-		79,648
Direct		71,704		532		5,523		-		77,759
Total consumer		149,666		551		7,190		-		157,407
Total	$	703,535	$	40,997	$	78,219	$	-		822,751
Deferred loan costs, net										1,859
									$	824,610

(dollars in thousands)	December 31, 2011
	Pass/Watch		Special mention		Substandard		Doubtful/Loss		Total
Commercial	$	122,189	$	7,791	$	20,406	$	-	$	150,386
Real estate mortgages:
One-to-four family residential		33,609		1,462		5,260		-		40,331
Multi-family and commercial		307,402		26,220		37,160		-		370,782
Total real estate mortgages		341,011		27,682		42,420		-		411,113
Real estate construction:
One-to-four family residential		26,110		2,313		30,387		-		58,810
Multi-family and commercial		24,402		4,416		2,728		-		31,546
Total real estate construction		50,512		6,729		33,115		-		90,356
Consumer:
Indirect		78,531		15		1,850		-		80,396
Direct		72,602		844		5,280		-		78,726
Total consumer		151,133		859		7,130		-		159,122
Total	$	664,845	$	43,061	$	103,071	$	-		810,977
Deferred loan costs, net										1,853
									$	812,830

-24-

WASHINGTON BANKING COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(6)  Covered Assets and FDIC Indemnification Asset

(a) Covered Loans: Loans acquired in an FDIC-assisted acquisition that are subject to a loss share agreement are referred to as “covered loans” and reported separately in the Condensed Consolidated Statements of Financial Condition.  Covered loans are reported exclusive of the expected cash flow reimbursements from the FDIC.

The following table presents the major types of covered loans at September 30, 2012 and December 31, 2011. The classification of covered loan balances presented is reported in accordance with the regulatory reporting requirements.

(dollars in thousands)	September 30, 2012
	City Bank			North County Bank			Total
Commercial	$	16,358		$	17,626		$	33,984
Real estate mortgages:
One-to-four family residential		3,836			10,976			14,812
Multi-family residential and commercial		143,943			53,756			197,699
Total real estate mortgages		147,779			64,732			212,511
Real estate construction:
One-to-four family residential		5,960			3,185			9,145
Multi-family and commercial		14,205			7,369			21,574
Total real estate construction		20,165			10,554			30,719
Consumer - direct		2,785			7,802			10,587
Subtotal		187,087			100,714			287,801
Fair value discount		(33,785	)		(21,492	)		(55,277	)
Total covered loans		153,302			79,222			232,524
Allowance for loan losses		(792	)		(215	)		(1,007	)
Total covered loans, net	$	152,510		$	79,007		$	231,517

(dollars in thousands)	December 31, 2011
	City Bank			North County Bank			Total
Commercial	$	17,380		$	26,208		$	43,588
Real estate mortgages:
One-to-four family residential		4,673			11,080			15,753
Multi-family residential and commercial		163,028			67,282			230,310
Total real estate mortgages		167,701			78,362			246,063
Real estate construction:
One-to-four family residential		6,102			5,773			11,875
Multi-family and commercial		21,479			12,991			34,470
Total real estate construction		27,581			18,764			46,345
Consumer - direct		3,562			11,206			14,768
Subtotal		216,224			134,540			350,764
Fair value discount		(46,099	)		(35,584	)		(81,683	)
Total covered loans		170,125			98,956			269,081
Allowance for loan losses		(655	)		(215	)		(870	)
Total covered loans, net	$	169,470		$	98,741		$	268,211

-25-

WASHINGTON BANKING COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(6)  Covered Assets and FDIC Indemnification Asset (continued)

In estimating the fair value of the covered loans at the acquisition date, we (a) calculated the contractual amount and timing of undiscounted principal and interest payments and (b) estimated the amount and timing of undiscounted expected principal and interest payments. The difference between these two amounts represents the nonaccretable difference.

On the acquisition date, the amount by which the undiscounted expected cash flows exceed the estimated fair value of the acquired loans is the “accretable yield.”  The accretable yield is then measured at each financial reporting date and represents the difference between the remaining undiscounted expected cash flows and the current carrying value of the loans.

The following table presents the changes in the accretable yield for the three and nine months ended September 30, 2012 and 2011, for each respective acquired loan portfolio:

(dollars in thousands)	Three Months Ended September 30,
	2012						2011
	City Bank			North County Bank			City Bank			North County Bank
Balance, beginning of period	$	63,623		$	26,845		$	71,089		$	23,275
Accretion to interest income		(5,247	)		(3,694	)		(6,468	)		(2,109	)
Disposals		(1,718	)		(2,796	)		(3,725	)		-
Reclassification (to) from nonaccretable difference		-			4			-			-
Balance, end of period	$	56,658		$	20,359		$	60,896		$	21,166

(dollars in thousands)	Nine Months Ended September 30,
	2012						2011
	City Bank			North County Bank			City Bank			North County Bank
Balance, beginning of period	$	78,004		$	29,574		$	56,079		$	27,880
Accretion to interest income		(16,552	)		(11,443	)		(18,493	)		(6,714	)
Disposals		(4,441	)		(5,517	)		(13,416	)		-
Reclassification (to) from nonaccretable difference		(353	)		7,745			36,726			-
Balance, end of period	$	56,658		$	20,359		$	60,896		$	21,166

-26-

WASHINGTON BANKING COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(6)  Covered Assets and FDIC Indemnification Asset (continued)

(b) Covered Other Real Estate Owned: All OREO acquired in FDIC-assisted acquisitions that are subject to an FDIC loss share agreement are referred to as “covered OREO” and reported separately in the Condensed Consolidated Statements of Financial Condition.  Covered OREO is reported exclusive of expected reimbursement cash flows from the FDIC. Foreclosed covered loan collateral is transferred into covered OREO at the lower of the loan’s appraised value, less selling costs, or the carrying value.

The following tables summarize the activity related to covered OREO for the three and nine months ended September 30, 2012 and 2011:

(dollars in thousands)	Three Months Ended September 30, 2012
	City Bank			North County Bank			Total
Balance, beginning of period	$	13,580		$	9,420		$	23,000
Additions to covered OREO		561			744			1,305
Dispositions of covered OREO, net		(4,579	)		(812	)		(5,391	)
Valuation adjustments		-			(103	)		(103	)
Balance, end of period	$	9,562		$	9,249		$	18,811

(dollars in thousands)	Three Months Ended September 30, 2011
	City Bank			North County Bank			Total
Balance, beginning of period	$	21,290		$	11,400		$	32,690
Additions to covered OREO		4,972			(36	)		4,936
Dispositions of covered OREO, net		(9,527	)		(2,326	)		(11,853	)
Balance, end of period	$	16,735		$	9,038		$	25,773

(dollars in thousands)	Nine Months Ended September 30, 2012
	City Bank			North County Bank			Total
Balance, beginning of period	$	19,341		$	7,281		$	26,622
Additions to covered OREO		1,517			6,961			8,478
Dispositions of covered OREO, net		(9,338	)		(4,049	)		(13,387	)
Valuation adjustments		(1,958	)		(944	)		(2,902	)
Balance, end of period	$	9,562		$	9,249		$	18,811

(dollars in thousands)	Nine Months Ended September 30, 2011
	City Bank			North County Bank			Total
Balance, beginning of period	$	17,906		$	11,860		$	29,766
Additions to covered OREO		16,899			2,659			19,558
Capitalized improvements		-			746			746
Dispositions of covered OREO, net		(18,070	)		(6,227	)		(24,297	)
Balance, end of period	$	16,735		$	9,038		$	25,773

-27-

WASHINGTON BANKING COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(6)  Covered Assets and FDIC Indemnification Asset (continued)

(c) FDIC Indemnification Asset:The following table summarizes the activity related to the FDIC indemnification asset for the three and nine months ended September 30, 2012 and 2011:

(dollars in thousands)	Three Months Ended September 30, 2012
	City Bank			North County Bank			Total
Balance, beginning of period	$	37,587		$	17,280		$	54,867
Change in FDIC indemnification asset		(2,510	)		(252	)		(2,762	)
Reduction due to loans paid in full		(415	)		(130	)		(545	)
Transfers to (due from) FDIC		(5,154	)		(1,693	)		(6,847	)
Balance, end of period	$	29,508		$	15,205		$	44,713

(dollars in thousands)	Three Months Ended September 30, 2011
	City Bank			North County Bank			Total
Balance, beginning of period	$	56,643		$	33,263		$	89,906
Change in FDIC indemnification asset		(2,586	)		-			(2,586	)
Reduction due to loans paid in full		(1,639	)		-			(1,639	)
Transfers to (due from) FDIC		(2,532	)		(4,851	)		(7,383	)
Balance, end of period	$	49,886		$	28,412		$	78,298

(dollars in thousands)	Nine Months Ended September 30, 2012
	City Bank			North County Bank			Total
Balance, beginning of period	$	43,235		$	22,351		$	65,586
Change in FDIC indemnification asset		(8,273	)		(625	)		(8,898	)
Reduction due to loans paid in full		(1,739	)		(2,430	)		(4,169	)
Transfers to (due from) FDIC		(3,715	)		(4,091	)		(7,806	)
Balance, end of period	$	29,508		$	15,205		$	44,713

(dollars in thousands)	Nine Months Ended September 30, 2011
	City Bank			North County Bank			Total
Balance, beginning of period	$	66,560		$	39,507		$	106,067
Change in FDIC indemnification asset		(6,188	)		558			(5,630	)
Reduction due to loans paid in full		(7,566	)		-			(7,566	)
Transfers to (due from) FDIC		(2,920	)		(11,653	)		(14,573	)
Balance, end of period	$	49,886		$	28,412		$	78,298

-28-

WASHINGTON BANKING COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(7)  Non-Covered Other Real Estate Owned

The following table presents the changes in non-covered other real estate owned for the three and nine months ended September 30, 2012 and 2011:

(dollars in thousands)	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2012			2011			2012			2011
Balance, beginning of period	$	4,414		$	2,671		$	1,976		$	4,122
Additions to OREO		554			1,619			4,296			3,118
Dispositions of OREO, net		(759	)		(1,820	)		(1,514	)		(4,717	)
Valuation adjustments		(129	)		-			(678	)		(53	)
Balance, end of period	$	4,080		$	2,470		$	4,080		$	2,470

(8)  Earnings per Common Share

Basic earnings per share is computed by dividing net income available to common shareholders by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed in the same manner as basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if certain shares issuable upon exercise of options and non-vested restricted stock were included.

The following table reconciles the numerators and denominators of the basic and diluted earnings per common share computations:

(dollars in thousands)	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2012		2011		2012		2011
Income available to common shareholders	$	4,638	$	3,625	$	12,258	$	10,629
Weighted average number of common shares, basic		15,413,000		15,343,000		15,418,000		15,339,000
Effect of dilutive stock awards and CPP warrants		33,000		48,000		35,000		82,000
Weighted average number of common shares, diluted		15,446,000		15,391,000		15,453,000		15,421,000
Earnings per common share
Basic	$	0.30	$	0.24	$	0.80	$	0.69
Diluted	$	0.30	$	0.24	$	0.79	$	0.69
Antidulitive stock awards excluded from the
computation of diluted earnings per common share		44,000		102,000		46,000		72,000

-29-

WASHINGTON BANKING COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(9)  Stock-Based Compensation

(a) Stock Options:  The Company measures the fair value of each stock option grant at the date of the grant, using the Black-Scholes option pricing model.  There were no options granted during the three and nine months ended September 30, 2012 and 2011.

The Company recognizes compensation expense for stock option grants on a straight-line basis over the requisite service period of the grant.  No stock-based compensation expense was recognized for the three months ended September 30, 2012.   The Company recognized $8 thousand in stock-based compensation expense, as a component of salaries and benefits, for the nine months ended September 30, 2012.  For the three and nine months ended September 30, 2011, the Company recognized $7 thousand and $80 thousand in stock-based compensation expense, as a component of salaries and benefits.  As of September 30, 2012, there was no remaining unrecognized compensation costs related to nonvested stock option grants.

The following table summarizes information on stock option activity during 2012:

	Shares			Weighted average exercise price per share		Weighted average remaining contractual terms (in years)		Total intrinsic value (in thousands)
Outstanding, January 1, 2012		155,224		$	10.71
Granted		-			-
Exercised		(26,682	)		7.69			$	150
Forfeited, expired or cancelled		(4,975	)		15.54
Outstanding, September 30, 2012		123,567			11.17		4.72	$	431
Exercisable at September 30, 2012		123,567		$	11.17		4.72	$	431

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (i.e., the difference between the Company’s closing stock price on September 30, 2012, and the exercise price, times the number of shares) that would have been received by the option holders had all the option holders exercised their options on September 30, 2012.  This amount changes based upon the fair market value of the Company’s stock.

(b) Restricted Stock Awards: The Company grants restricted stock awards (“RSA”) periodically for the benefit of employees and directors.  Recipients of RSAs do not pay any cash consideration to the Company for the shares and receive all dividends with respect to such shares, whether or not the shares have vested.  Restrictions are based on continuous service requirements with the Company.   At September 30, 2012 and December 31, 2011, there were no RSAs outstanding.

For the three and nine months ended September 30, 2012, the Company did not recognize any RSA compensation expense, as a component of salaries and benefits, compared to $1 thousand and $8 thousand for the three and nine months ended September 30, 2011, respectively.  As of September 30, 2012, there was no remaining unrecognized compensation costs related to nonvested RSAs.

-30-

WASHINGTON BANKING COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(9)  Stock-Based Compensation (continued)

(c) Restricted Stock Units: The Company grants restricted stock units (“RSU”) periodically for the benefit of employees and directors. Recipients of RSUs receive shares of the Company’s stock upon the lapse of their related restrictions and do not pay any cash consideration to the Company for the shares.  Restrictions are based on continuous service.

The following table summarizes information on RSU activity during 2012:

	Shares			Weighted average fair value per share		Weighted average remaining contractual terms (in years)
Outstanding, January 1, 2012		71,744		$	12.80
Granted		79,456			13.31
Vested		(27,954	)		12.77
Forfeited, expired or cancelled		(3,548	)		13.17
Outstanding, September 30, 2012		119,698		$	13.13	2.49

For the three and nine months ended September 30, 2012, the Company recognized $252 thousand and $583 thousand in RSU compensation expense, as a component of salaries and benefits, compared to $115 thousand and $365 thousand for the same periods a year ago, respectively.  As of September 30 2012, there was $1.2 million of total unrecognized compensation costs related to nonvested RSUs.

(10)  Shareholders’ Equity

On January 16, 2009, in exchange for an aggregate purchase price of $26.4 million, the Company issued and sold to the United States Department of the Treasury pursuant to the Troubled Asset Relief Program Capital Purchase Program the following: (i) 26,380 shares of the Company’s newly designated Fixed Rate Cumulative Perpetual Preferred Stock, Series A, no par value per share, and liquidation preference $1,000 per share ($26.4 million liquidation preference in the aggregate) and (ii) a warrant to purchase up to 492,164 shares of the Company’s common stock, no par value per share, at an exercise price of $8.04 per share, subject to certain anti-dilution and other adjustments.

In connection with the issuance and sale of the Company’s securities, the Company entered into a Letter Agreement including the Securities Purchase Agreement - Standard Terms, dated January 16, 2009, with the United States Department of the Treasury (the “Agreement”). The Agreement contained limitations on the payment of quarterly cash dividends on the Company’s common stock in excess of $0.065 per share and on the Company’s ability to repurchase its common stock.

The Series A Preferred Stock paid cumulative dividends at a rate of 5% per annum, applied to the $1,000 per share liquidation preference, as and if declared by the Company’s Board of Directors out of funds legally available. The Series A Preferred Stock had no maturity date and ranked senior to common stock with respect to the payment of dividends and distributions and amounts payable upon liquidation, dissolution and winding up of the Company.

On January 12, 2011, the Company redeemed all 26,380 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A.  The Company paid a total of $26.6 million to the Treasury, consisting of $26.4 million in principal and $209 thousand in accrued and unpaid dividends. The Company's redemption of the shares was not subject to additional conditions.

-31-

WASHINGTON BANKING COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(10)  Shareholders’ Equity (continued)

On March 2, 2011, the Company completed the repurchase of Warrant to Purchase Common Stock issued to the U.S. Department of the Treasury pursuant to the Troubled Asset Relief Program Capital Purchase Program. The Company repurchased the Warrant for $1.6 million. The Warrant repurchase, together with the Company’s earlier redemption of the entire amount of Fixed Rate Cumulative Perpetual Preferred Stock, Series A, issued to the U.S. Treasury, represents full repayment of all TARP obligations and cancellation of all equity interests in the Company held by the U.S. Treasury.

(11)  Fair Value Measurements

(a) Fair Value Hierarchy and Fair Value Measurement: The Company groups its assets and liabilities that are recorded at fair value in three levels, based on the markets, if any, in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:

Level 1:  Quoted prices for identical instruments in active markets.

Level 2:  Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.

Level 3:   Significant inputs to the valuation model are unobservable.

The following table presents the Company’s financial instruments measured at fair value on a recurring basis at September 30, 2012 and December 31, 2011:

(dollars in thousands)	Fair value at September 30, 2012
	Level 1		Level 2		Level 3		Total
U.S. government agencies	$	-	$	75,505	$	-	$	75,505
U.S. Treasuries		-		10,013		-		10,013
Pass-through securities		-		174,117		-		174,117
Taxable state and political subdivisions		-		6,557		-		6,557
Tax exempt state and political subdivisions		-		55,510		-		55,510
Corporate obligations		-		10,485		-		10,485
Agency-issued collateralized mortgage obligations		-		14,511		-		14,511
Asset-backed securities		-		5,167		-		5,167
Investments in mutual funds and other equities		-		2,016		-		2,016
Total	$	-	$	353,881	$	-	$	353,881

(dollars in thousands)	Fair value at December 31, 2011
	Level 1		Level 2		Level 3		Total
U.S. government agencies	$	-	$	76,574	$	-	$	76,574
U.S. Treasuries		-		42,597		-		42,597
Pass-through securities		-		117,398		-		117,398
Taxable state and political subdivisions		-		9,758		-		9,758
Tax exempt state and political subdivisions		-		37,335		-		37,335
Corporate obligations		-		10,287		-		10,287
Investments in mutual funds and other equities		-		2,006		-		2,006
Total	$	-	$	295,955	$	-	$	295,955

There were no transfers between Level 1 and Level 2 during the nine months ended September 30, 2012 or during the year ended December 31, 2011.

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WASHINGTON BANKING COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(11)  Fair Value Measurements (continued)

When available, the Company uses quoted market prices to determine the fair value of investment securities. These investments are included in Level 1. When quoted market prices are unobservable, the Company uses quotes from independent pricing vendors based on recent trading activity and other relevant information including market interest rate curves, referenced credit spreads and estimated prepayment rates where applicable. These investments are included in Level 2 and comprise the Company’s portfolio of U.S. agency securities, U.S. treasury securities, residential pass-through securities, municipal bonds and other corporate bonds.

Certain financial assets of the Company may be measured at fair value on a non-recurring basis. These assets are subject to fair value adjustments that result from application of lower-of-cost-or-market accounting or write-downs of individual assets.

The following table presents the carrying value of financial instruments by level within the fair value hierarchy, for which a non-recurring change in fair value has been recorded:

(dollars in thousands)	Fair value at September 30, 2012
	Level 1		Level 2		Level 3		Total		Total losses for the period
Non-covered impaired loans (1)	$	-	$	-	$	41,970	$	41,970	$	(7,982	)
Non-covered other real estate owned (2)		-		-		4,080		4,080		(678	)
Covered other real estate owned (2)		-		-		18,811		18,811		(2,902	)
Total	$	-	$	-	$	64,861	$	64,861	$	(11,562	)

(dollars in thousands)	Fair value at December 31, 2011
	Level 1		Level 2		Level 3		Total		Total losses for the period
Non-covered impaired loans (1)	$	-	$	-	$	44,845	$	44,845	$	(8,182	)
Non-covered other real estate owned (2)		-		-		1,976		1,976		(272	)
Covered other real estate owned (2)		-		-		26,622		26,622		-
Total	$	-	$	-	$	73,443	$	73,443	$	(8,454	)

(1) Represents carrying value and related specific valuation allowances, which are included in the allowance for loan losses.

(2) Represents the fair value and related losses of foreclosed real estate and other collateral owned that were measured at fair value subsequent to their initial classification as non-covered other real estate owned and covered other real estate owned.

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WASHINGTON BANKING COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(11)  Fair Value Measurements (continued)

Following is a description of methods and assumptions used to estimate the fair value of each class of financial instrument for which a non-recurring change in fair value has been recorded:

Non-covered impaired loans: 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.  Non-covered 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 the collateral, if the loan is collateral dependent.

The Company generally obtains appraisals for collateral dependent loans on an annual basis.  Depending on the loan, the Company may obtain appraisals more frequently than 12 months, particularly if the credit is deteriorating.  If the loan is performing and market conditions are stable, the Company may not obtain appraisals on an annual basis. This policy does not vary by loan type.

Impaired loans that are collateral dependent are reviewed quarterly.  The review involves a collateral valuation review, which also contemplates an assessment of whether the last appraisal is outdated.  Recent appraisals, adjustments to outdated appraisals, knowledgeable third party opinions of value and current market conditions are combined to determine whether a specific reserve and/or a loan charge-off is required.  Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.  For the period ended September 30, 2012, non-covered impaired loans totaling $8.3 million had adjustments to appraisals, based on unobservable inputs, ranging from 10% to 57%, with a weighted average adjustment of 27%.

In the rare case where an appraisal is not available, the Company consults with third party industry specific experts for estimates as well as relies upon the Company’s market knowledge and expertise.

Non-covered and covered other real estate owned: Non-covered and covered other real estate owned includes properties acquired through foreclosure. These properties are recorded at the lower of cost or estimated fair value, less estimated cost to sell, based on periodic evaluations.

The Company deducts 10% of the appraised value for selling costs on non-covered and covered other real estate owned.  If the property has been actively listed for sale for more than nine months and has had limited interest, the Company will typically reduce the fair value further based upon input from third party industry experts and knowledgeable management and may include adjustments for outdated appraisals (Level 3).

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WASHINGTON BANKING COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(11)  Fair Value Measurements (continued)

(b) Disclosures about Fair Value of Financial Instruments: The table below is a summary of fair value estimates for financial instruments at September 30, 2012 and December 31, 2011, including financial instruments recorded at fair value on a recurring and nonrecurring basis (summarized in the table above). The carrying amounts in the following table are recorded in the statement of financial condition under the indicated captions. The Company has excluded non-financial assets and non-financial liabilities such as Bank premises and equipment, deferred taxes and other liabilities.  

(dollars in thousands)	September 30, 2012
			Fair value measurements using:
	Carrying value		Total		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	30,885	$	30,885	$	30,885	$	-	$	-
Interest-bearing deposits		84,570		84,570		84,570		-		-
Federal funds sold		670		670		670		-		-
Investment securities available for sale		353,881		353,881		-		353,881		-
FHLB stock		7,509		15,018		7,509		-		-
Loans held for sale		15,139		15,139		-		15,139		-
Non-covered loans		824,610		811,222		-		-		811,222
Covered loans		232,524		247,670		-		-		247,670
Bank owned life insurance		17,671		17,671		17,671		-		-
FDIC indemnification asset		44,713		34,111		-		-		34,111
Financial liabilities:
Deposits		1,458,230		1,462,393		-		-		1,462,393
Junior subordinated debentures		25,774		12,193		-		-		12,193

(dollars in thousands)	December 31, 2011
			Fair value measurements using:
	Carrying value		Total		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	25,399	$	25,399	$	25,399	$	-	$	-
Interest-bearing deposits		80,514		80,514		80,514		-		-
Investment securities available for sale		295,955		295,955		-		295,955		-
FHLB stock		7,576		7,576		7,576		-		-
Loans held for sale		22,421		22,421		-		22,421		-
Non-covered loans		812,830		796,663		-		-		796,663
Covered loans		269,081		304,145		-		-		304,145
Bank owned life insurance		17,513		17,513		17,513		-		-
FDIC indemnification asset		65,586		41,041		-		-		41,041
Financial liabilities:
Deposits		1,466,344		1,471,615		-		-		1,471,615
Junior subordinated debentures		25,774		9,802		-		-		9,802

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WASHINGTON BANKING COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(11)  Fair Value Measurements (continued)

Following is a description of methods and assumptions used to estimate the fair value of each class of financial instrument not recorded at fair value but required for disclosure purposes:

Cash and Cash Equivalents:The carrying value of cash and cash equivalent instruments approximates fair value.

Interest-bearing Deposits:  The carrying values of interest-bearing 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.

Federal Funds Sold:  The carrying value of federal funds sold approximates fair value.

Investment Securities: Fair values of investment securities are based on quoted market prices when available or through the use of alternative approaches, such as matrix or model pricing, or broker indicative bids, when market quotes are not readily accessible or available.

FHLB stock: The Bank’s investment in FHLB stock is carried at par value, which approximates its fair value.

Loans Held for Sale:The carrying value of loans held for sale approximates fair value.

Non-covered 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.

Covered Loans: Covered loans are measured at estimated fair value on the date of acquisition. Subsequent to acquisition, the fair value of covered loans is measured using the same methodology as that of non-covered loans.

Bank Owned Life Insurance: Fair values of insurance policies owned are based on the insurance contract’s cash surrender value.

FDIC Indemnification Asset: The FDIC indemnification asset is calculated as the expected future cash flows under the loss share agreement discounted by a rate reflective of a U.S. government agency security.

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.

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.

Off-Balance Sheet Items: Commitments to extend credit represent the principal category of off-balance sheet financial instruments. The fair value of these commitments are 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.

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WASHINGTON BANKING COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(12)  Commitments and Contingencies

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, most guarantees expire within 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 amounted to one hundred percent of the commitment amount at September 30, 2012. The Company routinely charges a fee for these credit facilities.  Such fees are amortized into income over the life of the agreement and unamortized amounts were not significant as of September 30, 2012.  At September 30, 2012, the commitments under these agreements totaled $1.5 million.

At September 30, 2012, the Company was the guarantor of trust preferred securities. The Company issued junior subordinated debentures to a wholly owned special purpose trust, which has issued trust preferred securities.  The sole assets of the special purpose trust are the junior subordinated debentures issued 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. The maximum amount of future payments the Company will be required to make under these agreements is the principal and interest of the trust preferred securities, the principal of which totaled $25.8 million at September 30, 2012 and December 31, 2011.

(13)  Subsequent Events

On October 25, 2012, the Company announced that its Board of Directors declared a cash dividend of $0.15 per common share to shareholders of record as of November 5, 2012, payable on November 20, 2012.

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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

Note Regarding Forward-Looking Statements: This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements describe Washington Banking Company’s (the “Company”) management’s expectations regarding future events and developments such as future operating results, growth in loans and deposits, credit quality and adequacy of the allowance for loan losses, 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 “will,” “believe,” “expect,” “should,” “anticipate” 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 below are necessarily 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 (the “SEC”), factors that may cause actual results to differ materially from those contemplated in such forward-looking statements include, among others: (1) local and national general and economic condition; (2) changes in interest rates and their impact on net interest margin; (3) competition among financial institutions; (4) legislation or regulatory requirements; and (5) the ability to realize efficiencies expected from investment in personnel and infrastructure.  However, the reader should be aware that these factors are not an exhaustive list, and it should not be assumed that these are the only factors that may cause actual results to differ from expectations.  In addition, the reader should note that the Company does not intend to update any of the forward-looking statements or the uncertainties that may adversely impact those statements.

The following discussion and analysis should be read in conjunction with the financial statements and notes thereto presented elsewhere in this report.

Overview

Washington Banking Company (referred to in this report as the “Company”) is a registered bank holding company with two wholly-owned subsidiaries: Whidbey Island Bank (the “Bank”), the Company’s principal subsidiary and Washington Banking Master Trust (the “Trust”). Headquartered in Oak Harbor, the Company’s market area is primarily northwestern Washington. The market area encompasses distinct economies and none are particularly dependent upon a single industrial or occupational source.  The economies within the market areas have evolved from being heavily dependent upon forestry, fishing and farming to a more diverse blend of industries including retail trade, services, manufacturing, tourism and a large military presence.

The Company’s strategy is one of value-added growth.  Management believes that qualitative and sustainable growth of the Company, coupled with maintaining profitability, is currently the most appropriate path to providing good value for its shareholders.  Prior to 2010, the Company’s growth had been achieved organically.  On April 16, 2010 and September 24, 2010, the Bank acquired certain assets and assumed certain liabilities of City Bank and North County Bank, respectively, from the Federal Deposit Insurance Corporation (“FDIC”) in FDIC-assisted transactions.

The Company attributes its reputation for focusing on customer service and satisfaction as one of the cornerstones to the Company’s success.  The Company’s primary objectives are to improve profitability and operating efficiencies, increase market penetration in areas currently served and to continue an expansion strategy in appropriate market areas.

The Company’s geographical expansion to date has primarily been concentrated along the I-5 corridor from Snohomish to Whatcom Counties; however, additional areas will be considered if they meet the Company’s criteria.  Acquisition of banks or branches may also be used as a means of expansion if appropriate opportunities are presented.  The primary factors considered in determining the areas of geographic expansion are the availability of knowledgeable personnel, such as managers and lending officers with experience in their fields of expertise, longstanding community presence and extensive banking relationships, customer demand and perceived market potential.  The 2010 acquisition of City Bank resulted in expansion into King County.

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Executive Overview

Significant items for the third quarter of 2012 were as follows:

·   Net income available to common shareholders per diluted share was $0.30 and $0.79 for the three and nine months ended September 30, 2012, compared to $0.24 and $0.69 for the three and nine months ended September 30, 2011, respectively.

·   Net interest margin, on a tax equivalent basis, was 5.48% and 5.65% for the three and nine months ended September 30, 2012, respectively, compared to 5.43% and 5.42% for the same periods a year ago.

·   Non-covered loans, net of allowance for loan losses, totaled $808.0 million at September 30, 2012, compared to $794.8 million at December 31, 2011.

·   Nonperforming non-covered assets to total assets improved to 1.29% at September 30, 2012, compared to 1.44% at December 31, 2011.

·   Total risk-based capital for the Company was 19.59% at September 30, 2012, compared to 19.73% at December 31, 2011.  The FDIC requires a minimum total risk-based capital ratio of 10% to be considered “well-capitalized.”

·   Tangible book value per common share increased to $11.31 at September 30, 2012, compared to $10.67 at December 31, 2011.

Summary of Critical 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.  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.  Not all of these accounting policies require management to make difficult, subjective or complex judgments or estimates. Management believes that the following accounting policies could be considered critical under the SEC’s definition.

Allowance for Loan Losses: The allowance for loan losses is established to absorb known and inherent losses attributable to loans outstanding. The adequacy of the allowance is monitored on a regular basis and is based on management’s evaluation of numerous quantitative and qualitative factors. Quantitative factors include our historical loss experience, delinquency and charge-off trends, estimates of, and changes in, collateral values, changes in risk ratings on loans and other factors. Qualitative factors include the general economic environment in our markets and, in particular, the state of the real estate market and specific relevant industries. Other qualitative factors that are considered in our methodology include, size and complexity of individual loans in relation to the lending officer’s background and experience levels, loan structure, extent and nature of waivers of existing loan policies, and pace of loan portfolio growth.

As the Company adds new products, increases the complexity of the loan portfolio, and expands its geographic coverage, the Company intends to enhance and adapt its methodology to keep pace with the size and complexity of the loan portfolio. Changes in any of the above factors could have a significant effect on the calculation of the allowance for credit losses in any given period. The Company believes that its systematic methodology continues to be appropriate given our size and level of complexity.

