Exhibit 13
 PORTIONS OF ANNUAL REPORT TO SHAREHOLDERS FOR THE
YEAR ENDED DECEMBER 31, 2008 INCORPORATED BY REFERENCE
 Managements Discussion and Analysis of Financial Condition and Results of Operations
 You should read the following discussion and analysis of our financial condition and results
of operations together with Summary Consolidated Financial Information and our consolidated
financial statements and related notes appearing elsewhere in this report. This discussion and
analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our
actual results may differ materially from those anticipated in these forward-looking statements as
a result of many factors, including those set forth under Risk Factors and elsewhere in this
report.
 Overview
      13-1




---



##### 



13-2




---



##### 



Key Financial MeasuresYears Ended December 31,2008
    
    2007
    
    2006
    
    2005
    
    2004(Dollars in thousands, except per share data)Net income (loss)
    
    $
    (32,652
    )
    
    $
    (5,200
    )
    
    $
    3,885
    
    
    $
    2,412
    
    
    $
    1,340Basic earnings (loss) per share
    
    
    (5.86
    )
    
    
    (0.93
    )
    
    
    1.35
    
    
    
    0.91
    
    
    
    0.59Diluted earnings (loss) per share(1)
    
    
    (5.86
    )
    
    
    (0.93
    )
    
    
    1.18
    
    
    
    0.82
    
    
    
    0.55Total assets
    
    
    365,210
    
    
    
    489,333
    
    
    
    386,754
    
    
    
    249,998
    
    
    
    137,416Net loans
    
    
    265,780
    
    
    
    393,436
    
    
    
    340,208
    
    
    
    207,172
    
    
    
    117,623Total deposits
    
    
    330,031
    
    
    
    421,445
    
    
    
    315,022
    
    
    
    224,167
    
    
    
    123,593Net interest margin
    
    
    1.08
    %
    
    
    4.62
    %
    
    
    5.65
    %
    
    
    5.90
    %
    
    
    6.77
    %Efficiency Ratio
    
    
    397.9
    %
    
    
    67.6
    %
    
    
    65.3
    %
    
    
    67.9
    %
    
    
    70.4
    %Return on average assets
    
    
    -7.28
    %
    
    
    -1.17
    %
    
    
    1.28
    %
    
    
    1.28
    %
    
    
    1.37
    %Return on average equity
    
    
    -73.1
    %
    
    
    -8.4
    %
    
    
    19.6
    %
    
    
    16.6
    %
    
    
    13.6
    %
  (1)
    
    Excludes all stock options as anti-dilutive in periods with net losses. Recent Developments
 Construction and Development Loans.
    Regulatory Proceedings.
 FDIC Order:
 13-3




---



##### 



FRB Notice:
 Pending and Proposed Regulatory Compliance Actions.
 13-4




---



##### 



Sale of Premises and Equipment.
  Capital:
   Deposits.
   13-5




---



##### 



Investment
in FHLB Shares.
  Key Factors in Evaluating Financial Condition and Results of Operations
  
    
    Return on Average Equity;
    
    Return on Average Assets;
    
    Asset Quality;
    
    Asset Growth;
    
    Capital and Liquidity;
    
    Net Interest Margin; and
    
    Operating Efficiency.
 Return on Average Equity.
  Return on Average Assets.
 Asset Quality.
 Asset Growth.
 Capital and Liquidity.
 Net Interest Margin.
 13-6




---



##### 



Operating Efficiency.
 Critical Accounting Policies
  Allowance for Loan Losses.
      Foreclosed assets 
 Available for Sale Securities.
 13-7




---



##### 



Income Taxes.
   Stock Options.
     13-8




---



##### 



Results of Operations
  Financial Overview for the Years Ended December 31, 2008 and 2007
 2008
    
    
    2007
    
    
    Increase (Decrease)(Dollars in thousands, except per share data)Consolidated Statement of Earnings Data:Interest income
    
    $
    20,384
    
    
    $
    37,396
    
    
    $
    (17,012
    )Interest expense
    
    
    16,541
    
    
    
    17,514
    
    
    
    (973
    )Net interest income
    
    
    3,843
    
    
    
    19,882
    
    
    
    (16,039
    )Provision for loan losses
    
    
    17,379
    
    
    
    15,879
    
    
    
    1,500Net interest income (loss) after provision for loan losses
    
    
    (13,536
    )
    
    
    4,003
    
    
    
    (17,539
    )Non-interest income
    
    
    796
    
    
    
    4,531
    
    
    
    (3,735
    )Non-interest expense
    
    
    18,458
    
    
    
    16,494
    
    
    
    1,964Income (loss) before provision (benefit) for income taxes
    
    
    (31,198
    )
    
    
    (7,960
    )
    
    
    (23,238
    )Provision (benefit) for income taxes
    
    
    1,454
    
    
    
    (2,760
    )
    
    
    4,214Net loss
    
    $
    (32,652
    )
    
    $
    (5,200
    )
    
    $
    (27,452
    )Earnings (loss) per share  basic
    
    $
    (5.86
    )
    
    $
    (0.93
    )
    
    $
    (4.93
    )Earnings (loss) per share  diluted
    
    $
    (5.86
    )
    
    $
    (0.93
    )
    
    $
    (4.93
    )
  Net Interest Income and Net Interest Margin.
   13-9




---



##### 



Fiscal Year Ended December 31,2008
    
    
    2007Average
    
    
    
    
    
    
    
    
    
    
    AverageAverage
    
    
    
    
    
    
    Yield or
    
    
    Average
    
    
    
    
    
    
    Yield orBalance
    
    
    Interest
    
    
    Cost
    
    
    Balance
    
    
    Interest
    
    
    Cost(6)(Dollars in thousands)AssetsInterest-earning assets:Loans(1)(2)(3)
    
    $
    263,158
    
    
    $
    18,325
    
    
    
    6.96
    %
    
    $
    399,675
    
    
    $
    35,958
    
    
    
    9.00
    %Investment securities  taxable
    
    
    12,438
    
    
    
    487
    
    
    
    3.92
    %
    
    
    6,598
    
    
    
    316
    
    
    
    4.79
    %Investment securities  non-taxable(3)
    
    
    1,565
    
    
    
    46
    
    
    
    2.94
    %
    
    
    1,815
    
    
    
    76
    
    
    
    4.19
    %Federal funds sold
    
    
    71,506
    
    
    
    1,383
    
    
    
    1.93
    %
    
    
    17,732
    
    
    
    879
    
    
    
    4.96
    %Other investments(4)
    
    
    6,803
    
    
    
    143
    
    
    
    2.10
    %
    
    
    3,400
    
    
    
    167
    
    
    
    4.91
    %Total interest-earning assets
    
    
    355,470
    
    
    
    20,384
    
    
    
    5.73
    %
    
    
    429,220
    
    
    
    37,396
    
    
    
    8.71
    %Non-earning assets:Cash and due from banks
    
    
    4,955
    
    
    
    
    
    
    
    
    
    
    
    5,784Unearned loan fees
    
    
    (543
    )
    
    
    
    
    
    
    
    
    
    
    (1,175
    )Allowance for loan losses
    
    
    (23,638
    )
    
    
    
    
    
    
    
    
    
    
    (7,781
    )Other assets (1)
    
    
    112,386
    
    
    
    
    
    
    
    
    
    
    
    17,054Total assets
    
    $
    448,630
    
    
    
    
    
    
    
    
    
    
    $
    443,102Liabilities and Stockholders EquityInterest-bearing liabilities:DepositsInterest-bearing demand
    
    $
    6,870
    
    
    $
    57
    
    
    
    0.83
    %
    
    $
    7,542
    
    
    $
    77
    
    
    
    1.02
    %Money market
    
    
    63,226
    
    
    
    1,778
    
    
    
    2.81
    %
    
    
    99,941
    
    
    
    4,486
    
    
    
    4.49
    %Savings
    
    
    10,742
    
    
    
    245
    
    
    
    2.28
    %
    
    
    7,802
    
    
    
    295
    
    
    
    3.78
    %Time certificates of deposit
    
    
    290,797
    
    
    
    14,011
    
    
    
    4.82
    %
    
    
    226,050
    
    
    
    12,052
    
    
    
    5.33
    %Total interest-bearing deposits
    
    
    371,635
    
    
    
    16,091
    
    
    
    4.33
    %
    
    
    341,335
    
    
    
    16,910
    
    
    
    4.95
    %Short-term borrowings
    
    
    0
    
    
    
    0
    
    
    
    0.00
    %
    
    
    24
    
    
    
    1
    
    
    
    4.17
    %Junior subordinated debt
    
    
    8,248
    
    
    
    450
    
    
    
    5.46
    %
    
    
    8,248
    
    
    
    603
    
    
    
    7.31
    %Total interest-bearing liabilities
    
    
    379,883
    
    
    
    16,541
    
    
    
    4.35
    %
    
    
    349,607
    
    
    
    17,514
    
    
    
    5.01
    %Non-interest-bearing liabilitiesDemand deposits
    
    
    21,266
    
    
    
    
    
    
    
    
    
    
    
    28,426Other liabilities
    
    
    2,834
    
    
    
    
    
    
    
    
    
    
    
    2,815Total liabilities
    
    
    403,983
    
    
    
    
    
    
    
    
    
    
    
    380,848Stockholders equity
    
    
    44,647
    
    
    
    
    
    
    
    
    
    
    
    62,254Total liabilities and stockholders equity
    
    $
    448,630
    
    
    
    
    
    
    
    
    
    
    $
    443,102Net interest income
    
    
    
    
    
    $
    3,843
    
    
    
    
    
    
    
    
    
    
    $
    19,882Net interest spread(5)
    
    
    
    
    
    
    
    
    
    
    1.38
    %
    
    
    
    
    
    
    
    
    
    
    3.70
    %Net interest margin
    
    
    
    
    
    
    
    
    
    
    1.08
    %
    
    
    
    
    
    
    
    
    
    
    4.63
    %
 
 (1)
    
    Average non-accrual loans of $88.0 million at December 31, 2008 and $1.5 million at December
31, 2007 are included with other nonearning assets.(2)
    
    Loan fees of $1.1 million and $4.5 million are included in the yield computations for 2008
and 2007, respectively.(3)
    
    Yields on loans and securities have not been adjusted to a tax-equivalent basis.(4)
    
    Includes interest-bearing deposits with correspondent banks. 13-10




---



##### 



(5)
    
    Net interest spread represents the average yield earned on interest earning assets less the
average rate paid on interest bearing liabilities.  Year Ended December 31, 2008Compared to YearEnded December 31, 2007Net Change
    
    
    Rate
    
    
    Volume
    
    
    Mix(In thousands)Loans
    
    $
    (17,633
    )
    
    $
    (8,127
    )
    
    $
    (12,282
    )
    
    $
    2,776Investment securities  taxable
    
    
    171
    
    
    
    (58
    )
    
    
    280
    
    
    
    (51
    )Investment securities  non-taxable
    
    
    (30
    )
    
    
    (23
    )
    
    
    (10
    )
    
    
    3Federal funds sold
    
    
    504
    
    
    
    (536
    )
    
    
    2,666
    
    
    
    (1,626
    )Other investments
    
    
    (24
    )
    
    
    (96
    )
    
    
    167
    
    
    
    (95
    )Total interest income
    
    
    (17,012
    )
    
    
    (8,840
    )
    
    
    (9,179
    )
    
    
    1,007Interest expense:Interest-bearing demand
    
    
    (20
    )
    
    
    (14
    )
    
    
    (7
    )
    
    
    1Money market
    
    
    (2,708
    )
    
    
    (1,676
    )
    
    
    (1,648
    )
    
    
    616Savings
    
    
    (50
    )
    
    
    (117
    )
    
    
    111
    
    
    
    (44
    )Time certificates of deposit
    
    
    1,959
    
    
    
    (1,161
    )
    
    
    3,452
    
    
    
    (332
    )Short-term borrowings
    
    
    (1
    )
    
    
    (1
    )
    
    
    (1
    )
    
    
    1Junior subordinated debt
    
    
    (153
    )
    
    
    (153
    )
    
    
    0
    
    
    
    0Total interest expense
    
    
    (973
    )
    
    
    (3,122
    )
    
    
    1,907
    
    
    
    242Net interest income
    
    $
    (16,039
    )
    
    $
    (5,718
    )
    
    $
    (11,086
    )
    
    $
    765
 Provision for Loan Losses.
   Non-Interest Income.
 Year Ended December 31,
    
    
    Increase2008
    
    
    2007
    
    
    (Decrease)(In thousands)Service charges and other income
    
    $
    702
    
    
    $
    1,686
    
    
    $
    (984
    )Loan brokerage and referral fees
    
    
    94
    
    
    
    1,363
    
    
    
    (1,269
    )Net gain/(loss) on sale of loans
    
    
    0
    
    
    
    1,482
    
    
    
    (1,482
    )Total non-interest income
    
    $
    796
    
    
    $
    4,531
    
    
    $
    (3,735
    )
 13-11




---



##### 



Non-Interest Expense.
 Year Ended December 31,
    
    
    Increase2008
    
    
    2007
    
    
    (Decrease)(In thousands)Salaries, wages and employee benefits
    
    $
    6,275
    
    
    $
    9,486
    
    
    $
    (3,211
    )Occupancy, equipment and depreciation
    
    
    1,766
    
    
    
    1,767
    
    
    
    (1
    )Data and item processing
    
    
    757
    
    
    
    698
    
    
    
    59Advertising expense
    
    
    281
    
    
    
    180
    
    
    
    101Printing, stationery and supplies
    
    
    173
    
    
    
    191
    
    
    
    (18
    )Telephone expense
    
    
    89
    
    
    
    111
    
    
    
    (22
    )Postage and courier
    
    
    135
    
    
    
    155
    
    
    
    (20
    )Legal fees
    
    
    1,706
    
    
    
    301
    
    
    
    1,405Director fees
    
    
    220
    
    
    
    321
    
    
    
    (101
    )Business & occupation taxes
    
    
    181
    
    
    
    344
    
    
    
    (163
    )Accounting and audit fees
    
    
    612
    
    
    
    254
    
    
    
    358Consultant fees
    
    
    859
    
    
    
    216
    
    
    
    643OREO losses and expenses, net
    
    
    1,987
    
    
    
    266
    
    
    
    1,721Provision
(benefit) for unfunded credit losses
    
    
    (444
    )
    
    
    361
    
    
    
    (805
    )Other
    
    
    3,861
    
    
    
    1,843
    
    
    
    2,018Total non-interest expense
    
    $
    18,458
    
    
    $
    16,494
    
    
    $
    1,964
  Provision
(Benefits) for Income Taxes.
 13-12




---



##### 



Financial Overview for the Years Ended December 31, 2007 and 2006
 Consolidated Statement of Earnings Data:
 Increase2007
    
    
    2006
    
    
    (Decrease)(Dollars in thousands, except per share data)Interest income
    
    $
    37,396
    
    
    $
    28,342
    
    
    $
    9,054Interest expense
    
    
    17,514
    
    
    
    11,785
    
    
    
    5,729Net interest income
    
    
    19,882
    
    
    
    16,557
    
    
    
    3,325Provision for loan losses
    
    
    15,879
    
    
    
    1,523
    
    
    
    14,356Net interest income after provision for loan losses
    
    
    4,003
    
    
    
    15,034
    
    
    
    (11,031
    )Non-interest income
    
    
    4,531
    
    
    
    4,672
    
    
    
    (141
    )Non-interest expense
    
    
    16,494
    
    
    
    13,854
    
    
    
    2,640Income before provision (benefit) for income taxes
    
    
    (7,960
    )
    
    
    5,852
    
    
    
    (13,812
    )Provision (benefit) for income taxes
    
    
    (2,760
    )
    
    
    1,967
    
    
    
    (4,727
    )Net (loss) income
    
    $
    (5,200
    )
    
    $
    3,885
    
    
    $
    (9,085
    )Earnings (loss) per share  basic
    
    $
    (0.93
    )
    
    $
    1.35
    
    
    $
    (2.28
    )Earnings (loss) per share  diluted
    
    $
    (0.93
    )
    
    $
    1.18
    
    
    $
    (2.11
    )
  Net Interest Income and Net Interest Margin.
      13-13




---



##### 



Fiscal Year Ended December 31,2007
    
    
    2006Average
    
    
    
    
    
    
    
    
    
    
    AverageAverage
    
    
    
    
    
    
    Yield or
    
    
    Average
    
    
    
    
    
    
    Yield orBalance
    
    
    Interest
    
    
    Cost(6)
    
    
    Balance
    
    
    Interest
    
    
    Cost(6)(Dollars in thousands)AssetsInterest-earning assets:Loans(1)(2)(3)
    
    $
    401,109
    
    
    $
    35,958
    
    
    
    8.96
    %
    
    $
    276,865
    
    
    $
    27,634
    
    
    
    9.98
    %Investment securities  taxable
    
    
    6,598
    
    
    
    316
    
    
    
    4.79
    %
    
    
    6,363
    
    
    
    265
    
    
    
    4.16
    %Investment securities  non-taxable(3)
    
    
    1,815
    
    
    
    76
    
    
    
    4.19
    %
    
    
    1,823
    
    
    
    76
    
    
    
    4.17
    %Federal funds sold
    
    
    17,732
    
    
    
    879
    
    
    
    4.96
    %
    
    
    5,915
    
    
    
    282
    
    
    
    4.77
    %Other investments(4)
    
    
    3,400
    
    
    
    167
    
    
    
    4.91
    %
    
    
    1,876
    
    
    
    85
    
    
    
    4.53
    %Total interest-earning assets
    
    
    430,654
    
    
    
    37,396
    
    
    
    8.68
    %
    
    
    292,842
    
    
    
    28,342
    
    
    
    9.68
    %Non-earning assets:Cash and due from banks
    
    
    5,784
    
    
    
    
    
    
    
    
    
    
    
    6,272Unearned loan fees
    
    
    (1,175
    )
    
    
    
    
    
    
    
    
    
    
    (489
    )Allowance for loan losses
    
    
    (7,781
    )
    
    
    
    
    
    
    
    
    
    
    (3,257
    )Other assets
    
    
    15,620
    
    
    
    
    
    
    
    
    
    
    
    8,748Total assets
    
    $
    443,102
    
    
    
    
    
    
    
    
    
    
    $
    304,116Liabilities and Stockholders EquityInterest-bearing liabilities:DepositsInterest-bearing demand
    
    $
    7,542
    
    
    $
    77
    
    
    
    1.02
    %
    
    $
    11,682
    
    
    $
    71
    
    
    
    0.61
    %Money market
    
    
    99,941
    
    
    
    4,486
    
    
    
    4.49
    %
    
    
    114,527
    
    
    
    5,157
    
    
    
    4.50
    %Savings
    
    
    7,802
    
    
    
    295
    
    
    
    3.78
    %
    
    
    3,844
    
    
    
    59
    
    
    
    1.53
    %Time certificates of deposit
    
    
    226,050
    
    
    
    12,052
    
    
    
    5.33
    %
    
    
    117,400
    
    
    
    5,857
    
    
    
    4.99
    %Total interest-bearing deposits
    
    
    341,335
    
    
    
    16,910
    
    
    
    4.95
    %
    
    
    247,453
    
    
    
    11,144
    
    
    
    4.50
    %Short-term borrowings
    
    
    24
    
    
    
    1
    
    
    
    4.17
    %
    
    
    1,323
    
    
    
    75
    
    
    
    5.67
    %Junior subordinated debt
    
    
    8,248
    
    
    
    603
    
    
    
    7.31
    %
    
    
    8,248
    
    
    
    566
    
    
    
    6.86
    %Total interest-bearing liabilities
    
    
    349,607
    
    
    
    17,514
    
    
    
    5.01
    %
    
    
    257,024
    
    
    
    11,785
    
    
    
    4.59
    %Non-interest-bearing liabilitiesDemand deposits
    
    
    28,426
    
    
    
    
    
    
    
    
    
    
    
    25,736Other liabilities
    
    
    2,815
    
    
    
    
    
    
    
    
    
    
    
    1,526Total liabilities
    
    
    380,848
    
    
    
    
    
    
    
    
    
    
    
    284,286Stockholders equity
    
    
    62,254
    
    
    
    
    
    
    
    
    
    
    
    19,830Total liabilities and stockholders equity
    
    $
    443,102
    
    
    
    
    
    
    
    
    
    
    $
    304,116Net interest income
    
    
    
    
    
    $
    19,882
    
    
    
    
    
    
    
    
    
    
    $
    16,557Net interest spread(5)
    
    
    
    
    
    
    
    
    
    
    3.67
    %
    
    
    
    
    
    
    
    
    
    
    5.09
    %Net interest margin
    
    
    
    
    
    
    
    
    
    
    4.62
    %
    
    
    
    
    
    
    
    
    
    
    5.65
    %
 
 (1)
    
    Includes average non-accrual loans of $1,518,000 at December 31, 2007 and $50,000 at December
31, 2006.(2)
    
    Loan fees of $4.5 million and $5.4 million are included in the yield computations for fiscal
2007 and 2006, respectively.(3)
    
    Yields on loans and securities have not been adjusted to a tax-equivalent basis.(4)
    
    Includes interest-bearing deposits with correspondent banks.(5)
    
    Net interest spread represents the average yield earned on interest earning assets less the
average rate paid on interest bearing liabilities.(6)
    
    Annualized. 13-14




---



##### 



Year Ended December 31, 2007Compared to YearEnded December 31, 2006Net Change
    
    
    Rate
    
    
    Volume
    
    
    Mix(In thousands)Loans
    
    $
    8,324
    
    
    $
    (2,814
    )
    
    $
    12,401
    
    
    $
    (1,263
    )Investment securities  taxable
    
    
    51
    
    
    
    40
    
    
    
    10
    
    
    
    1Investment securities  non-taxable
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Federal funds sold
    
    
    597
    
    
    
    11
    
    
    
    563
    
    
    
    23Other investments
    
    
    82
    
    
    
    7
    
    
    
    69
    
    
    
    6Total interest income
    
    
    9,054
    
    
    
    (2,756
    )
    
    
    13,043
    
    
    
    (1,233
    )Interest expense:Interest-bearing demand
    
    
    6
    
    
    
    48
    
    
    
    (25
    )
    
    
    (17
    )Money market
    
    
    (671
    )
    
    
    (16
    )
    
    
    (657
    )
    
    
    2Savings
    
    
    236
    
    
    
    86
    
    
    
    61
    
    
    
    89Time certificates of deposit
    
    
    6,195
    
    
    
    402
    
    
    
    5,420
    
    
    
    373Short-term borrowings
    
    
    (74
    )
    
    
    (20
    )
    
    
    (74
    )
    
    
    20Junior subordinated debt
    
    
    37
    
    
    
    37
    
    
    
    0
    
    
    
    0Total interest expense
    
    
    5,729
    
    
    
    537
    
    
    
    4,725
    
    
    
    467Net interest income
    
    $
    3,325
    
    
    $
    (3,293
    )
    
    $
    8,318
    
    
    $
    (1,700
    )
 Provision for Loan Losses.
  Non-Interest Income.
 Year Ended December 31,
    
    
    Increase2007
    
    
    2006
    
    
    (Decrease)(In thousands)Service charges and other income
    
    $
    1,686
    
    
    $
    1,189
    
    
    $
    497Loan brokerage and referral fees
    
    
    1,363
    
    
    
    1,574
    
    
    
    (211
    )Net gain/(loss) on sale of loans
    
    
    1,482
    
    
    
    1,909
    
    
    
    (427
    )Total non-interest income
    
    $
    4,531
    
    
    $
    4,672
    
    
    $
    (141
    )
  Non-Interest Expense.
 13-15




---



##### 



Year Ended December 31,
    
    
    Increase2007
    
    
    2006
    
    
    (Decrease)(In thousands)Salaries, wages and employee benefits
    
    $
    9,486
    
    
    $
    9,258
    
    
    $
    228Occupancy, equipment and depreciation
    
    
    1,767
    
    
    
    1,462
    
    
    
    305Data and item processing
    
    
    698
    
    
    
    512
    
    
    
    186Advertising expense
    
    
    180
    
    
    
    215
    
    
    
    (35
    )Printing, stationery and supplies
    
    
    191
    
    
    
    219
    
    
    
    (28
    )Telephone expense
    
    
    111
    
    
    
    111
    
    
    
    0Postage and courier
    
    
    155
    
    
    
    132
    
    
    
    23Legal fees
    
    
    301
    
    
    
    45
    
    
    
    256Director fees
    
    
    321
    
    
    
    303
    
    
    
    18Business & occupation taxes
    
    
    344
    
    
    
    274
    
    
    
    70Accounting and audit fees
    
    
    254
    
    
    
    77
    
    
    
    177Consultant fees
    
    
    216
    
    
    
    64
    
    
    
    152OREO losses and expenses, net
    
    
    266
    
    
    
    0
    
    
    
    266Provision for unfunded credit losses
    
    
    361
    
    
    
    0
    
    
    
    361Other
    
    
    1,843
    
    
    
    1,182
    
    
    
    661Total non-interest expense
    
    $
    16,494
    
    
    $
    13,854
    
    
    $
    2,640
  Provision (Benefits) for Income Taxes.
 Financial Condition
  Loans
  13-16




---



##### 



December 31,2008
    
    
    2007
    
    
    2006
    
    
    2005
    
    
    2004(In thousands)Real estate loans:Construction
    
    $
    137,435
    
    
    $
    253,188
    
    
    $
    194,709
    
    
    $
    103,772
    
    
    $
    41,211Commercial real estate
    
    
    61,057
    
    
    
    72,435
    
    
    
    67,224
    
    
    
    46,947
    
    
    
    36,191Residential real estate
    
    
    46,547
    
    
    
    53,198
    
    
    
    63,942
    
    
    
    43,689
    
    
    
    24,659Commercial & industrial loans
    
    
    36,775
    
    
    
    31,377
    
    
    
    15,629
    
    
    
    13,123
    
    
    
    14,549Consumer loans
    
    
    2,812
    
    
    
    3,719
    
    
    
    3,235
    
    
    
    2,484
    
    
    
    2,202Gross loans
    
    
    284,626
    
    
    
    413,917
    
    
    
    344,739
    
    
    
    210,015
    
    
    
    118,812Allowance for loan losses
    
    
    18,411
    
    
    
    19,514
    
    
    
    3,972
    
    
    
    2,520
    
    
    
    1,189Deferred loan fees, net
    
    
    435
    
    
    
    967
    
    
    
    559
    
    
    
    323
    
    
    
    0Net loans
    
    $
    265,780
    
    
    $
    393,436
    
    
    $
    340,208
    
    
    $
    207,172
    
    
    $
    117,623
   Maturity
    
    
    Rate Structure forOne
    
    
    One
    
    
    
    
    
    
    
    
    
    
    Loans Maturing OverYear
    
    
    through
    
    
    Over
    
    
    
    
    
    
    One Yearor
    
    
    Five
    
    
    Five
    
    
    
    
    
    
    Fixed
    
    
    FloatingLess
    
    
    Years
    
    
    Years
    
    
    Total
    
    
    Rate
    
    
    Rate(In thousands)Real estate loans:Construction & land development
    
    $
    118,070
    
    
    $
    14,502
    
    
    $
    4,863
    
    
    $
    137,435
    
    
    $
    14,046
    
    
    $
    5,319Commercial real estate
    
    
    1,478
    
    
    
    13,037
    
    
    
    46,542
    
    
    
    61,057
    
    
    
    13,788
    
    
    
    45,791Residential real estate
    
    
    19,627
    
    
    