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Acquired Loans: Acquired loans are aggregated into pools, based on individually evaluated common risk characteristics, and aggregate expected cash flows were estimated for each pool. A pool is accounted for as a single asset with a single interest rate, cumulative loss rate and cash flow expectation. The Bank aggregated all of the loans acquired in the FDIC-assisted acquisitions of City Bank and North County Bank into 18 and 14 pools, respectively. A loan will be removed from a pool of loans only if the loan is sold, foreclosed, assets are received in satisfaction of the loan, or the loan is written off, and will be removed from the pool at the carrying value. If an individual loan is removed from a pool of loans due to a payoff, the difference between its carrying amount and the cash received will be recognized in income immediately and would not affect the effective yield used to recognize the accretable difference on the remaining pool. Loans originally placed into a performing pool will not be reported individually as 30-89 days past due, non-performing (90+ days past due or nonaccrual) or accounted for as a troubled debt restructuring as the pool is the unit of accounting. Rather, these metrics related to the underlying loans within a performing pool will be considered in our ongoing assessment and estimates of future cash flows. If, at acquisition, the loans are collateral dependent and acquired primarily for the rewards of ownership of the underlying collateral, or if cash flows expected to be collected cannot be reasonably estimated, accrual of income is inappropriate. Such loans will be placed into nonperforming (nonaccrual) loan pools.

The cash flows expected to be received over the life of the pool were estimated by management with the assistance of a third party valuation specialist. These cash flows were input into an accounting loan system which calculates the carrying values of the pools and underlying loans, book yields, effective interest income and impairment, if any, based on actual and projected events. Default rates, loss severity and prepayment speed assumptions will be periodically reassessed and updated within the accounting model to update the expectation of future cash flows. The excess of the cash flows expected to be collected over the pool’s carrying value is considered to be the accretable yield and is recognized as interest income over the estimated life of the loan or pool using the effective yield method. The accretable yield will change due to changes in the timing and amounts of expected cash flows. For the performing loan pools, a prepayment assumption as documented by the valuation specialist is initially applied. Changes in the accretable yield will be disclosed quarterly.

The excess of the contractual balances due over the cash flows expected to be collected is considered to be the nonaccretable difference. The nonaccretable difference represents the estimate of the credit losses expected to occur and was considered in determining the fair value of the loans as of the acquisition date. Subsequent to the acquisition date, any increases in expected cash flows over those expected at purchase date in excess of fair value are adjusted through the accretable difference on a prospective basis. Any subsequent decreases in expected cash flows over those expected at purchase date are recognized by recording a provision for loan losses. Any disposals of loans, including sales of loans, payments in full or foreclosures, result in the removal of the loan from the pool at its carrying amount.

FDIC Indemnification Asset: The Company has elected to account for amounts receivable under the loss share agreement as an indemnification asset. The FDIC indemnification asset is initially recorded at fair value, based on the discounted value of expected future cash flows under the loss share agreement. The difference between the present value and the undiscounted cash flows the Company expects to collect from the FDIC will be accreted into noninterest income over the life of the FDIC indemnification asset.

The FDIC indemnification asset is reviewed periodically and adjusted for any changes in expected cash flows based on recent performance and expectations for future performance of the covered portfolio. These adjustments are measured on the same basis as the related covered loans and covered other real estate owned. Any increases in cash flow of the covered assets over those expected will reduce the FDIC indemnification asset and any decreases in cash flow of the covered assets under those expected will increase the FDIC indemnification asset. Increases and decreases to the FDIC indemnification asset are recorded as adjustments to noninterest income.

Stock-based Compensation:The Company recognizes in the income statement the grant-date fair value of stock awards issued to employees over the employees’ requisite service period (generally the vesting period). The fair value of each stock option grant is estimated as of the grant date using the Black-Scholes option-pricing model. Significant variables used to estimate the fair value of the stock options granted include volatility, forfeiture rate and expected life. The Company’s assumptions utilized at the time of grant impact the fair value of the stock option calculated under the Black-Scholes methodology, and ultimately, the expense that will be recognized over the life of the stock award.

-40-

Results of Operations Overview

For the three months ended September 30, 2012, net income available to common shareholders totaled $4.6 million, or $0.30 per diluted common share, compared to net income available to common shareholders of $3.6 million, or $0.24 per diluted common share, for the same period a year ago.  The increase in net income available to common shareholders for the period was primarily attributable to positive loan growth, strong mortgage banking income and declining expenses related to the 2010 FDIC-assisted acquisitions.

Net income available to common shareholders increased to $12.3 million, or $0.79 per diluted common share, for the nine months ended September 30, 2012, compared to $10.6 million, or $0.69 per diluted common share, for the nine months ended September 30, 2011.  The increase in net income available to common shareholders for the period was primarily attributable to the decrease in provision for loan losses for non-covered loans and the decrease in preferred dividends, partially offset by the increase in the amortization of the FDIC indemnification asset.  For the nine months ended September 30, 2012, the provision for loan losses for non-covered loans totaled $5.6 million, compared to $8.5 million for the same period a year ago.  The Company did not pay dividends on the preferred stock for the nine months ended September 30, 2012, as the Company redeemed all of the outstanding shares of preferred stock during the first quarter of 2011.  For the nine months ended September 30, 2011, the Company paid dividends on preferred stock totaling $1.1 million.

In addition to results presented in accordance with generally accepted accounting principles in the United States of America (“GAAP”), this filing presents certain non-GAAP financial measures. Management believes that certain non-GAAP financial measures provide investors with information useful in understanding the Company's financial performance; however, readers of this report are urged to review these non-GAAP measures in conjunction with the GAAP results, as reported.

Operating earnings are not a measure of performance calculated in accordance with GAAP.  However, management believes that operating earnings are an important indication of the ability to generate earnings through the Company's fundamental banking business.  Since operating earnings exclude the effects of certain items that are unusual and/or difficult to predict, management believes that operating earnings provide useful supplemental information to both management and investors in evaluating the Company's financial results.

Operating earnings should not be considered in isolation or as a substitute for net income, cash flows from operating activities or other income or cash flow statement data calculated in accordance with GAAP.  Moreover, the manner in which the Company calculates operating earnings may differ from that of other companies reporting measures with similar names.

The following table provides the reconciliation of the Company's GAAP earnings to operating earnings (non-GAAP) for the periods presented:

(dollars in thousands)	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2012		2011		2012		2011
GAAP earnings available to common shareholders	$	4,638	$	3,625	$	12,258	$	10,629
Provision for income tax		2,359		1,581		5,703		5,213
GAAP earnings available to common shareholders
before provision for income tax		6,997		5,206		17,961		15,842
Adjustments to GAAP earnings available to common shareholders
Merger related expenses		-		70		-		324
Accelerated accretion of remaining preferred stock discount		-		-		-		1,046
Operating earnings before tax		6,997		5,276		17,961		17,212
Provision for income tax		2,359		1,606		5,703		5,326
Net operating earnings	$	4,638	$	3,670	$	12,258	$	11,886
Diluted GAAP earnings per common share	$	0.30	$	0.24	$	0.79	$	0.69
Diluted operating earnings per common share	$	0.30	$	0.24	$	0.79	$	0.77

-41-

Fully tax-equivalent net interest income and fully tax-equivalent net interest margin are non-GAAP performance measurements that management believes provide investors with a more accurate picture of the Company's operational performance and are consistent with industry practice. The calculation for both measurements involves grossing up interest income on tax-exempt loans and investments by an amount that makes it comparable to taxable income.

Neither fully tax-equivalent net interest income nor fully tax-equivalent net interest margin should be considered in isolation nor as a substitute for net interest income or net interest margin or any other measure calculated in accordance with GAAP. Moreover, the manner in which the Company calculates fully tax-equivalent net interest income and fully tax-equivalent net interest margin may differ from that of other companies reporting measures with similar names.

The following table provides the reconciliation of the Company's net interest income (GAAP) to a fully tax-equivalent net interest income (non-GAAP) and net interest margin (GAAP) to a fully tax-equivalent net interest margin (non-GAAP) for the periods presented:

(dollars in thousands)	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2012			2011			2012			2011
GAAP net interest income	$	20,552		$	20,082		$	62,743		$	58,855
Tax-equivalent adjustment		295			252			837			761
Tax-equivalent net interest income	$	20,847		$	20,334		$	63,580		$	59,616
Average interest earning assets	$	1,513,891		$	1,485,875		$	1,502,903		$	1,471,507
Net interest margin		5.40	%		5.36	%		5.58	%		5.35	%
Tax-equivalent net interest margin		5.48	%		5.43	%		5.65	%		5.42	%

Tangible common equity, tangible assets and tangible book value per common share are measures that are not calculated in accordance with GAAP.  However, management uses these non-GAAP measures in their analysis of the Company's performance. Management believes that these non-GAAP measures are an important indication of the Company's ability to grow both organically and through business combinations, and with respect to tangible common equity, the Company's ability to pay dividends and to engage in various capital management strategies.

Neither tangible common equity, tangible assets nor tangible book value per common share should be considered in isolation or as a substitute for common shareholders' equity or book value per common share or any other measure calculated in accordance with GAAP. Moreover, the manner in which the Company calculates tangible common equity, tangible assets and tangible book value per share may differ from that of other companies reporting measures with similar names.

The following table provides the reconciliation of the Company's shareholders' equity (GAAP) to tangible common equity (non-GAAP) and total assets (GAAP) to tangible assets (non-GAAP) for the periods presented:

(dollars in thousands)	September 30, 2012			December 31, 2011
Total shareholders' equity	$	180,967		$	170,820
Adjustments to shareholders' equity
Goodwill and other intangible assets, net		(6,156	)		(6,539	)
Tangible common equity	$	174,811		$	164,281
Total assets	$	1,680,126		$	1,670,682
Adjustments to total assets
Goodwill and other intangible assets, net		(6,156	)		(6,539	)
Tangible assets	$	1,673,970		$	1,664,143
Common shares outstanding at end of period		15,451,307			15,398,197
Tangible common equity ratio		10.44	%		9.87	%
Tangible book value per common share	$	11.31		$	10.67

-42-

Net Interest Income: One of the Company’s key sources of earnings is net interest income. To make it easier to compare results among several periods and the yields on various types of earning assets (some of which are taxable and others which are not), net interest income is presented in this discussion on a “taxable-equivalent basis” (i.e., as if it were all taxable at the same rate).  There are several factors that affect net interest income including:

·   The volume, pricing, mix and maturity of interest-earning assets and interest-bearing liabilities;

·   The volume of free funds (consisting of noninterest-bearing deposits and other liabilities and shareholders’ equity);

·   The volume of noninterest-earning assets;

·   Market interest rate fluctuations; and

·   Asset quality.

-43-

The following tables set forth various components of the balance sheet that affect interest income and expense and their respective yields or rates:

(dollars in thousands)	Three Months Ended September 30,
	2012							2011
			Interest							Interest
	Average		earned/		Average			Average		earned/		Average
	balance		paid		yield/rate			balance		paid		yield/rate
Assets
Non-covered loans (1)(2)	$	831,256	$	11,777		5.64	%	$	828,367	$	12,604		6.04	%
Covered loans		236,355		8,998		15.14	%		287,232		8,614		11.90	%
Federal funds sold		22		-		0.00	%		-		-		0.00	%
Interest-bearing deposits		113,298		71		0.25	%		127,149		89		0.28	%
Investments
Taxable		282,951		1,238		1.74	%		213,713		1,123		2.09	%
Non-taxable (2)		50,009		473		3.76	%		29,414		334		4.50	%
Interest-earning assets		1,513,891		22,557		5.93	%		1,485,875		22,764		6.08	%
Noninterest-earning assets		158,772							201,543
Total assets	$	1,672,663						$	1,687,418
Liabilities and shareholders' equity
Deposits:
NOW accounts and MMA	$	612,710	$	315		0.20	%	$	591,910	$	551		0.37	%
Savings		106,720		27		0.10	%		97,564		45		0.18	%
Time deposits		487,062		1,233		1.01	%		591,579		1,714		1.15	%
Total interest-bearing deposits		1,206,492		1,575		0.52	%		1,281,053		2,310		0.72	%
Junior subordinated debentures		25,774		135		2.08	%		25,774		120		1.85	%
Total interest-bearing liabilities		1,232,266		1,710		0.55	%		1,306,827		2,430		0.74	%
Noninterest-bearing deposits		250,522							210,059
Other liabilities		12,941							7,046
Total liabilities		1,495,729							1,523,932
Total shareholders' equity		176,934							163,486
Total liabilities and
shareholders' equity	$	1,672,663						$	1,687,418
Net interest income/spread			$	20,847		5.38	%			$	20,334		5.34	%
Credit for interest-bearing funds						0.10	%						0.09	%
Net interest margin (2)						5.48	%						5.43	%
(1) Average balance includes nonaccrual loans.
(2) Interest income on non-taxable investments and loans is presented on a taxable-equivalent basis using the federal statutory rate of 35%. These adjustments totaled $295 thousand and $252 thousand for the three months ended September 30, 2012 and 2011,
respectively. Taxable-equivalent is a non- GAAP performance measurement that management believes provides investors with a more accurate picture of the net interest margin and efficiency ratio for comparative purposes.

-44-

(dollars in thousands)	Nine Months Ended September 30,
	2012							2011
			Interest							Interest
	Average		earned/		Average			Average		earned/		Average
	balance		paid		yield/rate			balance		paid		yield/rate
Assets
Non-covered loans (1)(2)	$	827,867	$	35,409		5.71	%	$	832,495	$	38,091		6.12	%
Covered loans		248,958		28,248		15.16	%		319,082		25,422		10.65	%
Federal funds sold		7		-		0.00	%		694		1		0.20	%
Interest-bearing deposits		98,880		190		0.26	%		104,935		199		0.25	%
Investments
Taxable		283,659		3,981		1.87	%		188,829		2,722		1.93	%
Non-taxable (2)		43,532		1,280		3.93	%		25,472		990		5.20	%
Interest-earning assets		1,502,903		69,108		6.14	%		1,471,507		67,425		6.13	%
Noninterest-earning assets		167,132							213,346
Total assets	$	1,670,035						$	1,684,853
Liabilities and shareholders' equity
Deposits:
NOW accounts and MMA	$	606,291	$	1,045		0.23	%	$	575,891	$	1,934		0.45	%
Savings		103,260		79		0.10	%		96,199		162		0.22	%
Time deposits		510,615		4,000		1.05	%		622,438		5,352		1.15	%
Total interest-bearing deposits		1,220,166		5,124		0.56	%		1,294,528		7,448		0.77	%
Federal funds purchased		81		-		0.00	%		-		-		0.00	%
Junior subordinated debentures		25,774		404		2.09	%		25,774		361		1.87	%
Total interest-bearing liabilities		1,246,021		5,528		0.59	%		1,320,302		7,809		0.79	%
Noninterest-bearing deposits		238,685							197,705
Other liabilities		10,831							6,422
Total liabilities		1,495,537							1,524,429
Total shareholders' equity		174,498							160,424
Total liabilities and
shareholders' equity	$	1,670,035						$	1,684,853
Net interest income/spread			$	63,580		5.55	%			$	59,616		5.34	%
Credit for interest-bearing funds						0.10	%						0.08	%
Net interest margin (2)						5.65	%						5.42	%
(1) Average balance includes nonaccrual loans.
(2) Interest income on non-taxable investments and loans is presented on a taxable-equivalent basis using the federal statutory rate of 35%. These adjustments totaled $837 thousand and $761 thousand for the nine months ended September 30, 2012 and 2011,
respectively. Taxable-equivalent is a non- GAAP performance measurement that management believes provides investors with a more accurate picture of the net interest margin and efficiency ratio for comparative purposes.

Taxable-equivalent net interest income totaled $20.8 million for the third quarter of 2012, compared to $20.3 million for the third quarter of 2011.  Changes in net interest income during the third quarter of 2012 reflect a $207 thousand decrease in interest income on interest-earning assets primarily related to rate decreases on non-covered loans, partially offset by an increase in rates on covered loans and an increase in volume of investments.  Additionally, interest expense on interest-bearing liabilities decreased $720 thousand during the period and was primarily due to the decrease in rates on interest-bearing deposits.

Net interest margin (net interest income as a percentage of average interest-earning assets) on a taxable-equivalent basis was 5.48% for the third quarter of 2012, compared to 5.43% for the same period a year ago.  The yield on interest-earning assets was 5.93% for the three months ended September 30, 2012, a decrease of 15 basis points as compared to the same period in 2011.  This decrease was primarily attributable to the decreases in average yields on non-covered loans and investments during the period.  The average rate on interest-bearing liabilities was 0.55% for the three months ended September 30, 2012, a decrease of 19 basis points as compared to the same period in 2011. This decrease was primarily attributable to the decrease in rates offered on interest-bearing deposits.

-45-

For the nine months ended September 30, 2012, taxable-equivalent net interest income totaled $63.6 million, compared to $59.6 million for the same period a year ago.  Changes in net interest income during the first nine months of 2012 reflect a $1.7 million increase in interest income on interest-earning assets, primarily attributable to the increase in volume of taxable and non-taxable investments, and a $2.3 million decrease in interest expense on interest-bearing liabilities.

Net interest margin (net interest income as a percentage of average interest-earning assets) on a taxable-equivalent basis was 5.65% for the nine months ended September 30, 2012, compared to 5.42% for the same period a year ago.  The yield on interest-earning assets was 6.14% for the nine months ended September 30, 2012, compared to 6.13% for the same period in 2011.  For the same period, average yield on non-covered loans decreased 41 basis points to 5.71% from 6.12% due to lower yields in nearly every category of non-covered loans and the average yield on covered loans increased 451 basis points.  The average rate on interest-bearing liabilities was 0.59% for the nine months ended September 30, 2012, a decrease of 20 basis points as compared to the same period in 2011. This decrease was primarily attributable to the decrease in rates offered on interest-bearing deposits, particularly NOW and money market accounts and time deposits.

Due to the current low interest rate environment, together with the projected principal reduction in higher yielding covered loans, management expects net interest income and net interest margin will decline in future quarters.

The following table details the effects of changes in rates and volume for the periods indicated:

(dollars in thousands)	Three Months Ended September 30,									Nine Months Ended September 30,
	2012 compared to 2011									2012 compared to 2011
	Increase (decrease) due to (2)									Increase (decrease) due to (2)
	Volume			Rate			Total			Volume			Rate			Total
Assets
Non-covered loans (1)(3)	$	45		$	(872	)	$	(827	)	$	(208	)	$	(2,474	)	$	(2,682	)
Covered loans		(710	)		1,094			384			(3,059	)		5,885			2,826
Federal funds sold		-			-			-			(1	)		-			(1	)
Interest-bearing deposits		(9	)		(9	)		(18	)		(12	)		3			(9	)
Investments (1)
Taxable		240			(125	)		115			1,332			(73	)		1,259
Non-taxable		182			(43	)		139			442			(152	)		290
Interest-earning assets	$	(252	)	$	45		$	(207	)	$	(1,506	)	$	3,189		$	1,683
Liabilities
Deposits:
NOW accounts and money market	$	19		$	(255	)	$	(236	)	$	98		$	(987	)	$	(889	)
Savings		4			(22	)		(18	)		11			(94	)		(83	)
Time deposits		(283	)		(198	)		(481	)		(901	)		(451	)		(1,352	)
Total interest-bearing deposits		(260	)		(475	)		(735	)		(792	)		(1,532	)		(2,324	)
Junior subordinated debentures		-			15			15			-			43			43
Total interest-bearing liabilities	$	(260	)	$	(460	)	$	(720	)	$	(792	)	$	(1,489	)	$	(2,281	)
(1) Interest on loans and investments is presented on a fully tax-equivalent basis.
(2) The changes attributable to the combined effect of volume and interest rates have been allocated proportionately.
(3) Interest income previously accrued on nonaccrual loans is reversed in the period the loan is placed on nonaccrual status.

-46-

Provision for Loan Losses: The provision for loan losses is highly dependent on the Company’s ability to manage asset quality and control the level of net charge-offs through prudent underwriting standards. In addition, decline in general economic conditions could increase future provisions for loan losses and materially impact the Company’s net income. For further discussion of the Company’s asset quality see the Credit Risks and Asset Quality section found in Item 2- Management’s Discussion and Analysis of Financial Condition and Results of Operations.

For the three and nine months ended September 30, 2012 the Company recorded a $1.3 million and $5.6 million provision for non-covered loan losses, compared to $2.5 million and $8.5 million for the same periods a year ago.  Net charge-offs for the three and nine months ended September 30, 2012 were $2.2 million and $7.1 million, compared to $3.0 million and $8.4 million for the same periods in 2011.  At September 30, 2012 and 2011, the allowance for non-covered loan losses, as a percent of total non-covered loans, was 2.01% and 2.30%, respectively.

Noninterest Income:  Noninterest income remains a key focus of the Company. The Company has focused on diversifying the noninterest income mix through the introduction of nondeposit investment products consisting primarily of annuity sales and investment service fees and income from the Company’s Bank Owned Life Insurance (“BOLI”) policies. The following table presents the key components of noninterest income for the three and nine months ended September 30, 2012 and 2011:

(dollars in thousands)	Three Months Ended						Nine Months Ended						Three Month			Nine Month
	September 30,						September 30,						Change			Change
	2012			2011			2012			2011			2012 vs. 2011			2012 vs. 2011
Service charges and fees	$	886		$	956		$	2,700		$	2,884		$	(70	)	$	(184	)
Electronic banking income		820			838			2,728			2,355			(18	)		373
Investment products		335			230			1,064			835			105			229
Gain on sale of investment securities, net		345			-			687			-			345			687
Bank owned life insurance income		43			84			158			245			(41	)		(87	)
Income from the sale of mortgage loans		1,146			215			2,627			757			931			1,870
SBA premium income		126			103			318			375			23			(57	)
Change in FDIC indemnification asset		(2,762	)		(2,586	)		(8,898	)		(5,630	)		(176	)		(3,268	)
Gain on disposition of covered assets		125			1,119			1,310			4,104			(994	)		(2,794	)
Other		294			472			949			1,860			(178	)		(911	)
Total noninterest income	$	1,358		$	1,431		$	3,643		$	7,785		$	(73	)	$	(4,142	)

§   Electronic banking income year-over-year increase was primarily attributable to an increase in interchange fees on new deposit accounts gained through the acquisitions of City Bank and North County Bank in 2010.

§   Gain on sale of investment securities, net represents the net gain recognized on the sale of available for sale investment securities during the three and nine months ended September 30, 2012.  Management reviews the investment securities portfolio regularly for sales opportunities and expects additional sales in the upcoming quarter.

§   Income from the sale of mortgage loans increased due to the increase in sales volume of loans held for sale, primarily related to significant mortgage activity as a result of historically low interest rates.  For the three and nine months ended September 30, 2012, proceeds from the sale of loans held for sale totaled $59.2 million and $156.0 million, compared to $23.4 million and $85.4 million for the same periods a year ago.

§   Change in FDIC indemnification asset represents the amortization of the FDIC indemnification asset. Based upon the collections madeon the indemnification asset and subsequent revaluations of the estimated remaining cash flows, amortization was required to reduce the asset over the remaining term.

§   Gain on disposition of covered assets is the income the Company recognizes when a covered asset is paid off or sold and the proceeds exceed its carrying value.   The gain on disposition of covered assets is expected to continue to decline as the balance of covered assets decrease.  At September 30, 2012, covered assets totaled $250.3 million, compared to $302.2 million a year ago.

§   Other noninterest income decrease was primarily attributable to the $670 thousand gain generated from the sale of the merchant card processing portfolio to a new provider in the second quarter of 2011.

-47-

Noninterest Expense: The Company continues to focus on controlling noninterest expenses and addressing long term operating expenses. The following table presents the key elements of noninterest expense:

(dollars in thousands)	Three Months Ended				Nine Months Ended				Three Month			Nine Month
	September 30,				September 30,				Change			Change
	2012		2011		2012		2011		2012 vs. 2011			2012 vs. 2011
Salaries and benefits	$	7,741	$	7,310	$	22,317	$	21,038	$	431		$	1,279
Occupancy and equipment		1,738		1,660		5,126		4,898		78			228
Office supplies and printing		378		385		1,216		1,287		(7	)		(71	)
Data processing		539		446		1,603		1,418		93			185
Consulting and professional fees		194		202		710		847		(8	)		(137	)
Intangible amortization		129		160		383		475		(31	)		(92	)
Merger related expenses		-		70		-		324		(70	)		(324	)
FDIC premiums		314		319		967		1,469		(5	)		(502	)
FDIC clawback liability adjustment		247		-		1,385		-		247			1,385
Non-covered OREO and repossession expenses, net		398		559		1,511		1,199		(161	)		312
Covered OREO and repossession expenses, net		122		501		1,274		1,620		(379	)		(346	)
Other		1,863		2,195		5,935		6,957		(332	)		(1,022	)
Total noninterest expense	$	13,663	$	13,807	$	42,427	$	41,532	$	(144	)	$	895

§   Salaries and benefits increased primarily due to increases in real estate loan commissions and employee health insurance expense.  Additionally, the Company recorded a bonus accrual of $250 thousand and $750 thousand for the three and nine months ended September 30, 2012.

§   Merger related expenses relate to non-recurring expenses of the City Bank and North County Banks acquisitions. Merger related expenses include conversion expense, severance and professional and consulting services. The Company does not anticipate future merger related expenses related to these acquisitions.

§   FDIC premiums decreased due to the new assessment basis instituted by the FDIC during the third quarter of 2011. The Company anticipates the FDIC premiums to be 40% to 45% less on a comparative basis for the remainder of 2012.

§   FDIC clawback liability expense represents the Bank’s provision for the estimated liabilities under the provisions of the loss sharing arrangements under the Purchase and Assumption Agreements entered into with the FDIC for the acquisitions of City Bank on April 16, 2010 and North County Bank on September 24, 2010.  Approximately ten years following the respective acquisition dates, the Bank is required to make a payment to the FDIC in the event that losses on covered assets under the loss share agreements have been less than the stated threshold level per the Agreements.

§   Non-covered and covered OREO and repossession expense represents costs the Company incurs in reclaiming, repairing and selling real estate properties and automobiles, as well as any write-downs or losses on the sale of non-covered and covered OREO properties.

§   Other noninterest expense was primarily affected by decreases in advertising expense, telephone expense and Business and Occupation (B&O) tax.  During the first quarter of 2011, the Bank paid the B&O tax on the bargain purchase gain on acquisition recognized during the third quarter of 2010.

-48-

Income Taxes: The Company’s consolidated effective tax rates for the three and nine months ended September 30, 2012, were 33.7% and 31.8%, respectively, compared to 30.4% and 30.8% for the same periods a year ago. The quarterly effective tax rates are below the federal statutory rate of 35% principally due to nontaxable income generated from investments in bank owned life insurance, tax-exempt municipal bonds and loans. Additionally, the Company’s tax rates reflect a benefit from the New Market Tax Credit Program. The tax benefits related to these credits will be recognized in the same periods that the credits are recognized on the Company’s income tax returns.

Financial Condition Overview

Total assets at September 30, 2012, were $1.68 billion, compared to $1.67 billion at December 31, 2011.  For the period, investment securities increased $57.9 million and total non-covered loans, net of allowance for loan losses, increased $13.2 million.  Total shareholders’ equity was $181.0 million at September 30, 2012, compared to $170.8 million at December 31, 2011, an increase of $10.2 million.

Investment Securities:The composition of the Company’s investment portfolio reflects management’s investment strategy of maintaining an appropriate level of liquidity while providing a relatively stable source of investment income.  The investment securities portfolio provides a vehicle for the investment of available funds and a source of liquidity.   At September 30, 2012, total investment securities increased $57.9 million to $353.9 million, compared to $296.0 million at December 31, 2011.  The increase was primarily attributable to the Company actively purchasing investment securities during 2012 as it continues to deploy funds acquired from the City Bank and North County Bank acquisitions, as well as, funds generated through the resolution of acquired assets.

The Company’s investment portfolio mix, based upon fair value, is outlined in the table below:

(dollars in thousands)	September 30, 2012		December 31, 2011
U.S. government agencies	$	75,505	$	76,574
U.S. Treasuries		10,013		42,597
Residential pass-through securities		174,117		117,398
State and political subdivisions		62,067		47,093
Corporate obligations		10,485		10,287
Agency-issued collateralized mortgage obligations		14,511		-
Asset-backed securities		5,167		-
Investments in mutual funds and other equity securities		2,016		2,006
Total investment securities available for sale	$	353,881	$	295,955

-49-

Non-Covered Loans: Non-covered loans, net of allowance for loans losses, totaled $808.0 million at September 30, 2012, compared to $794.8 million at December 31, 2011. The Company attempts to balance the diversity of its portfolio, believing that this provides a good means of minimizing risk due to loss and interest rate sensitivity. Active portfolio management has resulted in a diversified portfolio that is not heavily concentrated in any one industry or community.

The following table further details the major components of the non-covered loan portfolio:

(dollars in thousands)	September 30, 2012						December 31, 2011
	Balance			% of total			Balance			% of total
Commercial	$	155,208			18.9	%	$	150,386			18.5	%
Real estate mortgages:
One-to-four family residential		37,262			4.5	%		40,331			5.0	%
Multi-family and commercial		394,878			48.0	%		370,782			45.7	%
Total real estate mortgages		432,140			52.5	%		411,113			50.7	%
Real estate construction:
One-to-four family residential		44,892			5.5	%		58,810			7.3	%
Multi-family and commercial		33,104			4.0	%		31,546			3.9	%
Total real estate construction		77,996			9.5	%		90,356			11.2	%
Consumer:
Indirect		79,648			9.7	%		80,396			9.9	%
Direct		77,759			9.4	%		78,726			9.7	%
Total consumer		157,407			19.1	%		159,122			19.6	%
Subtotal		822,751			100.0	%		810,977			100.0	%
Deferred loan costs, net		1,859						1,853
Allowance for loan losses		(16,570	)					(18,032	)
Total non-covered loans	$	808,040					$	794,798

-50-

Credit Risks and Asset Quality

The extension of credit, in the form of loans or other credit substitutes, to individuals and businesses is a major portion of the Company’s principal business activity. Company policies and applicable laws and regulations require risk analysis as well as ongoing portfolio and credit management.

The Company manages its credit risk through lending limits, credit review, approval policies and extensive, ongoing internal monitoring. Through this monitoring process, nonperforming loans are identified. Nonperforming assets consist of nonaccrual loans and other real estate owned.  Nonperforming assets are assessed for potential loss exposure on an individual or homogeneous group basis.

Loans are placed on nonaccrual status when collection of principal or interest is considered doubtful (generally, loans are 90 days or more past due).   Loans placed on nonaccrual will typically remain on nonaccrual status until all principal and interest payments are brought current and the prospects for future payments, in accordance with the loan agreement, appear relatively certain.

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 collectability of an impaired or nonaccrual loan, interest income may be recognized on a cash basis. Nonaccrual loans are returned to an accrual status when 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.

Loans are reported as restructured when the Bank grants a concession(s) to a borrower experiencing financial difficulties that it would not otherwise consider. Examples of such concessions include forgiveness of principal or accrued interest, extending the maturity date(s) or providing a lower interest rate than would be normally available for a transaction of similar risk. As a result of these concessions, restructured loans are impaired as the Bank will not collect all amounts due, both principal and interest, in accordance with the terms of the original loan agreement.