    11,770
    
    
    
    15,150
    
    
    
    46,547
    
    
    
    15,858
    
    
    
    11,062Commercial & industrial loans
    
    
    5,197
    
    
    
    22,263
    
    
    
    9,315
    
    
    
    36,775
    
    
    
    24,849
    
    
    
    6,729Consumer & other loans
    
    
    533
    
    
    
    2,063
    
    
    
    216
    
    
    
    2,812
    
    
    
    1,141
    
    
    
    1,138Total
    
    $
    144,905
    
    
    $
    63,635
    
    
    $
    76,086
    
    
    $
    284,626
    
    
    $
    69,682
    
    
    $
    70,039
 13-17




---



##### 



Maturity
    
    
    Rate Structure forOne
    
    
    One
    
    
    
    
    
    
    
    
    
    
    Loans Maturing OverYear
    
    
    through
    
    
    Over
    
    
    
    
    
    
    One Yearor
    
    
    Five
    
    
    Five
    
    
    
    
    
    
    Fixed
    
    
    FloatingLess
    
    
    Years
    
    
    Years
    
    
    Total
    
    
    Rate
    
    
    Rate(In thousands)Real estate loans:Construction & land development
    
    $
    220,631
    
    
    $
    21,821
    
    
    $
    10,736
    
    
    $
    253,188
    
    
    $
    16,222
    
    
    $
    16,335Commercial real estate
    
    
    5,781
    
    
    
    10,300
    
    
    
    56,354
    
    
    
    72,435
    
    
    
    14,669
    
    
    
    51,985Residential real estate
    
    
    25,387
    
    
    
    13,146
    
    
    
    14,665
    
    
    
    53,198
    
    
    
    16,155
    
    
    
    11,656Commercial & industrial loans
    
    
    9,538
    
    
    
    9,615
    
    
    
    12,224
    
    
    
    31,377
    
    
    
    12,947
    
    
    
    8,892Consumer & other loans
    
    
    746
    
    
    
    2,843
    
    
    
    130
    
    
    
    3,719
    
    
    
    1,783
    
    
    
    1,190Total
    
    $
    262,083
    
    
    $
    57,725
    
    
    $
    94,109
    
    
    $
    413,917
    
    
    $
    61,776
    
    
    $
    90,058
 Concentrations.
    December 31,
    
    
    December 31,2008
    
    
    2007(In thousands)Real estate loans:Construction & land development loansInterest only
    
    $
    109,656
    
    
    $
    224,105Principal and interest
    
    
    27,779
    
    
    
    29,083Commercial real estate loansInterest only
    
    
    2,843
    
    
    
    10,596Principal and interest
    
    
    58,214
    
    
    
    61,839
 13-18




---



##### 



December 31,
    
    
    December 31,2008
    
    
    2007(In thousands)Residential real estate loansInterest only
    
    
    13,456
    
    
    
    21,778Principal and interest
    
    
    33,092
    
    
    
    31,420Commercial & industrial loansInterest only
    
    
    4,809
    
    
    
    9,329Principal and interest
    
    
    31,966
    
    
    
    22,048Consumer and other loansInterest only
    
    
    248
    
    
    
    589Principal and interest
    
    
    2,563
    
    
    
    3,130Total
    
    $
    284,626
    
    
    $
    413,917
  Non-Performing Assets.
 December 31,2008
    
    
    2007
    
    
    2006
    
    
    2005
    
    
    2004(Dollars in thousands)Non-accrual loans
    
    $
    112,233
    
    
    $
    24,923
    
    
    $
    219
    
    
    $
    128
    
    
    $
    100Accruing loans past due 90 days or more
    
    
    
    
    
    
    399
    
    
    
    
    
    
    
    
    
    
    
    Total non-performing loans (NPLs)
    
    
    112,233
    
    
    
    25,322
    
    
    
    219
    
    
    
    128
    
    
    $
    100Other real estate owned
    
    
    19,629
    
    
    
    983
    
    
    
    
    
    
    
    
    
    
    
    30Total non-performing assets (NPAs)
    
    $
    131,862
    
    
    $
    26,305
    
    
    $
    219
    
    
    $
    128
    
    
    $
    130Selected ratiosNPLs to total loans
    
    
    39.43
    %
    
    
    6.12
    %
    
    
    0.06
    %
    
    
    0.06
    %
    
    
    0.09
    %NPAs to total assets
    
    
    36.11
    %
    
    
    5.38
    %
    
    
    0.06
    %
    
    
    0.05
    %
    
    
    0.09
    %
  13-19




---



##### 



Total
    
    
    Kitsap
    
    
    % of
    
    
    King
    
    
    % of
    
    
    Pierce
    
    
    % of
    
    
    Other
    
    
    % ofLoans
    
    
    County
    
    
    Loans
    
    
    County
    
    
    Loans
    
    
    County
    
    
    Loans
    
    
    Counties
    
    
    LoansReal estate loans:Spec construction
    
    
    35,314
    
    
    
    13,408
    
    
    
    5
    %
    
    
    8,035
    
    
    
    3
    %
    
    
    7,141
    
    
    
    3
    %
    
    
    6,730
    
    
    
    2
    %Custom construction
    
    
    56,160
    
    
    
    10,880
    
    
    
    4
    %
    
    
    27,859
    
    
    
    10
    %
    
    
    11,775
    
    
    
    4
    %
    
    
    5,646
    
    
    
    2
    %Total construction
    
    
    91,474
    
    
    
    24,288
    
    
    
    9
    %
    
    
    35,894
    
    
    
    13
    %
    
    
    18,916
    
    
    
    7
    %
    
    
    12,376
    
    
    
    4
    %Vacant land & land
development
    
    
    45,961
    
    
    
    27,209
    
    
    
    10
    %
    
    
    2,821
    
    
    
    1
    %
    
    
    5,469
    
    
    
    2
    %
    
    
    10,462
    
    
    
    4
    %1-4 family mortgage
    
    
    33,936
    
    
    
    17,464
    
    
    
    6
    %
    
    
    3,115
    
    
    
    1
    %
    
    
    5,384
    
    
    
    2
    %
    
    
    7,973
    
    
    
    3
    %Multifamily mortgage
    
    
    12,611
    
    
    
    6,468
    
    
    
    2
    %
    
    
    
    
    
    
    0
    %
    
    
    2,955
    
    
    
    1
    %
    
    
    3,188
    
    
    
    1
    %Commercial real estate
    
    
    61,057
    
    
    
    42,615
    
    
    
    15
    %
    
    
    2,897
    
    
    
    1
    %
    
    
    3,001
    
    
    
    1
    %
    
    
    12,544
    
    
    
    4
    %Commercial & industrial
loans
    
    
    36,775
    
    
    
    19,028
    
    
    
    7
    %
    
    
    13,705
    
    
    
    5
    %
    
    
    2,405
    
    
    
    1
    %
    
    
    1,637
    
    
    
    1
    %Consumer loans
    
    
    2,812
    
    
    
    2,148
    
    
    
    1
    %
    
    
    21
    
    
    
    0
    %
    
    
    81
    
    
    
    0
    %
    
    
    562
    
    
    
    0
    %Gross loans
    
    
    284,626
    
    
    
    139,220
    
    
    
    49
    %
    
    
    58,453
    
    
    
    21
    %
    
    
    38,211
    
    
    
    13
    %
    
    
    48,742
    
    
    
    17
    %
  Loans
    
    
    % of Loans
    
    
    Non-Accruals
    
    
    % of Non-AccrualsReal estate loans:Spec construction
    
    $
    35,314
    
    
    
    12
    %
    
    $
    25,150
    
    
    
    22.4
    %Custom construction
    
    
    56,160
    
    
    
    20
    %
    
    
    40,802
    
    
    
    36.4
    %Total construction
    
    
    91,474
    
    
    
    32
    %
    
    
    65,952
    
    
    
    58.8
    %Vacant land & land development
    
    
    45,961
    
    
    
    16
    %
    
    
    16,169
    
    
    
    14.4
    %1-4 family mortgage
    
    
    33,936
    
    
    
    12
    %
    
    
    11,733
    
    
    
    10.4
    %Multifamily mortgage
    
    
    12,611
    
    
    
    4
    %
    
    
    3,447
    
    
    
    3.1
    %Commercial real estate
    
    
    61,057
    
    
    
    22
    %
    
    
    2,712
    
    
    
    2.4
    %Commercial & industrial loans
    
    
    36,775
    
    
    
    13
    %
    
    
    11,793
    
    
    
    10.5
    %Consumer loans
    
    
    2,812
    
    
    
    1
    %
    
    
    426
    
    
    
    0.4
    %Gross loans
    
    $
    284,626
    
    
    
    100
    %
    
    $
    112,232
    
    
    
    100
    %
 OREO Properties.
  Impaired Loans.
  13-20




---



##### 



Year Ended December 31,2008
    
    2007Impaired LoansImpaired
loans with an allowance for loan loss
    
    $
    66,912,051
    
    
    $
    25,437,668Impaired loans without an allowance for loan loss
    
    $
    46,447,130
    
    
    $
    Total impaired loans (1)
    
    $
    113,359,181
    
    
    $
    25,437,668Total related allowance for losses
    
    $
    12,947,123
    
    
    $
    5,009,141Average investment in impaired loans
    
    $
    57,357,825
    
    
    $
    7,375,426Interest income recognized on impaired loans
    
    $
    685,110
    
    
    $
    1,254,832Interest income received on impaired loans
    
    $
    632,081
    
    
    $
    1,094,351
 
 (1)
    
    Includes $111.8 million and $11.8 million non-accrual loans for 2008 and 2007, respectively.    Loan Commitments.
   Contingent Liabilities for Sold Loans.
 Allowance for Loan Losses
  13-21




---



##### 



Specific Allocations.
 General Allowances.
  Years Ended December 31,2008
    
    
    2007
    
    
    2006
    
    
    2005
    
    
    2004(Dollars in thousands)Allowance for loan losses:Beginning balance
    
    $
    19,514
    
    
    $
    3,972
    
    
    $
    2,520
    
    
    $
    1,189
    
    
    $
    578Loans charged offReal estate loans:Construction
    
    
    15,899
    
    
    
    69
    
    
    
    
    
    
    
    
    
    
    
    Commercial real estate
    
    
    294
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Residential real estate
    
    
    1,814
    
    
    
    156
    
    
    
    
    
    
    
    
    
    
    
    Commercial & industrial loans
    
    
    381
    
    
    
    88
    
    
    
    21
    
    
    
    
    
    
    
    Consumer loans
    
    
    133
    
    
    
    26
    
    
    
    4
    
    
    
    1
    
    
    
    22Total
    
    
    18,521
    
    
    
    339
    
    
    
    25
    
    
    
    1
    
    
    
    22Recoveries:Real estate loans:Construction
    
    
    34
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Commercial real estate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Residential real estate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Commercial & industrial loans
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    1
    
    
    
    
 13-22




---



##### 



Years Ended December 31,2008
    
    
    2007
    
    
    2006
    
    
    2005
    
    
    2004(Dollars in thousands)Consumer loans
    
    
    5
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    1Total
    
    
    39
    
    
    
    2
    
    
    
    2
    
    
    
    1
    
    
    
    1Net loan charge-off (recovery)
    
    
    18,482
    
    
    
    337
    
    
    
    23
    
    
    
    
    
    
    
    21Reclassification of unfunded
credit commitments to other
liabilities
    
    
    
    
    
    
    
    
    
    
    (48
    )
    
    
    (20
    )
    
    
    (22
    )Provision for loan losses
    
    
    17,379
    
    
    
    15,879
    
    
    
    1,523
    
    
    
    1,351
    
    
    
    654Ending balance
    
    $
    18,411
    
    
    $
    19,514
    
    
    $
    3,972
    
    
    $
    2,520
    
    
    $
    1,189Loans
    
    $
    284,626
    
    
    $
    413,917
    
    
    $
    344,739
    
    
    $
    210,015
    
    
    $
    118,812Average loans
    
    
    350,943
    
    
    
    401,198
    
    
    
    276,865
    
    
    
    161,357
    
    
    
    82,118Non-performing loans
    
    
    12,233
    
    
    
    25,322
    
    
    
    219
    
    
    
    128
    
    
    
    100Selected ratios:Net charge-offs to average loans
    
    
    5.27
    %
    
    
    0.08
    %
    
    
    0.01
    %
    
    
    0.00
    %
    
    
    0.03
    %Provision for loan losses to
average loans
    
    
    4.95
    %
    
    
    3.96
    %
    
    
    0.55
    %
    
    
    0.84
    %
    
    
    0.80
    %Allowance for loan losses to
loans outstanding at end of
period
    
    
    6.47
    %
    
    
    4.71
    %
    
    
    1.15
    %
    
    
    1.20
    %
    
    
    1.00
    %Allowance for loan losses to
non-performing loans
    
    
    150.5
    %
    
    
    77.1
    %
    
    
    1813.7
    %
    
    
    1968.8
    %
    
    
    1189.0
    %
    13-23




---



##### 



December 31,2008
    
    
    2007
    
    
    2006
    
    
    2005
    
    
    2004Percent of
    
    
    
    
    
    
    Percent of
    
    
    
    
    
    
    Percent of
    
    
    
    
    
    
    Percent of
    
    
    
    
    
    
    Percent ofLoans in
    
    
    
    
    
    
    Loans in
    
    
    
    
    
    
    Loans in
    
    
    
    
    
    
    Loans in
    
    
    
    
    
    
    Loans inEach
    
    
    
    
    
    
    Each
    
    
    
    
    
    
    Each
    
    
    
    
    
    
    Each
    
    
    
    
    
    
    EachAllocation
    
    
    Category
    
    
    Allocation
    
    
    Category
    
    
    Allocation
    
    
    Category
    
    
    Allocation
    
    
    Category
    
    
    Allocation
    
    
    Categoryof the
    
    
    to Total
    
    
    of the
    
    
    to Total
    
    
    of the
    
    
    to Total
    
    
    of the
    
    
    to Total
    
    
    of the
    
    
    to TotalAllowance
    
    
    Loans
    
    
    Allowance
    
    
    Loans
    
    
    Allowance
    
    
    Loans
    
    
    Allowance
    
    
    Loans
    
    
    Allowance
    
    
    Loans(Dollars in Thousands)Construction & land development
    
    $
    177
    
    
    
    48.3
    %
    
    $
    1,860
    
    
    
    61.2
    %
    
    $
    1,460
    
    
    
    56.5
    %
    
    $
    778
    
    
    
    49.4
    %
    
    
    309
    
    
    
    34.7
    %Commercial real estate
    
    
    362
    
    
    
    21.5
    %
    
    
    601
    
    
    
    17.5
    %
    
    
    504
    
    
    
    19.5
    %
    
    
    352
    
    
    
    22.4
    %
    
    
    271
    
    
    
    30.5
    %Residential real estate
    
    
    36
    
    
    
    16.4
    %
    
    
    143
    
    
    
    12.9
    %
    
    
    160
    
    
    
    18.5
    %
    
    
    109
    
    
    
    20.8
    %
    
    
    62
    
    
    
    20.8
    %Commercial & industrial loans
    
    
    165
    
    
    
    12.9
    %
    
    
    149
    
    
    
    7.6
    %
    
    
    117
    
    
    
    4.5
    %
    
    
    98
    
    
    
    6.2
    %
    
    
    109
    
    
    
    12.2
    %Consumer loans
    
    
    14
    
    
    
    0.9
    %
    
    
    42
    
    
    
    0.9
    %
    
    
    32
    
    
    
    0.9
    %
    
    
    25
    
    
    
    1.2
    %
    
    
    22
    
    
    
    1.9
    %Direct and Unallocated
    
    $
    17,657
    
    
    
    
    
    
    $
    16,719
    
    
    
    
    
    
    $
    1,698
    
    
    
    
    
    
    $
    1.157
    
    
    
    
    
    
    $
    416Total
    
    $
    18,411
    
    
    
    100.00
    %
    
    $
    19,514
    
    
    
    100.0
    %
    
    $
    3,972
    
    
    
    100.0
    %
    
    $
    2,520
    
    
    
    100.0
    %
    
    $
    1,189
    
    
    
    100.0
    %
   Investments
   Carrying Value at December 31,2008
    
    
    2007
    
    
    2006(In thousands)U.S. government agencies
    
    $
    17,016
    
    
    $
    6,980
    
    
    $
    6,382Obligations of states and political subdivisions
    
    
    1,402
    
    
    
    1,813
    
    
    
    1,812Mortgage-backed securities
    
    
    25
    
    
    
    39
    
    
    
    50Total investment securities
    
    $
    18,443
    
    
    $
    8,832
    
    
    $
    8,244
  December 31, 2008After One Year but
    
    
    After Five Years butWithin One Year
    
    
    within Five Years
    
    
    within Ten Years
    
    
    After Ten YearsAmount
    
    
    Yield
    
    
    Amount
    
    
    Yield
    
    
    Amount
    
    
    Yield
    
    
    Amount
    
    
    Yield(Dollars in thousands)U.S. government agencies
    
    $
    3,007
    
    
    
    3.30
    %
    
    $
    14,009
    
    
    
    3.58
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Obligations of states and political subdivisions
    
    
    244
    
    
    
    3.80
    %
    
    
    259
    
    
    
    3.80
    %
    
    
    899
    
    
    
    4.25
    %
    
    
    
    
    
    
    Mortgage-backed securities
    
    
    25
    
    
    
    4.26
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total available for sale
    
    $
    3,276
    
    
    
    3.35
    %
    
    $
    14,268
    
    
    
    3.58
    %
    
    $
    899
    
    
    
    4.25
    %
    
    $
    
    
    
    
    
 13-24




---



##### 



December 31, 2007After One Year but
    
    
    After Five Years butWithin One Year
    
    
    within Five Years
    
    
    within Ten Years
    
    
    After Ten YearsAmount
    
    
    Yield
    
    
    Amount
    
    
    Yield
    
    
    Amount
    
    
    Yield
    
    
    Amount
    
    
    Yield(Dollars in thousands)U.S. government agencies
    
    $
    998
    
    
    
    4.52
    %
    
    $
    5,982
    
    
    
    4.95
    %
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    Obligations of states and political subdivisions
    
    
    
    
    
    
    
    
    
    
    502
    
    
    
    3.80
    %
    
    
    1,089
    
    
    
    4.25
    %
    
    
    222
    
    
    
    4.55
    %Mortgage-backed securities
    
    
    8
    
    
    
    4.52
    %
    
    
    31
    
    
    
    4.52
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total available-for-sale
    
    $
    1,006
    
    
    
    4.52
    %
    
    $
    6,515
    
    
    
    4.86
    %
    
    $
    1,089
    
    
    
    4.25
    %
    
    $
    222
    
    
    
    4.55
    %
 Deposits
   Years Ended December 31,2008
    
    
    2007
    
    
    2006Average
    
    
    Average
    
    
    Average
    
    
    Average
    
    
    Average
    
    
    AverageBalance
    
    
    Rate
    
    
    Balance
    
    
    Rate
    
    
    Balance
    
    
    Rate(Dollars in Thousands)Interest-bearing demand
    
    $
    6,870
    
    
    
    0.83
    %
    
    $
    7,542
    
    
    
    1.02
    %
    
    $
    11,682
    
    
    
    0.61
    %Money market
    
    
    63,226
    
    
    
    2.81
    %
    
    
    99,941
    
    
    
    4.49
    %
    
    
    114,527
    
    
    
    4.50
    %Savings
    
    
    10,742
    
    
    
    2.28
    %
    
    
    7,802
    
    
    
    3.78
    %
    
    
    3,844
    
    
    
    1.53
    %Time certificates of deposit
    
    
    290,797
    
    
    
    4.82
    %
    
    
    226,050
    
    
    
    5.33
    %
    
    
    117,400
    
    
    
    4.99
    %Non-interest-bearing deposits
    
    
    21,266
    
    
    
    0.00
    %
    
    
    28,426
    
    
    
    0.00
    %
    
    
    25,736
    
    
    
    0.00
    %Total
    
    $
    392,901
    
    
    
    4.10
    %
    
    $
    369,761
    
    
    
    4.57
    %
    
    $
    273,189
    
    
    
    4.08
    %
  December 31,2008(In thousands)Due in three months or less
    
    $
    28,980Due in over three months through six months
    
    
    22,040Due in over six months through twelve months
    
    
    27,543Due in over twelve months
    
    
    25,558Total
    
    $
    104,121
  Shareholders Equity
 Initial Public Offering.
 13-25




---



##### 



December 31, 2008 Overview.
 December 31, 2007 Overview.
 2006 Overview.
 Stock Split.
 Capital Resources
  Regulatory Requirements(Greater than or equal to
    
    Actual at December 31, 2008stated percentage)
    
    
    
    
    
    WSB FinancialAdequately Capitalized
    
    Well Capitalized
    
    Westsound Bank
    
    Group, Inc.Tier 1 leverage capital ratio
    
    
    4.0
    %
    
    
    5.0
    %
    
    
    8.2
    %
    
    
    8.1
    %Tier 1 risk-based capital
    
    
    4.0
    %
    
    
    6.0
    %
    
    
    10.5
    %
    
    
    10.5
    %Total risk-based capital
    
    
    8.0
    %
    
    
    10.0
    %
    
    
    11.8
    %
    
    
    11.8
    %
 Regulatory Requirements(Greater than or equal to
    
    Actual at December 31, 2007stated percentage)
    
    
    
    
    
    WSB FinancialAdequately Capitalized
    
    Well Capitalized
    
    Westsound Bank
    
    Group, Inc.Tier 1 leverage capital ratio
    
    
    4.0
    %
    
    
    5.0
    %
    
    
    13.6
    %
    
    
    13.9
    %Tier 1 risk-based capital
    
    
    4.0
    %
    
    
    6.0
    %
    
    
    15.0
    %
    
    
    15.4
    %Total risk-based capital
    
    
    8.0
    %
    
    
    10.0
    %
    
    
    16.3
    %
    
    
    16.7
    %
  13-26




---



##### 



13-27




---



##### 



Contractual Obligations
  Payments Due by PeriodLessThan
    
    
    
    
    
    
    
    
    
    
    After1
    
    
    1-3
    
    
    3-5
    
    
    5Contractual Obligations
    
    Total
    
    
    Year
    
    
    Years
    
    
    Years
    
    
    Years(In Thousands)Junior subordinated deferrable interest debentures
    
    $
    8,248
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    8,248Time certificates of deposit
    
    
    248,745
    
    
    
    185,141
    
    
    
    49,022
    
    
    
    14,582
    
    
    
    Operating lease obligations
    
    
    809
    
    
    
    302
    
    
    
    294
    
    
    
    213
    
    
    
    Total
    
    $
    257,802
    
    
    $
    185,443
    
    
    $
    49,316
    
    
    $
    14,795
    
    
    $
    8,248
  Amount of Commitment Expiration Per PeriodLessTotal
    
    
    Than
    
    
    
    
    
    
    
    
    
    
    AfterAmounts
    
    
    1
    
    
    1-3
    
    
    3-5
    
    
    5Other Commitments
    
    Committed
    
    
    Year
    
    
    Years
    
    
    Years
    
    
    Years(In Thousands)Commitments to extend credit
    
    $
    6,398
    
    
    $
    5,073
    
    
    $
    1,325
    
    
    $
    
    
    
    $
    Credit cards
    
    
    2,218
    
    
    
    
    
    
    
    2,218
    
    
    
    
    
    
    
    Standby letters of credit
    
    
    250
    
    
    
    179
    
    
    
    71
    
    
    
    
    
    
    
    Total
    
    $
    8,866
    
    
    $
    5,252
    
    
    $
    3,614
    
    
    $
    
    
    
    $
    
  Liquidity
    13-28




---



##### 



Quantitative and Qualitative Disclosures about Market Risk
     Market Value of Portfolio Equity.
 13-29




---



##### 



Market Value of Portfolio Equity
 Percentage ofPercentage Change
    
    Percentage of
    
    Portfolio EquityInterest Rate Scenario
    
    Market Value
    
    from Base
    
    Total Assets
    
    Book Value(Dollars in thousands)Up 200 basis points
    
    $
    25,365
    
    
    
    3.3
    %
    
    
    6.9
    %
    
    
    104.31
    %Up 100 basis points
    
    
    25,009
    
    
    
    1.8
    %
    
    
    6.8
    %
    
    
    102.85
    %BASE
    
    
    25,561
    
    
    
    
    
    
    
    6.7
    %
    
    
    101.01
    %Down 100 basis points
    
    
    25,945
    
    
    
    5.6
    %
    
    
    7.1
    %
    
    
    106.70
    %Down 200 basis points
    
    
    27,738
    
    
    
    12.9
    %
    
    
    7.6
    %
    
    
    114.07
    %
  Net Interest Income Simulation.
    13-30




---



##### 



Sensitivity of Net Interest Income
 Net InterestMargin ChangeAdjusted Net
    
    Percentage Change
    
    Net Interest
    
    (in basisInterest Rate Scenario
    
    Interest Income(1)
    
    from Base
    
    Margin Percent(1)
    
    points)(Dollars in thousands)Up 200 basis points
    
    $
    2,667
    
    
    
    2.4
    %
    
    
    3.30
    %
    
    
    24Up 100 basis points
    
    
    2,660
    
    
    
    2.1
    %
    
    
    3.19
    %
    
    
    13BASE
    
    
    2,605
    
    
    
    
    %
    
    
    3.06
    %
    
    
    Down 100 basis points
    
    
    2,442
    
    
    
    (6.3
    )%
    
    
    2.91
    %
    
    
    (15
    )Down 200 basis points
    
    
    2,157
    
    
    
    (7.2
    )%
    
    
    2.79
    %
    
    
    (27
    )
 
 (1)
    
    These percentages are not comparable to other information discussing the percent of net
interest margin since the income simulation does not take into account loan fees. Gap Analysis.
  December 31, 2008Amounts Maturing or Re-pricing inOver
    
    
    Over3
    
    
    13
    
    
    Months
    
    
    YearMonths
    
    
    to
    
    
    to
    
    
    Overor
    
    
    12
    
    
    5
    
    
    5
    
    
    Non-Less
    
    
    Months
    
    
    Years
    
    
    Years
    
    
    Sensitive(1)
    
    
    Total(Dollars in thousands)AssetsCash and due from banks
    
    $
    8,759
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    4,756
    
    
    $
    13,515Federal funds sold
    
    
    32,500
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    32,500Investment securities
    
    
    2,151
    
    
    
    4,258
    
    
    
    11,108
    
    
    
    531
    
    
    
    395
    
    
    
    18,443Loans
    
    
    67,744
    
    
    
    40,026
    
    
    
    50,713
    
    
    
    13,941
    
    
    
    111,767
    
    
    
    284,191Other assets(2)
    
    
    248
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,313
    
    
    
    16,561Total assets
    
    $
    111,402
    
    
    $
    44,284
    
    
    $
    61,821
    
    
    $
    14,472
    
    
    $
    133,231
    
    
    $
    365,210Liabilities and Stockholders EquityNon-interest-bearing demand
deposits
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    16,966
    
    
    $
    16,966Interest-bearing demand, money
market and savings
    
    
    6,986
    
    
    
    20,939
    
    
    
    32,605
    
    
    
    3,790
    
    
    
    
    
    
    
    64,320Time certificates of deposit
    
    
    73,854
    
    
    
    111,295
    
    
    
    61,461
    
    
    
    2,145
    
    
    
    (10
    )
    
    
    248,745Short-term debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Long-term debt
    
    
    8,248
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,248Other liabilities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,615
    