-51-

Non-Covered Nonperforming Assets

The following table summarizes the Company’s non-covered, nonperforming assets at September 30, 2012 and December 31, 2011:

(dollars in thousands)	September 30, 2012			December 31, 2011
Non-covered nonperforming loans	$	17,642		$	22,100
Non-covered other real estate owned		4,080			1,976
Total non-covered nonperforming assets	$	21,722		$	24,076
Restructured Loans (1)	$	27,843		$	26,493
Total non-covered impaired loans	$	45,485		$	48,593
Non-covered accruing loans past due 90
days or more	$	-		$	-
Non-covered potential problem loans (2)	$	1,947		$	2,179
Allowance for loan losses	$	16,570		$	18,032
Non-covered nonperforming loans to total gross
non-covered loans		2.14	%		2.72	%
Allowance for loan losses to total gross non-covered loans		2.01	%		2.22	%
Allowance for loan losses to total non-covered
nonperfoming loans		93.92	%		81.59	%
Non-covered nonperforming assets to total assets		1.29	%		1.44	%
(1) Represents accruing restructured loans performing according to their restructured terms.
(2) Non-covered potential problem loans represent loans where known information about possible credit problems of borrowers causes management to have serious doubts about the ability of such borrowers to comply with the present loan repayment terms.

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The following table summarizes the Company’s non-covered, nonperforming assets, by location, at September 30, 2012:

(dollars in thousands)	Island County			King County			San Juan County			Skagit County			Snohomish County			Whatcom County			Total			Percent of total Non-Covered NPA by loan type
Commercial loans	$	26		$	-		$	285		$	698		$	561		$	347		$	1,917			8.83	%
Real estate mortgage loans:
One-to-four family residential		102			-			-			308			-			774			1,184			5.45	%
Multi-family and commercial		315			456			676			1,017			700			414			3,578			16.47	%
Real estate construction loans:
One-to-four family residential		1,651			-			-			5,389			-			2,686			9,726			44.77	%
Multi-family and commercial		596			-			-			-			-			-			596			2.73	%
Consumer loans:
Direct		180			-			119			217			125			-			641			2.95	%
Other Real Estate Owned		1,120			933			-			1,283			475			269			4,080			18.78	%
Total	$	3,990		$	1,389		$	1,080		$	8,912		$	1,861		$	4,490		$	21,722			100.00	%
Percent of total non-covered NPA
by location		18.37	%		6.39	%		4.97	%		41.03	%		8.57	%		20.67	%		100.00	%

Allowance for Loan Losses: The allowance for loan losses is maintained at a level considered adequate by management to provide for potential loan losses inherent in the portfolio. The Company assesses the allowance for loan losses on a quarterly basis. The Company's methodology for making such assessments and determining the adequacy of the allowance includes the following key elements:

·   Specific Allowances: A specific allowance is established when management has identified unique or particular risks that are related to a specific loan that demonstrate risk characteristics consistent with impairment. Specific allowances may also be established to address the unique risks associated with a group of loans or particular type of credit exposure.

·   Formula Allowance: The calculations of expected loss rates are determined utilizing a two factor approach; loss given default (“LGD”) and probability of default (“PD”). Taken together, these two factors produce the expected loss rate.

Ø   LGD is defined as the rate of loss as determined by dividing the expected net charge-off by defaulted loans, where defaulted loans are defined as loans that have 30 days or greater payment delinquency plus nonaccrual and gross loans charged off.  LGD rates utilized reflect industry experience as determined by state and loan type, and are based upon banks with total assets below one billion dollars.  Banks falling into these size and state groupings will better capture state/geographic differences that occur in LGD rates, as well as provide a sufficient number of observations to be statistically meaningful. LGD rates will be based upon industry experience starting in 1992 and applied at a two standard deviation level. Bank specific LGD rates will be utilized when there are sufficient observations to generate a meaningful result, and these observations should include at least three observations as observed over a minimum of at least one full economic cycle for each type/sector/subsector/geographic combination to be considered meaningful.

Ø   PD is defined as the actual payment default rate (defined as the number of times a loan has been delinquent 30 or more days divided by the number of months the loan has been outstanding from the origination date to the valuation date), or for loans which have not generated an actual payment default rate, the rate applied is based upon industry experience for such loans as applied by loan type and state in which the loan applies to (in the case of real estate loans, the state determination is based upon were the collateral resides), where the expected payment default rate is defined as the sum loans where payment delinquencies are 30 or more days delinquent, plus nonaccrual and gross loans charged off divided by total loans for each group. Expected payment default rates are then scaled against the Bank’s loan risk grades with the Bank’s lowest pass/non-watch grade set to equal the industry PD and then scaled lower or higher against the Bank’s remaining loan grades.

-53-

The following table summarizes the Company’s allocation of allowance for non-covered loan losses at September 30, 2012 and December 31, 2011:

(dollars in thousands)	September 30, 2012					December 31, 2011
	Amount		% of Loans (1)			Amount		% of Loans (1)
Commercial	$	4,357		18.9	%	$	4,034		18.5	%
Real estate mortgage		6,158		52.5	%		6,500		50.7	%
Real estate construction		2,824		9.5	%		4,046		11.2	%
Consumer		3,231		19.1	%		3,452		19.6	%
Total	$	16,570		100.0	%	$	18,032		100.0	%

(1) Represents the total outstanding non-covered loans in each category as a percentage of total non-covered loans outstanding.

While the Company believes that it uses the best information available to determine the allowance for non-covered loan losses, unforeseen market conditions could result in adjustments to the allowance for non-covered loan losses, and net income could be significantly affected if circumstances differ substantially from the assumptions used in making the final determination. Based on the assessment of loan quality, the Company believes that the current allowance for non-covered loan losses is appropriate under the current circumstances and economic conditions.

The following table sets forth historical information regarding the Company's allowance for non-covered loan losses and net charge-offs for the three and nine months ended September 30, 2012 and 2011:

(dollars in thousands)	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2012			2011			2012			2011
Balance at beginning of period	$	17,565		$	19,407		$	18,032		$	18,812
Provision for non-covered loan losses		1,250			2,500			5,600			8,500
Charge-offs:
Commercial		(258	)		(163	)		(1,234	)		(1,320	)
Real estate mortgage		(655	)		(732	)		(3,220	)		(2,351	)
Real estate construction		(1,308	)		(2,216	)		(2,041	)		(4,070	)
Consumer
Direct		(144	)		(207	)		(632	)		(1,120	)
Indirect		(134	)		(260	)		(560	)		(884	)
Total charge-offs		(2,499	)		(3,578	)		(7,687	)		(9,745	)
Recoveries:
Commercial		81			58			114			246
Real estate mortgage		68			424			112			550
Real estate construction		7			1			10			3
Consumer
Direct		23			33			70			98
Indirect		75			91			319			472
Total recoveries		254			607			625			1,369
Net charge-offs		(2,245	)		(2,971	)		(7,062	)		(8,376	)
Balance at end of period	$	16,570		$	18,936		$	16,570		$	18,936

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Deposits: Total deposits decreased $8.1 million for the period ended September 30, 2012, compared to December 31, 2011.

The following table further details the major components of the Company’s deposit portfolio:

(dollars in thousands)	September 30, 2012					December 31, 2011
	Balance		% of total			Balance		% of total			Change
Noninterest-bearing demand	$	252,484		17.3	%	$	219,250		15.0	%	$	33,234
NOW accounts		332,116		22.8	%		276,288		18.8	%		55,828
Money market		292,745		20.1	%		327,256		22.3	%		(34,511	)
Savings		109,107		7.5	%		99,882		6.8	%		9,225
Time deposits		471,778		32.3	%		543,668		37.1	%		(71,890	)
Total deposits	$	1,458,230		100.0	%	$	1,466,344		100.0	%	$	(8,114	)

Wholesale Deposits: The following table further details wholesale deposits, which are included in total deposits shown above:

(dollars in thousands)	September 30, 2012						December 31, 2011
	Balance			% of total			Balance			% of total
Mutual fund money market deposits		14,704			53.4	%		24,704			75.1	%
CDARS deposits		12,837			46.6	%		8,174			24.9	%
Total wholesale deposits	$	27,541			100.0	%	$	32,878			100.0	%
Wholesale deposits to total deposits		1.9	%					2.2	%

Mutual fund money market deposits are obtained from an intermediary that provides cash sweep services to broker-dealers and clearing firms.  Currently, the Company anticipates limiting the growth of these types of deposits. The deposits are payable upon demand.

Certificate Deposit Account Registry System (“CDARS”) deposits are obtained through a broker and represent a reciprocal agreement, whereby the Company obtains a portion of time deposits from another financial institution, not to exceed $250,000 per customer. In return, the other financial institution obtains a portion of the Company’s time deposits. All CDARS deposits represent direct customer relationships with the Company, but for regulatory purposes are required to be classified as brokered deposits. Deposit maturities range between four weeks and twenty four months.

-55-

Borrowings: At September 30, 2012 and December 31, 2011, borrowings totaled $25.8 million. The Company’s sources of funds consist of borrowings from correspondent banks, the FHLB and junior subordinated debentures.  

·   FHLB Overnight Borrowings:  The Company can use advances from the FHLB to supplement funding needs. The FHLB provides credit for member financial institutions in the form of overnight borrowings, short term and long term advances. As a member, the Bank is required to own capital stock in the FHLB and is authorized to apply for advances on the pledge of certain of its mortgage loans and other assets (principally, securities which are obligations of, or guaranteed by, the United States) provided certain standards related to creditworthiness have been met. At September 30, 2012, the Company had no outstanding overnight borrowings, with an unused line of credit of $144.0 million, subject to certain collateral and stock requirements.

·   Federal Funds Purchased: The Company also uses lines of credit at correspondent banks to purchase federal funds for short-term funding. There were no outstanding borrowings at September 30, 2012.  Available borrowings under these lines of credit totaled $35.0 million at September 30, 2012.

·   Federal Reserve Bank Overnight Borrowings: The Company can use advances from the Federal Reserve Bank (“FRB”) of San Francisco to supplement funding needs. The FRB provides credit for financial institutions in the form of overnight borrowings. The Bank is required to pledge certain of its loans and other assets (principally, securities which are obligations of, or guaranteed by, the United States) provided certain standards related to creditworthiness have been met.  There were no outstanding overnight borrowings at September 30, 2012, with an unused line of credit of $17.4 million.

·   Junior Subordinated Debentures: Washington Banking Master Trust (the “Master Trust”), a wholly-owned subsidiary of the Company, issued $25.8 million of trust preferred securities with a quarterly adjustable rate based upon the London Interbank Offered Rate (“LIBOR”) plus 1.56%. The debentures, within certain limitations, are considered Tier 1 capital for regulatory capital requirements.  The Company does not expect to issue any additional junior subordinated debentures in the future.

Capital

Shareholders’ Equity: Shareholders’ equity increased $10.2 million to $181.0 million at September 30, 2012, from $170.8 million at December 31, 2011. The increase in shareholders’ equity was primarily attributable to net income available to common shareholders of $12.3 million partially reduced by $5.4 million in cash dividends on common stock during the nine months ended September 30, 2012.

On October 25, 2012, the Company announced that its Board of Directors declared a cash dividend of $0.15 per share to shareholders of record as of November 5, 2012, payable on November 20, 2012.  Cash dividends are approved by the Board of Directors in connection with its review of the Company’s capital plan. The cash dividend is subject to regulatory limitation. There is no assurance that future cash dividends will be declared or increased.

TARP-CPP Capital: On January 16, 2009, in exchange for an aggregate purchase price of $26.4 million, the Company issued and sold to the United States Department of the Treasury pursuant to the Troubled Asset Relief Program Capital Purchase Program the following: (i) 26,380 shares of the Company’s newly designated Fixed Rate Cumulative Perpetual Preferred Stock, Series A, no par value per share, and liquidation preference $1,000 per share ($26.4 million liquidation preference in the aggregate) and (ii) a warrant to purchase up to 492,164 shares of the Company’s common stock, no par value per share, at an exercise price of $8.04 per share, subject to certain anti-dilution and other adjustments.

In connection with the issuance and sale of the Company’s securities, the Company entered into a Letter Agreement including the Securities Purchase Agreement - Standard Terms, dated January 16, 2009, with the United States Department of the Treasury (the “Agreement”). The Agreement contained limitations on the payment of quarterly cash dividends on the Company’s common stock in excess of $0.065 per share and on the Company’s ability to repurchase its common stock.

The Series A Preferred Stock paid cumulative dividends at a rate of 5% per annum, applied to the $1,000 per share liquidation preference, as and if declared by the Company’s Board of Directors out of funds legally available. The Series A Preferred Stock had no maturity date and ranked senior to common stock with respect to the payment of dividends and distributions and amounts payable upon liquidation, dissolution and winding up of the Company.

-56-

On January 12, 2011, the Company redeemed all 26,380 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A.  The Company paid a total of $26.6 million to the Treasury, consisting of $26.4 million in principal and $209 thousand in accrued and unpaid dividends. The Company's redemption of the shares was not subject to additional conditions.

On March 2, 2011, the Company completed the repurchase of Warrant to Purchase Common Stock issued to the U.S. Department of the Treasury pursuant to the Troubled Asset Relief Program Capital Purchase Program. The Company repurchased the Warrant for $1.6 million. The Warrant repurchase, together with the Company’s earlier redemption of the entire amount of Fixed Rate Cumulative Perpetual Preferred Stock, Series A, issued to the U.S. Treasury, represents full repayment of all TARP obligations and cancellation of all equity interests in the Company held by the U.S. Treasury.

Regulatory Capital Requirements: Banking regulations require bank holding companies and banks to maintain a minimum leverage ratio of core capital to adjusted average total assets of at least 4%. In addition, banking regulators have adopted risk-based capital guidelines, under which risk percentages are assigned to various categories of assets and off-balance sheet items to calculate a risk-adjusted capital ratio. Tier I capital generally consists of common shareholders' equity (which does not include unrealized gains and losses on securities), less goodwill and certain identifiable intangible assets, while Tier II capital includes the allowance for loan losses and subordinated debt, both subject to certain limitations.

The FDIC established the qualifications necessary to be classified as a “well-capitalized” bank, primarily for assignment of FDIC insurance premium rates.  As the following table indicates, the Company and Bank qualified as “well-capitalized” at September 30, 2012 and December 31, 2011:

	Regulatory Requirements						Actual Ratios
	Adequately- capitalized			Well-capitalized			September 30, 2012			December 31, 2011
Total risk-based capital ratio
Company (consolidated)		8.00	%		N/A			19.59	%		19.73	%
Whidbey Island Bank		8.00	%		10.00	%		19.02	%		19.09	%
Tier 1 risk-based capital ratio
Company (consolidated)		4.00	%		N/A			18.34	%		18.47	%
Whidbey Island Bank		4.00	%		6.00	%		17.77	%		17.84	%
Tier 1 leverage ratio
Company (consolidated)		4.00	%		N/A			11.65	%		11.16	%
Whidbey Island Bank		4.00	%		5.00	%		11.25	%		10.77	%

There can be no assurance that additional capital will not be required in the future due to greater-than-expected growth, unforeseen expenses or revenue shortfalls.

Liquidity and Cash Flows

Whidbey Island Bank: The principal objective of the Bank’s liquidity management program is to maintain the ability to meet day-to-day cash flow requirements of its customers who either wish to withdraw funds or to draw upon credit facilities to meet their cash needs. The Bank monitors the sources and uses of funds on a daily basis to maintain an acceptable liquidity position. In addition to liquidity from core deposits and the repayment and maturities of loans, the Bank can utilize established lines of credit with correspondent banks, sale of investment securities or borrowings from the FHLB.

Washington Banking Company:The Company is a separate legal entity from the Bank and must provide for its own liquidity. Substantially all of the Company’s revenues are obtained from dividends declared and paid by the Bank. There are statutory and regulatory provisions that could limit the ability of the Bank to pay dividends to the Company. However, management believes that such restrictions will not have an adverse impact on the ability of the Company to meets its ongoing cash obligations, which consist principally of debt service on the $25.8 million of outstanding junior subordinated debentures.

-57-

Consolidated Cash Flows: As disclosedin the Condensed Consolidated Statements of Cash Flows, net cash provided by operating activities was $53.7 million for the nine months ended September 30, 2012.  For the same period, net cash used in investing activities was $30.2 million.  Purchases of available for sale investment securities accounted for $133.6 million, which was partially offset by $78.4 million in maturities, calls and principal payments of investment securities and mortgage-backed securities and $15.8 million in proceeds from the sale of covered other real estate owned.  Net cash used in financing activities was $13.3 million for the nine months ended September 30, 2012, and primarily consisted of the net decrease in deposits of $8.1 million and the $5.4 million payment of cash dividends on common stock.

Capital Resources:

Off-Balance Sheet Items: The Company is a party to financial instruments with off-balance sheet risk.  Among the off-balance sheet items entered into in the ordinary course of business are commitments to extend credit and the issuance of letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized on the balance sheet.  Certain commitments are collateralized. At September 30, 2012 and December 31, 2011, the Company’s commitments under letters of credit and financial guarantees amounted to $1.5 million and $1.1 million, respectively. Since many of the commitments are expected to expire without being drawn upon, these total commitment amounts do not necessarily represent future cash requirements.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

At September 30, 2012, based on the measures used to monitor and manage interest rate risk, there has not been a material change in the Company's interest rate risk since December 31, 2011.  Should rates increase, the Company may, or may not be positively impacted due to its current slightly liability sensitive position.  For additional information, refer to the Company's Form 10-K for year ended December 31, 2011 filed with the SEC.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this report, management, including our Chief Executive Officer, Chief Financial Officer and Principal Accounting Officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures.  Based on this evaluation, they concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information required to be included in the periodic reports to the SEC.  The design of any system of controls is based in part upon various assumptions about the likelihood of future events, and there can be no assurance that any of the Company’s plans, products, services or procedures will succeed in achieving their intended goals under future conditions. Management found no facts that would require the Company to take any corrective actions with regard to significant deficiencies or material weaknesses.

Changes in Internal Control over Disclosure and Reporting

There was no change in the Company’s internal control over financial reporting that occurred during the period ended September 30, 2012, that has materially affected, or is reasonably likely to materially affect, the internal control over financial reporting.

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PART II – OTHER INFORMATION

Item 1. Legal Proceedings

The Company is involved in legal proceedings from time to time in the regular course of business. At this time, based on information currently available, we believe that the eventual outcome of such pending litigation will not have a material adverse effect on the Company’s financial condition, results of operations or cash flows.

Item 1A. Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed under Part I, Item 1A in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.  These factors could materially and adversely affect our business, financial condition, liquidity, results of operations and capital position, and could cause our actual results to differ materially from our historical results or the results contemplated by the forward-looking statements contained in this report.

Proposed rules will increase capital requirements.

On June 6, 2012, the OCC and the other federal bank regulatory agencies issued a series of proposed rules to revise their risk-based and leverage capital requirements and their method for calculating risk-weighted assets to make them consistent with the agreements that were reached by the Basel Committee on Banking Supervision in “Basel III: A Global Regulatory Framework for More Resilient Banks and Banking Systems” (“Basel III”). The proposed rules would apply to all depository institutions, top-tier bank holding companies with total consolidated assets of $500 million or more, and top-tier savings and loan holding companies (“banking organizations”). Among other things, the proposed rules establish a new common equity tier 1 minimum capital requirement and a higher minimum tier 1 capital requirement, and assign higher risk weightings (150%) to exposures that are more than 90 days past due or are on nonaccrual status and certain commercial real estate facilities that finance the acquisition, development or construction of real property. The proposed rules also limit a banking organization’s capital distributions and certain discretionary bonus payments if the banking organization does not hold a “capital conservation buffer” consisting of a specified amount of common equity tier 1 capital in addition to the amount necessary to meet its minimum risk-based capital requirements. The final rules will become effective on January 1, 2013, and the changes set forth in the final rules will be phased in from January 1, 2013 through January 1, 2019.  

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

(a) – (c) None

Item 3. Defaults Upon Senior Securities

(a) – (b) None

Item 4. Mine Safety Disclosures

Not applicable

Item 5. Other Information

Not applicable

-59-

Item 6. Exhibits

	3.1		Amended and Restated Articles of Incorporation (incorporated by reference to Exhibit 3.1 to Form 10-Q filed August 9, 2011)
	3.2		Bylaws of the Company (1)
	4.1		Form of Common Stock Certificate (1)
	4.2		Pursuant to Section 601(b)(4)(iii)(A) of Regulation S-K, copies of instruments defining the rights of holders of long-term debt are not filed.  The Company agrees to furnish a copy thereof to the Securities and Exchange Commission upon request.
	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
101.INSXBRL Instance Document **
101.SCHXBRL Taxonomy Extension Scheme Document **
101.CALXBRL Taxonomy Extension Calculation Linkbase Document **
101.DEFXBRL Taxonomy Extension Definition Linkbase Document **
101.LABXBRL Taxonomy Extension Label Linkbase Document **
101.PREXBRL Taxonomy Extension Presentation Linkbase Document **
** Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the
Securities Act of 1933, as amended, or Section 18 of the Securities and Exchange Act of 1934, as amended and otherwise are not subject to liability under those sections.
		(1)	Incorporated by reference to the Company's registration statement Form SB-2 (File No. 333-49925), filed April 10, 1998

-60-

SIGNATURES

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

WASHINGTON BANKING COMPANY

Date: November 8, 2012	By: /s/ John L. Wagner
	President and Chief Executive Officer
	(Principal Executive Officer)

Date: November 8, 2012	By: /s/ Richard A.Shields
	Executive Vice President and Chief Financial Officer
	(Principal Financial and Accounting Officer)

-61-

EX-31.1

Exhibit 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

I, John L. Wagner, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Washington Banking Company;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)and15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)   Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

         (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures andpresentedin this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

         (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting,to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):

          (a) All significant deficiencies in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

          (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: November 8, 2012	/s/ John L. Wagner
	Chief Executive Officer
	(Principal Executive Officer)

EX-31.2

Exhibit 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

I, Richard A. Shields, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Washington Banking Company;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)and15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)   Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

        (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures andpresentedin this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

         (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting,to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):

         (a) All significant deficiencies in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

         (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: November 8, 2012	/s/ Richard A. Shields
	Chief Financial Officer
	(Principal Financial and Accounting Officer)

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Washington Banking Company (the “Company”) on Form 10-Q for the period ended September 30, 2012, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, John L. Wagner, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company as of, and for, the periods presented in the Report.

This certification is being furnished solely to comply with the requirements of 18 U.S.C. Section 1350, and shall not be incorporated by reference into any of the Company’s filings under the Securities Act of 1933 or the Securities Exchange Act of 1934, or otherwise be deemed to be filed as part of the Report or under such Acts.

 /s/ John L. Wagner

 Chief Executive Officer

 (Principal Executive Officer)

 November 8, 2012

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Washington Banking Company (the “Company”) on Form 10-Q for the period ended September 30, 2012, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Richard A. Shields, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company as of, and for, the periods presented in the Report.

This certification is being furnished solely to comply with the requirements of 18 U.S.C. Section 1350, and shall not be incorporated by reference into any of the Company’s filings under the Securities Act of 1933 or the Securities Exchange Act of 1934, or otherwise be deemed to be filed as part of the Report or under such Acts.

 /s/ Richard A. Shields

 Chief Financial Officer

 (Principal Financial and Accounting Officer)

 November 8, 2012

XML

Fair Value Measurements, Balance Sheet Grouping (Details) (Fair Value, Measurements, Recurring [Member], USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011
Assets
Cash and cash equivalents	$ 30,885	$ 25,399
Interest bearing deposit, fair value	84,570	80,514
Federal funds sold	670
Available-for-sale securities fair value	353,881	295,955
FHLB stock	7,509	7,576
Loans held-for-sale - fair value	15,139	22,421
Non-covered loans fair value	811,222	796,663
Covered loans fair value	247,670	304,145
Bank owned life insurance fair value	17,671	17,513
FDIC indemnification asset fair value	34,111	41,041
Financial liabilities [Abstract]
Deposits	1,462,393	1,471,615
Junior subordinated debentures fair value	12,193	9,802
Level 1 [Member]
Assets
Cash and cash equivalents	30,885	25,399
Interest bearing deposit, fair value	84,570	80,514
Federal funds sold	670
Available-for-sale securities fair value	0	0
FHLB stock		7,576
Loans held-for-sale - fair value	0	0
Non-covered loans fair value	0	0
Covered loans fair value	0	0
Bank owned life insurance fair value	17,671	17,513
FDIC indemnification asset fair value	0	0
Financial liabilities [Abstract]
Deposits	0	0
Junior subordinated debentures fair value	0	0
Level 2 [Member]
Assets
Cash and cash equivalents	0	0
Interest bearing deposit, fair value	0	0
Federal funds sold	0
Available-for-sale securities fair value	353,881	295,955
FHLB stock	0	0
Loans held-for-sale - fair value	15,139	22,421
Non-covered loans fair value	0	0
Covered loans fair value	0	0
Bank owned life insurance fair value	0	0
FDIC indemnification asset fair value	0	0
Financial liabilities [Abstract]
Deposits	0	0
Junior subordinated debentures fair value	0	0
Level 3 [Member]
Assets
Cash and cash equivalents	0	0
Interest bearing deposit, fair value	0	0
Federal funds sold	0
Available-for-sale securities fair value	0	0
FHLB stock	0	0
Loans held-for-sale - fair value	0	0
Non-covered loans fair value	811,222	796,663
Covered loans fair value	247,670	304,145
Bank owned life insurance fair value	0	0
FDIC indemnification asset fair value	34,111	41,041
Financial liabilities [Abstract]
Deposits	1,462,393	1,471,615
Junior subordinated debentures fair value	12,193	9,802
Carrying value [Member]
Assets
Cash and cash equivalents	30,885	25,399
Interest bearing deposit, fair value	84,570	80,514
Federal funds sold	670
Available-for-sale securities fair value	353,881	295,955
FHLB stock	7,509	7,576
Loans held-for-sale - fair value	15,139	22,421
Non-covered loans fair value	824,610	812,830
Covered loans fair value	232,524	269,081
Bank owned life insurance fair value	17,671	17,513
FDIC indemnification asset fair value	44,713	65,586
Financial liabilities [Abstract]
Deposits	1,458,230	1,466,344
Junior subordinated debentures fair value	$ 25,774	$ 25,774

XML

Covered Assets and FDIC Indemnification Asset (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011	Dec. 31, 2011
Covered loans [Line Items]
Covered loans	$ 232,524		$ 232,524		$ 269,081
Subtotal, before discounts	287,801		287,801		350,764
Fair Value discount	(55,277)		(55,277)		(81,683)
Allowance for loan losses	(1,007)		(1,007)		(870)
Total covered loans, net	231,517		231,517		268,211
Other Real Estate, Covered [Roll Forward]
Balance, beginning of period	23,000	32,690	26,622	29,766
Additions to covered OREO	1,305	4,936	8,478	19,558
Capitalized improvements				746
Valuation adjustments	(103)		(2,902)
Dispositions of covered OREO, net	(5,391)	(11,853)	(13,387)	(24,297)
Balance, end of period	18,811	25,773	18,811	25,773
FDIC Indemnification Asset [Roll Forward]
Balance, beginning of period	54,867	89,906	65,586	106,067
Change in FDIC indemnification asset	(2,762)	(2,586)	(8,898)	(5,630)
Reduction due to loans paid in full	(545)	(1,639)	(4,169)	(7,566)
Transfers to (due from) FDIC	(6,847)	(7,383)	(7,806)	(14,573)
Balance, end of period	44,713	78,298	44,713	78,298
City Bank [Member]
Covered loans [Line Items]
Covered loans	153,302		153,302		170,125
Subtotal, before discounts	187,087		187,087		216,224
Fair Value discount	(33,785)		(33,785)		(46,099)
Allowance for loan losses	(792)		(792)		(655)
Total covered loans, net	152,510		152,510		169,470
Certain Loans Acquired in Transfer Accounted for as Debt Securities, Accretable Yield Movement Schedule [Roll Forward]
Balance at beginning of period	63,623	71,089	78,004	56,079
Accretion to interest income	(5,247)	(6,468)	(16,552)	(18,493)
Disposals	(1,718)	(3,725)	(4,441)	(13,416)
Reclassifications (to) from nonaccretable difference	0	0	(353)	36,726
Balance at end of period	56,658	60,896	56,658	60,896
Other Real Estate, Covered [Roll Forward]
Balance, beginning of period	13,580	21,290	19,341	17,906
Additions to covered OREO	561	4,972	1,517	16,899
Capitalized improvements				0
Valuation adjustments	0		(1,958)
Dispositions of covered OREO, net	(4,579)	(9,527)	(9,338)	(18,070)
Balance, end of period	9,562	16,735	9,562	16,735
FDIC Indemnification Asset [Roll Forward]
Balance, beginning of period	37,587	56,643	43,235	66,560
Change in FDIC indemnification asset	(2,510)	(2,586)	(8,273)	(6,188)
Reduction due to loans paid in full	(415)	(1,639)	(1,739)	(7,566)
Transfers to (due from) FDIC	(5,154)	(2,532)	(3,715)	(2,920)
Balance, end of period	29,508	49,886	29,508	49,886
North County Bank [Member]
Covered loans [Line Items]
Covered loans	79,222		79,222		98,956
Subtotal, before discounts	100,714		100,714		134,540
Fair Value discount	(21,492)		(21,492)		(35,584)
Allowance for loan losses	(215)		(215)		(215)
Total covered loans, net	79,007		79,007		98,741
Certain Loans Acquired in Transfer Accounted for as Debt Securities, Accretable Yield Movement Schedule [Roll Forward]
Balance at beginning of period	26,845	23,275	29,574	27,880
Accretion to interest income	(3,694)	(2,109)	(11,443)	(6,714)
Disposals	(2,796)	0	(5,517)	0
Reclassifications (to) from nonaccretable difference	4	0	7,745	0
Balance at end of period	20,359	21,166	20,359	21,166
Other Real Estate, Covered [Roll Forward]
Balance, beginning of period	9,420	11,400	7,281	11,860
Additions to covered OREO	744	(36)	6,961	2,659
Capitalized improvements				746
Valuation adjustments	(103)		(944)
Dispositions of covered OREO, net	(812)	(2,326)	(4,049)	(6,227)
Balance, end of period	9,249	9,038	9,249	9,038
FDIC Indemnification Asset [Roll Forward]
Balance, beginning of period	17,280	33,263	22,351	39,507
Change in FDIC indemnification asset	(252)	0	(625)	558
Reduction due to loans paid in full	(130)	0	(2,430)	0
Transfers to (due from) FDIC	(1,693)	(4,851)	(4,091)	(11,653)
Balance, end of period	15,205	28,412	15,205	28,412
Commercial [Member]
Covered loans [Line Items]
Covered loans	33,984		33,984		43,588
Commercial [Member] | City Bank [Member]
Covered loans [Line Items]
Covered loans	16,358		16,358		17,380
Commercial [Member] | North County Bank [Member]
Covered loans [Line Items]
Covered loans	17,626		17,626		26,208
Real Estate Mortgage [Member]
Covered loans [Line Items]
Covered loans	212,511		212,511		246,063
Real Estate Mortgage [Member] | City Bank [Member]
Covered loans [Line Items]
Covered loans	147,779		147,779		167,701
Real Estate Mortgage [Member] | North County Bank [Member]
Covered loans [Line Items]
Covered loans	64,732		64,732		78,362
Real Estate Mortgage [Member] | One to Four Family Residential [Member]
Covered loans [Line Items]
Covered loans	14,812		14,812		15,753
Real Estate Mortgage [Member] | One to Four Family Residential [Member] | City Bank [Member]
Covered loans [Line Items]
Covered loans	3,836		3,836		4,673
Real Estate Mortgage [Member] | One to Four Family Residential [Member] | North County Bank [Member]
Covered loans [Line Items]
Covered loans	10,976		10,976		11,080
Real Estate Mortgage [Member] | Multi Family and Commercial [Member]
Covered loans [Line Items]
Covered loans	197,699		197,699		230,310
Real Estate Mortgage [Member] | Multi Family and Commercial [Member] | City Bank [Member]
Covered loans [Line Items]
Covered loans	143,943		143,943		163,028
Real Estate Mortgage [Member] | Multi Family and Commercial [Member] | North County Bank [Member]
Covered loans [Line Items]
Covered loans	53,756		53,756		67,282
Real Estate Construction [Member]
Covered loans [Line Items]
Covered loans	30,719		30,719		46,345
Real Estate Construction [Member] | City Bank [Member]
Covered loans [Line Items]
Covered loans	20,165		20,165		27,581
Real Estate Construction [Member] | North County Bank [Member]
Covered loans [Line Items]
Covered loans	10,554		10,554		18,764
Real Estate Construction [Member] | One to Four Family Residential [Member]
Covered loans [Line Items]
Covered loans	9,145		9,145		11,875
Real Estate Construction [Member] | One to Four Family Residential [Member] | City Bank [Member]
Covered loans [Line Items]
Covered loans	5,960		5,960		6,102
Real Estate Construction [Member] | One to Four Family Residential [Member] | North County Bank [Member]
Covered loans [Line Items]
Covered loans	3,185		3,185		5,773
Real Estate Construction [Member] | Multi Family and Commercial [Member]
Covered loans [Line Items]
Covered loans	21,574		21,574		34,470
Real Estate Construction [Member] | Multi Family and Commercial [Member] | City Bank [Member]
Covered loans [Line Items]
Covered loans	14,205		14,205		21,479
Real Estate Construction [Member] | Multi Family and Commercial [Member] | North County Bank [Member]
Covered loans [Line Items]
Covered loans	7,369		7,369		12,991
Consumer [Member] | Direct Consumer Loan [Member]
Covered loans [Line Items]
Covered loans	10,587		10,587		14,768
Consumer [Member] | Direct Consumer Loan [Member] | City Bank [Member]
Covered loans [Line Items]
Covered loans	2,785		2,785		3,562
Consumer [Member] | Direct Consumer Loan [Member] | North County Bank [Member]
Covered loans [Line Items]
Covered loans	$ 7,802		$ 7,802		$ 11,206

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Covered Assets and FDIC Indemnification Asset (Tables)

9 Months Ended

Sep. 30, 2012

Covered Assets and FDIC Indemnification Asset [Abstract]

Schedule of Covered Loans by Type and Covering Bank

The following table presents the major types of covered loans at September 30, 2012 and December 31, 2011. The classification of covered loan balances presented is reported in accordance with the regulatory reporting requirements.

(dollars in thousands)	September 30, 2012
	City Bank			North County Bank			Total
Commercial	$	16,358		$	17,626		$	33,984
Real estate mortgages:
One-to-four family residential		3,836			10,976			14,812
Multi-family residential and commercial		143,943			53,756			197,699
Total real estate mortgages		147,779			64,732			212,511
Real estate construction:
One-to-four family residential		5,960			3,185			9,145
Multi-family and commercial		14,205			7,369			21,574
Total real estate construction		20,165			10,554			30,719
Consumer - direct		2,785			7,802			10,587
Subtotal		187,087			100,714			287,801
Fair value discount		(33,785	)		(21,492	)		(55,277	)
Total covered loans		153,302			79,222			232,524
Allowance for loan losses		(792	)		(215	)		(1,007	)
Total covered loans, net	$	152,510		$	79,007		$	231,517

(dollars in thousands)	December 31, 2011
	City Bank			North County Bank			Total
Commercial	$	17,380		$	26,208		$	43,588
Real estate mortgages:
One-to-four family residential		4,673			11,080			15,753
Multi-family residential and commercial		163,028			67,282			230,310
Total real estate mortgages		167,701			78,362			246,063
Real estate construction:
One-to-four family residential		6,102			5,773			11,875
Multi-family and commercial		21,479			12,991			34,470
Total real estate construction		27,581			18,764			46,345
Consumer - direct		3,562			11,206			14,768
Subtotal		216,224			134,540			350,764
Fair value discount		(46,099	)		(35,584	)		(81,683	)
Total covered loans		170,125			98,956			269,081
Allowance for loan losses		(655	)		(215	)		(870	)
Total covered loans, net	$	169,470		$	98,741		$	268,211

Schedule of Changes in Accretable Yield

The following table presents the changes in the accretable yield for the three and nine months ended September 30, 2012 and 2011, for each respective acquired loan portfolio:

(dollars in thousands)	Three Months Ended September 30,
	2012						2011
	City Bank			North County Bank			City Bank			North County Bank
Balance, beginning of period	$	63,623		$	26,845		$	71,089		$	23,275
Accretion to interest income		(5,247	)		(3,694	)		(6,468	)		(2,109	)
Disposals		(1,718	)		(2,796	)		(3,725	)		-
Reclassification (to) from nonaccretable difference		-			4			-			-
Balance, end of period	$	56,658		$	20,359		$	60,896		$	21,166

(dollars in thousands)	Nine Months Ended September 30,
	2012						2011
	City Bank			North County Bank			City Bank			North County Bank
Balance, beginning of period	$	78,004		$	29,574		$	56,079		$	27,880
Accretion to interest income		(16,552	)		(11,443	)		(18,493	)		(6,714	)
Disposals		(4,441	)		(5,517	)		(13,416	)		-
Reclassification (to) from nonaccretable difference		(353	)		7,745			36,726			-
Balance, end of period	$	56,658		$	20,359		$	60,896		$	21,166

Schedule of Covered Other Real Estate Owned

The following tables summarize the activity related to covered OREO for the three and nine months ended September 30, 2012 and 2011:

(dollars in thousands)	Three Months Ended September 30, 2012
	City Bank			North County Bank			Total
Balance, beginning of period	$	13,580		$	9,420		$	23,000
Additions to covered OREO		561			744			1,305
Dispositions of covered OREO, net		(4,579	)		(812	)		(5,391	)
Valuation adjustments		-			(103	)		(103	)
Balance, end of period	$	9,562		$	9,249		$	18,811

(dollars in thousands)	Three Months Ended September 30, 2011
	City Bank			North County Bank			Total
Balance, beginning of period	$	21,290		$	11,400		$	32,690
Additions to covered OREO		4,972			(36	)		4,936
Dispositions of covered OREO, net		(9,527	)		(2,326	)		(11,853	)
Balance, end of period	$	16,735		$	9,038		$	25,773

(dollars in thousands)	Nine Months Ended September 30, 2012
	City Bank			North County Bank			Total
Balance, beginning of period	$	19,341		$	7,281		$	26,622
Additions to covered OREO		1,517			6,961			8,478
Dispositions of covered OREO, net		(9,338	)		(4,049	)		(13,387	)
Valuation adjustments		(1,958	)		(944	)		(2,902	)
Balance, end of period	$	9,562		$	9,249		$	18,811

(dollars in thousands)	Nine Months Ended September 30, 2011
	City Bank			North County Bank			Total
Balance, beginning of period	$	17,906		$	11,860		$	29,766
Additions to covered OREO		16,899			2,659			19,558
Capitalized improvements		-			746			746
Dispositions of covered OREO, net		(18,070	)		(6,227	)		(24,297	)
Balance, end of period	$	16,735		$	9,038		$	25,773

Schedule of FDIC Indemnification Asset

(c) FDIC Indemnification Asset:The following table summarizes the activity related to the FDIC indemnification asset for the three and nine months ended September 30, 2012 and 2011:

(dollars in thousands)	Three Months Ended September 30, 2012
	City Bank			North County Bank			Total
Balance, beginning of period	$	37,587		$	17,280		$	54,867
Change in FDIC indemnification asset		(2,510	)		(252	)		(2,762	)
Reduction due to loans paid in full		(415	)		(130	)		(545	)
Transfers to (due from) FDIC		(5,154	)		(1,693	)		(6,847	)
Balance, end of period	$	29,508		$	15,205		$	44,713

(dollars in thousands)	Three Months Ended September 30, 2011
	City Bank			North County Bank			Total
Balance, beginning of period	$	56,643		$	33,263		$	89,906
Change in FDIC indemnification asset		(2,586	)		-			(2,586	)
Reduction due to loans paid in full		(1,639	)		-			(1,639	)
Transfers to (due from) FDIC		(2,532	)		(4,851	)		(7,383	)
Balance, end of period	$	49,886		$	28,412		$	78,298

(dollars in thousands)	Nine Months Ended September 30, 2012
	City Bank			North County Bank			Total
Balance, beginning of period	$	43,235		$	22,351		$	65,586
Change in FDIC indemnification asset		(8,273	)		(625	)		(8,898	)
Reduction due to loans paid in full		(1,739	)		(2,430	)		(4,169	)
Transfers to (due from) FDIC		(3,715	)		(4,091	)		(7,806	)
Balance, end of period	$	29,508		$	15,205		$	44,713

(dollars in thousands)	Nine Months Ended September 30, 2011
	City Bank			North County Bank			Total
Balance, beginning of period	$	66,560		$	39,507		$	106,067
Change in FDIC indemnification asset		(6,188	)		558			(5,630	)
Reduction due to loans paid in full		(7,566	)		-			(7,566	)
Transfers to (due from) FDIC		(2,920	)		(11,653	)		(14,573	)
Balance, end of period	$	49,886		$	28,412		$	78,298

XML

Shareholders' Equity (Details) (USD $) Share data in Thousands, except Per Share data, unless otherwise specified	1 Months Ended	3 Months Ended
	Jan. 31, 2011	Mar. 31, 2011	Sep. 30, 2012	Dec. 31, 2011	Jan. 16, 2009
Shareholders' Equity [Abstract]
Preferred stock issued					$ 26,400,000
Preferred stock, shares issued (in shares)					26,380
Preferred Stock, No Par Value					$ 0
Preferred stock, liquidation preference per share (in dollars per share)					1,000
Preferred stock, liquidation preference					26,400,000
Number of common shares available for TARP warrant issued (in shares)					492,164
Common Stock, No Par Value			$ 0	$ 0	$ 0
Investment Warrants, exercise price (in dollars per share)	$ 8.04
Maximum dividends allowed under agreement (in dollars per share)	$ 0.065
Preferred Stock, Dividend Rate, Percentage (in hundredths)	5.00%
Preferred stock redeemed (in shares)	26,380
Preferred stock redeemed	26,600,000
Principal value of preferred stock redeemed	26,400,000
Payment of accrued dividends	209,000
Repurchase of TARP warrants		$ 1,600,000

XML

Description of Business and Summary of Significant Accounting Policies

9 Months Ended

Sep. 30, 2012

Description of Business and Summary of Significant Accounting Policies [Abstract]

Description of Business and Summary of Significant Accounting Policies

(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.

§ 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 September 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 nine months ended September 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 to 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.

(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.

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Fair Value Measurements (Tables)

9 Months Ended

Sep. 30, 2012

Fair Value Measurements [Abstract]

Fair Value, Assets Measured on Recurring Basis

The following table presents the Company's financial instruments measured at fair value on a recurring basis at September 30, 2012 and December 31, 2011:

(dollars in thousands)	Fair value at September 30, 2012
	Level 1		Level 2		Level 3		Total
U.S. government agencies	$	-	$	75,505	$	-	$	75,505
U.S. Treasuries		-		10,013		-		10,013
Pass-through securities		-		174,117		-		174,117
Taxable state and political subdivisions		-		6,557		-		6,557
Tax exempt state and political subdivisions		-		55,510		-		55,510
Corporate obligations		-		10,485		-		10,485
Agency-issued collateralized mortgage obligations		-		14,511		-		14,511
Asset-backed securities		-		5,167		-		5,167
Investments in mutual funds and other equities		-		2,016		-		2,016
Total	$	-	$	353,881	$	-	$	353,881

(dollars in thousands)	Fair value at December 31, 2011
	Level 1		Level 2		Level 3		Total
U.S. government agencies	$	-	$	76,574	$	-	$	76,574
U.S. Treasuries		-		42,597		-		42,597
Pass-through securities		-		117,398		-		117,398
Taxable state and political subdivisions		-		9,758		-		9,758
Tax exempt state and political subdivisions		-		37,335		-		37,335
Corporate obligations		-		10,287		-		10,287
Investments in mutual funds and other equities		-		2,006		-		2,006
Total	$	-	$	295,955	$	-	$	295,955

Fair Value Measurements, Nonrecurring

The following table presents the carrying value of financial instruments by level within the fair value hierarchy, for which a non-recurring change in fair value has been recorded:

(dollars in thousands)	Fair value at September 30, 2012
	Level 1		Level 2		Level 3		Total		Total losses for the period
Non-covered impaired loans (1)	$	-	$	-	$	41,970	$	41,970	$	(7,982	)
Non-covered other real estate owned (2)		-		-		4,080		4,080		(678	)
Covered other real estate owned (2)		-		-		18,811		18,811		(2,902	)
Total	$	-	$	-	$	64,861	$	64,861	$	(11,562	)

(dollars in thousands)	Fair value at December 31, 2011
	Level 1		Level 2		Level 3		Total		Total losses for the period
Non-covered impaired loans (1)	$	-	$	-	$	44,845	$	44,845	$	(8,182	)
Non-covered other real estate owned (2)		-		-		1,976		1,976		(272	)
Covered other real estate owned (2)		-		-		26,622		26,622		-
Total	$	-	$	-	$	73,443	$	73,443	$	(8,454	)

(1) Represents carrying value and related specific valuation allowances, which are included in the allowance for loan losses.

(2) Represents the fair value and related losses of foreclosed real estate and other collateral owned that were measured at fair value subsequent to their initial classification as non-covered other real estate owned and covered other real estate owned.

Schedule of carrying value and fair value of financial instruments

(b) Disclosures about Fair Value of Financial Instruments: The table below is a summary of fair value estimates for financial instruments at September 30, 2012 and December 31, 2011, including financial instruments recorded at fair value on a recurring and nonrecurring basis (summarized in the table above). The carrying amounts in the following table are recorded in the statement of financial condition under the indicated captions. The Company has excluded non-financial assets and non-financial liabilities such as Bank premises and equipment, deferred taxes and other liabilities.

(dollars in thousands)	September 30, 2012
			Fair value measurements using:
	Carrying value		Total		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	30,885	$	30,885	$	30,885	$	-	$	-
Interest-bearing deposits		84,570		84,570		84,570		-		-
Federal funds sold		670		670		670		-		-
Investment securities available for sale		353,881		353,881		-		353,881		-
FHLB stock		7,509		7,509		7,509		-		-
Loans held for sale		15,139		15,139		-		15,139		-
Non-covered loans		824,610		811,222		-		-		811,222
Covered loans		232,524		247,670		-		-		247,670
Bank owned life insurance		17,671		17,671		17,671		-		-
FDIC indemnification asset		44,713		34,111		-		-		34,111
Financial liabilities:
Deposits		1,458,230		1,462,393		-		-		1,462,393
Junior subordinated debentures		25,774		12,193		-		-		12,193

(dollars in thousands)	December 31, 2011
			Fair value measurements using:
	Carrying value		Total		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	25,399	$	25,399	$	25,399	$	-	$	-
Interest-bearing deposits		80,514		80,514		80,514		-		-
Investment securities available for sale		295,955		295,955		-		295,955		-
FHLB stock		7,576		7,576		7,576		-		-
Loans held for sale		22,421		22,421		-		22,421		-
Non-covered loans		812,830		796,663		-		-		796,663
Covered loans		269,081		304,145		-		-		304,145
Bank owned life insurance		17,513		17,513		17,513		-		-
FDIC indemnification asset		65,586		41,041		-		-		41,041
Financial liabilities:
Deposits		1,466,344		1,471,615		-		-		1,471,615
Junior subordinated debentures		25,774		9,802		-		-		9,802

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Stock-Based Compensation (Tables)

9 Months Ended

Sep. 30, 2012

Stock-Based Compensation [Abstract]

Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants in Period, Weighted Average Grant Date Fair Value [Table Text Block]

The following table summarizes information on stock option activity during 2012:

	Shares			Weighted average exercise price per share		Weighted average remaining contractual terms (in years)		Total intrinsic value (in thousands)
Outstanding, January 1, 2012		155,224		$	10.71
Granted		-			-
Exercised		(26,682	)		7.69			$	150
Forfeited, expired or cancelled		(4,975	)		15.54
Outstanding, September 30, 2012		123,567			11.17		4.72	$	431
Exercisable at September 30, 2012		123,567		$	11.17		4.72	$	431

Schedule of Share-based Compensation Arrangement by Share-based Payment Award, Restricted Stock Units, Vested and Expected to Vest [Table Text Block]

The following table summarizes information on RSU activity during 2012:

	Shares			Weighted average fair value per share		Weighted average remaining contractual terms (in years)
Outstanding, January 1, 2012		71,744		$	12.80
Granted		79,456			13.31
Vested		(27,954	)		12.77
Forfeited, expired or cancelled		(3,548	)		13.17
Outstanding, September 30, 2012		119,698		$	13.13	2.49

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Investment Securities (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011	Dec. 31, 2011
Available-for-sale Securities, Balance Sheet, Reported Amounts [Abstract]
Amortized cost	$ 345,227		$ 345,227		$ 291,103
Unrealized gains	9,221		9,221		5,737
Unrealized losses	(567)		(567)		(885)
Fair value	353,881		353,881		295,955
Available-for-sale Securities, Continuous Unrealized Loss Position, Fair Value [Abstract]
Less than 12 months, fair value	8,050		8,050		51,879
12 months or more, fair value	12,503		12,503		2,006
Total fair value	20,553		20,553		53,885
Less than 12 months, unrealized losses	(50)		(50)		(873)
12 months or more, unrealized losses	(517)		(517)		(12)
Unrealized losses	(567)		(567)		(885)
Number of securities temporarily impaired	12		12		10
Available-for-sale Securities, Debt Maturities, Fair Value, Fiscal Year Maturity [Abstract]
Three months or less, fair value	13,574		13,574
Over three months to one year or less, fair value	12,185		12,185
After one year through three years, fair value	209,384		209,384
After three years through five years, fair value	57,221		57,221
After five years through ten years, fair value	27,614		27,614
After ten years, fair value	33,903		33,903
Total cost - fair value	353,881		353,881
Available-for-sale Securities, Debt Maturities, Amortized Cost Basis, Fiscal Year Maturity [Abstract]
Three months or less, amortized cost	13,548		13,548
Over three months to one year, amortized cost	12,135		12,135
After one year through three years, fair value	204,262		204,262
After year three through five years, amortized cost	56,508		56,508
After five through ten years, amortized cost	26,662		26,662
After ten years, amortized cost	32,112		32,112
Total amortized cost	345,227		345,227
Pledged Financial Instruments, Not Separately Reported, Securities [Abstract]
To state and local governments to secure public deposits, amortized cost	68,705		68,705
To Federal Reserve Bank to secure borrowings, amortized cost	17,201		17,201
To Federal Home Loan Bank to secure borrowings, amortized cost	572		572
Other securities pledged, principally to secure deposits, amortized cost	15,872		15,872
Total pledged investment securities, amortized cost	102,350		102,350
Pledged Assets Separately Reported, Securities Pledged as Collateral, at Fair Value, by Type of Agreement [Abstract]
To state and local governments to secure public deposits, fair value	71,260		71,260
To Federal Reserve Bank to secure borrowings, fair value	17,877		17,877
To Federal Home Loan Bank to secure borrowings, fair value	600		600
Other securities pledged, principally to secure deposits, fair value	16,573		16,573
Total pledged investment securities, fair value	106,310		106,310
Gain on sale of investment securities [Abstract]
Gross realized gains	345	0	689	0
Gross realized losses	0	0	(2)	0
Gain on sale of investment securities, net	345	0	687	0
US Government Agencies [Member]
Available-for-sale Securities, Balance Sheet, Reported Amounts [Abstract]
Amortized cost	73,984		73,984		75,383
Unrealized gains	1,538		1,538		1,207
Unrealized losses	(17)		(17)		(16)
Fair value	75,505		75,505		76,574
Available-for-sale Securities, Continuous Unrealized Loss Position, Fair Value [Abstract]
Less than 12 months, fair value	2,032		2,032		10,499
12 months or more, fair value	0		0		0
Total fair value	2,032		2,032		10,499
Less than 12 months, unrealized losses	(17)		(17)		(16)
12 months or more, unrealized losses	0		0		0
Unrealized losses	(17)		(17)		(16)
US Treasury [Member]
Available-for-sale Securities, Balance Sheet, Reported Amounts [Abstract]
Amortized cost	9,999		9,999		42,077
Unrealized gains	14		14		520
Unrealized losses	0		0		0
Fair value	10,013		10,013		42,597
Residential Pass Through Securities [Member]
Available-for-sale Securities, Balance Sheet, Reported Amounts [Abstract]
Amortized cost	169,840		169,840		116,219
Unrealized gains	4,277		4,277		1,295
Unrealized losses	0		0		(116)
Fair value	174,117		174,117		117,398
Available-for-sale Securities, Continuous Unrealized Loss Position, Fair Value [Abstract]
Less than 12 months, fair value					29,838
12 months or more, fair value					0
Total fair value					29,838
Less than 12 months, unrealized losses					(116)
12 months or more, unrealized losses					0
Unrealized losses					(116)
Taxable state and political subdivisions [Member]
Available-for-sale Securities, Balance Sheet, Reported Amounts [Abstract]
Amortized cost	5,779		5,779		9,143
Unrealized gains	778		778		615
Unrealized losses	0		0		0
Fair value	6,557		6,557		9,758
Tax exempt states and political subdivisions [Member]
Available-for-sale Securities, Balance Sheet, Reported Amounts [Abstract]
Amortized cost	53,067		53,067		35,263
Unrealized gains	2,476		2,476		2,100
Unrealized losses	(33)		(33)		(28)
Fair value	55,510		55,510		37,335
Available-for-sale Securities, Continuous Unrealized Loss Position, Fair Value [Abstract]
Less than 12 months, fair value	6,018		6,018		1,255
12 months or more, fair value	0		0		0
Total fair value	6,018		6,018		1,255
Less than 12 months, unrealized losses	(33)		(33)		(28)
12 months or more, unrealized losses	0		0		0
Unrealized losses	(33)		(33)		(28)
Corporate obligations [Member]
Available-for-sale Securities, Balance Sheet, Reported Amounts [Abstract]
Amortized cost	11,000		11,000		11,000
Unrealized gains	0		0		0
Unrealized losses	(515)		(515)		(713)
Fair value	10,485		10,485		10,287
Available-for-sale Securities, Continuous Unrealized Loss Position, Fair Value [Abstract]
Less than 12 months, fair value	0		0		10,287
12 months or more, fair value	10,485		10,485		0
Total fair value	10,485		10,485		10,287
Less than 12 months, unrealized losses	0		0		(713)
12 months or more, unrealized losses	(515)		(515)		0
Unrealized losses	(515)		(515)		(713)
Agency-issued collateralized mortgage obligations [Member]
Available-for-sale Securities, Balance Sheet, Reported Amounts [Abstract]
Amortized cost	14,409		14,409
Unrealized gains	102		102
Unrealized losses	0		0
Fair value	14,511		14,511
Asset-backed Securities [Member]
Available-for-sale Securities, Balance Sheet, Reported Amounts [Abstract]
Amortized cost	5,131		5,131
Unrealized gains	36		36
Unrealized losses	0		0
Fair value	5,167		5,167
Investments in mutual funds and other equities [Member]
Available-for-sale Securities, Balance Sheet, Reported Amounts [Abstract]
Amortized cost	2,018		2,018		2,018
Unrealized gains	0		0		0
Unrealized losses	(2)		(2)		(12)
Fair value	2,016		2,016		2,006
Available-for-sale Securities, Continuous Unrealized Loss Position, Fair Value [Abstract]
Less than 12 months, fair value	0		0		0
12 months or more, fair value	2,018		2,018		2,006
Total fair value	2,018		2,018		2,006
Less than 12 months, unrealized losses	0		0		0
12 months or more, unrealized losses	(2)		(2)		(12)
Unrealized losses	$ (2)		$ (2)		$ (12)

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Non-covered Loans (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011
Accounts, Notes, Loans and Financing Receivable [Line Items]
Loans non-covered	$ 822,751	$ 810,977
Deferred loan costs, net	1,859	1,853
Allowance for loan losses	(16,570)	(18,032)
Total non-covered loans, net	808,040	794,798
Commercial [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Loans non-covered	155,208	150,386
Real Estate Mortgage [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Loans non-covered	432,140	411,113
Real Estate Construction [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Loans non-covered	77,996	90,356
Consumer [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Loans non-covered	$ 157,407	$ 159,122

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Condensed Consolidated Statements of Cash Flows (unaudited) (USD $) In Thousands, unless otherwise specified	9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011
Cash flows from operating activities:
Net income	$ 12,258	$ 11,713
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of investment security premiums, net	1,721	560
Depreciation	1,795	1,534
Intangible amortization	383	475
Provision for loan losses, non-covered loans	5,600	8,500
Provision (recovery) of loan losses, covered loans	398	(318)
Earnings on bank owned life insurance	(158)	(245)
Net gain on sale of investment securities	(687)	0
Net loss (gain) on sale of premises and equipment	10	(81)
Net loss (gain) on sale of non-covered other real estate owned	47	(76)
Net gain on sale of covered other real estate owned	(2,367)	(2,900)
Net gain on sales of loans held for sale	(2,627)	(757)
Origination of loans held for sale	(146,063)	(83,959)
Proceeds from sales of loans held for sale	155,972	85,354
Valuation adjustment on non-covered other real estate owned	678	53
Valuation adjustment on covered other real estate owned	2,902	0
Deferred taxes	3,084	2,132
Change in FDIC indemnification asset	8,898	5,630
Stock-based compensation	591	453
Excess tax benefit from stock-based compensation	(21)	(4)
Net change in assets and liabilities:
Net decrease in other assets	3,904	13,298
Net increase in other liabilities	7,411	1,293
Net cash provided by operating activities	53,729	42,655
Cash flows from investing activities:
Purchases of investment securities, available for sale	(133,580)	(144,976)
Maturities/calls/principal payments of investment and mortgage-backed securities available for sale	78,422	70,480
Redemption of Federal Home Loan Bank stock	67	0
Net decrease in non-covered loans and covered loans	8,849	77,859
Purchases of premises and equipment	(1,218)	(1,277)
Proceeds from the sale of premises and equipment	9	464
Proceeds from sale of non-covered other real estate owned	1,467	4,793
Proceeds from sale of covered other real estate owned	15,754	27,197
Capitalization of covered other real estate owned improvements	0	(746)
Net cash (used in) provided by investing activities	(30,230)	33,794
Cash flows from financing activities:
Net decrease in deposits	(8,114)	(12,072)
Redemption of preferred stock	0	(26,380)
Repurchase of common stock warrant	0	(1,625)
Proceeds from exercise of stock options	205	113
Excess tax benefits from stock-based compensation	21	4
Dividends paid on preferred stock	0	(38)
Dividends paid on common stock	(5,399)	(2,300)
Net cash used in financing activities	(13,287)	(42,298)
Net change in cash and cash equivalents	10,212	34,151
Cash, restricted cash and cash equivalents at beginning of period	105,913	81,687
Cash, restricted cash and cash equivalents at end of period	116,125	115,838
Cash paid during the period for:
Interest	5,742	7,973
Income taxes	1,000	5,900
Supplemental disclosures about noncash investing and financing activities:
Change in fair value of investment securities available for sale, net of taxes	2,471	2,976
Transfer of non-covered loans to non-covered other real estate owned	4,296	3,118
Transfer of covered loans to covered other real estate owned	$ 8,478	$ 19,558