    
    
    2,615Stockholders equity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    24,316
    
    
    
    24,316Total liabilities and
stockholders equity
    
    $
    89,088
    
    
    $
    132,234
    
    
    $
    94,066
    
    
    $
    5,935
    
    
    $
    43,887
    
    
    $
    365,210
 13-31




---



##### 



December 31, 2008Amounts Maturing or Re-pricing inOver
    
    
    Over3
    
    
    13
    
    
    Months
    
    
    YearMonths
    
    
    to
    
    
    to
    
    
    Overor
    
    
    12
    
    
    5
    
    
    5
    
    
    Non-Less
    
    
    Months
    
    
    Years
    
    
    Years
    
    
    Sensitive(1)
    
    
    Total(Dollars in thousands)Period gap
    
    
    22,314
    
    
    
    (87,950
    )
    
    
    (32,245
    )
    
    
    8,537
    
    
    
    89,344Cumulative interest-earning
assets
    
    
    111,402
    
    
    
    155,686
    
    
    
    217,507
    
    
    
    231,979Cumulative interest-bearing
liabilities
    
    
    89,088
    
    
    
    221,322
    
    
    
    315,388
    
    
    
    321,323Cumulative gap
    
    
    22,314
    
    
    
    (65,636
    )
    
    
    (97,881
    )
    
    
    (89,344
    )Cumulative interest-earning
assets to cumulative
interest-bearing liabilities
    
    
    1.25
    
    
    
    0.70
    
    
    
    0.69
    
    
    
    0.72Cumulative gap as a percent of:Total assets
    
    
    6.1
    %
    
    
    (18.0
    )%
    
    
    (26.8
    )%
    
    
    (24.5
    )%Interest-earning assets
    
    
    20.0
    %
    
    
    (42.2
    )%
    
    
    (45.0
    )%
    
    
    (38.5
    )%
 
 (1)
    
    Assets or liabilities and equity which are not interest rate-sensitive.(2)
    
    Allowance for loan losses of $18.6 million as of December 31, 2008.   Recent Accounting Pronouncements
  13-32




---



##### 



INDEX TO FINANCIAL STATEMENTS
 Report of Independent Registered Public Accounting Firm
    
    
    13-34Consolidated Statement of Financial Condition
    
    
    13-35Consolidated Statement of Operations
    
    
    13-36Consolidated Statement of Changes in Stockholders Equity and Comprehensive Income (Loss)
    
    
    13-37Consolidated Statement of Cash Flows
    
    
    13-38Notes to Consolidated Financial Statements
    
    
    13-39
 13-33




---



##### 



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
       /s/ Moss
Adams, LLP
 13-34




---



##### 



WSB FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
 December 31,
    
    
    December 31,2008
    
    
    2007ASSETSCash and cash equivalentsCash and due from banks
    
    $
    13,515,375
    
    
    $
    10,026,460Federal funds sold
    
    
    32,500,000
    
    
    
    56,900,000Total cash and cash equivalents
    
    
    46,015,375
    
    
    
    66,926,460Investment securities available for sale, at fair value
    
    
    18,442,639
    
    
    
    8,832,146Federal Home Loan Bank stock, at cost
    
    
    318,900
    
    
    
    318,900Loans
    
    
    284,190,841
    
    
    
    412,949,947Less allowance for loan losses
    
    
    (18,410,606
    )
    
    
    (19,513,765
    )Total loans, net
    
    
    265,780,235
    
    
    
    393,436,182Premises and equipment, net
    
    
    7,905,049
    
    
    
    8,759,750Accrued interest receivable
    
    
    983,335
    
    
    
    2,540,554Other real estate owned (OREO)
    
    
    19,628,571
    
    
    
    983,411Deferred tax asset
    
    
    12,021,579
    
    
    
    6,496,106Less deferred tax valuation allowance
    
    
    (12,021,579
    )
    
    
    Total deferred tax asset, net
    
    
    
    
    
    
    6,496,106Federal income tax receivable
    
    
    4,895,762
    
    
    
    Other assets
    
    $
    1,240,236
    
    
    
    1,039,655Total assets
    
    $
    365,210,102
    
    
    $
    489,333,164LIABILITIES AND STOCKHOLDERS EQUITYDepositsNon-interest-bearing
    
    $
    16,965,525
    
    
    $
    24,711,246Interest-bearing
    
    
    313,065,679
    
    
    
    396,733,599Total deposits
    
    
    330,031,204
    
    
    
    421,444,845Accrued interest payable
    
    
    1,973,590
    
    
    
    1,955,434Other liabilities
    
    
    640,906
    
    
    
    964,870Junior subordinated debentures
    
    
    8,248,000
    
    
    
    8,248,000Total liabilities
    
    
    340,893,700
    
    
    
    432,613,149Stockholders equityCommon stock, $1 par value; 15,357,250 shares
authorized; 5,574,853 and 5,574,853 shares issued and
outstanding at December 31, 2008 and December 31,
2007, respectively
    
    
    5,574,853
    
    
    
    5,574,853Additional paid-in capital
    
    
    48,279,212
    
    
    
    48,223,669Retained earnings (accumulated deficit)
    
    
    (29,798,393
    )
    
    
    2,853,756Accumulated other comprehensive income
    
    
    260,730
    
    
    
    67,737Total stockholders equity
    
    
    24,316,402
    
    
    
    56,720,015Total liabilities and stockholders equity
    
    $
    365,210,102
    
    
    $
    489,333,164
 13-35

    See accompanying notes




---



##### 



WSB
FINANCIAL GROUP, INC. AND SUBSIDIARIES  CONSOLIDATED STATEMENT OF OPERATIONS
 Year ended December 31,2008
    
    
    2007
    
    
    2006INTEREST INCOMEInterest and fees on loans
    
    $
    18,324,820
    
    
    $
    35,958,390
    
    
    $
    27,633,568Interest on investmentsTaxable
    
    
    487,094
    
    
    
    316,280
    
    
    
    265,174Tax-exempt
    
    
    46,043
    
    
    
    75,510
    
    
    
    75,842Interest on federal funds sold
    
    
    1,382,621
    
    
    
    879,040
    
    
    
    282,055Other interest income
    
    
    143,604
    
    
    
    166,581
    
    
    
    84,466Total interest income
    
    
    20,384,182
    
    
    
    37,395,801
    
    
    
    28,341,105INTEREST EXPENSEDeposits
    
    
    16,091,456
    
    
    
    16,910,386
    
    
    
    11,143,894Other borrowings
    
    
    
    
    
    
    1,241
    
    
    
    75,232Junior subordinated debentures
    
    
    450,000
    
    
    
    603,017
    
    
    
    565,486Total interest expense
    
    
    16,541,456
    
    
    
    17,514,644
    
    
    
    11,784,612NET INTEREST INCOME
    
    
    3,842,726
    
    
    
    19,881,157
    
    
    
    16,556,493PROVISION FOR LOAN LOSSES
    
    
    17,379,000
    
    
    
    15,879,000
    
    
    
    1,522,917Net interest income (loss) after provision for loan losses
    
    
    (13,536,274
    )
    
    
    4,002,157
    
    
    
    15,033,576NONINTEREST INCOMEService charges on deposit accounts
    
    
    356,917
    
    
    
    381,380
    
    
    
    255,659Other client fees
    
    
    403,389
    
    
    
    789,513
    
    
    
    878,372Net gain on sale of loans
    
    
    
    
    
    
    2,845,046
    
    
    
    3,483,303Other income
    
    
    36,264
    
    
    
    515,029
    
    
    
    54,754Total noninterest income
    
    
    796,570
    
    
    
    4,530,968
    
    
    
    4,672,088NONINTEREST EXPENSESalaries and employee benefits
    
    
    6,275,522
    
    
    
    9,486,241
    
    
    
    9,257,885Premises lease
    
    
    314,088
    
    
    
    328,825
    
    
    
    338,113Depreciation and amortization expense
    
    
    812,214
    
    
    
    824,207
    
    
    
    611,766Occupancy and equipment
    
    
    639,573
    
    
    
    613,537
    
    
    
    511,886Data and item processing
    
    
    756,863
    
    
    
    698,446
    
    
    
    511,610Advertising expense
    
    
    280,668
    
    
    
    180,194
    
    
    
    214,680Printing, stationery and supplies
    
    
    172,889
    
    
    
    191,392
    
    
    
    218,935Telephone expense
    
    
    88,539
    
    
    
    110,757
    
    
    
    110,625Postage and courier
    
    
    135,261
    
    
    
    154,911
    
    
    
    132,320Legal fees
    
    
    1,706,339
    
    
    
    301,124
    
    
    
    44,570Director fees
    
    
    219,650
    
    
    
    321,000
    
    
    
    303,334Business and occupation taxes
    
    
    181,482
    
    
    
    343,628
    
    
    
    273,522Accounting and audit fees
    
    
    612,022
    
    
    
    253,680
    
    
    
    76,987Consultant fees
    
    
    858,794
    
    
    
    216,127
    
    
    
    63,805OREO losses and expense, net
    
    
    1,986,240
    
    
    
    265,891
    
    
    
    Provision (reversal of provision) for unfunded credit losses
    
    
    (444,000
    )
    
    
    361,400
    
    
    
    Other expenses
    
    
    3,861,680
    
    
    
    1,841,652
    
    
    
    1,183,523Total noninterest expense
    
    
    18,457,824
    
    
    
    16,493,012
    
    
    
    13,853,561INCOME (LOSS) BEFORE PROVISION
(BENEFIT) FOR INCOME TAXES
    
    
    (31,197,528
    )
    
    
    (7,959,887
    )
    
    
    5,852,103PROVISION (BENEFIT) FOR INCOME TAXES
    
    
    1,454,621
    
    
    
    (2,759,728
    )
    
    
    1,967,420NET (LOSS) INCOME
    
    $
    (32,652,149
    )
    
    $
    (5,200,159
    )
    
    $
    3,884,683EARNINGS (LOSS) PER SHAREBasic
    
    $
    (5.86
    )
    
    $
    (0.93
    )
    
    $
    1.35Diluted
    
    $
    (5.86
    )
    
    $
    (0.93
    )
    
    $
    1.18Weighted-average number of common shares outstanding
    
    
    5,574,853
    
    
    
    5,565,123
    
    
    
    2,870,022Weighted-average number of dilutive shares outstanding
    
    
    5,574,853
    
    
    
    5,565,123
    
    
    
    3,285,622
 13-36

    See accompanying notes




---



##### 



WSB FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS EQUITY AND COMPREHENSIVE INCOME (LOSS)
 Retained
    
    
    AccumulatedCommon Stock
    
    
    Additional
    
    
    Earnings
    
    
    OtherNumber
    
    
    
    
    
    
    Paid-In
    
    
    (Accumulated
    
    
    Comprehensiveof Shares
    
    
    Amount
    
    
    Capital
    
    
    Deficit)
    
    
    Income (Loss)
    
    
    TotalBalance, December 31, 2005
    
    
    2,722,048
    
    
    $
    2,722,048
    
    
    $
    9,052,658
    
    
    $
    4,295,429
    
    
    $
    (64,377
    )
    
    $
    16,005,758Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,884,683
    
    
    
    
    
    
    
    3,884,683Other comprehensive income,
net of tax of ($15,710)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    32,056
    
    
    
    32,056Total comprehensive
income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,916,739Tax benefit of stock options
exercised
    
    
    
    
    
    
    
    
    
    
    375,643
    
    
    
    
    
    
    
    
    
    
    
    375,643Fractional shares repurchased
    
    
    (228
    )
    
    
    (228
    )
    
    
    (758
    )
    
    
    (2,008
    )
    
    
    
    
    
    
    (2,994
    )Stock repurchases
    
    
    (14,068
    )
    
    
    (14,068
    )
    
    
    (46,786
    )
    
    
    (124,189
    )
    
    
    
    
    
    
    (185,043
    )Stock issued for director fees
    
    
    10,473
    
    
    
    10,473
    
    
    
    113,460
    
    
    
    
    
    
    
    
    
    
    
    123,933Stock options exercised
    
    
    182,448
    
    
    
    182,448
    
    
    
    1,003,808
    
    
    
    
    
    
    
    
    
    
    
    1,186,256Net proceeds from issuance of
common stock in public
offering
    
    
    2,645,000
    
    
    
    2,645,000
    
    
    
    37,591,836
    
    
    
    
    
    
    
    
    
    
    
    40,236,836Balance, December 31, 2006
    
    
    5,545,673
    
    
    $
    5,545,673
    
    
    $
    48,089,861
    
    
    $
    8,053,915
    
    
    $
    (32,321
    )
    
    $
    61,657,128Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,200,159
    )
    
    
    
    
    
    
    (5,200,159
    )Other comprehensive income,
net of tax of ($51,545)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    100,058
    
    
    
    100,058Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,100,101
    )Stock based compensation
expense
    
    
    
    
    
    
    
    
    
    
    26,484
    
    
    
    
    
    
    
    
    
    
    
    26,484Stock options exercised
    
    
    29,180
    
    
    
    29,180
    
    
    
    107,324
    
    
    
    
    
    
    
    
    
    
    
    136,504Balance, December 31, 2007
    
    
    5,574,853
    
    
    $
    5,574,853
    
    
    $
    48,223,669
    
    
    $
    2,853,756
    
    
    $
    67,737
    
    
    $
    56,720,015Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (32,652,149
    )
    
    
    
    
    
    
    (32,652,149
    )Other comprehensive income
net of tax of ($99,420)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    192,993
    
    
    
    192,993Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (32,459,156
    )Stock based compensation expense
    
    
    
    
    
    
    
    
    
    
    55,543
    
    
    
    
    
    
    
    
    
    
    
    55,543Balance, December 31, 2008
    
    
    5,574,853
    
    
    $
    5,574,853
    
    
    $
    48,279,212
    
    
    $
    (29,798,393
    )
    
    $
    260,730
    
    
    $
    24,316,402
 13-37

    See accompanying notes.