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Allowance for Non-Covered Loan Losses and Credit Quality (Details) (USD $)	3 Months Ended			9 Months Ended
	Sep. 30, 2012		Sep. 30, 2011	Sep. 30, 2012		Sep. 30, 2011	Dec. 31, 2011
Loans, Allowance for Credit Losses [Roll Forward]
Balance at beginning of period	$ 17,565,000		$ 19,407,000	$ 18,032,000		$ 18,812,000
Provision	1,250,000		2,500,000	5,600,000		8,500,000
Charge-offs	(2,499,000)		(3,578,000)	(7,687,000)		(9,745,000)
Recoveries	254,000		607,000	625,000		1,369,000
Balance at end of period	16,570,000		18,936,000	16,570,000		18,936,000
Loans, Allowance for Credit Loss, Additional Information [Abstract]
Individually evaluated for impairment	3,515,000			3,515,000			3,748,000
Collectively evaluated for impairment	13,055,000			13,055,000			14,284,000
Total allowance for loan losses	16,570,000			16,570,000			18,032,000
Non-covered loans
Individually evaluated for impairment	45,485,000			45,485,000			48,593,000
Collectively evaluated for impairment	777,266,000			777,266,000			762,384,000
Total non-covered loans	822,751,000	[1]		822,751,000	[1]		810,977,000	[1]
Deferred loan costs, net	1,859,000			1,859,000			1,853,000
Impaired Loans Receivable, Recorded Investment [Abstract]
With no related allowance recorded	23,142,000			23,142,000			29,952,000
With an allowance recorded	22,343,000			22,343,000			18,641,000
Related Allowance	3,515,000			3,515,000			3,748,000
Total	45,485,000			45,485,000			48,593,000
Impaired Loans, Unpaid Principal Balance [Abstract]
Loans with no related allowance, unpaid principal balance	28,670,000			28,670,000			40,790,000
Loans with related allowance, unpaid principal balance	25,839,000			25,839,000			19,742,000
Total impaired non-covered loans, unpaid principal balance, Total	54,509,000			54,509,000			60,532,000
Impaired Loans, Average Recorded Investment [Abstract]
Average recorded investment in non-covered impaired loans	47,200,000		52,400,000	47,000,000		49,900,000
Impaired Financing Receivable, Interest Income, Accrual Method [Abstract]
Interest income on non-covered impaired loans	202,000		0	406,000		0
Impaired loans, interest income forgone	282,000		0	514,000		0
Troubled Debt Restructuring (TDR) [Abstract]
TDR - accrual status	27,843,000			27,843,000			26,493,000
TDR - Non - accrual status	13,144,000			13,144,000			15,540,000
TDR total modifications	40,987,000			40,987,000			42,033,000
Financing Receivable, Modifications, Number of Contracts, Period to Date	3		10	19		24
Financing Receivable, Modifications, Pre-Modification Recorded Investment, Period to Date	671,000		6,369,000	6,972,000		16,372,000
Financing Receivable, Modifications, Post-Modification Recorded Investment, Period to Date	671,000		6,228,000	6,691,000		16,224,000
Non-covered nonaccrual loans and past due loans, by class
30 to 59 days past due	2,917,000			2,917,000			5,660,000
60 to 89 days past due	254,000			254,000			1,134,000
Greater than 90 days and accruing	0			0			0
Total past due	3,171,000			3,171,000			6,794,000
Nonaccrual status	17,642,000			17,642,000			22,100,000
Current	801,938,000			801,938,000			782,083,000
Total non-covered loans	822,751,000			822,751,000			810,977,000
Deferred loan costs, net	1,859,000			1,859,000			1,853,000
Total non-covered loans, gross	824,610,000			824,610,000			812,830,000
Pass/Watch [Member]
Non-covered loans
Total non-covered loans	703,535,000			703,535,000			664,845,000
Special Mention [Member]
Non-covered loans
Total non-covered loans	40,997,000			40,997,000			43,061,000
Substandard [Member]
Non-covered loans
Total non-covered loans	78,219,000			78,219,000			103,071,000
Doubtful [Member]
Non-covered loans
Total non-covered loans	0			0			0
Troubled Debt Restructuring [Member]
Non-covered loans
Total non-covered loans	822,751,000			822,751,000			810,977,000
Commercial [Member]
Loans, Allowance for Credit Losses [Roll Forward]
Balance at beginning of period	4,471,000		4,638,000	4,034,000		3,915,000
Provision	63,000		(318,000)	1,443,000		1,374,000
Charge-offs	(258,000)		(163,000)	(1,234,000)		(1,320,000)
Recoveries	81,000		58,000	114,000		246,000
Balance at end of period	4,357,000		4,215,000	4,357,000		4,215,000
Loans, Allowance for Credit Loss, Additional Information [Abstract]
Individually evaluated for impairment	1,465,000			1,465,000			588,000
Collectively evaluated for impairment	2,892,000			2,892,000			3,446,000
Total allowance for loan losses	4,357,000			4,357,000			4,034,000
Non-covered loans
Individually evaluated for impairment	9,904,000			9,904,000			6,525,000
Collectively evaluated for impairment	145,304,000			145,304,000			143,861,000
Total non-covered loans	155,208,000	[1]		155,208,000	[1]		150,386,000	[1]
Impaired Loans Receivable, Recorded Investment [Abstract]
With no related allowance recorded	2,973,000			2,973,000			3,801,000
With an allowance recorded	6,931,000			6,931,000			2,724,000
Related Allowance	1,465,000			1,465,000			588,000
Impaired Loans, Unpaid Principal Balance [Abstract]
Loans with no related allowance, unpaid principal balance	3,251,000			3,251,000			5,692,000
Loans with related allowance, unpaid principal balance	7,117,000			7,117,000			3,128,000
Troubled Debt Restructuring (TDR) [Abstract]
TDR - accrual status	7,986,000			7,986,000			3,341,000
TDR - Non - accrual status	993,000			993,000			0
TDR total modifications	8,979,000			8,979,000			3,341,000
Financing Receivable, Modifications, Number of Contracts, Period to Date	1		1	13		5
Financing Receivable, Modifications, Pre-Modification Recorded Investment, Period to Date	181,000		628,000	5,042,000		2,804,000
Financing Receivable, Modifications, Post-Modification Recorded Investment, Period to Date	181,000		628,000	4,884,000		2,804,000
Non-covered nonaccrual loans and past due loans, by class
30 to 59 days past due	683,000			683,000			1,482,000
60 to 89 days past due	61,000			61,000			4,000
Greater than 90 days and accruing	0			0			0
Total past due	744,000			744,000			1,486,000
Nonaccrual status	1,918,000			1,918,000			3,183,000
Current	152,546,000			152,546,000			145,717,000
Total non-covered loans	155,208,000			155,208,000			150,386,000
Commercial [Member] | Pass/Watch [Member]
Non-covered loans
Total non-covered loans	131,097,000			131,097,000			122,189,000
Commercial [Member] | Special Mention [Member]
Non-covered loans
Total non-covered loans	6,123,000			6,123,000			7,791,000
Commercial [Member] | Substandard [Member]
Non-covered loans
Total non-covered loans	17,988,000			17,988,000			20,406,000
Commercial [Member] | Doubtful [Member]
Non-covered loans
Total non-covered loans	0			0			0
Commercial [Member] | Troubled Debt Restructuring [Member]
Non-covered loans
Total non-covered loans	155,208,000			155,208,000			150,386,000
Real Estate Mortgage [Member]
Loans, Allowance for Credit Losses [Roll Forward]
Balance at beginning of period	5,844,000		5,921,000	6,500,000		6,507,000
Provision	901,000		785,000	2,766,000		1,692,000
Charge-offs	(655,000)		(732,000)	(3,220,000)		(2,351,000)
Recoveries	68,000		424,000	112,000		550,000
Balance at end of period	6,158,000		6,398,000	6,158,000		6,398,000
Loans, Allowance for Credit Loss, Additional Information [Abstract]
Individually evaluated for impairment	943,000			943,000			1,212,000
Collectively evaluated for impairment	5,215,000			5,215,000			5,288,000
Total allowance for loan losses	6,158,000			6,158,000			6,500,000
Non-covered loans
Individually evaluated for impairment	13,382,000			13,382,000			14,032,000
Collectively evaluated for impairment	418,758,000			418,758,000			397,081,000
Total non-covered loans	432,140,000	[1]		432,140,000	[1]		411,113,000	[1]
Impaired Loans Receivable, Recorded Investment [Abstract]
With no related allowance recorded	6,519,000			6,519,000			8,619,000
With an allowance recorded	6,863,000			6,863,000			5,412,000
Related Allowance	943,000			943,000			1,212,000
Impaired Loans, Unpaid Principal Balance [Abstract]
Loans with no related allowance, unpaid principal balance	7,776,000			7,776,000			12,008,000
Loans with related allowance, unpaid principal balance	6,863,000			6,863,000			5,428,000
Troubled Debt Restructuring (TDR) [Abstract]
TDR - accrual status	8,620,000			8,620,000			9,420,000
TDR - Non - accrual status	2,008,000			2,008,000			1,870,000
TDR total modifications	10,628,000			10,628,000			11,290,000
Financing Receivable, Modifications, Number of Contracts, Period to Date	1		3	3		10
Financing Receivable, Modifications, Pre-Modification Recorded Investment, Period to Date	49,000		1,687,000	595,000		6,110,000
Financing Receivable, Modifications, Post-Modification Recorded Investment, Period to Date	49,000		1,667,000	595,000		6,083,000
Non-covered nonaccrual loans and past due loans, by class
30 to 59 days past due	469,000			469,000			1,740,000
60 to 89 days past due	0			0			638,000
Greater than 90 days and accruing	0			0			0
Total past due	469,000			469,000			2,378,000
Nonaccrual status	4,762,000			4,762,000			4,613,000
Current	426,909,000			426,909,000			404,122,000
Total non-covered loans	432,140,000			432,140,000			411,113,000
Real Estate Mortgage [Member] | Pass/Watch [Member]
Non-covered loans
Total non-covered loans	371,458,000			371,458,000			341,011,000
Real Estate Mortgage [Member] | Special Mention [Member]
Non-covered loans
Total non-covered loans	31,802,000			31,802,000			27,682,000
Real Estate Mortgage [Member] | Substandard [Member]
Non-covered loans
Total non-covered loans	28,880,000			28,880,000			42,420,000
Real Estate Mortgage [Member] | Doubtful [Member]
Non-covered loans
Total non-covered loans	0			0			0
Real Estate Mortgage [Member] | Troubled Debt Restructuring [Member]
Non-covered loans
Total non-covered loans	432,140,000			432,140,000			411,113,000
Real Estate Construction [Member]
Loans, Allowance for Credit Losses [Roll Forward]
Balance at beginning of period	3,983,000		5,788,000	4,046,000		4,947,000
Provision	142,000		1,211,000	809,000		3,904,000
Charge-offs	(1,308,000)		(2,216,000)	(2,041,000)		(4,070,000)
Recoveries	7,000		1,000	10,000		3,000
Balance at end of period	2,824,000		4,784,000	2,824,000		4,784,000
Loans, Allowance for Credit Loss, Additional Information [Abstract]
Individually evaluated for impairment	1,053,000			1,053,000			1,869,000
Collectively evaluated for impairment	1,771,000			1,771,000			2,177,000
Total allowance for loan losses	2,824,000			2,824,000			4,046,000
Non-covered loans
Individually evaluated for impairment	21,224,000			21,224,000			27,483,000
Collectively evaluated for impairment	56,772,000			56,772,000			62,873,000
Total non-covered loans	77,996,000	[1]		77,996,000	[1]		90,356,000	[1]
Impaired Loans Receivable, Recorded Investment [Abstract]
With no related allowance recorded	13,009,000			13,009,000			17,319,000
With an allowance recorded	8,215,000			8,215,000			10,164,000
Related Allowance	1,053,000			1,053,000			1,869,000
Impaired Loans, Unpaid Principal Balance [Abstract]
Loans with no related allowance, unpaid principal balance	16,828,000			16,828,000			22,190,000
Loans with related allowance, unpaid principal balance	11,525,000			11,525,000			10,845,000
Troubled Debt Restructuring (TDR) [Abstract]
TDR - accrual status	10,902,000			10,902,000			13,391,000
TDR - Non - accrual status	10,121,000			10,121,000			13,670,000
TDR total modifications	21,023,000			21,023,000			27,061,000
Financing Receivable, Modifications, Number of Contracts, Period to Date	1		5	3		8
Financing Receivable, Modifications, Pre-Modification Recorded Investment, Period to Date	441,000		3,712,000	1,335,000		7,116,000
Financing Receivable, Modifications, Post-Modification Recorded Investment, Period to Date	441,000		3,591,000	1,212,000		6,995,000
Non-covered nonaccrual loans and past due loans, by class
30 to 59 days past due	0			0			127,000
60 to 89 days past due	0			0			0
Greater than 90 days and accruing	0			0			0
Total past due	0			0			127,000
Nonaccrual status	10,321,000			10,321,000			14,092,000
Current	67,675,000			67,675,000			76,137,000
Total non-covered loans	77,996,000			77,996,000			90,356,000
Real Estate Construction [Member] | Pass/Watch [Member]
Non-covered loans
Total non-covered loans	51,314,000			51,314,000			50,512,000
Real Estate Construction [Member] | Special Mention [Member]
Non-covered loans
Total non-covered loans	2,521,000			2,521,000			6,729,000
Real Estate Construction [Member] | Substandard [Member]
Non-covered loans
Total non-covered loans	24,161,000			24,161,000			33,115,000
Real Estate Construction [Member] | Doubtful [Member]
Non-covered loans
Total non-covered loans	0			0			0
Real Estate Construction [Member] | Troubled Debt Restructuring [Member]
Non-covered loans
Total non-covered loans	77,996,000			77,996,000			90,356,000
Consumer [Member]
Loans, Allowance for Credit Losses [Roll Forward]
Balance at beginning of period	3,267,000		3,060,000	3,452,000		3,443,000
Provision	144,000		822,000	582,000		1,530,000
Charge-offs	(278,000)		(467,000)	(1,192,000)		(2,004,000)
Recoveries	98,000		124,000	389,000		570,000
Balance at end of period	3,231,000		3,539,000	3,231,000		3,539,000
Loans, Allowance for Credit Loss, Additional Information [Abstract]
Individually evaluated for impairment	54,000			54,000			79,000
Collectively evaluated for impairment	3,177,000			3,177,000			3,373,000
Total allowance for loan losses	3,231,000			3,231,000			3,452,000
Non-covered loans
Individually evaluated for impairment	975,000			975,000			553,000
Collectively evaluated for impairment	156,432,000			156,432,000			158,569,000
Total non-covered loans	157,407,000	[1]		157,407,000	[1]		159,122,000	[1]
Impaired Loans Receivable, Recorded Investment [Abstract]
With no related allowance recorded	641,000			641,000			213,000
With an allowance recorded	334,000			334,000			341,000
Related Allowance	54,000			54,000			79,000
Impaired Loans, Unpaid Principal Balance [Abstract]
Loans with no related allowance, unpaid principal balance	815,000			815,000			900,000
Loans with related allowance, unpaid principal balance	334,000			334,000			341,000
Troubled Debt Restructuring (TDR) [Abstract]
TDR - accrual status	335,000			335,000			341,000
TDR - Non - accrual status	22,000			22,000			0
TDR total modifications	357,000			357,000			341,000
Financing Receivable, Modifications, Number of Contracts, Period to Date			1			1
Financing Receivable, Modifications, Pre-Modification Recorded Investment, Period to Date			342,000			342,000
Financing Receivable, Modifications, Post-Modification Recorded Investment, Period to Date			342,000			342,000
Non-covered nonaccrual loans and past due loans, by class
30 to 59 days past due	1,765,000			1,765,000			2,311,000
60 to 89 days past due	193,000			193,000			492,000
Greater than 90 days and accruing	0			0			0
Total past due	1,958,000			1,958,000			2,803,000
Nonaccrual status	641,000			641,000			212,000
Current	154,808,000			154,808,000			156,107,000
Total non-covered loans	157,407,000			157,407,000			159,122,000
Consumer [Member] | Pass/Watch [Member]
Non-covered loans
Total non-covered loans	149,666,000			149,666,000			151,133,000
Consumer [Member] | Special Mention [Member]
Non-covered loans
Total non-covered loans	551,000			551,000			859,000
Consumer [Member] | Substandard [Member]
Non-covered loans
Total non-covered loans	7,190,000			7,190,000			7,130,000
Consumer [Member] | Doubtful [Member]
Non-covered loans
Total non-covered loans	0			0			0
Consumer [Member] | Troubled Debt Restructuring [Member]
Non-covered loans
Total non-covered loans	157,407,000			157,407,000			159,122,000
Non-accrual Loans [Member]
Impaired Loans Receivable, Recorded Investment [Abstract]
With no related allowance recorded	13,272,000			13,272,000			18,744,000
With an allowance recorded	4,370,000			4,370,000			3,356,000
Related Allowance	184,000			184,000			262,000
Restructured Loans Member]
Impaired Loans Receivable, Recorded Investment [Abstract]
With no related allowance recorded	9,870,000			9,870,000			11,208,000
With an allowance recorded	17,973,000			17,973,000			15,285,000
Related Allowance	3,331,000			3,331,000			3,486,000
One to Four Family Residential [Member] | Real Estate Mortgage [Member]
Impaired Loans Receivable, Recorded Investment [Abstract]
With no related allowance recorded	1,234,000			1,234,000			1,557,000
With an allowance recorded	526,000			526,000			174,000
Related Allowance	52,000			52,000			13,000
Impaired Loans, Unpaid Principal Balance [Abstract]
Loans with no related allowance, unpaid principal balance	1,346,000			1,346,000			3,217,000
Loans with related allowance, unpaid principal balance	526,000			526,000			190,000
Troubled Debt Restructuring (TDR) [Abstract]
TDR - accrual status	575,000			575,000			0
TDR - Non - accrual status	0			0			933,000
TDR total modifications	575,000			575,000			933,000
Financing Receivable, Modifications, Number of Contracts, Period to Date	1			2
Financing Receivable, Modifications, Pre-Modification Recorded Investment, Period to Date	49,000			221,000
Financing Receivable, Modifications, Post-Modification Recorded Investment, Period to Date	49,000			221,000
Non-covered nonaccrual loans and past due loans, by class
30 to 59 days past due	54,000			54,000			53,000
60 to 89 days past due	0			0			154,000
Greater than 90 days and accruing	0			0			0
Total past due	54,000			54,000			207,000
Nonaccrual status	1,185,000			1,185,000			1,732,000
Current	36,023,000			36,023,000			38,392,000
Total non-covered loans	37,262,000			37,262,000			40,331,000
One to Four Family Residential [Member] | Real Estate Mortgage [Member] | Pass/Watch [Member]
Non-covered loans
Total non-covered loans	31,600,000			31,600,000			33,609,000
One to Four Family Residential [Member] | Real Estate Mortgage [Member] | Special Mention [Member]
Non-covered loans
Total non-covered loans	1,150,000			1,150,000			1,462,000
One to Four Family Residential [Member] | Real Estate Mortgage [Member] | Substandard [Member]
Non-covered loans
Total non-covered loans	4,512,000			4,512,000			5,260,000
One to Four Family Residential [Member] | Real Estate Mortgage [Member] | Doubtful [Member]
Non-covered loans
Total non-covered loans	0			0			0
One to Four Family Residential [Member] | Real Estate Mortgage [Member] | Troubled Debt Restructuring [Member]
Non-covered loans
Total non-covered loans	37,262,000			37,262,000			40,331,000
One to Four Family Residential [Member] | Real Estate Construction [Member]
Impaired Loans Receivable, Recorded Investment [Abstract]
With no related allowance recorded	13,009,000			13,009,000			16,932,000
With an allowance recorded	7,950,000			7,950,000			10,164,000
Related Allowance	1,026,000			1,026,000			1,869,000
Impaired Loans, Unpaid Principal Balance [Abstract]
Loans with no related allowance, unpaid principal balance	16,828,000			16,828,000			21,803,000
Loans with related allowance, unpaid principal balance	11,260,000			11,260,000			10,845,000
Troubled Debt Restructuring (TDR) [Abstract]
TDR - accrual status	10,638,000			10,638,000			13,391,000
TDR - Non - accrual status	10,121,000			10,121,000			13,283,000
TDR total modifications	20,759,000			20,759,000			26,674,000
Financing Receivable, Modifications, Number of Contracts, Period to Date	1		5	2		8
Financing Receivable, Modifications, Pre-Modification Recorded Investment, Period to Date	441,000		3,712,000	1,070,000		7,116,000
Financing Receivable, Modifications, Post-Modification Recorded Investment, Period to Date	441,000		3,591,000	947,000		6,995,000
Non-covered nonaccrual loans and past due loans, by class
30 to 59 days past due	0			0			27,000
60 to 89 days past due	0			0			0
Greater than 90 days and accruing	0			0			0
Total past due	0			0			27,000
Nonaccrual status	10,321,000			10,321,000			13,705,000
Current	34,571,000			34,571,000			45,078,000
Total non-covered loans	44,892,000			44,892,000			58,810,000
One to Four Family Residential [Member] | Real Estate Construction [Member] | Pass/Watch [Member]
Non-covered loans
Total non-covered loans	22,248,000			22,248,000			26,110,000
One to Four Family Residential [Member] | Real Estate Construction [Member] | Special Mention [Member]
Non-covered loans
Total non-covered loans	783,000			783,000			2,313,000
One to Four Family Residential [Member] | Real Estate Construction [Member] | Substandard [Member]
Non-covered loans
Total non-covered loans	21,861,000			21,861,000			30,387,000
One to Four Family Residential [Member] | Real Estate Construction [Member] | Doubtful [Member]
Non-covered loans
Total non-covered loans	0			0			0
One to Four Family Residential [Member] | Real Estate Construction [Member] | Troubled Debt Restructuring [Member]
Non-covered loans
Total non-covered loans	44,892,000			44,892,000			58,810,000
Multi Family and Commercial [Member] | Real Estate Mortgage [Member]
Impaired Loans Receivable, Recorded Investment [Abstract]
With no related allowance recorded	5,285,000			5,285,000			7,062,000
With an allowance recorded	6,337,000			6,337,000			5,238,000
Related Allowance	891,000			891,000			1,199,000
Impaired Loans, Unpaid Principal Balance [Abstract]
Loans with no related allowance, unpaid principal balance	6,430,000			6,430,000			8,791,000
Loans with related allowance, unpaid principal balance	6,337,000			6,337,000			5,238,000
Troubled Debt Restructuring (TDR) [Abstract]
TDR - accrual status	8,045,000			8,045,000			9,420,000
TDR - Non - accrual status	2,008,000			2,008,000			937,000
TDR total modifications	10,053,000			10,053,000			10,357,000
Financing Receivable, Modifications, Number of Contracts, Period to Date			3	1		10
Financing Receivable, Modifications, Pre-Modification Recorded Investment, Period to Date			1,687,000	374,000		6,110,000
Financing Receivable, Modifications, Post-Modification Recorded Investment, Period to Date			1,667,000	374,000		6,083,000
Non-covered nonaccrual loans and past due loans, by class
30 to 59 days past due	415,000			415,000			1,687,000
60 to 89 days past due	0			0			484,000
Greater than 90 days and accruing	0			0			0
Total past due	415,000			415,000			2,171,000
Nonaccrual status	3,577,000			3,577,000			2,881,000
Current	390,886,000			390,886,000			365,730,000
Total non-covered loans	394,878,000			394,878,000			370,782,000
Multi Family and Commercial [Member] | Real Estate Mortgage [Member] | Pass/Watch [Member]
Non-covered loans
Total non-covered loans	339,858,000			339,858,000			307,402,000
Multi Family and Commercial [Member] | Real Estate Mortgage [Member] | Special Mention [Member]
Non-covered loans
Total non-covered loans	30,652,000			30,652,000			26,220,000
Multi Family and Commercial [Member] | Real Estate Mortgage [Member] | Substandard [Member]
Non-covered loans
Total non-covered loans	24,368,000			24,368,000			37,160,000
Multi Family and Commercial [Member] | Real Estate Mortgage [Member] | Doubtful [Member]
Non-covered loans
Total non-covered loans	0			0			0
Multi Family and Commercial [Member] | Real Estate Mortgage [Member] | Troubled Debt Restructuring [Member]
Non-covered loans
Total non-covered loans	394,878,000			394,878,000			370,782,000
Multi Family and Commercial [Member] | Real Estate Construction [Member]
Impaired Loans Receivable, Recorded Investment [Abstract]
With no related allowance recorded	0			0			387,000
With an allowance recorded	265,000			265,000			0
Related Allowance	27,000			27,000			0
Impaired Loans, Unpaid Principal Balance [Abstract]
Loans with no related allowance, unpaid principal balance	0			0			387,000
Loans with related allowance, unpaid principal balance	265,000			265,000			0
Troubled Debt Restructuring (TDR) [Abstract]
TDR - accrual status	264,000			264,000			0
TDR - Non - accrual status	0			0			387,000
TDR total modifications	264,000			264,000			387,000
Financing Receivable, Modifications, Number of Contracts, Period to Date				1
Financing Receivable, Modifications, Pre-Modification Recorded Investment, Period to Date				265,000
Financing Receivable, Modifications, Post-Modification Recorded Investment, Period to Date				265,000
Non-covered nonaccrual loans and past due loans, by class
30 to 59 days past due	0			0			100,000
60 to 89 days past due	0			0			0
Greater than 90 days and accruing	0			0			0
Total past due	0			0			100,000
Nonaccrual status	0			0			387,000
Current	33,104,000			33,104,000			31,059,000
Total non-covered loans	33,104,000			33,104,000			31,546,000
Multi Family and Commercial [Member] | Real Estate Construction [Member] | Pass/Watch [Member]
Non-covered loans
Total non-covered loans	29,066,000			29,066,000			24,402,000
Multi Family and Commercial [Member] | Real Estate Construction [Member] | Special Mention [Member]
Non-covered loans
Total non-covered loans	1,738,000			1,738,000			4,416,000
Multi Family and Commercial [Member] | Real Estate Construction [Member] | Substandard [Member]
Non-covered loans
Total non-covered loans	2,300,000			2,300,000			2,728,000
Multi Family and Commercial [Member] | Real Estate Construction [Member] | Doubtful [Member]
Non-covered loans
Total non-covered loans	0			0			0
Multi Family and Commercial [Member] | Real Estate Construction [Member] | Troubled Debt Restructuring [Member]
Non-covered loans
Total non-covered loans	33,104,000			33,104,000			31,546,000
Indirect Consumer Loan [Member] | Consumer [Member]
Non-covered nonaccrual loans and past due loans, by class
30 to 59 days past due	1,124,000			1,124,000			1,288,000
60 to 89 days past due	128,000			128,000			198,000
Greater than 90 days and accruing	0			0			0
Total past due	1,252,000			1,252,000			1,486,000
Nonaccrual status	0			0			0
Current	78,396,000			78,396,000			78,910,000
Total non-covered loans	79,648,000			79,648,000			80,396,000
Indirect Consumer Loan [Member] | Consumer [Member] | Pass/Watch [Member]
Non-covered loans
Total non-covered loans	77,962,000			77,962,000			78,531,000
Indirect Consumer Loan [Member] | Consumer [Member] | Special Mention [Member]
Non-covered loans
Total non-covered loans	19,000			19,000			15,000
Indirect Consumer Loan [Member] | Consumer [Member] | Substandard [Member]
Non-covered loans
Total non-covered loans	1,667,000			1,667,000			1,850,000
Indirect Consumer Loan [Member] | Consumer [Member] | Doubtful [Member]
Non-covered loans
Total non-covered loans	0			0			0
Indirect Consumer Loan [Member] | Consumer [Member] | Troubled Debt Restructuring [Member]
Non-covered loans
Total non-covered loans	79,648,000			79,648,000			80,396,000
Direct Consumer Loan [Member] | Consumer [Member]
Impaired Loans Receivable, Recorded Investment [Abstract]
With no related allowance recorded	641,000			641,000			213,000
With an allowance recorded	334,000			334,000			341,000
Related Allowance	54,000			54,000			79,000
Impaired Loans, Unpaid Principal Balance [Abstract]
Loans with no related allowance, unpaid principal balance	815,000			815,000			900,000
Loans with related allowance, unpaid principal balance	334,000			334,000			341,000
Troubled Debt Restructuring (TDR) [Abstract]
Financing Receivable, Modifications, Number of Contracts, Period to Date			1			1
Financing Receivable, Modifications, Pre-Modification Recorded Investment, Period to Date			342,000			342,000
Financing Receivable, Modifications, Post-Modification Recorded Investment, Period to Date			342,000			342,000
Non-covered nonaccrual loans and past due loans, by class
30 to 59 days past due	641,000			641,000			1,023,000
60 to 89 days past due	65,000			65,000			294,000
Greater than 90 days and accruing	0			0			0
Total past due	706,000			706,000			1,317,000
Nonaccrual status	641,000			641,000			212,000
Current	76,412,000			76,412,000			77,197,000
Total non-covered loans	77,759,000			77,759,000			78,726,000
Direct Consumer Loan [Member] | Consumer [Member] | Pass/Watch [Member]
Non-covered loans
Total non-covered loans	71,704,000			71,704,000			72,602,000
Direct Consumer Loan [Member] | Consumer [Member] | Special Mention [Member]
Non-covered loans
Total non-covered loans	532,000			532,000			844,000
Direct Consumer Loan [Member] | Consumer [Member] | Substandard [Member]
Non-covered loans
Total non-covered loans	5,523,000			5,523,000			5,280,000
Direct Consumer Loan [Member] | Consumer [Member] | Doubtful [Member]
Non-covered loans
Total non-covered loans	0			0			0
Direct Consumer Loan [Member] | Consumer [Member] | Troubled Debt Restructuring [Member]
Non-covered loans
Total non-covered loans	$ 77,759,000			$ 77,759,000			$ 78,726,000

[1] Total non-covered loans excludes deferred loan costs of $1.9 million.

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Commitments and Contingencies (Details) (USD $) In Millions, unless otherwise specified	9 Months Ended
	Sep. 30, 2012	Dec. 31, 2011
Line of Credit Facility [Line Items]
Collateral supporting commitments (in hundredths)	100.00%
Trust preferred securities commitments	$ 25.8	$ 25.8
Letter of Credit [Member]
Line of Credit Facility [Line Items]
Commitment under letters of credit	$ 1.5

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Condensed Consolidated Statements of Financial Condition (unaudited) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011
Assets
Cash and due from banks ($13,960 and $653, respectively, are restricted)	$ 30,885	$ 25,399
Interest-bearing deposits	84,570	80,514
Federal funds sold	670	0
Total cash, restricted cash and cash equivalents	116,125	105,913
Investment securities available for sale, at fair value	353,881	295,955
Federal Home Loan Bank stock	7,509	7,576
Loans held for sale	15,139	22,421
Non-covered loans, net of allowance for loan losses	808,040	794,798
Covered loans, net of allowance for loan losses	231,517	268,211
Total loans	1,039,557	1,063,009
Premises and equipment, net	36,896	37,492
Bank owned life insurance	17,671	17,513
Goodwill and other intangible assets, net	6,156	6,539
Non-covered other real estate owned	4,080	1,976
Covered other real estate owned	18,811	26,622
FDIC indemnification assets	44,713	65,586
Other assets	19,588	20,080
Total assets	1,680,126	1,670,682
Deposits
Noninterest-bearing demand	252,484	219,250
Interest-bearing	1,205,746	1,247,094
Total deposits	1,458,230	1,466,344
Junior subordinated debentures	25,774	25,774
Other liabilities	15,155	7,744
Total liabilities	1,499,159	1,499,862
Commitments and contingencies (See Note 12)
Shareholders' Equity:
Common stock, no par value; 35,000,000 shares authorized; 15,451,307 and 15,398,197 shares issued and outstanding at September 30, 2012 and December 31, 2011, respectively	85,381	84,564
Retained earnings	89,966	83,107
Accumulated other comprehensive income	5,620	3,149
Total shareholders' equity	180,967	170,820
Total liabilities and shareholders' equity	$ 1,680,126	$ 1,670,682

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Condensed Consolidated Statements of Shareholders' Equity (unaudited) (USD $) In Thousands, except Share data, unless otherwise specified	Preferred stock [Member]	Common stock [Member]	Retained earnings [Member]	Accumulated other comprehensive income [Member]	Total
Balance at Dec. 31, 2010	$ 25,334	$ 85,264	$ 71,307	$ 193	$ 182,098
Balance (in shares) at Dec. 31, 2010		15,321
Comprehensive income:
Net income	0	0	11,713	0	11,713
Other comprehensive income, net	0	0	0	2,976	2,976
Redemption of preferred stock issued to U.S. Treasury	(26,380)	0	0	0	(26,380)
Repurchase of warrant issued to U.S. Treasury	0	(1,625)	0	0	(1,625)
Preferred stock dividends and accretion	1,046	0	(1,084)	0	(38)
Cash dividends on common stock	0	0	(2,300)	0	(2,300)
Stock-based compensation expense	0	453	0	0	453
Issuance of common stock under stock plans	0	113	0	0	113
Issuance of common stock under stock plans (in shares)		36
Tax benefit associated with stock awards	0	4	0	0	4
Balance at Sep. 30, 2011	0	84,209	79,636	3,169	167,014
Balance (in shares) at Sep. 30, 2011		15,357
Balance at Dec. 31, 2011	0	84,564	83,107	3,149	170,820
Balance (in shares) at Dec. 31, 2011		15,398			15,398,197
Comprehensive income:
Net income	0	0	12,258	0	12,258
Other comprehensive income, net	0	0	0	2,471	2,471
Cash dividends on common stock	0	0	(5,399)	0	(5,399)
Stock-based compensation expense	0	591	0	0	591
Issuance of common stock under stock plans	0	205	0	0	205
Issuance of common stock under stock plans (in shares)		53
Tax benefit associated with stock awards	0	21	0	0	21
Balance at Sep. 30, 2012	$ 0	$ 85,381	$ 89,966	$ 5,620	$ 180,967
Balance (in shares) at Sep. 30, 2012		15,451			15,451,307

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Earnings per Common Share (Details) (USD $) In Thousands, except Share data, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011
Earnings per Common Share [Abstract]
Income available to common shareholders	$ 4,638	$ 3,625	$ 12,258	$ 10,629
Weighted average number of common shares, basic, (in shares)	15,413,000	15,343,000	15,418,000	15,339,000
Effect of dilutive stock awards CPP warrants (in shares)	33,000	48,000	35,000	82,000
Weighted average number of common shares, diluted (in shares)	15,446,000	15,391,000	15,453,000	15,421,000
Earnings per Common Share [Abstract]
Earnings per share, basic (in dollars per share)	$ 0.30	$ 0.24	$ 0.80	$ 0.69
Earnings per share, diluted (in dollars per share)	$ 0.30	$ 0.24	$ 0.79	$ 0.69
Antidilutive stock award excluded from the computation of diluted earnings per common share (in shares)	44,000	102,000	46,000	72,000

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Investment Securities (Tables)

9 Months Ended

Sep. 30, 2012

Investment Securities [Abstract]

Amortized Cost, Unrealized Gains and Losses and Fair Value of Investments

The following table presents the amortized cost, unrealized gains, unrealized losses and fair value of investment securities available for sale at September 30, 2012 and December 31, 2011.  At September 30, 2012 and December 31, 2011, there were no investment securities classified as held to maturity or trading.

(dollars in thousands)	September 30, 2012
	Amortized cost		Unrealized gains		Unrealized losses			Fair value
U.S. government agencies	$	73,984	$	1,538	$	(17	)	$	75,505
U.S. Treasuries		9,999		14		-			10,013
Residential pass-through securities		169,840		4,277		-			174,117
Taxable state and political subdivisions		5,779		778		-			6,557
Tax exempt state and political subdivisions		53,067		2,476		(33	)		55,510
Corporate obligations		11,000		-		(515	)		10,485
Agency-issued collateralized mortgage obligations		14,409		102		-			14,511
Asset-backed securities		5,131		36		-			5,167
Investments in mutual funds and other equities		2,018		-		(2	)		2,016
Total investment securities available for sale	$	345,227	$	9,221	$	(567	)	$	353,881

(dollars in thousands)	December 31, 2011
	Amortized cost		Unrealized gains		Unrealized losses			Fair value
U.S. government agencies	$	75,383	$	1,207	$	(16	)	$	76,574
U.S. Treasuries		42,077		520		-			42,597
Residential pass-through securities		116,219		1,295		(116	)		117,398
Taxable state and political subdivisions		9,143		615		-			9,758
Tax exempt state and political subdivisions		35,263		2,100		(28	)		37,335
Corporate obligations		11,000		-		(713	)		10,287
Investments in mutual funds and other equities		2,018		-		(12	)		2,006
Total investment securities available for sale	$	291,103	$	5,737	$	(885	)	$	295,955

Investment Securities in Unrealized Loss Position

Investment securities that were in an unrealized loss position at September 30, 2012 and December 31, 2011, are presented in the following tables, based on the length of time individual securities have been in an unrealized loss position. In the opinion of management, these securities are considered only temporarily impaired due to changes in market interest rates or the widening of market spreads subsequent to the initial purchase of the securities, and not due to concerns regarding the underlying credit of the issuers or the underlying collateral.

(dollars in thousands)	September 30, 2012
	Less than 12 Months					12 Months or Longer					Total
	Fair value		Unrealized losses			Fair value		Unrealized losses			Fair value		Unrealized losses
U.S. government agencies	$	2,032	$	(17	)	$	-	$	-		$	2,032	$	(17	)
Tax exempt state and political subdivisions		6,018		(33	)		-		-			6,018		(33	)
Corporate obligations		-		-			10,485		(515	)		10,485		(515	)
Investments in mutual funds and other equities		-		-			2,018		(2	)		2,018		(2	)
Total investment securities available for sale	$	8,050	$	(50	)	$	12,503	$	(517	)	$	20,553	$	(567	)

(dollars in thousands)	December 31, 2011
	Less than 12 Months					12 Months or Longer					Total
	Fair value		Unrealized losses			Fair value		Unrealized losses			Fair value		Unrealized losses
U.S. government agencies	$	10,499	$	(16	)	$	-	$	-		$	10,499	$	(16	)
Residential pass-through securities		29,838		(116	)		-		-			29,838		(116	)
Tax exempt state and political subdivisions		1,255		(28	)		-		-			1,255		(28	)
Corporate obligations		10,287		(713	)		-		-			10,287		(713	)
Investments in mutual funds and other equities		-		-			2,006		(12	)		2,006		(12	)
Total investment securities available for sale	$	51,879	$	(873	)	$	2,006	$	(12	)	$	53,885	$	(885	)

Investments Classified by Contractual Maturity

The amortized cost and fair value of investment securities, by maturity, are shown in the table below.  The amortized cost and fair value of residential pass-through securities, agency-issued collateralized mortgage obligations and asset-backed securities are presented by expected average life, rather than contractual maturity.  Expected maturities may differ from contractual maturities because issuers of the securities may have the right to call or prepay obligations with or without call or prepayment penalties.

(dollars in thousands)	September 30, 2012
	Amortized cost		Fair value
Three months or less	$	13,548	$	13,574
Over three months to one year		12,135		12,185
After one year through three years		204,262		209,384
After three years through five years		56,508		57,221
After five years through ten years		26,662		27,614
After ten years		32,112		33,903
Total	$	345,227	$	353,881

Schedule of Investment Securities Pledged to Secure Borrowing and Public Deposits

The following table presents investment securities which were pledged to secure borrowings and public deposits as permitted or required by law:

(dollars in thousands)	September 30, 2012
	Amortized cost		Fair value
To state and local governments to secure public deposits	$	68,705	$	71,260
To Federal Reserve Bank to secure borrowings		17,201		17,877
To Federal Home Loan Bank to secure borrowings		572		600
Other securities pledged, principally to secure deposits		15,872		16,573
Total pledged investment securities	$	102,350	$	106,310

Gross realized gains and losses on sale of available for sale securities

The following table presents the gross realized gains and gross realized losses on the sale of investment securities available for sale for the three and nine months ended September 30, 2012 and 2011:

(dollars in thousands)	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2012		2011		2012			2011
Gross realized gains		345		-		689			-
Gross realized losses		-		-		(2	)		-
Gain on sale of investment securities, net	$	345	$	-	$	687		$	-

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Stock-Based Compensation (Details) (USD $) Share data in Thousands, except Per Share data, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding [Roll Forward]
Total intrinsic value	$ 150,000		$ 150,000
Stock Options [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Compensation expense		7,000	8,000	80,000
Compensation cost not yet recognized	0		0
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding [Roll Forward]
Outstanding, beginning of period (in shares)			155,224
Granted (in shares)			0
Exercised (in shares)			(26,682)
Forfeited or expired or cancelled (in shares)			(4,975)
Outstanding, end of period (in shares)	123,567		123,567
Exercisable at end of period (in shares)	123,567		123,567
Outstanding, weighted average remaining contractual terms			4 years 8 months 19 days
Exercisable, weighted average remaining contractual terms			4 years 8 months 19 days
Total intrinsic value	431,000		431,000
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Weighted Average Exercise Price [Roll Forward]
Outstanding, weighted average exercise price per share at beginning of period (in dollars per share)			$ 10.71
Granted, weighted average exercise price (in dollars per share)			$ 0
Exercised, weighted average exercise price (in dollars per share)			$ 7.69
Forfeited, expired or cancelled (in dollars per share)			$ 15.54
Outstanding, weighted average exercise price per share at end of period (in dollars per share)	$ 11.17		$ 11.17
Exercisable, weighted average exercise price per share (in dollars per share)	$ 11.17		$ 11.17
Restricted Stock Units (RSUs) [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Compensation expense	252,000	115,000	583,000	365,000
Compensation cost not yet recognized	1,200,000		1,200,000
Share-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other than Options, Nonvested, Number of Shares [Roll Forward]
Outstanding at beginning of period (in shares)			71,744
Granted (in shares)			79,456
Vested (in shares)			(27,954)
Forfeited, expired or cancelled (in shares)			(3,548)
Outstanding at end of period (in shares)	119,698		119,698
Weighted Average Per Share, Grant Date Fair Value [Roll Forward]
Weighted average exercise price per share at beginning of period (in dollars per share)			$ 12.80
Weighted average exercise price per share granted (in dollars per share)			$ 13.31
Weighted average exercise price per share vested (in dollars per share)			$ 12.77
Weighted average exercise price per share forfeited, expired or cancelled (in dollars per share)			$ 13.17
Weighted average exercise price per share at end of period (in dollars per share)	$ 13.13		$ 13.13
Outstanding weighted average remaining contractual terms (in years)			2 years 5 months 27 days
Restricted Stock Awards [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Compensation expense	0	1,000	0	8,000
Compensation cost not yet recognized	$ 0		$ 0

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Allowance for Non-Covered Loan Losses and Credit Quality (Tables)

9 Months Ended

Sep. 30, 2012

Allowance for Non Covered Loan Losses and Credit Quality [Abstract]

Schedule of Loan Allowances

The following table summarizes activity related to the allowance for loan losses on non-covered loans, by portfolio segment, for the three and nine months ended September 30, 2012 and 2011:

(dollars in thousands)	Three Months Ended September 30, 2012
	Commercial			Real estate mortgage			Real estate construction			Consumer			Total
Beginning balance	$	4,471		$	5,844		$	3,983		$	3,267		$	17,565
Provision		63			901			142			144			1,250
Charge-offs		(258	)		(655	)		(1,308	)		(278	)		(2,499	)
Recoveries		81			68			7			98			254
Ending Balance	$	4,357		$	6,158		$	2,824		$	3,231		$	16,570

(dollars in thousands)	Three Months Ended September 30, 2011
	Commercial			Real estate mortgage			Real estate construction			Consumer			Total
Beginning balance	$	4,638		$	5,921		$	5,788		$	3,060		$	19,407
Provision		(318	)		785			1,211			822			2,500
Charge-offs		(163	)		(732	)		(2,216	)		(467	)		(3,578	)
Recoveries		58			424			1			124			607
Ending Balance	$	4,215		$	6,398		$	4,784		$	3,539		$	18,936

(dollars in thousands)	Nine Months Ended September 30, 2012
	Commercial			Real estate mortgage			Real estate construction			Consumer			Total
Beginning balance	$	4,034		$	6,500		$	4,046		$	3,452		$	18,032
Provision		1,443			2,766			809			582			5,600
Charge-offs		(1,234	)		(3,220	)		(2,041	)		(1,192	)		(7,687	)
Recoveries		114			112			10			389			625
Ending Balance	$	4,357		$	6,158		$	2,824		$	3,231		$	16,570

(dollars in thousands)	Nine Months Ended September 30, 2011
	Commercial			Real estate mortgage			Real estate construction			Consumer			Total
Beginning balance	$	3,915		$	6,507		$	4,947		$	3,443		$	18,812
Provision		1,374			1,692			3,904			1,530			8,500
Charge-offs		(1,320	)		(2,351	)		(4,070	)		(2,004	)		(9,745	)
Recoveries		246			550			3			570			1,369
Ending Balance	$	4,215		$	6,398		$	4,784		$	3,539		$	18,936

Schedule of Allowance For Loan Losses and Related Non Covered Loans, by Portfolio Segment

The following table provides a summary of the allowance for loan losses and related non-covered loans, by portfolio segment, at September 30, 2012 and December 31, 2011:

(dollars in thousands)	September 30, 2012
	Commercial		Real estate mortgage		Real estate construction		Consumer		Total
Allowance for non-covered loan losses:
Individually evaluated for impairment	$	1,465	$	943	$	1,053	$	54	$	3,515
Collectively evaluated for impairment		2,892		5,215		1,771		3,177		13,055
Total allowance for non-covered loan losses	$	4,357	$	6,158	$	2,824	$	3,231	$	16,570
Non-covered loans:
Individually evaluated for impairment	$	9,904	$	13,382	$	21,224	$	975	$	45,485
Collectively evaluated for impairment		145,304		418,758		56,772		156,432		777,266
Total non-covered loans (1)	$	155,208	$	432,140	$	77,996	$	157,407	$	822,751

(1) Total non-covered loans excludes deferred loan costs of $1.9 million.

(dollars in thousands)	December 31, 2011
	Commercial		Real estate mortgage		Real estate construction		Consumer		Total
Allowance for non-covered loan losses:
Individually evaluated for impairment	$	588	$	1,212	$	1,869	$	79	$	3,748
Collectively evaluated for impairment		3,446		5,288		2,177		3,373		14,284
Total allowance for non-covered loan losses	$	4,034	$	6,500	$	4,046	$	3,452	$	18,032
Non-covered loans:
Individually evaluated for impairment	$	6,525	$	14,032	$	27,483	$	553	$	48,593
Collectively evaluated for impairment		143,861		397,081		62,873		158,569		762,384
Total non-covered loans (1)	$	150,386	$	411,113	$	90,356	$	159,122	$	810,977

(1) Total non-covered loans excludes deferred loan costs of $1.9 million.

Schedule of Impaired Loans and the Related Allowance for Loan Losses

At September 30, 2012 and December 31, 2011, the Company had non-covered impaired loans which consisted of nonaccrual loans and restructured loans.  As of September 30, 2012, the Company had no commitments to extend additional credit on these non-covered impaired loans.  Non-covered impaired loans and the related allowance for loan losses at September 30, 2012 and December 31, 2011 were as follows:

(dollars in thousands)	September 30, 2012				December 31, 2011
	Recorded investment		Allowance		Recorded investment		Allowance
With no related allowance recorded
Nonaccrual loans	$	13,272	$	-	$	18,744	$	-
Restructured loans		9,870		-		11,208		-
Total with no related allowance	$	23,142	$	-	$	29,952	$	-
With an allowance recorded
Nonaccrual loans	$	4,370	$	184	$	3,356	$	262
Restructured loans		17,973		3,331		15,285		3,486
Total with an allowance recorded		22,343		3,515		18,641		3,748
Total	$	45,485	$	3,515	$	48,593	$	3,748

Schedule of Impaired Non Covered Loans, By Class

The following table further summarizes impaired non-covered loans, by class, at September 30, 2012 and December 31, 2011:

(dollars in thousands)	September 30, 2012						December 31, 2011
	Recorded investment		Unpaid principal balance		Related allowance		Recorded investment		Unpaid principal balance		Related allowance
With no related allowance recorded
Commercial	$	2,973	$	3,251	$	-	$	3,801	$	5,692	$	-
Real estate mortgages:
One-to-four family residential		1,234		1,346		-		1,557		3,217		-
Multi-family and commercial		5,285		6,430		-		7,062		8,791		-
Total real estate mortgages		6,519		7,776		-		8,619		12,008		-
Real estate construction:
One-to-four family residential		13,009		16,828		-		16,932		21,803		-
Multi-family and commercial		-		-		-		387		387		-
Total real estate construction		13,009		16,828		-		17,319		22,190		-
Consumer:
Direct		641		815		-		213		900		-
Total consumer		641		815		-		213		900		-
Total with no related allowance recorded	$	23,142	$	28,670	$	-	$	29,952	$	40,790	$	-
With an allowance recorded
Commercial	$	6,931	$	7,117	$	1,465	$	2,724	$	3,128	$	588
Real estate mortgages:
One-to-four family residential		526		526		52		174		190		13
Multi-family and commercial		6,337		6,337		891		5,238		5,238		1,199
Total real estate mortgages		6,863		6,863		943		5,412		5,428		1,212
Real estate construction:
One-to-four family residential		7,950		11,260		1,026		10,164		10,845		1,869
Multi-family and commercial		265		265		27		-		-		-
Total real estate construction		8,215		11,525		1,053		10,164		10,845		1,869
Consumer:
Direct		334		334		54		341		341		79
Total consumer		334		334		54		341		341		79
Total with an allowance recorded		22,343		25,839		3,515		18,641		19,742		3,748
Total impaired non-covered loans	$	45,485	$	54,509	$	3,515	$	48,593	$	60,532	$	3,748

Troubled Debt Restructurings

A troubled debt restructured loan is classified as a restructuring when the Company grants a concession(s) to a borrower experiencing financial difficulties that it would not otherwise consider. Examples of such concessions include forgiveness of principal or accrued interest, extending the maturity date(s) or providing a lower interest rate than would be normally available for a transaction of similar risk. As a result of these concessions, restructured loans are considered impaired as the Company will not collect all amounts due, both principal and interest, in accordance with the terms of the original loan agreement.

Troubled debt restructurings at September 30, 2012 and December 31, 2011 were as follows:

(dollars in thousands)	September 30, 2012						December 31, 2011
	Accrual status		Nonaccrual status		Total modifications		Accrual status		Nonaccrual status		Total modifications
Troubled debt restructurings:
Commercial	$	7,986	$	993	$	8,979	$	3,341	$	-	$	3,341
Real estate mortgages:
One-to-four family residential		575		-		575		-		933		933
Multi-family and commercial		8,045		2,008		10,053		9,420		937		10,357
Total real estate mortgage		8,620		2,008		10,628		9,420		1,870		11,290
Real estate construction:
One-to-four family residential		10,638		10,121		20,759		13,391		13,283		26,674
Multi-family and commercial		264		-		264		-		387		387
Total real estate construction		10,902		10,121		21,023		13,391		13,670		27,061
Consumer:
Direct		335		22		357		341		-		341
Total consumer		335		22		357		341		-		341
Total restructured loans	$	27,843	$	13,144	$	40,987	$	26,493	$	15,540	$	42,033

Troubled Debt Restructurings, Modified During the Period

The following tables present loans restructured during the three and nine months ended September 30, 2012 and 2011. During the periods presented, all modification terms were a combination of terms employed by the Company.

(dollars in thousands)	For the Three Months Ended September 30, 2012
	Number of contracts		Pre-modification recorded investment		Post-modification recorded investment
Troubled debt restructurings:
Commercial		1	$	181	$	181
Real estate mortgages:
One-to-four family residential		1		49		49
Total real estate mortgage		1		49		49
Real estate construction:
One-to-four family residential		1		441		441
Total real estate construction		1		441		441
Total restructured loans		3	$	671	$	671

(dollars in thousands)	For the Three Months Ended September 30, 2011
	Number of contracts		Pre-modification recorded investment		Post-modification recorded investment
Troubled debt restructurings:
Commercial		1	$	628	$	628
Real estate mortgages:
Multi-family and commercial		3		1,687		1,667
Total real estate mortgage		3		1,687		1,667
Real estate construction:
One-to-four family residential		5		3,712		3,591
Total real estate construction		5		3,712		3,591
Consumer:
Direct		1		342		342
Total consumer		1		342		342
Total restructured loans		10	$	6,369	$	6,228

(dollars in thousands)	For the Nine Months Ended September 30, 2012
	Number of contracts		Pre-modification recorded investment		Post-modification recorded investment
Troubled debt restructurings:
Commercial		13	$	5,042	$	4,884
Real estate mortgages:
One-to-four family residential		2		221		221
Multi-family and commercial		1		374		374
Total real estate mortgage		3		595		595
Real estate construction:
One-to-four family residential		2		1,070		947
Multi-family and commercial		1		265		265
Total real estate construction		3		1,335		1,212
Total restructured loans		19	$	6,972	$	6,691

(dollars in thousands)	For the Nine Months Ended September 30, 2011
	Number of contracts		Pre-modification recorded investment		Post-modification recorded investment
Troubled debt restructurings:
Commercial		5	$	2,804	$	2,804
Real estate mortgages:
Multi-family and commercial		10		6,110		6,083
Total real estate mortgage		10		6,110		6,083
Real estate construction:
One-to-four family residential		8		7,116		6,995
Total real estate construction		8		7,116		6,995
Consumer:
Direct		1		342		342
Total consumer		1		342		342
Total restructured loans		24	$	16,372	$	16,224

Schedule of Past Due Status of Loans Receivable

The following table summarizes non-covered nonaccrual loans and past due loans, by class, as of September 30, 2012 and December 31, 2011:

(dollars in thousands)	September 30, 2012
	30 - 59 Days past due		60 - 89 Days past due		Greater than 90 days and accruing		Total past due		Nonaccrual		Current		Total non-covered loans
Commercial	$	683	$	61	$	-	$	744	$	1,918	$	152,546	$	155,208
Real estate mortgages:
One-to-four family residential		54		-		-		54		1,185		36,023		37,262
Multi-family and commercial		415		-		-		415		3,577		390,886		394,878
Total real estate mortgages		469		-		-		469		4,762		426,909		432,140
Real estate construction:
One-to-four family residential		-		-		-		-		10,321		34,571		44,892
Multi-family and commercial		-		-		-		-		-		33,104		33,104
Total real estate construction		-		-		-		-		10,321		67,675		77,996
Consumer:
Indirect		1,124		128		-		1,252		-		78,396		79,648
Direct		641		65		-		706		641		76,412		77,759
Total consumer		1,765		193		-		1,958		641		154,808		157,407
Total	$	2,917	$	254	$	-	$	3,171	$	17,642	$	801,938		822,751
Deferred loan costs, net														1,859
Total non-covered loans													$	824,610

(dollars in thousands)	December 31, 2011
	30 - 59 Days past due		60 - 89 Days past due		Greater than 90 days and accruing		Total past due		Nonaccrual		Current		Total non-covered loans
Commercial	$	1,482	$	4	$	-	$	1,486	$	3,183	$	145,717	$	150,386
Real estate mortgages:
One-to-four family residential		53		154		-		207		1,732		38,392		40,331
Multi-family and commercial		1,687		484		-		2,171		2,881		365,730		370,782
Total real estate mortgages		1,740		638		-		2,378		4,613		404,122		411,113
Real estate construction:
One-to-four family residential		27		-		-		27		13,705		45,078		58,810
Multi-family and commercial		100		-		-		100		387		31,059		31,546
Total real estate construction		127		-		-		127		14,092		76,137		90,356
Consumer:
Indirect		1,288		198		-		1,486		-		78,910		80,396
Direct		1,023		294		-		1,317		212		77,197		78,726
Total consumer		2,311		492		-		2,803		212		156,107		159,122
Total	$	5,660	$	1,134	$	-	$	6,794	$	22,100	$	782,083		810,977
Deferred loan costs, net														1,853
Total non-covered loans													$	812,830

Allowance for Credit Losses on Financing Receivables by Credit Quality Indicators

The following table summarizes our internal risk rating, by class, as of September 30, 2012 and December 31, 2011:

(dollars in thousands)	September 30, 2012
	Pass/Watch		Special mention		Substandard		Doubtful/Loss		Total
Commercial	$	131,097	$	6,123	$	17,988	$	-	$	155,208
Real estate mortgages:
One-to-four family residential		31,600		1,150		4,512		-		37,262
Multi-family and commercial		339,858		30,652		24,368		-		394,878
Total real estate mortgages		371,458		31,802		28,880		-		432,140
Real estate construction:
One-to-four family residential		22,248		783		21,861		-		44,892
Multi-family and commercial		29,066		1,738		2,300		-		33,104
Total real estate construction		51,314		2,521		24,161		-		77,996
Consumer:
Indirect		77,962		19		1,667		-		79,648
Direct		71,704		532		5,523		-		77,759
Total consumer		149,666		551		7,190		-		157,407
Total	$	703,535	$	40,997	$	78,219	$	-		822,751
Deferred loan costs, net										1,859
									$	824,610

Allowance for Credit Losses on Financing Receivables by Credit Quality Indicators Prior Year

(dollars in thousands)	December 31, 2011
	Pass/Watch		Special mention		Substandard		Doubtful/Loss		Total
Commercial	$	122,189	$	7,791	$	20,406	$	-	$	150,386
Real estate mortgages:
One-to-four family residential		33,609		1,462		5,260		-		40,331
Multi-family and commercial		307,402		26,220		37,160		-		370,782
Total real estate mortgages		341,011		27,682		42,420		-		411,113
Real estate construction:
One-to-four family residential		26,110		2,313		30,387		-		58,810
Multi-family and commercial		24,402		4,416		2,728		-		31,546
Total real estate construction		50,512		6,729		33,115		-		90,356
Consumer:
Indirect		78,531		15		1,850		-		80,396
Direct		72,602		844		5,280		-		78,726
Total consumer		151,133		859		7,130		-		159,122
Total	$	664,845	$	43,061	$	103,071	$	-		810,977
Deferred loan costs, net										1,853
									$	812,830

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Condensed Consolidated Statements of Shareholders' Equity (unaudited) (Parenthetical) (USD $)	9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011
Condensed Consolidated Statements of Shareholders' Equity (unaudited) [Abstract]
Cash dividends on common stock, per share (in dollars per share)	$ 0.35	$ 0.15

XML

Condensed Consolidated Statements of Financial Condition (unaudited) (Parenthetical) (USD $) In Thousands, except Share data, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011
Assets
Cash and due from banks, restricted cash	$ 13,960	$ 653
Shareholders' Equity:
Common stock, no par value (in dollars per share)	$ 0	$ 0
Common stock, shares authorized (in shares)	35,000,000	35,000,000
Common stock, shares issued (in shares)	15,451,307	15,398,197
Common stock, shares outstanding (in shares)	15,451,307	15,398,197

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Stock-Based Compensation

9 Months Ended

Sep. 30, 2012

Stock-Based Compensation [Abstract]

Stock-Based Compensation

(9)  Stock-Based Compensation

(a) Stock Options:  The Company measures the fair value of each stock option grant at the date of the grant, using the Black-Scholes option pricing model.  There were no options granted during the three and nine months ended September 30, 2012 and 2011.

The Company recognizes compensation expense for stock option grants on a straight-line basis over the requisite service period of the grant.  No stock-based compensation expense was recognized for the three months ended September 30, 2012.   The Company recognized $8 thousand in stock-based compensation expense, as a component of salaries and benefits, for the nine months ended September 30, 2012.  For the three and nine months ended September 30, 2011, the Company recognized $7 thousand and $80 thousand in stock-based compensation expense, as a component of salaries and benefits.  As of September 30, 2012, there was no remaining unrecognized compensation costs related to nonvested stock option grants.

The following table summarizes information on stock option activity during 2012:

	Shares			Weighted average exercise price per share		Weighted average remaining contractual terms (in years)		Total intrinsic value (in thousands)
Outstanding, January 1, 2012		155,224		$	10.71
Granted		-			-
Exercised		(26,682	)		7.69			$	150
Forfeited, expired or cancelled		(4,975	)		15.54
Outstanding, September 30, 2012		123,567			11.17		4.72	$	431
Exercisable at September 30, 2012		123,567		$	11.17		4.72	$	431

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (i.e., the difference between the Company's closing stock price on September 30, 2012, and the exercise price, times the number of shares) that would have been received by the option holders had all the option holders exercised their options on September 30, 2012.  This amount changes based upon the fair market value of the Company's stock.

(b) Restricted Stock Awards: The Company grants restricted stock awards ("RSA") periodically for the benefit of employees and directors.  Recipients of RSAs do not pay any cash consideration to the Company for the shares and receive all dividends with respect to such shares, whether or not the shares have vested.  Restrictions are based on continuous service requirements with the Company.   At September 30, 2012 and December 31, 2011, there were no RSAs outstanding.

For the three and nine months ended September 30, 2012, the Company did not recognize any RSA compensation expense, as a component of salaries and benefits, compared to $1 thousand and $8 thousand for the three and nine months ended September 30, 2011, respectively.  As of September 30, 2012, there was no remaining unrecognized compensation costs related to nonvested RSAs.

(c) Restricted Stock Units: The Company grants restricted stock units ("RSU") periodically for the benefit of employees and directors. Recipients of RSUs receive shares of the Company's stock upon the lapse of their related restrictions and do not pay any cash consideration to the Company for the shares.  Restrictions are based on continuous service.

The following table summarizes information on RSU activity during 2012:

	Shares			Weighted average fair value per share		Weighted average remaining contractual terms (in years)
Outstanding, January 1, 2012		71,744		$	12.80
Granted		79,456			13.31
Vested		(27,954	)		12.77
Forfeited, expired or cancelled		(3,548	)		13.17
Outstanding, September 30, 2012		119,698		$	13.13	2.49

For the three and nine months ended September 30, 2012, the Company recognized $252 thousand and $583 thousand in RSU compensation expense, as a component of salaries and benefits, compared to $115 thousand and $365 thousand for the same periods a year ago, respectively.  As of September 30 2012, there was $1.2 million of total unrecognized compensation costs related to nonvested RSUs.

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Document and Entity Information	9 Months Ended
	Sep. 30, 2012	Nov. 01, 2012
Document and Entity Information [Abstract]
Entity Registrant Name	WASHINGTON BANKING CO
Entity Central Index Key	0001058690
Current Fiscal Year End Date	--12-31
Entity Well-known Seasoned Issuer	No
Entity Voluntary Filers	No
Entity Current Reporting Status	Yes
Entity Filer Category	Accelerated Filer
Entity Common Stock, Shares Outstanding		15,453,497
Document Fiscal Year Focus	2012
Document Fiscal Period Focus	Q3
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Sep. 30, 2012

XML

Shareholders' Equity

9 Months Ended

Sep. 30, 2012

Shareholders' Equity [Abstract]

Shareholders' Equity

(10)  Shareholders' Equity

On January 16, 2009, in exchange for an aggregate purchase price of $26.4 million, the Company issued and sold to the United States Department of the Treasury pursuant to the Troubled Asset Relief Program Capital Purchase Program the following: (i) 26,380 shares of the Company's newly designated Fixed Rate Cumulative Perpetual Preferred Stock, Series A, no par value per share, and liquidation preference $1,000 per share ($26.4 million liquidation preference in the aggregate) and (ii) a warrant to purchase up to 492,164 shares of the Company's common stock, no par value per share, at an exercise price of $8.04 per share, subject to certain anti-dilution and other adjustments.

In connection with the issuance and sale of the Company's securities, the Company entered into a Letter Agreement including the Securities Purchase Agreement - Standard Terms, dated January 16, 2009, with the United States Department of the Treasury (the "Agreement"). The Agreement contained limitations on the payment of quarterly cash dividends on the Company's common stock in excess of $0.065 per share and on the Company's ability to repurchase its common stock.

The Series A Preferred Stock paid cumulative dividends at a rate of 5% per annum, applied to the $1,000 per share liquidation preference, as and if declared by the Company's Board of Directors out of funds legally available. The Series A Preferred Stock had no maturity date and ranked senior to common stock with respect to the payment of dividends and distributions and amounts payable upon liquidation, dissolution and winding up of the Company.

On January 12, 2011, the Company redeemed all 26,380 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A.  The Company paid a total of $26.6 million to the Treasury, consisting of $26.4 million in principal and $209 thousand in accrued and unpaid dividends. The Company's redemption of the shares was not subject to additional conditions.

On March 2, 2011, the Company completed the repurchase of Warrant to Purchase Common Stock issued to the U.S. Department of the Treasury pursuant to the Troubled Asset Relief Program Capital Purchase Program. The Company repurchased the Warrant for $1.6 million. The Warrant repurchase, together with the Company's earlier redemption of the entire amount of Fixed Rate Cumulative Perpetual Preferred Stock, Series A, issued to the U.S. Treasury, represents full repayment of all TARP obligations and cancellation of all equity interests in the Company held by the U.S. Treasury.