---



##### 



WSB FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
 Year Ended December 31,2008
    
    
    2007
    
    
    2006CASH FLOWS FROM OPERATING ACTIVITIESNet (loss) income
    
    $
    (32,652,149
    )
    
    $
    (5,200,159
    )
    
    $
    3,884,683Adjustments to reconcile net (loss) income to net cash
from operating activitiesProvision for loan losses
    
    
    17,379,000
    
    
    
    15,879,000
    
    
    
    1,522,917Provision (reversal of provision) for unfunded credit losses
    
    
    (444,000
    )
    
    
    361,400
    
    
    
    OREO write-downs
    
    
    1,352,929
    
    
    
    186,312
    
    
    
    Depreciation and amortization
    
    
    812,214
    
    
    
    824,207
    
    
    
    611,766Amortization (accretion) of premiums/discounts
    
    
    68,477
    
    
    
    (2,318
    )
    
    
    6,764Director fees paid by stock in lieu of cash
    
    
    
    
    
    
    
    
    
    
    123,933Excess tax benefits from stock options exercised
    
    
    
    
    
    
    
    
    
    
    (375,643
    )Stock based compensation
    
    
    55,543
    
    
    
    26,484
    
    
    
    Net loss (gain) on sale of premises and equipment
    
    
    8,563
    
    
    
    (393,687
    )
    
    
    Net loss
(gain) on sale of other real estate owned
    
    
    119,182
    
    
    
    (16,362
    )
    
    
    Origination of loans held for sale
    
    
    
    
    
    
    (93,986,895
    )
    
    
    (122,304,063
    )Proceeds from sale of loans held for sale
    
    
    
    
    
    
    107,839,135
    
    
    
    123,512,035Net gain on sale of loans
    
    
    
    
    
    
    (2,845,046
    )
    
    
    (3,483,303
    )Deferred income tax
    
    
    (5,624,893
    )
    
    
    (5,719,741
    )
    
    
    (674,367
    )Deferred tax valuation allowance
    
    
    12,021,579
    
    
    
    
    
    
    
    Net change inAccrued interest receivable
    
    
    1,557,219
    
    
    
    (560,437
    )
    
    
    (981,095
    )Other assets
    
    
    (5,096,344
    )
    
    
    176,572
    
    
    
    (226,477
    )Accrued interest payable
    
    
    18,156
    
    
    
    846,746
    
    
    
    874,514Other liabilities
    
    
    120,036
    
    
    
    (114,865
    )
    
    
    (625,037
    )Net cash from operating activities
    
    
    (10,304,488
    )
    
    
    17,300,346
    
    
    
    1,866,627CASH FLOWS FROM INVESTING ACTIVITIESPurchase of lease receivables
    
    
    (15,023,001
    )
    
    
    
    
    
    
    Net change in loans
    
    
    102,654,668
    
    
    
    (82,247,717
    )
    
    
    (132,283,986
    )Purchases of investments available-for-sale
    
    
    (13,925,078
    )
    
    
    (5,745,804
    )
    
    
    (1,000,000
    )Proceeds from calls and maturities of investments
available-for-sale
    
    
    4,525,000
    
    
    
    5,300,000
    
    
    
    1,000,000Principal repayments of mortgage-backed securities
    
    
    13,522
    
    
    
    11,222
    
    
    
    32,490Purchase of Federal Home Loan Bank stock
    
    
    
    
    
    
    (84,700
    )
    
    
    Proceeds from sale of other real estate owned
    
    
    2,528,009
    
    
    
    980,193
    
    
    
    Purchases of premises and equipment
    
    
    (435,631
    )
    
    
    (2,713,201
    )
    
    
    (2,440,783
    )Proceeds from sale of premises and equipment
    
    
    469,555
    
    
    
    1,368,671
    
    
    
    Net cash from investing activities
    
    
    80,807,044
    
    
    
    (83,131,336
    )
    
    
    (134,692,279
    )CASH FLOW FROM FINANCING ACTIVITIESNet change in non-interest-bearing deposits
    
    
    (7,745,721
    )
    
    
    (2,152,876
    )
    
    
    5,074,312Net change in interest-bearing deposits
    
    
    (83,667,920
    )
    
    
    108,575,718
    
    
    
    85,780,918Net proceeds from sale of stock
    
    
    
    
    
    
    
    
    
    
    40,236,836Proceeds from exercise of stock options
    
    
    
    
    
    
    136,504
    
    
    
    1,186,256Excess tax benefit from stock options exercised
    
    
    
    
    
    
    
    
    
    
    375,643Fractional share payout
    
    
    
    
    
    
    
    
    
    
    (2,994
    )Stock repurchases
    
    
    
    
    
    
    
    
    
    
    (185,043
    )Net cash from financing activities
    
    
    (91,413,641
    )
    
    
    106,559,346
    
    
    
    132,465,928NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    (20,911,085
    )
    
    
    40,728,356
    
    
    
    (359,724
    )CASH AND CASH EQUIVALENTS, beginning of period
    
    
    66,926,460
    
    
    
    26,198,104
    
    
    
    26,557,828CASH AND CASH EQUIVALENTS, end of period
    
    $
    46,015,375
    
    
    $
    66,926,460
    
    
    $
    26,198,104SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATIONCash paid for interest
    
    $
    16,523,300
    
    
    $
    16,667,898
    
    
    $
    10,910,098Income taxes paid
    
    
    
    
    
    $
    2,790,000
    
    
    $
    2,550,000NON-CASH INVESTING ACTIVITIESReal estate acquired through foreclosure in settlement of loans
    
    $
    22,645,280
    
    
    $
    2,133,554
    
    
    
    
 13-38
    See accompanying notes.




---



##### 



WSB FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Note 1  Summary of Significant Accounting Policies
 Nature of operations and basis of consolidation
   Consolidation of Variable
Interest Entities
  Use of estimates
 Cash and cash equivalents
 Investment securities 
 13-39




---



##### 



WSB FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
    Federal Home Loan Bank stock
 Loans held for sale
  Accounting for derivatives
 Loans and allowances for loan losses
  13-40




---



##### 



WSB FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
      Transfers of financial assets
 Premises and equipment
 Foreclosed assets
 13-41




---



##### 



WSB FINANCIAL GROUP, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
  Income taxes
  Stock option plans Share-Based Payment Accounting for Stock-Based Compensation Accounting for Stock Issued to Employees Statement of Cash Flows
 Earnings (loss) per common share
  2008
    
    
    2007
    
    
    2006NumeratorNet (loss) income
    
    $
    (32,652,149
    )
    
    $
    (5,200,159
    )
    
    $
    3,884,683DenominatorWeighted-average number of
common shares outstanding
    
    
    5,574,853
    
    
    
    5,565,123
    
    
    
    2,870,022Incremental shares assumed
for stock options
    
    
    
    
    
    
    
    
    
    
    415,600Weighted-average number of diluted
shares outstanding
    
    
    5,574,853
    
    
    
    5,565,123
    
    
    
    3,285,622Basic earnings (loss) per common share
    
    $
    (5.86
    )
    
    $
    (0.93
    )
    
    $
    1.35Diluted earnings (loss) per common share (1)
    
    $
    (5.86
    )
    
    $
    (0.93
    )
    
    $
    1.18
  (1)
    
    Excludes all stock options as anti-dilutive in periods with net losses. Comprehensive income (loss)
 13-42




---



##### 



WSB FINANCIAL GROUP, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
  2008
    
    
    2007
    
    
    2006Unrealized holding gain (loss) on
available-for-sale securities
    
    $
    292,413
    
    
    $
    151,603
    
    
    $
    47,766Tax (provision) benefit
    
    
    (99,420
    )
    
    
    (51,545
    )
    
    
    (15,710
    )Net-of-tax-amount
    
    $
    192,993
    
    
    $
    100,058
    
    
    $
    32,056
  2008
    
    
    2007
    
    
    2006Unrealized holding gain (loss) on
available-for-sale securities
    
    $
    395,045
    
    
    $
    102,631
    
    
    $
    (48,971
    )Tax (provision) benefit
    
    
    (134,315
    )
    
    
    (34,894
    )
    
    
    16,650Net-of-tax-amount
    
    $
    260,730
    
    
    $
    67,737
    
    
    $
    (32,321
    )
 Advertising costs
 Recent accounting pronouncements Fair
Value Measurement
 The Fair Value Option for Financial Assets
and Financial Liabilities  an amendment of FASB Statement No. 115
 Noncontrolling Interests in Consolidated
Financial Statements  an amendment of ARB No. 51
 Disclosures about Derivative Instruments and
Hedging Activities  an amendment of FASB Statement No. 133
 13-43




---



##### 



WSB FINANCIAL GROUP, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
  Business Combinations
 The Hierarchy of Generally Accepted Accounting
Principles The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles
 Accounting for Financial Guarantee Insurance
Contracts  an Interpretation of FASB Statement No. 60
 Determining the Fair Value of a Financial
Asset When the Market for That Asset Is Not Active
 Amendments
to the Impairment Guidance of EITF Issue No. 99-20 Recognition of Interest Income and Impairment on Purchased Beneficial
Interests and Beneficial Interests That Continue to Be Held by a Transferor in Securitized
Financial Assets Accounting for Certain Investments in Debt and Equity Securities
 Note 2  Regulatory Actions, Business Plan and Going Concern Considerations
 FDIC Order
 13-44




---



##### 



WSB FINANCIAL GROUP, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
    FRB Notice
 Pending and Proposed Regulatory Compliance Actions:
 Capital
 13-45




---



##### 



WSB FINANCIAL GROUP, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
   Business
Plan and Going Concern Considerations.
   
 
 
 
    Compliance
Efforts:
 
    
    Retained a new president and chief executive officer, Terry A. Peterson, on April
15, 2008;
    
    Conducted a comprehensive review of the qualifications of management and the board
of directors and consideration of potential changes that may be required;
    
    Retained an independent third party consultant to review and evaluate the loan
portfolio and implemented many of his recommendations to improve the Banks loan
approval and loan servicing processes;
    
    Added $17.4 million to total provisions for loan losses in 2008:
    
    Strengthened collections and loss recovery teams to accelerate resolution of problem
loans, including retaining two experienced loan administration and workout specialists
as consultants.
    
    Began developing a capital management plan to maintain required capital ratios;
    
    Began implementing new procedures to strengthen the monitoring of lending activities
with particular emphasis on monitoring individual lender/borrower relationships;
    
    Initiated a review of loan documentation policy and is correcting documentation
deficiencies;
    
    Developed a liquidity and funds management plan to address anticipated funding
needs;
    
    Increased internal controls over loan portfolio review;
    
    Established a communications procedure for reporting progress in all areas to the
FDIC and DFI;
    
    Engaged an independent third party consultant to review management assumptions and
methodology of determining the allowance for loan and lease losses.
  Risk Management Plan
 Increased Reserves for Loan Losses.
 13-45A




---



##### 



WSB FINANCIAL GROUP, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
   Construction and Development Loans.
     Net Interest Margin Compression.
  13-47




---



##### 



WSB FINANCIAL GROUP, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
  Note 3  Investment Securities
  Gross
    
    
    Gross Unrealized LossesAmortized
    
    
    Unrealized
    
    
    Less Than 12
    
    
    12 Months orCost
    
    
    Gain
    
    
    Months
    
    
    Longer
    
    
    Fair ValueDecember 31, 2008Available for saleMunicipal securities
    
    $
    1,383,908
    
    
    $
    17,821
    
    
    $
    (225
    )
    
    $
    
    
    
    $
    1,401,504Mortgage-backed
    
    
    25,290
    
    
    
    
    
    
    
    (90
    )
    
    
    
    
    
    
    25,200Federal agencies
    
    
    16,638,395
    
    
    
    377,540
    
    
    
    
    
    
    
    
    
    
    
    17,015,935$
    18,047,593
    
    
    $
    395,361
    
    
    $
    (315
    )
    
    $
    
    
    
    $
    18,442,639December 31, 2007Available for saleMunicipal securities
    
    $
    1,810,241
    
    
    $
    17,213
    
    
    
    
    
    
    $
    (14,631
    )
    
    $
    1,812,823Mortgage-backed
    
    
    39,136
    
    
    
    
    
    
    
    
    
    
    
    (22
    )
    
    
    39,114Federal agencies
    
    
    6,880,138
    
    
    
    102,311
    
    
    
    (457
    )
    
    
    (1,783
    )
    
    
    6,980,209$
    8,729,515
    
    
    $
    119,524
    
    
    $
    (457
    )
    
    $
    (16,436
    )
    
    $
    8,832,146
  Available-for-saleAmortized Cost
    
    
    Fair ValueAccounts maturing inOne year or less
    
    $
    3,262,603
    
    
    $
    3,275,795After one year through five years
    
    
    13,891,367
    
    
    
    14,267,456After five years through ten years
    
    
    893,623
    
    
    
    899,388After ten years
    
    
    
    
    
    
    $
    18,047,593
    
    
    $
    18,442,639
     13-48




---



##### 



WSB FINANCIAL GROUP, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
    Less than 12 Months
    
    
    12 Months or More
    
    
    TotalGross
    
    
    
    
    
    
    Gross
    
    
    
    
    
    
    GrossUnrealized
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    UnrealizedLosses
    
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    Losses
    
    
    Fair ValueDecember 31, 2008Available for saleMunicipal securities
    
    $
    (225
    )
    
    $
    217,253
    
    
    $
    
    
    
    $
    
    
    
    $
    (225
    )
    
    $
    217,253Mortgage-backed
    
    
    (90
    )
    
    
    25,199
    
    
    
    
    
    
    
    
    
    
    
    (90
    )
    
    
    25,199Federal agencies
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (315
    )
    
    $
    242,452
    
    
    $
    
    
    
    $
    
    
    
    $
    (315
    )
    
    $
    242,452December 31, 2007Available for saleMunicipal securities
    
    $
    
    
    
    $
    
    
    
    $
    (14,631
    )
    
    $
    404,392
    
    
    $
    (14,631
    )
    
    $
    404,392Mortgage-backed
    
    
    
    
    
    
    
    
    
    
    (22
    )
    
    
    39,114
    
    
    
    (22
    )
    
    
    39,114Federal agencies
    
    
    (457
    )
    
    
    623,426
    
    
    
    (1,783
    )
    
    
    498,217
    
    
    
    (2,240
    )
    
    
    1,121,643$
    (457
    )
    
    $
    623,426
    
    
    $
    (16,436
    )
    
    $
    941,723
    
    
    $
    (16,893
    )
    
    $
    1,565,149
 Note 4  Loans and Allowance for Loan Losses
  2008
    
    
    2007Real estate loansConstruction & land development
    
    $
    137,434,901
    
    
    $
    253,187,532Commercial real estate
    
    
    61,057,144
    
    
    
    72,435,273Residential real estate
    
    
    46,546,720
    
    
    
    53,198,016Commercial and industrial loans
    
    
    36,774,948
    
    
    
    31,376,932Consumer loans
    
    
    2,812,180
    
    
    
    3,718,805Gross loans
    
    
    284,625,893
    
    
    
    413,916,558Allowance for loan losses
    
    
    (18,410,606
    )
    
    
    (19,513,765
    )Deferred fees
    
    
    (435,052
    )
    
    
    (966,611
    )$
    265,780,235
    
    
    $
    393,436,182
 13-49




---



##### 



WSB FINANCIAL GROUP, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 2008
    
    
    2007
    
    
    2006Allowance for loan lossesBalances, beginning of period
    
    $
    19,513,765
    
    
    $
    3,971,789
    
    
    $
    2,520,323Provision for losses
    
    
    17,379,000
    
    
    
    15,879,000
    
    
    
    1,522,917Recoveries
    
    
    39,169
    
    
    
    2,064
    
    
    
    1,851Loans charged off
    
    
    (18,521,328
    )
    
    
    (339,088
    )
    
    
    (24,702
    )Reclassification of allowance
for unfunded credit
commitments to other liabilities
    
    
    
    
    
    
    
    
    
    
    (48,600
    )Balances, end of period
    
    $
    18,410,606
    
    
    $
    19,513,765
    
    
    $
    3,971,789
  2008
    
    
    2007Total non-accrual loans
    
    $
    112,232,972
    
    
    $
    24,923,234Total loans 90 days or more
past due and still accruing
    
    $
    
    
    
    $
    399,438
  December 31,2008
    
    
    2007Impaired LoansImpaired
loans with an allowance for loan loss
    
    $
    66,912,051
    
    
    $
    25,437,668Impaired loans without an allowance for loan loss
    
    $
    46,447,130
    
    
    $
    Total impaired loans (1)
    
    $
    113,359,181
    
    
    $
    25,437,668Total related allowance for losses
    
    $
    12,947,123
    
    
    $
    5,009,141Average investment in impaired loans
    
    $
    57,357,825
    
    
    $
    7,375,426Interest income recognized on impaired loans
    
    $
    685,110
    
    
    $
    1,245,832Interest income received on impaired loans
    
    $
    632,081
    
    
    $
    1,094,351
 
 (1)
    
    Includes $111.8 million non-accrual loans at December 31, 2008 and $11.8
million at December 31, 2007.   13-50




---



##### 



WSB FINANCIAL GROUP, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
  2008
    
    
    2007Balance at beginning of year
    
    $
    6,568,883
    
    
    $
    7,561,384New loans or advances
    
    
    3,000
    
    
    
    2,056,363Payoffs/Repayments
    
    
    (3,821,477
    )
    
    
    (3,048,864
    )Balance at end of year
    
    $
    2,750,406
    
    
    $
    6,568,883
  Note 5  Premises and Equipment
  2008
    
    
    2007Leasehold improvements
    
    $
    644,727
    
    
    $
    505,474Equipment, furniture, and software
    
    
    3,070,447
    
    
    
    2,949,445Land and buildings
    
    
    7,154,303
    
    
    
    7,482,389$
    10,869,477
    
    
    $
    10,937,308Accumulated depreciation
    
    
    (2,964,428
    )
    
    
    (2,177,558
    )$
    7,905,049
    
    
    $
    8,759,750
   Note 6  Deposits
  2008
    
    
    2007Non-interest-bearing
    
    $
    16,965,525
    
    
    $
    24,711,246Interest-bearing demand
    
    
    8,707,719
    
    
    
    12,350,558Money market accounts
    
    
    46,353,936
    
    
    
    79,218,421Savings deposits
    
    
    9,259,127
    
    
    
    10,338,768Certificates of deposit exceeding $100,000
    
    
    104,120,698
    
    
    
    149,198,911Certificates of deposit less than $100,000
    
    
    144,624,199
    
    
    
    145,626,941$
    330,031,204
    
    
    $
    421,444,845
 13-51




---



##### 



WSB FINANCIAL GROUP, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
  2009
    
    $
    185,140,6112010
    
    
    42,307,2012011
    
    
    6,714,8222012
    
    
    12,437,0622013
    
    
    2,145,201$
    248,744,897
   Note 7  Advances and Junior Subordinated Debentures Payable
     Consolidation of Variable Interest
 13-52




---



##### 



WSB FINANCIAL GROUP, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 Entities
  Note 8  Income Taxes
  2008
    
    
    2007
    
    
    2006Current
    
    $
    (4,942,065
    )
    
    $
    2,960,013
    
    
    $
    2,641,787Deferred
    
    
    (5,624,893
    )
    
    
    (5,719,741
    )
    
    
    (674,367
    )Change in valuation allowance
    
    
    12,021,579
    
    
    
    
    
    
    
    Income tax expense (benefit)
    
    $
    1,454,621
    
    
    $
    (2,759,728
    )
    
    $
    1,967,420
  2008
    
    
    2007
    
    
    2006Percent of
    
    
    
    
    
    
    Percent of
    
    
    
    
    
    
    Percent ofPretax
    
    
    
    
    
    
    Pretax
    
    
    
    
    
    
    PretaxAmount
    
    
    Income
    
    
    Amount
    
    
    Income
    
    
    Amount
    
    
    IncomeIncome tax at statutory rate
    
    $
    (10,607,159
    )
    
    
    34.0
    %
    
    $
    (2,706,362
    )
    
    
    34.0
    %
    
    
    1,989,715
    
    
    
    34.0
    %Increase (decrease) resulting
fromTax-exempt income
    
    $
    (11,562
    )
    
    
    0.0
    %
    
    $
    (20,949
    )
    
    
    0.3
    %
    
    $
    (21,407
    )
    
    
    -0.4
    %Change in valuation allowance
    
    
    12,021,579
    
    
    
    -38.5
    %
    
    
    
    
    
    
    0.0
    %
    
    
    
    
    
    
    0.0
    %Other
    
    
    51,763
    
    
    
    -0.2
    %
    
    
    (32,417
    )
    
    
    0.4
    %
    
    
    (888
    )
    
    
    0.0
    %Total provision (benefit) for
income tax
    
    $
    1,454,621
    
    
    
    -4.7
    %
    
    $
    (2,759,728
    )
    
    
    34.7
    %
    
    $
    1,967,420
    
    
    
    33.6
    %
 13-53




---



##### 



WSB FINANCIAL GROUP, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
  2008
    
    
    2007
    
    
    2006Deferred tax assetsAllowance for loan losses
    
    $
    6,266,746
    
    
    $
    6,792,780
    
    
    $
    1,385,632Unrealized loss on securities
    
    
    
    
    
    
    
    
    
    
    16,650Depreciation
    
    
    60,479
    
    
    
    24,749
    
    
    
    (9,368
    )Net operating loss carry forward
    
    
    2,785,797
    
    
    
    
    
    
    
    Non-accrual interest
    
    
    2,906,961
    
    
    
    315,127
    
    
    
    Other, net
    
    
    627,748
    
    
    
    (27,965
    )
    
    
    (47,883
    )Total deferred tax assets
    
    
    12,647,731
    
    
    
    7,104,691
    
    
    
    1,345,031Deferred tax liabilitiesDeferred loan fees and costs
    
    
    491,837
    
    
    
    573,690
    
    
    
    517,121Unrealized gain on securities
    
    
    134,315
    
    
    
    34,895
    
    
    
    Total deferred tax liabilities
    
    
    626,152
    
    
    
    608,585
    
    
    
    517,121Net deferred tax asset
    
    
    12,021,579
    
    
    
    6,496,106
    
    
    
    827,910Less valuation allowance
    
    
    (12,021,579
    )
    
    
    
    
    
    
    Net deferred tax asset
    
    $
    
    
    
    $
    6,496,106
    
    
    $
    827,910
    Accounting for Uncertainty
in Income Taxes
   13-54




---



##### 



WSB FINANCIAL GROUP, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 Note 9  Loan Commitments and Contingent Liabilities
 Loan Commitments.
  December 31, 2008
 Amount of Commitment Expiration Per PeriodTotalAmounts
    
    
    Less Than 1
    
    
    
    
    
    
    
    
    After 5Committed
    
    
    Year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    Years(In thousands)Other CommitmentsCommitments to extend
credit
    
    $
    6,398
    
    
    $
    5,073
    
    
    $
    1,325
    
    
    $
    
    
    
    $
    Unused credit card lines
    
    
    2,218
    
    
    
    
    
    
    
    2,218
    
    
    
    
    
    
    
    Standby letters of credit
    
    
    250
    
    
    
    179
    
    
    
    71
    
    
    
    
    
    
    
    Total
    
    $
    8,866
    
    
    $
    5,252
    
    
    $
    3,614
    
    
    $
    
    
    
    $
    
 December 31, 2007
 Amount of Commitment Expiration Per PeriodTotalAmounts
    
    
    Less Than 1
    
    
    
    
    
    
    
    
    
    
    After 5Committed
    
    
    Year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    Years(In thousands)Other CommitmentsCommitments to extend
credit
    
    $
    78,580
    
    
    $
    72,024
    
    
    $
    6,556
    
    
    
    
    
    
    
    Unused credit card lines
    
    
    2,315
    
    
    
    
    
    
    
    2,315
    
    
    
    
    
    
    
    Standby letters of credit
    
    
    715
    
    
    
    715
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    81,610
    
    
    $
    72,739
    
    
    $
    8,871
    
    
    
    
    
    
    
    
  Contingent Liabilities for Sold Loans.
 13-55




---



##### 



WSB FINANCIAL GROUP, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 Note 10  Stockholders Equity and Regulatory Matters
    To Be Well CapitalizedUnder the PromptFor Capital Adequacy
    
    Corrective ActionActual
    
    Purposes
    
    ProvisionsAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    RatioAs of December 31, 2008Total Risk-Based Capital
(to Risk-Weighted Assets)
Consolidated
    
    $
    36,342
    
    
    
    11.8
    %
    
    $
    24,701
    
    
    
    3 8.0
    %
    
    NA
    
    NAWestsound Bank
    
    $
    36,396
    
    
    
    11.8
    %
    
    $
    24,696
    
    
    
    3 8.0
    %
    
    $
    30,870
    
    
    
    3 10.0
    %Tier 1 Capital
(to Risk-Weighted Assets)
Consolidated
    
    $
    32,303
    
    
    
    10.5
    %
    
    $
    24,706
    
    
    
    3 8.0
    %
    
    NA
    
    NAWestsound Bank
    
    $
    32,357
    
    
    
    10.5
    %
    
    $
    12,350
    
    
    
    3 4.0
    %
    
    $
    18,525
    
    
    
    3 6.0
    %Tier 1 Capital
(to Average Assets)
Consolidated
    
    $
    32,303
    
    
    
    8.1
    %
    
    $
    31,747
    
    
    
    3 8.0
    %
    
    NA
    
    NAWestsound Bank
    
    $
    32,357
    
    
    
    8.2
    %
    
    $
    15,861
    
    
    
    3 4.0
    %
    
    $
    19,827
    
    
    
    3 5.0
    %As of December 31, 2007Total Risk-Based Capital
(to Risk-Weighted Assets)
Consolidated
    
    $
    70,364
    
    
    
    16.7
    %
    
    $
    33,809
    
    
    
    3 8.0
    %
    
    NA
    
    NAWestsound Bank
    
    $
    68,761
    
    
    
    16.3
    %
    
    $
    33,810
    
    
    
    3 8.0
    %
    
    $
    42,262
    
    
    
    3 10.0
    %Tier 1 Capital
(to Risk-Weighted Assets)
Consolidated
    
    $
    64,900
    
    
    
    15.4
    %
    
    $
    33,802
    
    
    
    3 8.0
    %
    
    NA
    
    NAWestsound Bank
    
    $
    63,297
    
    
    
    15.0
    %
    
    $
    16,902
    
    
    
    3 4.0
    %
    
    $
    25,353
    
    
    
    3 6.0
    %Tier 1 Capital
(to Average Assets)
Consolidated
    
    $
    64,900
    
    
    
    13.9
    %
    
    $
    37,299
    
    
    
    3 8.0
    %
    
    NA
    
    NAWestsound Bank
    
    $
    63,297
    
    
    
    13.6
    %
    
    $
    18,589
    
    
    
    3 4.0
    %
    
    $
    23,237
    
    
    
    3 5.0
    %
  13-56




---



##### 



WSB FINANCIAL GROUP, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
   Note 11  Commitments
   2009
    
    $
    301,7112010
    
    
    174,1392011
    
    
    120,2402012
    
    
    126,3602013
    
    
    86,370
   Note 12  Employee Benefits
 Incentive stock option plan
  13-57




---



##### 



WSB FINANCIAL GROUP, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 2008
    
    2007
    
    2006Risk-free interest rate
    
    
    3.00
    %
    
    
    4.74
    %
    
    
    N/A
    *Dividend yield rate
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    N/A
    *Weighted average expected life of options
    