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Condensed Consolidated Statements of Income (unaudited) (USD $) In Thousands, except Share data, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011
Interest income:
Interest and fees on non-covered loans	$ 11,644	$ 12,466	$ 35,010	$ 37,670
Interest and fees on covered loans	8,998	8,614	28,248	25,422
Interest on taxable investment securities	1,238	1,123	3,981	2,724
Interest on tax-exempt investment securities	311	220	842	649
Other	71	89	190	200
Total interest income	22,262	22,512	68,271	66,665
Interest expense:
Interest on deposits	1,575	2,310	5,124	7,449
Interest on junior subordinated debentures	135	120	404	361
Total interest expense	1,710	2,430	5,528	7,810
Net interest income	20,552	20,082	62,743	58,855
Provision for loan losses, non-covered loans	1,250	2,500	5,600	8,500
Provision (recovery) of loan losses, covered loans	0	0	398	(318)
Net interest income after provision for loan losses	19,302	17,582	56,745	50,673
Noninterest income:
Service charges and fees	886	956	2,700	2,884
Electronic banking income	820	838	2,728	2,355
Investment products	335	230	1,064	835
Gain on sale of investment securities, net	345	0	687	0
Bank owned life insurance income	43	84	158	245
Income from the sale of mortgage loans	1,146	215	2,627	757
SBA premium income	126	103	318	375
Change in FDIC indemnification asset	(2,762)	(2,586)	(8,898)	(5,630)
Gain on disposition of covered assets	125	1,119	1,310	4,104
Other	294	472	949	1,860
Total noninterest income	1,358	1,431	3,643	7,785
Noninterest expense:
Salaries and benefits	7,741	7,310	22,317	21,038
Occupancy and equipment	1,738	1,660	5,126	4,898
Office supplies and printing	378	385	1,216	1,287
Data processing	539	446	1,603	1,418
Consulting and professional fees	194	202	710	847
Intangible amortization	129	160	383	475
Merger related expenses	0	70	0	324
FDIC premiums	314	319	967	1,469
FDIC clawback liability adjustment	247	0	1,385	0
Non-covered OREO and repossession expenses, net	398	559	1,511	1,199
Covered OREO and repossession expenses, net	122	501	1,274	1,620
Other	1,863	2,195	5,935	6,957
Total noninterest expense	13,663	13,807	42,427	41,532
Income before provision for income tax	6,997	5,206	17,961	16,926
Provision for income taxes	2,359	1,581	5,703	5,213
Net income before preferred dividends	4,638	3,625	12,258	11,713
Preferred stock dividends and discount accretion	0	0	0	1,084
Net income available to common shareholders	$ 4,638	$ 3,625	$ 12,258	$ 10,629
Net income available per common share, basis (in dollars per share)	$ 0.30	$ 0.24	$ 0.80	$ 0.69
Net income available per common share, diluted (in dollars per share)	$ 0.30	$ 0.24	$ 0.79	$ 0.69
Average number of common shares outstanding, basis (in shares)	15,413,000	15,343,000	15,418,000	15,339,000
Average number of common shares outstanding, diluted (in shares)	15,446,000	15,391,000	15,453,000	15,421,000

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Non-covered Loans

9 Months Ended

Sep. 30, 2012

Non-covered Loans [Abstract]

Non-covered Loans

(4)  Non-Covered Loans

The following table presents the major types of non-covered loans at September 30, 2012 and December 31, 2011.  The classification of non-covered loan balances presented is reported in accordance with regulatory reporting requirements.

(dollars in thousands)	September 30, 2012			December 31, 2011
Commercial	$	155,208		$	150,386
Real estate mortgage		432,140			411,113
Real estate construction		77,996			90,356
Consumer		157,407			159,122
		822,751			810,977
Deferred loan costs, net		1,859			1,853
Allowance for loan losses		(16,570	)		(18,032	)
Total non-covered loans, net	$	808,040		$	794,798

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Investment Securities

9 Months Ended

Sep. 30, 2012

Investment Securities [Abstract]

Investment Securities

(3)  Investment Securities

The following table presents the amortized cost, unrealized gains, unrealized losses and fair value of investment securities available for sale at September 30, 2012 and December 31, 2011.  At September 30, 2012 and December 31, 2011, there were no investment securities classified as held to maturity or trading.

(dollars in thousands)	September 30, 2012
	Amortized cost		Unrealized gains		Unrealized losses			Fair value
U.S. government agencies	$	73,984	$	1,538	$	(17	)	$	75,505
U.S. Treasuries		9,999		14		-			10,013
Residential pass-through securities		169,840		4,277		-			174,117
Taxable state and political subdivisions		5,779		778		-			6,557
Tax exempt state and political subdivisions		53,067		2,476		(33	)		55,510
Corporate obligations		11,000		-		(515	)		10,485
Agency-issued collateralized mortgage obligations		14,409		102		-			14,511
Asset-backed securities		5,131		36		-			5,167
Investments in mutual funds and other equities		2,018		-		(2	)		2,016
Total investment securities available for sale	$	345,227	$	9,221	$	(567	)	$	353,881

(dollars in thousands)	December 31, 2011
	Amortized cost		Unrealized gains		Unrealized losses			Fair value
U.S. government agencies	$	75,383	$	1,207	$	(16	)	$	76,574
U.S. Treasuries		42,077		520		-			42,597
Residential pass-through securities		116,219		1,295		(116	)		117,398
Taxable state and political subdivisions		9,143		615		-			9,758
Tax exempt state and political subdivisions		35,263		2,100		(28	)		37,335
Corporate obligations		11,000		-		(713	)		10,287
Investments in mutual funds and other equities		2,018		-		(12	)		2,006
Total investment securities available for sale	$	291,103	$	5,737	$	(885	)	$	295,955

Investment securities that were in an unrealized loss position at September 30, 2012 and December 31, 2011, are presented in the following tables, based on the length of time individual securities have been in an unrealized loss position. In the opinion of management, these securities are considered only temporarily impaired due to changes in market interest rates or the widening of market spreads subsequent to the initial purchase of the securities, and not due to concerns regarding the underlying credit of the issuers or the underlying collateral.

(dollars in thousands)	September 30, 2012
	Less than 12 Months					12 Months or Longer					Total
	Fair value		Unrealized losses			Fair value		Unrealized losses			Fair value		Unrealized losses
U.S. government agencies	$	2,032	$	(17	)	$	-	$	-		$	2,032	$	(17	)
Tax exempt state and political subdivisions		6,018		(33	)		-		-			6,018		(33	)
Corporate obligations		-		-			10,485		(515	)		10,485		(515	)
Investments in mutual funds and other equities		-		-			2,018		(2	)		2,018		(2	)
Total investment securities available for sale	$	8,050	$	(50	)	$	12,503	$	(517	)	$	20,553	$	(567	)

(dollars in thousands)	December 31, 2011
	Less than 12 Months					12 Months or Longer					Total
	Fair value		Unrealized losses			Fair value		Unrealized losses			Fair value		Unrealized losses
U.S. government agencies	$	10,499	$	(16	)	$	-	$	-		$	10,499	$	(16	)
Residential pass-through securities		29,838		(116	)		-		-			29,838		(116	)
Tax exempt state and political subdivisions		1,255		(28	)		-		-			1,255		(28	)
Corporate obligations		10,287		(713	)		-		-			10,287		(713	)
Investments in mutual funds and other equities		-		-			2,006		(12	)		2,006		(12	)
Total investment securities available for sale	$	51,879	$	(873	)	$	2,006	$	(12	)	$	53,885	$	(885	)

At September 30, 2012 and December 31, 2011, there were 12 and 10 investment securities in unrealized loss positions, respectively.  For each security in an unrealized loss position, the Company assesses whether it intends to sell the security, or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. For debt securities that are considered other-than-temporarily impaired and that the Company does not intend to sell and will not be required to sell prior to recovery of its amortized cost basis, the Company will separate the amount of the impairment into the amount that is credit related (credit loss component) and the amount due to all other factors. The credit loss component is recognized in earnings and is calculated as the difference between the security's amortized cost basis and the present value of its expected future cash flows. The remaining difference between the security's fair value and the present value of future expected cash flows is deemed to be due to factors that are not credit related and is recognized in other comprehensive income.

The Company does not intend to sell the securities that are temporarily impaired, and it is more likely than not that the Company will not have to sell those securities before recovery of the cost basis. Additionally, the Company has evaluated the credit ratings of its investment securities and their issuers and/or insurers, as applicable. Based on the Company's evaluation, management has determined that no investment security in the Company's investment portfolio was other-than-temporarily impaired at September 30, 2012 or December 31, 2011.

The amortized cost and fair value of investment securities, by maturity, are shown in the table below.  The amortized cost and fair value of residential pass-through securities, agency-issued collateralized mortgage obligations and asset-backed securities are presented by expected average life, rather than contractual maturity.  Expected maturities may differ from contractual maturities because issuers of the securities may have the right to call or prepay obligations with or without call or prepayment penalties.

(dollars in thousands)	September 30, 2012
	Amortized cost		Fair value
Three months or less	$	13,548	$	13,574
Over three months to one year		12,135		12,185
After one year through three years		204,262		209,384
After three years through five years		56,508		57,221
After five years through ten years		26,662		27,614
After ten years		32,112		33,903
Total	$	345,227	$	353,881

The following table presents investment securities which were pledged to secure borrowings and public deposits as permitted or required by law:

(dollars in thousands)	September 30, 2012
	Amortized cost		Fair value
To state and local governments to secure public deposits	$	68,705	$	71,260
To Federal Reserve Bank to secure borrowings		17,201		17,877
To Federal Home Loan Bank to secure borrowings		572		600
Other securities pledged, principally to secure deposits		15,872		16,573
Total pledged investment securities	$	102,350	$	106,310

The following table presents the gross realized gains and gross realized losses on the sale of investment securities available for sale for the three and nine months ended September 30, 2012 and 2011:

(dollars in thousands)	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2012		2011		2012			2011
Gross realized gains		345		-		689			-
Gross realized losses		-		-		(2	)		-
Gain on sale of investment securities, net	$	345	$	-	$	687		$	-

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Non-covered Loans (Tables)

9 Months Ended

Sep. 30, 2012

Non-covered Loans [Abstract]

Non-covered Loans

The following table presents the major types of non-covered loans at September 30, 2012 and December 31, 2011.  The classification of non-covered loan balances presented is reported in accordance with regulatory reporting requirements.

(dollars in thousands)	September 30, 2012			December 31, 2011
Commercial	$	155,208		$	150,386
Real estate mortgage		432,140			411,113
Real estate construction		77,996			90,356
Consumer		157,407			159,122
		822,751			810,977
Deferred loan costs, net		1,859			1,853
Allowance for loan losses		(16,570	)		(18,032	)
Total non-covered loans, net	$	808,040		$	794,798

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Fair Value Measurements

9 Months Ended

Sep. 30, 2012

Fair Value Measurements [Abstract]

Fair Value Measurements

(11) Fair Value Measurements

(a) Fair Value Hierarchy and Fair Value Measurement: The Company groups its assets and liabilities that are recorded at fair value in three levels, based on the markets, if any, in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:

Level 1: Quoted prices for identical instruments in active markets.

Level 2: Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.

Level 3: Significant inputs to the valuation model are unobservable.

The following table presents the Company's financial instruments measured at fair value on a recurring basis at September 30, 2012 and December 31, 2011:

(dollars in thousands)	Fair value at September 30, 2012
	Level 1		Level 2		Level 3		Total
U.S. government agencies	$	-	$	75,505	$	-	$	75,505
U.S. Treasuries		-		10,013		-		10,013
Pass-through securities		-		174,117		-		174,117
Taxable state and political subdivisions		-		6,557		-		6,557
Tax exempt state and political subdivisions		-		55,510		-		55,510
Corporate obligations		-		10,485		-		10,485
Agency-issued collateralized mortgage obligations		-		14,511		-		14,511
Asset-backed securities		-		5,167		-		5,167
Investments in mutual funds and other equities		-		2,016		-		2,016
Total	$	-	$	353,881	$	-	$	353,881

(dollars in thousands)	Fair value at December 31, 2011
	Level 1		Level 2		Level 3		Total
U.S. government agencies	$	-	$	76,574	$	-	$	76,574
U.S. Treasuries		-		42,597		-		42,597
Pass-through securities		-		117,398		-		117,398
Taxable state and political subdivisions		-		9,758		-		9,758
Tax exempt state and political subdivisions		-		37,335		-		37,335
Corporate obligations		-		10,287		-		10,287
Investments in mutual funds and other equities		-		2,006		-		2,006
Total	$	-	$	295,955	$	-	$	295,955

There were no transfers between Level 1 and Level 2 during the nine months ended September 30, 2012 or during the year ended December 31, 2011.

When available, the Company uses quoted market prices to determine the fair value of investment securities. These investments are included in Level 1. When quoted market prices are unobservable, the Company uses quotes from independent pricing vendors based on recent trading activity and other relevant information including market interest rate curves, referenced credit spreads and estimated prepayment rates where applicable. These investments are included in Level 2 and comprise the Company's portfolio of U.S. agency securities, U.S. treasury securities, pass-through residential securities, municipal bonds and other corporate bonds.

Certain financial assets of the Company may be measured at fair value on a non-recurring basis. These assets are subject to fair value adjustments that result from application of lower-of-cost-or-market accounting or write-downs of individual assets.

The following table presents the carrying value of financial instruments by level within the fair value hierarchy, for which a non-recurring change in fair value has been recorded:

(dollars in thousands)	Fair value at September 30, 2012
	Level 1		Level 2		Level 3		Total		Total losses for the period
Non-covered impaired loans (1)	$	-	$	-	$	41,970	$	41,970	$	(7,982	)
Non-covered other real estate owned (2)		-		-		4,080		4,080		(678	)
Covered other real estate owned (2)		-		-		18,811		18,811		(2,902	)
Total	$	-	$	-	$	64,861	$	64,861	$	(11,562	)

(dollars in thousands)	Fair value at December 31, 2011
	Level 1		Level 2		Level 3		Total		Total losses for the period
Non-covered impaired loans (1)	$	-	$	-	$	44,845	$	44,845	$	(8,182	)
Non-covered other real estate owned (2)		-		-		1,976		1,976		(272	)
Covered other real estate owned (2)		-		-		26,622		26,622		-
Total	$	-	$	-	$	73,443	$	73,443	$	(8,454	)

(1) Represents carrying value and related specific valuation allowances, which are included in the allowance for loan losses.

(2) Represents the fair value and related losses of foreclosed real estate and other collateral owned that were measured at fair value subsequent to their initial classification as non-covered other real estate owned and covered other real estate owned.

Following is a description of methods and assumptions used to estimate the fair value of each class of financial instrument for which a non-recurring change in fair value has been recorded:

Non-covered impaired loans: 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.  Non-covered 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 the collateral, if the loan is collateral dependent.

The Company generally obtains appraisals for collateral dependent loans on an annual basis.  Depending on the loan, the Company may obtain appraisals more frequently than 12 months, particularly if the credit is deteriorating.  If the loan is performing and market conditions are stable, the Company may not obtain appraisals on an annual basis. This policy does not vary by loan type.

Impaired loans that are collateral dependent are reviewed quarterly.  The review involves a collateral valuation review, which also contemplates an assessment of whether the last appraisal is outdated.  Recent appraisals, adjustments to outdated appraisals, knowledgeable third party opinions of value and current market conditions are combined to determine whether a specific reserve and/or a loan charge-off is required.  Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.  For the period ended September 30, 2012, non-covered impaired loans totaling $8.3 million had adjustments to appraisals, based on unobservable inputs, ranging from 10% to 57%, with a weighted average adjustment of 27%.

In the rare case where an appraisal is not available, the Company consults with third party industry specific experts for estimates as well as relies upon the Company's market knowledge and expertise.

Non-covered and covered other real estate owned: Non-covered and covered other real estate owned includes properties acquired through foreclosure. These properties are recorded at the lower of cost or estimated fair value, less estimated cost to sell, based on periodic evaluations.

The Company deducts 10% of the appraised value for selling costs on non-covered and covered other real estate owned.  If the property has been actively listed for sale for more than nine months and has had limited interest, the Company will typically reduce the fair value further based upon input from third party industry experts and knowledgeable management and may include adjustments for outdated appraisals (Level 3).

(b) Disclosures about Fair Value of Financial Instruments: The table below is a summary of fair value estimates for financial instruments at September 30, 2012 and December 31, 2011, including financial instruments recorded at fair value on a recurring and nonrecurring basis (summarized in the table above). The carrying amounts in the following table are recorded in the statement of financial condition under the indicated captions. The Company has excluded non-financial assets and non-financial liabilities such as Bank premises and equipment, deferred taxes and other liabilities.

(dollars in thousands)	September 30, 2012
			Fair value measurements using:
	Carrying value		Total		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	30,885	$	30,885	$	30,885	$	-	$	-
Interest-bearing deposits		84,570		84,570		84,570		-		-
Federal funds sold		670		670		670		-		-
Investment securities available for sale		353,881		353,881		-		353,881		-
FHLB stock		7,509		7,509		7,509		-		-
Loans held for sale		15,139		15,139		-		15,139		-
Non-covered loans		824,610		811,222		-		-		811,222
Covered loans		232,524		247,670		-		-		247,670
Bank owned life insurance		17,671		17,671		17,671		-		-
FDIC indemnification asset		44,713		34,111		-		-		34,111
Financial liabilities:
Deposits		1,458,230		1,462,393		-		-		1,462,393
Junior subordinated debentures		25,774		12,193		-		-		12,193

(dollars in thousands)	December 31, 2011
			Fair value measurements using:
	Carrying value		Total		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	25,399	$	25,399	$	25,399	$	-	$	-
Interest-bearing deposits		80,514		80,514		80,514		-		-
Investment securities available for sale		295,955		295,955		-		295,955		-
FHLB stock		7,576		7,576		7,576		-		-
Loans held for sale		22,421		22,421		-		22,421		-
Non-covered loans		812,830		796,663		-		-		796,663
Covered loans		269,081		304,145		-		-		304,145
Bank owned life insurance		17,513		17,513		17,513		-		-
FDIC indemnification asset		65,586		41,041		-		-		41,041
Financial liabilities:
Deposits		1,466,344		1,471,615		-		-		1,471,615
Junior subordinated debentures		25,774		9,802		-		-		9,802

Following is a description of methods and assumptions used to estimate the fair value of each class of financial instrument not recorded at fair value but required for disclosure purposes:

Cash and Cash Equivalents:The carrying value of cash and cash equivalent instruments approximates fair value.

Interest-bearing Deposits:  The carrying values of interest-bearing 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.

Federal Funds Sold:  The carrying value of federal funds sold approximates fair value.

Investment Securities: Fair values of investment securities are based on quoted market prices when available or through the use of alternative approaches, such as matrix or model pricing, or broker indicative bids, when market quotes are not readily accessible or available.

FHLB stock: The Bank's investment in FHLB stock is carried at par value, which approximates its fair value.

Loans Held for Sale:The carrying value of loans held for sale approximates fair value.

Non-covered 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.

Covered Loans: Covered loans are measured at estimated fair value on the date of acquisition. Subsequent to acquisition, the fair value of covered loans is measured using the same methodology as that of non-covered loans.

Bank Owned Life Insurance: Fair values of insurance policies owned are based on the insurance contract's cash surrender value.

FDIC Indemnification Asset: The FDIC indemnification asset is calculated as the expected future cash flows under the loss share agreement discounted by a rate reflective of a U.S. government agency security.

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.

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.

Off-Balance Sheet Items: Commitments to extend credit represent the principal category of off-balance sheet financial instruments. The fair value of these commitments are 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.

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Non-covered Other Real Estate Owned

9 Months Ended

Sep. 30, 2012

Non Covered Other Real Estate Owned [Abstract]

Non-covered Other Real Estate Owned

(7)  Non-Covered Other Real Estate Owned

The following table presents the changes in non-covered other real estate owned for the three and nine months ended September 30, 2012 and 2011:

(dollars in thousands)	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2012			2011			2012			2011
Balance, beginning of period	$	4,414		$	2,671		$	1,976		$	4,122
Additions to OREO		554			1,619			4,296			3,118
Dispositions of OREO, net		(759	)		(1,820	)		(1,514	)		(4,717	)
Valuation adjustments		(129	)		-			(678	)		(53	)
Balance, end of period	$	4,080		$	2,470		$	4,080		$	2,470

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Allowance for Non-Covered Loan Losses and Credit Quality

9 Months Ended

Sep. 30, 2012

Allowance for Non Covered Loan Losses and Credit Quality [Abstract]

Allowance for Non-Covered Loan Losses and Credit Quality

(5)  Allowance for Non-Covered Loan Losses and Credit Quality

Activity in the Allowance for Non Covered Loan Losses

The following table summarizes activity related to the allowance for loan losses on non-covered loans, by portfolio segment, for the three and nine months ended September 30, 2012 and 2011:

(dollars in thousands)	Three Months Ended September 30, 2012
	Commercial			Real estate mortgage			Real estate construction			Consumer			Total
Beginning balance	$	4,471		$	5,844		$	3,983		$	3,267		$	17,565
Provision		63			901			142			144			1,250
Charge-offs		(258	)		(655	)		(1,308	)		(278	)		(2,499	)
Recoveries		81			68			7			98			254
Ending Balance	$	4,357		$	6,158		$	2,824		$	3,231		$	16,570

(dollars in thousands)	Three Months Ended September 30, 2011
	Commercial			Real estate mortgage			Real estate construction			Consumer			Total
Beginning balance	$	4,638		$	5,921		$	5,788		$	3,060		$	19,407
Provision		(318	)		785			1,211			822			2,500
Charge-offs		(163	)		(732	)		(2,216	)		(467	)		(3,578	)
Recoveries		58			424			1			124			607
Ending Balance	$	4,215		$	6,398		$	4,784		$	3,539		$	18,936

(dollars in thousands)	Nine Months Ended September 30, 2012
	Commercial			Real estate mortgage			Real estate construction			Consumer			Total
Beginning balance	$	4,034		$	6,500		$	4,046		$	3,452		$	18,032
Provision		1,443			2,766			809			582			5,600
Charge-offs		(1,234	)		(3,220	)		(2,041	)		(1,192	)		(7,687	)
Recoveries		114			112			10			389			625
Ending Balance	$	4,357		$	6,158		$	2,824		$	3,231		$	16,570

(dollars in thousands)	Nine Months Ended September 30, 2011
	Commercial			Real estate mortgage			Real estate construction			Consumer			Total
Beginning balance	$	3,915		$	6,507		$	4,947		$	3,443		$	18,812
Provision		1,374			1,692			3,904			1,530			8,500
Charge-offs		(1,320	)		(2,351	)		(4,070	)		(2,004	)		(9,745	)
Recoveries		246			550			3			570			1,369
Ending Balance	$	4,215		$	6,398		$	4,784		$	3,539		$	18,936

The following table provides a summary of the allowance for loan losses and related non-covered loans, by portfolio segment, at September 30, 2012 and December 31, 2011:

(dollars in thousands)	September 30, 2012
	Commercial		Real estate mortgage		Real estate construction		Consumer		Total
Allowance for non-covered loan losses:
Individually evaluated for impairment	$	1,465	$	943	$	1,053	$	54	$	3,515
Collectively evaluated for impairment		2,892		5,215		1,771		3,177		13,055
Total allowance for non-covered loan losses	$	4,357	$	6,158	$	2,824	$	3,231	$	16,570
Non-covered loans:
Individually evaluated for impairment	$	9,904	$	13,382	$	21,224	$	975	$	45,485
Collectively evaluated for impairment		145,304		418,758		56,772		156,432		777,266
Total non-covered loans (1)	$	155,208	$	432,140	$	77,996	$	157,407	$	822,751

(1) Total non-covered loans excludes deferred loan costs of $1.9 million.

(dollars in thousands)	December 31, 2011
	Commercial		Real estate mortgage		Real estate construction		Consumer		Total
Allowance for non-covered loan losses:
Individually evaluated for impairment	$	588	$	1,212	$	1,869	$	79	$	3,748
Collectively evaluated for impairment		3,446		5,288		2,177		3,373		14,284
Total allowance for non-covered loan losses	$	4,034	$	6,500	$	4,046	$	3,452	$	18,032
Non-covered loans:
Individually evaluated for impairment	$	6,525	$	14,032	$	27,483	$	553	$	48,593
Collectively evaluated for impairment		143,861		397,081		62,873		158,569		762,384
Total non-covered loans (1)	$	150,386	$	411,113	$	90,356	$	159,122	$	810,977

(1) Total non-covered loans excludes deferred loan costs of $1.9 million.

Credit Quality and Nonperforming Non-Covered Loans

The Company manages credit quality and controls its credit risk through lending limits, credit review, approval policies and extensive, ongoing internal monitoring. Through this monitoring process, nonperforming loans are identified. Non-covered nonperforming loans consist of non-covered nonaccrual loans.  Non-covered nonperforming loans are assessed for potential loss exposure on an individual or homogeneous group basis.

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.

Loans are placed on nonaccrual status when collection of principal or interest is considered doubtful (generally when loans are 90 days or more past due).   Loans placed on nonaccrual will typically remain on nonaccrual status until all principal and interest payments are brought current and the prospects for future payments, in accordance with the loan agreement, appear relatively certain.

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 collectability of an impaired or nonaccrual loan, interest income may be recognized on a cash basis. Nonaccrual loans are returned to an accrual status when 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.

Non-Covered Impaired Loans

At September 30, 2012 and December 31, 2011, the Company had non-covered impaired loans which consisted of nonaccrual loans and restructured loans.  As of September 30, 2012, the Company had no commitments to extend additional credit on these non-covered impaired loans.  Non-covered impaired loans and the related allowance for loan losses at September 30, 2012 and December 31, 2011 were as follows:

(dollars in thousands)	September 30, 2012				December 31, 2011
	Recorded investment		Allowance		Recorded investment		Allowance
With no related allowance recorded
Nonaccrual loans	$	13,272	$	-	$	18,744	$	-
Restructured loans		9,870		-		11,208		-
Total with no related allowance	$	23,142	$	-	$	29,952	$	-
With an allowance recorded
Nonaccrual loans	$	4,370	$	184	$	3,356	$	262
Restructured loans		17,973		3,331		15,285		3,486
Total with an allowance recorded		22,343		3,515		18,641		3,748
Total	$	45,485	$	3,515	$	48,593	$	3,748

The following table further summarizes impaired non-covered loans, by class, at September 30, 2012 and December 31, 2011:

(dollars in thousands)	September 30, 2012						December 31, 2011
	Recorded investment		Unpaid principal balance		Related allowance		Recorded investment		Unpaid principal balance		Related allowance
With no related allowance recorded
Commercial	$	2,973	$	3,251	$	-	$	3,801	$	5,692	$	-
Real estate mortgages:
One-to-four family residential		1,234		1,346		-		1,557		3,217		-
Multi-family and commercial		5,285		6,430		-		7,062		8,791		-
Total real estate mortgages		6,519		7,776		-		8,619		12,008		-
Real estate construction:
One-to-four family residential		13,009		16,828		-		16,932		21,803		-
Multi-family and commercial		-		-		-		387		387		-
Total real estate construction		13,009		16,828		-		17,319		22,190		-
Consumer:
Direct		641		815		-		213		900		-
Total consumer		641		815		-		213		900		-
Total with no related allowance recorded	$	23,142	$	28,670	$	-	$	29,952	$	40,790	$	-
With an allowance recorded
Commercial	$	6,931	$	7,117	$	1,465	$	2,724	$	3,128	$	588
Real estate mortgages:
One-to-four family residential		526		526		52		174		190		13
Multi-family and commercial		6,337		6,337		891		5,238		5,238		1,199
Total real estate mortgages		6,863		6,863		943		5,412		5,428		1,212
Real estate construction:
One-to-four family residential		7,950		11,260		1,026		10,164		10,845		1,869
Multi-family and commercial		265		265		27		-		-		-
Total real estate construction		8,215		11,525		1,053		10,164		10,845		1,869
Consumer:
Direct		334		334		54		341		341		79
Total consumer		334		334		54		341		341		79
Total with an allowance recorded		22,343		25,839		3,515		18,641		19,742		3,748
Total impaired non-covered loans	$	45,485	$	54,509	$	3,515	$	48,593	$	60,532	$	3,748

The average recorded investment in non-covered impaired loans was $47.2 million and $47.0 million for the three and nine months ended September 30, 2012, respectively, compared to $52.4 million and $49.9 million for the same periods a year ago.  For the three and nine months ended September 30, 2012, the Company recognized interest income on non-covered impaired loans of $202 thousand and $406 thousand, respectively.  Additional interest income of $282 thousand and $514 thousand would have been recognized had the non-covered impaired loans accrued interest, in accordance with their original terms, for the three and nine months ended September 30, 2012.

Troubled Debt Restructurings

A troubled debt restructured loan is classified as a restructuring when the Company grants a concession(s) to a borrower experiencing financial difficulties that it would not otherwise consider. Examples of such concessions include forgiveness of principal or accrued interest, extending the maturity date(s) or providing a lower interest rate than would be normally available for a transaction of similar risk. As a result of these concessions, restructured loans are considered impaired as the Company will not collect all amounts due, both principal and interest, in accordance with the terms of the original loan agreement.

Troubled debt restructurings at September 30, 2012 and December 31, 2011 were as follows:

(dollars in thousands)	September 30, 2012						December 31, 2011
	Accrual status		Nonaccrual status		Total modifications		Accrual status		Nonaccrual status		Total modifications
Troubled debt restructurings:
Commercial	$	7,986	$	993	$	8,979	$	3,341	$	-	$	3,341
Real estate mortgages:
One-to-four family residential		575		-		575		-		933		933
Multi-family and commercial		8,045		2,008		10,053		9,420		937		10,357
Total real estate mortgage		8,620		2,008		10,628		9,420		1,870		11,290
Real estate construction:
One-to-four family residential		10,638		10,121		20,759		13,391		13,283		26,674
Multi-family and commercial		264		-		264		-		387		387
Total real estate construction		10,902		10,121		21,023		13,391		13,670		27,061
Consumer:
Direct		335		22		357		341		-		341
Total consumer		335		22		357		341		-		341
Total restructured loans	$	27,843	$	13,144	$	40,987	$	26,493	$	15,540	$	42,033

The Company's policy is that loans placed on nonaccrual will typically remain on nonaccrual status until all principal and interest payments are brought current and the prospect for future payment in accordance with the loan agreement appear relatively certain.  The Company's policy generally refers to nine months of payment performance as sufficient to warrant a return to accrual status.

Troubled Debt Restructurings Modification Terms

The Company offers a variety of modifications to borrowers. In restructuring a loan with a borrower, the Company normally employs several types of modifications terms. The modification terms offered by the Company are as follows:

Rate Modification: A modification in which the interest rate is changed.

Term Modification: A modification in which the maturity date, the timing of payments, or frequency of payments is changed.

Interest Only Modification: A modification in which the loan is converted to interest only payments for a period of time.

Payment Modification: A modification in which the dollar amount of the payment is changed, other than an interest only modification described above.

Combination Modification: Any other type of modification, including the use of multiple terms above.

The following tables present loans restructured during the three and nine months ended September 30, 2012 and 2011. During the periods presented, all modification terms were a combination of terms employed by the Company.

(dollars in thousands)	For the Three Months Ended September 30, 2012
	Number of contracts		Pre-modification recorded investment		Post-modification recorded investment
Troubled debt restructurings:
Commercial		1	$	181	$	181
Real estate mortgages:
One-to-four family residential		1		49		49
Total real estate mortgage		1		49		49
Real estate construction:
One-to-four family residential		1		441		441
Total real estate construction		1		441		441
Total restructured loans		3	$	671	$	671

(dollars in thousands)	For the Three Months Ended September 30, 2011
	Number of contracts		Pre-modification recorded investment		Post-modification recorded investment
Troubled debt restructurings:
Commercial		1	$	628	$	628
Real estate mortgages:
Multi-family and commercial		3		1,687		1,667
Total real estate mortgage		3		1,687		1,667
Real estate construction:
One-to-four family residential		5		3,712		3,591
Total real estate construction		5		3,712		3,591
Consumer:
Direct		1		342		342
Total consumer		1		342		342
Total restructured loans		10	$	6,369	$	6,228

(dollars in thousands)	For the Nine Months Ended September 30, 2012
	Number of contracts		Pre-modification recorded investment		Post-modification recorded investment
Troubled debt restructurings:
Commercial		13	$	5,042	$	4,884
Real estate mortgages:
One-to-four family residential		2		221		221
Multi-family and commercial		1		374		374
Total real estate mortgage		3		595		595
Real estate construction:
One-to-four family residential		2		1,070		947
Multi-family and commercial		1		265		265
Total real estate construction		3		1,335		1,212
Total restructured loans		19	$	6,972	$	6,691

(dollars in thousands)	For the Nine Months Ended September 30, 2011
	Number of contracts		Pre-modification recorded investment		Post-modification recorded investment
Troubled debt restructurings:
Commercial		5	$	2,804	$	2,804
Real estate mortgages:
Multi-family and commercial		10		6,110		6,083
Total real estate mortgage		10		6,110		6,083
Real estate construction:
One-to-four family residential		8		7,116		6,995
Total real estate construction		8		7,116		6,995
Consumer:
Direct		1		342		342
Total consumer		1		342		342
Total restructured loans		24	$	16,372	$	16,224

For the three and nine months ended September 30, 2012, there was a $37 thousand commercial loan that had been restructured within the previous 12 months that subsequently defaulted.  For the same periods a year ago, there was a $163 thousand real estate mortgage multi-family and commercial loan that had been restructured withing the previous 12 months that subsequently defaulted.