    6.5 years
    
    6.5 years
    
    
    N/A
    *
 
 *
    
    There were no grants in 2006.  Weighted AverageWeighted Average
    
    
    Remaining
    
    
    AggregateExercise Price
    
    
    Contractual Term
    
    
    IntrinsicOptions
    
    
    Per Share
    
    
    (in years)
    
    
    ValueOutstanding as of December 31, 2007
    
    
    887,080
    
    
    $
    7.99Authorized
    
    
    
    
    
    
    Granted
    
    
    100,000
    
    
    
    6.13Exercised
    
    
    
    
    
    
    Forfeited
    
    
    (269,982
    )
    
    
    7.92Outstanding as of December 31, 2008
    
    
    717,098
    
    
    $
    7.76
    
    
    
    6.22
    
    
    $
    0Exercisable as of December 31, 2008
    
    
    570,562
    
    
    $
    7.62
    
    
    
    5.62
    
    
    $
    0
    4 01(k) Plan
 Note 13  Fair Value of Financial Instruments
 Disclosures about Fair Value of Financial Instruments
 13-58




---



##### 



WSB FINANCIAL GROUP, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
   Carrying Amount
    
    Estimated Fair Value2008AssetsCash and cash equivalents
    
    $
    46,015,375
    
    
    $
    46,015,375Securities available for sale
    
    $
    18,442,639
    
    
    $
    18,442,639Loans receivable
    
    $
    284,190,841
    
    
    $
    276,018,000Accrued interest receivable
    
    $
    983,335
    
    
    $
    983,335FHLB Stock
    
    $
    318,900
    
    
    $
    318,900LiabilitiesChecking, savings and money market
    
    $
    81,286,307
    
    
    $
    81,286,307Certificates of deposit
    
    $
    248,744,897
    
    
    $
    254,252,000Accrued interest payable
    
    $
    1,973,590
    
    
    $
    1,973,590Junior subordinated debentures payable
    
    $
    8,248,000
    
    
    $
    8,248,0002007AssetsCash and cash equivalents
    
    $
    66,926,460
    
    
    $
    66,926,460Securities available for sale
    
    $
    8,832,146
    
    
    $
    8,832,146Loans receivable
    
    $
    412,949,947
    
    
    $
    412,545,000Accrued interest receivable
    
    $
    2,540,554
    
    
    $
    2,540,554FHLB Stock
    
    $
    318,900
    
    
    $
    318,900LiabilitiesChecking, savings and money market
    
    $
    126,618,993
    
    
    $
    126,618,993Certificates of deposit
    
    $
    294,825,852
    
    
    $
    295,593,692Accrued interest payable
    
    $
    1,955,434
    
    
    $
    1,955,434Junior subordinated debentures payable
    
    $
    8,248,000
    
    
    $
    8,248,000
  Cash and cash equivalents
 Investment securities available for sale
 Loans receivable
 13-59




---



##### 



WSB FINANCIAL GROUP, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 FHLB stock
 Client accounts
 Accrued interest receivable and payable 
 Junior subordinated debentures payable
 Note 14  Fair Value Measurements
 Fair Market Measurements
 Level 1
 Level 2
 Level 3
  Fair value measurements usingQuoted Prices in
    
    
    Significant Other
    
    
    SignificantActive Markets for
    
    
    Observable
    
    
    UnobservableFair Value at
    
    
    Identical Assets
    
    
    Inputs
    
    
    InputsDescription
    
    12/31/2008
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)(In thousands)Securities available for sale
    
    $
    18,443
    
    
    $
    0
    
    
    $
    18,443
    
    
    $
    0Total
    
    $
    18,443
    
    
    $
    0
    
    
    $
    18,443
    
    
    $
    0
 13-60




---



##### 



WSB FINANCIAL GROUP, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
  Fair value measurements usingQuoted Prices in
    
    
    Significant
    
    
    Significant
    
    
    Total LossesActive Markets for
    
    
    Other Observable
    
    
    Unobservable
    
    
    for the YearFair Value at
    
    
    Identical Assets
    
    
    Inputs
    
    
    Inputs
    
    
    EndedDescription
    
    12/31/2008
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    12/31/2008(In thousands)Impaired loans
    
    $
    56,472
    
    
    $
    0
    
    
    $
    0
    
    
    $
    56,472
    
    
    $
    18,730Other real estate owned
    
    
    17,908
    
    
    
    0
    
    
    
    0
    
    
    
    17,908
    
    
    
    11,952Total
    
    $
    74,380
    
    
    $
    0
    
    
    $
    0
    
    
    $
    74,380
    
    
    $
    30,682
     Note 15  Loan Concentrations
   13-61




---



##### 



WSB FINANCIAL GROUP, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
    Note 16  Restrictions on Dividends, Loans and Advances
     13-62




---



##### 



WSB FINANCIAL GROUP, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 Note 17  Condensed Financial Statements of Parent Company
  Statement of Financial Condition
 December 31, 2008
    
    
    December 31, 2007AssetsCash and cash equivalents
    
    $
    134,465
    
    
    $
    654,340Investments in common stock of Westsound Bank
    
    
    32,617,687
    
    
    
    63,365,254Other assets
    
    
    262,250
    
    
    
    948,421Total assets
    
    $
    33,014,402
    
    
    $
    64,968,015Liabilities and stockholders equityAccounts Payable
    
    $
    450,000
    
    
    $
    Junior subordinated debentures payable
    
    
    8,248,000
    
    
    $
    8,248,000Stockholders equity
    
    
    24,316,402
    
    
    
    56,720,015Total liabilities and stockholders equity
    
    $
    33,014,402
    
    
    $
    64,968,015
 13-63




---



##### 



WSB FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 Statement of Operations
 Year ended December 31,2008
    
    
    2007IncomeInterest income
    
    $
    14,250
    
    
    $
    18,131Dividend income from Westsound Bank
    
    
    
    
    
    
    700,000Total income
    
    
    14,250
    
    
    
    718,131Operating expensesInterest expense junior subordinated debentures
    
    
    450,000
    
    
    
    603,018Salaries and employee benefits
    
    
    123,886
    
    
    
    191,712Travel and entertainment
    
    
    
    
    
    
    9,687Legal expenses
    
    
    1,028,969
    
    
    
    118,208Accounting an audit fees
    
    
    45,187
    
    
    
    134,198Other expense
    
    
    77,797
    
    
    
    107,172Total operating expenses
    
    
    1,725,839
    
    
    
    1,163,995Net loss before income tax benefit
    
    
    (1,711,589
    )
    
    
    (445,864
    )Income tax benefit
    
    
    
    
    
    
    134,879Loss before equity in undistributed net loss of
Westsound Bank
    
    
    (1,711,589
    )
    
    
    (310,985
    )Equity in undistributed net loss of Westsound Bank
    
    
    (30,940,560
    )
    
    
    (4,889,174
    )Net loss
    
    $
    (32,652,149
    )
    
    $
    (5,200,159
    )
 Statement of Cash Flows
 Year ended December 31,2008
    
    
    2007Cash flows from operating activitiesNet loss
    
    $
    (32,652,149
    )
    
    $
    (5,200,159
    )Adjustments to reconcile net loss to net cash
from operating activitiesEquity in undistributed net loss of Westsound Bank
    
    
    30,940,560
    
    
    
    4,889,174Dividend income from Westsound Bank
    
    
    
    
    
    
    (700,000
    )Stock based compensation
    
    
    55,543
    
    
    
    26,484Net change in other assets
    
    
    686,171
    
    
    
    (134,878
    )Net change in other liabilities
    
    
    450,000
    
    
    
    (118,461
    )Net cash from operating activities
    
    
    (519,875
    )
    
    
    (1,237,840
    )
 13-64




---



##### 



WSB FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 Statement of Cash Flows
 Year ended December 31,2008
    
    
    2007Cash Flows from Investing ActivitiesInvestment in Westsound Bank
    
    
    
    
    
    
    Cash flows from financing activitiesDividends received from Westsound Bank
    
    
    
    
    
    
    700,000Proceeds from exercise of stock options and stock issued
    
    
    
    
    
    
    136,504Net cash from financing activities
    
    
    
    
    
    
    836,504Net decrease in cash and cash equivalents
    
    
    (519,875
    )
    
    
    (401,336
    )Cash and cash equivalents, beginning of year
    
    
    654,340
    
    
    
    1,055,676Cash and cash equivalents, end of year
    
    $
    134,465
    
    
    $
    654,340
 Note 18  Stock Split
  Note 19  Initial Public Offering
  Note 20  Pending Litigation
   13-65




---



##### 



WSB FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Note 21Recent Developments
 Washington State Deposits.
 FDIC Insurance Premiums and Assessments.
 Investment in FHLB Shares.
  13-66




---



##### 



WSB FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 Note 22  Selected Quarterly Financial Data (Unaudited)
 Quarter EndedMarch 31,
    
    
    June 30,
    
    
    September 30,
    
    
    December 31,(Dollars in thousands except per share data)
    
    2008
    
    
    2008
    
    
    2008
    
    
    2008
    
    
    TotalInterest income
    
    $
    7,014
    
    
    $
    5,318
    
    
    $
    4,226
    
    
    $
    3,826
    
    
    $
    20,384Interest expense
    
    
    4,979
    
    
    
    4,370
    
    
    
    3,657
    
    
    
    3,535
    
    
    
    16,541Net interest income
    
    
    2,035
    
    
    
    948
    
    
    
    569
    
    
    
    291
    
    
    
    3,843Provision for loan losses
    
    
    7,690
    
    
    
    3,545
    
    
    
    
    
    
    
    6,144
    
    
    
    17,379Net interest income (loss) after
provision for loan losses
    
    
    (5,655
    )
    
    
    (2,597
    )
    
    
    569
    
    
    
    (5,853
    )
    
    
    (13,536
    )Noninterest income
    
    
    236
    
    
    
    161
    
    
    
    194
    
    
    
    205
    
    
    
    796Noninterest expense
    
    
    3,393
    
    
    
    4,270
    
    
    
    5,061
    
    
    
    5,734
    
    
    
    18,458Income (loss) before federal income tax
(benefit) expense
    
    
    (8,812
    )
    
    
    (6,706
    )
    
    
    (4,298
    )
    
    
    (11,382
    )
    
    
    (31,198
    )Provision (benefit) for federal income tax
    
    
    (2,994
    )
    
    
    4,255
    
    
    
    
    
    
    
    193
    
    
    
    1,454Net loss
    
    $
    (5,818
    )
    
    $
    (10,961
    )
    
    $
    (4,298
    )
    
    $
    (11,575
    )
    
    $
    (32,652
    )Earnings (loss) per shareBasic
    
    $
    (1.04
    )
    
    $
    (1.97
    )
    
    $
    (0.77
    )
    
    $
    (2.08
    )
    
    $
    (5.86
    )Diluted
    
    
    ($1.04
    )
    
    $
    (1.97
    )
    
    $
    (0.77
    )
    
    $
    (2.08
    )
    
    $
    (5.86
    )Weighted-average shares outstandingBasic
    
    
    5,574,853
    
    
    
    5,574,853
    
    
    
    5,574,853
    
    
    
    5,574,853
    
    
    
    5,574,853Diluted
    
    
    5,574,853
    
    
    
    5,574,853
    
    
    
    5,574,853
    
    
    
    5,574,853
    
    
    
    5,574,853
 Quarter EndedMarch 31,
    
    
    June 30,
    
    
    September 30,
    
    
    December 31,(Dollars in thousands except per share data)
    
    2007
    
    
    2007
    
    
    2007
    
    
    2007
    
    
    TotalInterest income
    
    $
    8,641
    
    
    $
    9,715
    
    
    $
    10,142
    
    
    $
    8,898
    
    
    $
    37,396Interest expense
    
    
    3,809
    
    
    
    4,332
    
    
    
    4,666
    
    
    
    4,707
    
    
    
    17,514Net interest income
    
    
    4,832
    
    
    
    5,383
    
    
    
    5,476
    
    
    
    4,191
    
    
    
    19,882Provision for loan losses
    
    
    491
    
    
    
    326
    
    
    
    13,362
    
    
    
    1,700
    
    
    
    15,879Net interest income (loss) after
provision for loan losses
    
    
    4,341
    
    
    
    5,057
    
    
    
    (7,886
    )
    
    
    2,491
    
    
    
    4,003Noninterest income
    
    
    1,345
    
    
    
    1,231
    
    
    
    1,025
    
    
    
    930
    
    
    
    4,531Noninterest expense
    
    
    4,059
    
    
    
    4,150
    
    
    
    4,768
    
    
    
    3,517
    
    
    
    16,494Income (loss) before federal income tax
expense (benefit)
    
    
    1,627
    
    
    
    2,138
    
    
    
    (11,629
    )
    
    
    (96
    )
    
    
    (7,960
    )Provision (benefit) for federal income tax
    
    
    545
    
    
    
    708
    
    
    
    (3,877
    )
    
    
    (136
    )
    
    
    (2,760
    )Net income (loss)
    
    $
    1,082
    
    
    $
    1,430
    
    
    $
    (7,752
    )
    
    $
    40
    
    
    $
    (5,200
    )Earnings (loss) per shareBasic
    
    $
    0.20
    
    
    $
    0.26
    
    
    $
    (1.39
    )
    
    $
    0.01
    
    
    $
    (0.93
    )Diluted
    
    $
    0.18
    
    
    $
    0.24
    
    
    $
    (1.39
    )
    
    $
    0.01
    
    
    $
    (0.93
    )Weighted-average shares outstandingBasic
    
    
    5,548,283
    
    
    
    5,563,887
    
    
    
    5,573,089
    
    
    
    5,574,853
    
    
    
    5,565,123Diluted
    
    
    6,109,233
    
    
    
    5,926,369
    
    
    
    5,573,089
    
    
    
    5,650,715
    
    
    
    5,565,123
 13-67