Non-Covered Nonaccrual Loans and Loans Past Due

The following table summarizes non-covered nonaccrual loans and past due loans, by class, as of September 30, 2012 and December 31, 2011:

(dollars in thousands)	September 30, 2012
	30 - 59 Days past due		60 - 89 Days past due		Greater than 90 days and accruing		Total past due		Nonaccrual		Current		Total non-covered loans
Commercial	$	683	$	61	$	-	$	744	$	1,918	$	152,546	$	155,208
Real estate mortgages:
One-to-four family residential		54		-		-		54		1,185		36,023		37,262
Multi-family and commercial		415		-		-		415		3,577		390,886		394,878
Total real estate mortgages		469		-		-		469		4,762		426,909		432,140
Real estate construction:
One-to-four family residential		-		-		-		-		10,321		34,571		44,892
Multi-family and commercial		-		-		-		-		-		33,104		33,104
Total real estate construction		-		-		-		-		10,321		67,675		77,996
Consumer:
Indirect		1,124		128		-		1,252		-		78,396		79,648
Direct		641		65		-		706		641		76,412		77,759
Total consumer		1,765		193		-		1,958		641		154,808		157,407
Total	$	2,917	$	254	$	-	$	3,171	$	17,642	$	801,938		822,751
Deferred loan costs, net														1,859
Total non-covered loans													$	824,610

(dollars in thousands)	December 31, 2011
	30 - 59 Days past due		60 - 89 Days past due		Greater than 90 days and accruing		Total past due		Nonaccrual		Current		Total non-covered loans
Commercial	$	1,482	$	4	$	-	$	1,486	$	3,183	$	145,717	$	150,386
Real estate mortgages:
One-to-four family residential		53		154		-		207		1,732		38,392		40,331
Multi-family and commercial		1,687		484		-		2,171		2,881		365,730		370,782
Total real estate mortgages		1,740		638		-		2,378		4,613		404,122		411,113
Real estate construction:
One-to-four family residential		27		-		-		27		13,705		45,078		58,810
Multi-family and commercial		100		-		-		100		387		31,059		31,546
Total real estate construction		127		-		-		127		14,092		76,137		90,356
Consumer:
Indirect		1,288		198		-		1,486		-		78,910		80,396
Direct		1,023		294		-		1,317		212		77,197		78,726
Total consumer		2,311		492		-		2,803		212		156,107		159,122
Total	$	5,660	$	1,134	$	-	$	6,794	$	22,100	$	782,083		810,977
Deferred loan costs, net														1,853
Total non-covered loans													$	812,830

Non-Covered Credit Quality Indicators

The Company's internal risk rating methodology assigns risk ratings from 1 to 9, where a higher rating represents higher risk.  The nine risk ratings can be generally described by the following groups:

Pass/Watch: Pass/watch loans, risk rated 1 through 5, range from minimal credit risk to lower than average, but still acceptable, credit risk.

Special Mention:  Special mention loans, risk rated 6,are loans that present certain potential weaknesses that require management's attention.  Those weaknesses, if left uncorrected, may result in deterioration of the borrower's repayment ability or the Company's credit position in the future.

Substandard:  Substandard loans, risk rated 7, are inadequately protected by the current worth and paying capacity of the borrower or of the collateral pledged, if any.  There are well-defined weaknesses that may jeopardize the repayment of debt.  Such weaknesses include deteriorated financial condition of the borrower resulting from insufficient income, excessive expenses or other factors that result in inadequate cash flows to meet all scheduled obligations.

Doubtful/Loss:  Doubtful/loss loans are risk rated 8 and 9.  Loans assigned as doubtful have all the weaknesses inherent with substandard loans, with the added characteristic that the weaknesses make collection in full, on the basis of currently existing facts, conditions and values, highly questionable.  The possibility of loss is high, but because of certain important and reasonably specific pending factors that may work to the advantage of, and strengthen the credit, its classification as an estimated loss is deferred until a more exact status may be determined.  The Company charges off loans that would otherwise be classified loss.

The following table summarizes our internal risk rating, by class, as of September 30, 2012 and December 31, 2011:

(dollars in thousands)	September 30, 2012
	Pass/Watch		Special mention		Substandard		Doubtful/Loss		Total
Commercial	$	131,097	$	6,123	$	17,988	$	-	$	155,208
Real estate mortgages:
One-to-four family residential		31,600		1,150		4,512		-		37,262
Multi-family and commercial		339,858		30,652		24,368		-		394,878
Total real estate mortgages		371,458		31,802		28,880		-		432,140
Real estate construction:
One-to-four family residential		22,248		783		21,861		-		44,892
Multi-family and commercial		29,066		1,738		2,300		-		33,104
Total real estate construction		51,314		2,521		24,161		-		77,996
Consumer:
Indirect		77,962		19		1,667		-		79,648
Direct		71,704		532		5,523		-		77,759
Total consumer		149,666		551		7,190		-		157,407
Total	$	703,535	$	40,997	$	78,219	$	-		822,751
Deferred loan costs, net										1,859
									$	824,610

(dollars in thousands)	December 31, 2011
	Pass/Watch		Special mention		Substandard		Doubtful/Loss		Total
Commercial	$	122,189	$	7,791	$	20,406	$	-	$	150,386
Real estate mortgages:
One-to-four family residential		33,609		1,462		5,260		-		40,331
Multi-family and commercial		307,402		26,220		37,160		-		370,782
Total real estate mortgages		341,011		27,682		42,420		-		411,113
Real estate construction:
One-to-four family residential		26,110		2,313		30,387		-		58,810
Multi-family and commercial		24,402		4,416		2,728		-		31,546
Total real estate construction		50,512		6,729		33,115		-		90,356
Consumer:
Indirect		78,531		15		1,850		-		80,396
Direct		72,602		844		5,280		-		78,726
Total consumer		151,133		859		7,130		-		159,122
Total	$	664,845	$	43,061	$	103,071	$	-		810,977
Deferred loan costs, net										1,853
									$	812,830

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Covered Assets and FDIC Indemnification Asset

9 Months Ended

Sep. 30, 2012

Covered Assets and FDIC Indemnification Asset [Abstract]

Covered Assets and FDIC Indemnification Asset

(6)  Covered Assets and FDIC Indemnification Asset

(a) Covered Loans: Loans acquired in an FDIC-assisted acquisition that are subject to a loss share agreement are referred to as "covered loans" and reported separately in the Condensed Consolidated Statements of Financial Condition.  Covered loans are reported exclusive of the expected cash flow reimbursements from the FDIC.

The following table presents the major types of covered loans at September 30, 2012 and December 31, 2011. The classification of covered loan balances presented is reported in accordance with the regulatory reporting requirements.

(dollars in thousands)	September 30, 2012
	City Bank			North County Bank			Total
Commercial	$	16,358		$	17,626		$	33,984
Real estate mortgages:
One-to-four family residential		3,836			10,976			14,812
Multi-family residential and commercial		143,943			53,756			197,699
Total real estate mortgages		147,779			64,732			212,511
Real estate construction:
One-to-four family residential		5,960			3,185			9,145
Multi-family and commercial		14,205			7,369			21,574
Total real estate construction		20,165			10,554			30,719
Consumer - direct		2,785			7,802			10,587
Subtotal		187,087			100,714			287,801
Fair value discount		(33,785	)		(21,492	)		(55,277	)
Total covered loans		153,302			79,222			232,524
Allowance for loan losses		(792	)		(215	)		(1,007	)
Total covered loans, net	$	152,510		$	79,007		$	231,517

(dollars in thousands)	December 31, 2011
	City Bank			North County Bank			Total
Commercial	$	17,380		$	26,208		$	43,588
Real estate mortgages:
One-to-four family residential		4,673			11,080			15,753
Multi-family residential and commercial		163,028			67,282			230,310
Total real estate mortgages		167,701			78,362			246,063
Real estate construction:
One-to-four family residential		6,102			5,773			11,875
Multi-family and commercial		21,479			12,991			34,470
Total real estate construction		27,581			18,764			46,345
Consumer - direct		3,562			11,206			14,768
Subtotal		216,224			134,540			350,764
Fair value discount		(46,099	)		(35,584	)		(81,683	)
Total covered loans		170,125			98,956			269,081
Allowance for loan losses		(655	)		(215	)		(870	)
Total covered loans, net	$	169,470		$	98,741		$	268,211

In estimating the fair value of the covered loans at the acquisition date, we (a) calculated the contractual amount and timing of undiscounted principal and interest payments and (b) estimated the amount and timing of undiscounted expected principal and interest payments. The difference between these two amounts represents the nonaccretable difference.

On the acquisition date, the amount by which the undiscounted expected cash flows exceed the estimated fair value of the acquired loans is the "accretable yield."  The accretable yield is then measured at each financial reporting date and represents the difference between the remaining undiscounted expected cash flows and the current carrying value of the loans.

The following table presents the changes in the accretable yield for the three and nine months ended September 30, 2012 and 2011, for each respective acquired loan portfolio:

(dollars in thousands)	Three Months Ended September 30,
	2012						2011
	City Bank			North County Bank			City Bank			North County Bank
Balance, beginning of period	$	63,623		$	26,845		$	71,089		$	23,275
Accretion to interest income		(5,247	)		(3,694	)		(6,468	)		(2,109	)
Disposals		(1,718	)		(2,796	)		(3,725	)		-
Reclassification (to) from nonaccretable difference		-			4			-			-
Balance, end of period	$	56,658		$	20,359		$	60,896		$	21,166

(dollars in thousands)	Nine Months Ended September 30,
	2012						2011
	City Bank			North County Bank			City Bank			North County Bank
Balance, beginning of period	$	78,004		$	29,574		$	56,079		$	27,880
Accretion to interest income		(16,552	)		(11,443	)		(18,493	)		(6,714	)
Disposals		(4,441	)		(5,517	)		(13,416	)		-
Reclassification (to) from nonaccretable difference		(353	)		7,745			36,726			-
Balance, end of period	$	56,658		$	20,359		$	60,896		$	21,166

(b) Covered Other Real Estate Owned: All OREO acquired in FDIC-assisted acquisitions that are subject to an FDIC loss share agreement are referred to as "covered OREO" and reported separately in the Condensed Consolidated Statements of Financial Condition.  Covered OREO is reported exclusive of expected reimbursement cash flows from the FDIC. Foreclosed covered loan collateral is transferred into covered OREO at the lower of the loan's appraised value, less selling costs, or the carrying value.

The following tables summarize the activity related to covered OREO for the three and nine months ended September 30, 2012 and 2011:

(dollars in thousands)	Three Months Ended September 30, 2012
	City Bank			North County Bank			Total
Balance, beginning of period	$	13,580		$	9,420		$	23,000
Additions to covered OREO		561			744			1,305
Dispositions of covered OREO, net		(4,579	)		(812	)		(5,391	)
Valuation adjustments		-			(103	)		(103	)
Balance, end of period	$	9,562		$	9,249		$	18,811

(dollars in thousands)	Three Months Ended September 30, 2011
	City Bank			North County Bank			Total
Balance, beginning of period	$	21,290		$	11,400		$	32,690
Additions to covered OREO		4,972			(36	)		4,936
Dispositions of covered OREO, net		(9,527	)		(2,326	)		(11,853	)
Balance, end of period	$	16,735		$	9,038		$	25,773

(dollars in thousands)	Nine Months Ended September 30, 2012
	City Bank			North County Bank			Total
Balance, beginning of period	$	19,341		$	7,281		$	26,622
Additions to covered OREO		1,517			6,961			8,478
Dispositions of covered OREO, net		(9,338	)		(4,049	)		(13,387	)
Valuation adjustments		(1,958	)		(944	)		(2,902	)
Balance, end of period	$	9,562		$	9,249		$	18,811

(dollars in thousands)	Nine Months Ended September 30, 2011
	City Bank			North County Bank			Total
Balance, beginning of period	$	17,906		$	11,860		$	29,766
Additions to covered OREO		16,899			2,659			19,558
Capitalized improvements		-			746			746
Dispositions of covered OREO, net		(18,070	)		(6,227	)		(24,297	)
Balance, end of period	$	16,735		$	9,038		$	25,773

(c) FDIC Indemnification Asset:The following table summarizes the activity related to the FDIC indemnification asset for the three and nine months ended September 30, 2012 and 2011:

(dollars in thousands)	Three Months Ended September 30, 2012
	City Bank			North County Bank			Total
Balance, beginning of period	$	37,587		$	17,280		$	54,867
Change in FDIC indemnification asset		(2,510	)		(252	)		(2,762	)
Reduction due to loans paid in full		(415	)		(130	)		(545	)
Transfers to (due from) FDIC		(5,154	)		(1,693	)		(6,847	)
Balance, end of period	$	29,508		$	15,205		$	44,713

(dollars in thousands)	Three Months Ended September 30, 2011
	City Bank			North County Bank			Total
Balance, beginning of period	$	56,643		$	33,263		$	89,906
Change in FDIC indemnification asset		(2,586	)		-			(2,586	)
Reduction due to loans paid in full		(1,639	)		-			(1,639	)
Transfers to (due from) FDIC		(2,532	)		(4,851	)		(7,383	)
Balance, end of period	$	49,886		$	28,412		$	78,298

(dollars in thousands)	Nine Months Ended September 30, 2012
	City Bank			North County Bank			Total
Balance, beginning of period	$	43,235		$	22,351		$	65,586
Change in FDIC indemnification asset		(8,273	)		(625	)		(8,898	)
Reduction due to loans paid in full		(1,739	)		(2,430	)		(4,169	)
Transfers to (due from) FDIC		(3,715	)		(4,091	)		(7,806	)
Balance, end of period	$	29,508		$	15,205		$	44,713

(dollars in thousands)	Nine Months Ended September 30, 2011
	City Bank			North County Bank			Total
Balance, beginning of period	$	66,560		$	39,507		$	106,067
Change in FDIC indemnification asset		(6,188	)		558			(5,630	)
Reduction due to loans paid in full		(7,566	)		-			(7,566	)
Transfers to (due from) FDIC		(2,920	)		(11,653	)		(14,573	)
Balance, end of period	$	49,886		$	28,412		$	78,298

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Earnings per Common Share

9 Months Ended

Sep. 30, 2012

Earnings per Common Share [Abstract]

Earnings per Common Share

(8)  Earnings per Common Share

Basic earnings per share is computed by dividing net income available to common shareholders by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed in the same manner as basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if certain shares issuable upon exercise of options and non-vested restricted stock were included.

The following table reconciles the numerators and denominators of the basic and diluted earnings per common share computations:

(dollars in thousands)	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2012		2011		2012		2011
Income available to common shareholders	$	4,638	$	3,625	$	12,258	$	10,629
Weighted average number of common shares, basic		15,413,000		15,343,000		15,418,000		15,339,000
Effect of dilutive stock awards and CPP warrants		33,000		48,000		35,000		82,000
Weighted average number of common shares, diluted		15,446,000		15,391,000		15,453,000		15,421,000

Earnings per common share
Basic	$	0.30	$	0.24	$	0.80	$	0.69
Diluted	$	0.30	$	0.24	$	0.79	$	0.69
Antidulitive stock awards excluded from the
computation of diluted earnings per common share		44,000		102,000		46,000		72,000

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Non-covered Other Real Estate Owned (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011
Other Real Estate, Non Covered [Roll Forward]
Balance, beginning of year	$ 4,414	$ 2,671	$ 1,976	$ 4,122
Additions to OREO	554	1,619	4,296	3,118
Dispositions of OREO, net	(759)	(1,820)	(1,514)	(4,717)
Valuation adjustments	(129)	0	(678)	(53)
Balance, end of period	$ 4,080	$ 2,470	$ 4,080	$ 2,470

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Subsequent Events

9 Months Ended

Sep. 30, 2012

Subsequent Events [Abstract]

Subsequent Events

(13)  Subsequent Events

On October 25, 2012, the Company announced that its Board of Directors declared a cash dividend of $0.15 per common share to shareholders of record as of November 5, 2012, payable on November 20, 2012.

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Non-covered Other Real Estate Owned (Tables)

9 Months Ended

Sep. 30, 2012

Non Covered Other Real Estate Owned [Abstract]

Changes in non-covered other real estate owned

The following table presents the changes in non-covered other real estate owned for the three and nine months ended September 30, 2012 and 2011:

(dollars in thousands)	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2012			2011			2012			2011
Balance, beginning of period	$	4,414		$	2,671		$	1,976		$	4,122
Additions to OREO		554			1,619			4,296			3,118
Dispositions of OREO, net		(759	)		(1,820	)		(1,514	)		(4,717	)
Valuation adjustments		(129	)		-			(678	)		(53	)
Balance, end of period	$	4,080		$	2,470		$	4,080		$	2,470

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Subsequent Events (Details) (USD $)	9 Months Ended
	Sep. 30, 2012
Subsequent Events [Abstract]
Dividends Payable, Date Declared	Oct. 25, 2012
Dividends Payable, Amount Per Share	$ 0.15
Dividends Payable, Date of Record	Nov. 05, 2012
Dividends Payable, Date to be Paid	Nov. 20, 2012

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Condensed Consolidated Statements of Comprehensive Income (unaudited) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011
Condensed Consolidated Statements of Comprehensive Income (unaudited) [Abstract]
Net income before preferred dividends	$ 4,638	$ 3,625	$ 12,258	$ 11,713
Investment securities available for sale:
Unrealized gains arising in period	2,939	3,632	4,489	4,580
Reclassification adjustment for net gains realized in earnings	(345)	0	(687)	0
Other comprehensive income before income tax provision	2,594	3,632	3,802	4,580
Income tax provision	908	1,272	1,331	1,604
Other comprehensive income, net	1,686	2,360	2,471	2,976
Total comprehensive income	$ 6,324	$ 5,985	$ 14,729	$ 14,689

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Recent Financial Accounting Pronouncements

9 Months Ended

Sep. 30, 2012

Recent Financial Accounting Pronouncements [Abstract]

Recent Financial Accounting Pronouncements

(2)  Recent Financial Accounting Pronouncements

In April 2011, the FASB issued ASU No. 2011-03, Reconsideration of Effective Control for Repurchase Agreements. The ASU amends existing guidance to remove from the assessment of effective control, the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee and, as well as, the collateral maintenance implementation guidance related to that criterion. ASU No. 2011-03 is effective for the Company's reporting period beginning on or after December 15, 2011. The guidance applies prospectively to transactions or modification of existing transactions that occur on or after the effective date and early adoption is not permitted. The adoption of this ASU did not have a material impact on the Company's consolidated financial statements.

In April 2011, the FASB issued ASU No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The ASU amends existing guidance regarding the highest and best use and valuation premise by clarifying these concepts are only applicable to measuring the fair value of nonfinancial assets. The ASU also clarifies that the fair value measurement of financial assets and financial liabilities which have offsetting market risks or counterparty credit risks that are managed on a portfolio basis, when several criteria are met, can be measured at the net risk position. Additional disclosures about Level 3 fair value measurements are required including a quantitative disclosure of the unobservable inputs and assumptions used in the measurement, a description of the valuation process in place, and discussion of the sensitivity of fair value changes in unobservable inputs and interrelationships about those inputs as well as disclosure of the level of the fair value of items that are not measured at fair value in the financial statements but disclosure of fair value is required. The provisions of ASU No. 2011-04 are effective for the Company's reporting period beginning after December 15, 2011 and are applied prospectively. The adoption of this ASU did not have a material impact on the Company's consolidated financial statements.

In June 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income. The ASU amends current guidance to allow a company the option of presenting the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The provisions do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The amendments do not change the option for a company to present components of other comprehensive income either net of related tax effects or before related tax effects, with one amount shown for the aggregate income tax expense (benefit) related to the total of other comprehensive income items. The amendments do not affect how earnings per share is calculated or presented. The provisions of ASU No. 2011-05 are effective for the Company's reporting period beginning after December 15, 2011 and are applied retrospectively. Early adoption was permitted and there are no required transition disclosures. In December 2011, the FASB issued ASU No. 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. The ASU defers indefinitely the requirement to present reclassification adjustments and the effect of those reclassification adjustments on the face of the financial statements where net income is presented, by component of net income, and on the face of the financial statements where other comprehensive income is presented, by component of other comprehensive income. The adoption of the ASUs did not have a material impact on the Company's consolidated financial statements.

In September 2011, the FASB issued ASU No. 2011-08, Testing Goodwill for Impairment. With the ASU, a company testing goodwill for impairment now has the option of performing a qualitative assessment before calculating the fair value of the reporting unit (the first step of goodwill impairment test). If, on the basis of qualitative factors, the fair value of the reporting unit is more likely than not greater than the carrying amount, a quantitative calculation would not be needed. Additionally, new examples of events and circumstances that an entity should consider in performing its qualitative assessment about whether to proceed to the first step of the goodwill impairment have been made to the guidance and replace the previous guidance for triggering events for interim impairment assessment. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The adoption of this ASU did not have a material impact on the Company's consolidated financial statements.

In December 2011, the FASB issued ASU No. 2011-11, Disclosures about Offsetting Assets and Liabilities. The ASU requires an entity to offset, and present as a single net amount, a recognized eligible asset and a recognized eligible liability when it has an unconditional and legally enforceable right of setoff and intends either to settle the asset and liability on a net basis or to realize the asset and settle the liability simultaneously. The ASU requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. The amendments are effective for annual and interim reporting periods beginning on or after January 1, 2013. The Company does not expect this ASU will have a material impact on the Company's consolidated financial statements.

In July 2012, the FASB issued ASU No. 2012-2, Testing Indefinite-Lived Intangible Assets for Impairment. This ASU states that an entity has the option to first assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, an entity concludes that it is not more likely than not that the indefinite-lived intangible asset is impaired, then the entity is not required to take further action. However, if an entity concludes otherwise, it is required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test by comparing the fair value with the carrying amount, in accordance with Codification Subtopic 350-30, Intangibles—Goodwill and Other, General Intangibles Other than Goodwill. Under guidance in this ASU, an entity also has the option to bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to performing the quantitative impairment test. An entity will be able to resume performing the qualitative assessment in any subsequent period. The amendments in this ASU are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted, including for annual and interim impairment tests performed as of a date before July 27, 2012, if a public entity's financial statements for the most recent annual or interim period have not yet been issued. The Company is currently in the process of evaluating the ASU but does not expect it will have a material impact on the Company's consolidated financial statements.

In October 2012, the FASB issued ASU No. 2012-06, Subsequent Accounting for an Indemnification Asset Recognized at the Acquisition Date as a Result of a Government-Assisted Acquisition of a Financial Institution. The ASU clarifies that when an entity recognizes an indemnification asset as a result of a government-assisted acquisition of a financial institution and subsequently, a change in the cash flows expected to be collected on the indemnification asset occurs, as a result of a change in cash flows expected to be collected on the assets subject to indemnification, the reporting entity should subsequently account for the change in the measurement of the indemnification asset on the same basis as the change in the assets subject to indemnification. Any amortization of changes in value should be limited to the contractual term of the indemnification agreement. The amendments are effective for annual and interim reporting periods beginning on or after December 15, 2012. The adoption of this ASU will not have a material impact on the Company's consolidated financial statements.

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Earnings per Common Share (Tables)

9 Months Ended

Sep. 30, 2012

Earnings per Common Share [Abstract]

Reconciliation of basic and diluted earnings per common share computations

The following table reconciles the numerators and denominators of the basic and diluted earnings per common share computations:

(dollars in thousands)	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2012		2011		2012		2011
Income available to common shareholders	$	4,638	$	3,625	$	12,258	$	10,629
Weighted average number of common shares, basic		15,413,000		15,343,000		15,418,000		15,339,000
Effect of dilutive stock awards and CPP warrants		33,000		48,000		35,000		82,000
Weighted average number of common shares, diluted		15,446,000		15,391,000		15,453,000		15,421,000

Earnings per common share
Basic	$	0.30	$	0.24	$	0.80	$	0.69
Diluted	$	0.30	$	0.24	$	0.79	$	0.69
Antidulitive stock awards excluded from the
computation of diluted earnings per common share		44,000		102,000		46,000		72,000

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Fair Value Measurements (Details) (USD $)	9 Months Ended		12 Months Ended
	Sep. 30, 2012		Dec. 31, 2011
Fair Value Assets And Liabilities Measured On Nonrecurring Basis [Abstract]
Non-covered other real estate owned	$ 4,080,000		$ 1,976,000
Covered other real estate owned	18,811,000		26,622,000
Losses For The Period On Nonrecurring Valuated Assets [Abstract]
Total losses for the period, non-covered impaired loans	(7,982,000)	[1]	(8,182,000)	[1]
Total losses for the period, non covered other real estate owned	(678,000)	[2]	(272,000)	[1]
Total losses for the period, covered other real estate owned	(2,902,000)	[2]	0	[1]
Total	(11,562,000)		(8,454,000)
Fair Value Assets And Liabilities Measured On Nonrecurring Basis Other Disclosures [Abstract]
Impaired loans with adjustments to appraisals	8,300,000
Percentage deducted of the appraised value to cover selling costs (in hundreths)	10.00%
Minimum [Member]
Fair Value Assets And Liabilities Measured On Nonrecurring Basis Other Disclosures [Abstract]
Impaired loans, adjustments to appraisals based on unobservable inputs	10.00%
Maximum [Member]
Fair Value Assets And Liabilities Measured On Nonrecurring Basis Other Disclosures [Abstract]
Impaired loans, adjustments to appraisals based on unobservable inputs	57.00%
Weighted Average [Member]
Fair Value Assets And Liabilities Measured On Nonrecurring Basis Other Disclosures [Abstract]
Impaired loans, adjustments to appraisals based on unobservable inputs	27.00%
Fair Value, Measurements, Recurring [Member]
Fair Value, Assets and Liabilities Measured on Recurring Basis [Abstract]
U.S. government agencies	75,505,000		76,574,000
U.S. Treasuries	10,013,000		42,597,000
Pass-through securities	174,117,000		117,398,000
Taxable state and political subdivisions	6,557,000		9,758,000
Tax exempt state and political subdivisions	55,510,000		37,335,000
Corporate obligations	10,485,000		10,287,000
Agency-issued collateralized mortgage obligations	14,511,000
Asset-backed securities	5,167,000
Investments in mutual funds and other equities	2,016,000		2,006,000
Total	353,881,000		295,955,000
Fair Value, Measurements, Recurring [Member] | Level 1 [Member]
Fair Value, Assets and Liabilities Measured on Recurring Basis [Abstract]
U.S. government agencies	0		0
U.S. Treasuries	0		0
Pass-through securities	0		0
Taxable state and political subdivisions	0		0
Tax exempt state and political subdivisions	0		0
Corporate obligations	0		0
Agency-issued collateralized mortgage obligations	0
Asset-backed securities	0
Investments in mutual funds and other equities	0		0
Total	0		0
Fair Value, Measurements, Recurring [Member] | Level 2 [Member]
Fair Value, Assets and Liabilities Measured on Recurring Basis [Abstract]
U.S. government agencies	75,505,000		76,574,000
U.S. Treasuries	10,013,000		42,597,000
Pass-through securities	174,117,000		117,398,000
Taxable state and political subdivisions	6,557,000		9,758,000
Tax exempt state and political subdivisions	55,510,000		37,335,000
Corporate obligations	10,485,000		10,287,000
Agency-issued collateralized mortgage obligations	14,511,000
Asset-backed securities	5,167,000
Investments in mutual funds and other equities	2,016,000		2,006,000
Total	353,881,000		295,955,000
Fair Value, Measurements, Recurring [Member] | Level 3 [Member]
Fair Value, Assets and Liabilities Measured on Recurring Basis [Abstract]
U.S. government agencies	0		0
U.S. Treasuries	0		0
Pass-through securities	0		0
Taxable state and political subdivisions	0		0
Tax exempt state and political subdivisions	0		0
Corporate obligations	0		0
Agency-issued collateralized mortgage obligations	0
Asset-backed securities	0
Investments in mutual funds and other equities	0		0
Total	0		0
Fair Value, Measurements, Nonrecurring [Member]
Fair Value Assets And Liabilities Measured On Nonrecurring Basis [Abstract]
Non-covered impaired loans	41,970,000	[1]	44,845,000	[1]
Non-covered other real estate owned	4,080,000	[2]	1,976,000	[1]
Covered other real estate owned	18,811,000	[2]	26,622,000	[1]
Total fair value measurements, nonrecurring	64,861,000		73,443,000
Fair Value, Measurements, Nonrecurring [Member] | Level 1 [Member]
Fair Value Assets And Liabilities Measured On Nonrecurring Basis [Abstract]
Non-covered impaired loans	0	[1]	0	[1]
Non-covered other real estate owned	0	[2]	0	[1]
Covered other real estate owned	0	[2]	0	[1]
Total fair value measurements, nonrecurring	0		0
Fair Value, Measurements, Nonrecurring [Member] | Level 2 [Member]
Fair Value Assets And Liabilities Measured On Nonrecurring Basis [Abstract]
Non-covered impaired loans	0	[1]	0	[1]
Non-covered other real estate owned	0	[2]	0	[1]
Covered other real estate owned	0	[2]	0	[1]
Total fair value measurements, nonrecurring	0		0
Fair Value, Measurements, Nonrecurring [Member] | Level 3 [Member]
Fair Value Assets And Liabilities Measured On Nonrecurring Basis [Abstract]
Non-covered impaired loans	41,970,000	[1]	44,845,000	[1]
Non-covered other real estate owned	4,080,000	[2]	1,976,000	[1]
Covered other real estate owned	18,811,000	[2]	26,622,000	[1]
Total fair value measurements, nonrecurring	$ 64,861,000		$ 73,443,000

[1] Represents carrying value net of any related specific reserve in the allowance for loan losses.

[2] Represents the carrying value and related losses on foreclosed real estate and other collateral owned that were measured at fair value at the time of transfer or subsequent to the initial transfer into other non-covered real estate owned and covered other real estate owned.

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Commitments and Contingencies

9 Months Ended

Sep. 30, 2012

Commitments and Contingencies [Abstract]

Commitments and Contingencies

(12)  Commitments and Contingencies

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, most guarantees expire within 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 amounted to one hundred percent of the commitment amount at September 30, 2012. The Company routinely charges a fee for these credit facilities.  Such fees are amortized into income over the life of the agreement and unamortized amounts were not significant as of September 30, 2012.  At September 30, 2012, the commitments under these agreements totaled $1.5 million.

At September 30, 2012, the Company was the guarantor of trust preferred securities. The Company issued junior subordinated debentures to a wholly owned special purpose trust, which has issued trust preferred securities.  The sole assets of the special purpose trust are the junior subordinated debentures issued 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. The maximum amount of future payments the Company will be required to make under these agreements is the principal and interest of the trust preferred securities, the principal of which totaled $25.8 million at September 30, 2012 and December 31, 2011.