##### 



Exhibit 13
 PORTIONS OF ANNUAL REPORT TO SHAREHOLDERS FOR THE
YEAR ENDED DECEMBER 31, 2006 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




---



##### 



Key Financial MattersYears Ended December 31,2006
    
    2005
    
    2004
    
    2003
    
    2002(Dollars in thousands, except per share data)Net income
    
    $
    3,885
    
    
    $
    2,412
    
    
    $
    1,340
    
    
    $
    631
    
    
    $
    286Basic earnings per share
    
    
    1.35
    
    
    
    0.91
    
    
    
    0.59
    
    
    
    0.36
    
    
    
    0.19Diluted earnings per share
    
    
    1.18
    
    
    
    0.82
    
    
    
    0.55
    
    
    
    0.35
    
    
    
    0.19Total assets
    
    
    386,754
    
    
    
    249,998
    
    
    
    137,416
    
    
    
    76,012
    
    
    
    52,765Net loans(1)
    
    
    340,208
    
    
    
    207,172
    
    
    
    117,623
    
    
    
    58,222
    
    
    
    39,769Total deposits
    
    
    315,022
    
    
    
    224,167
    
    
    
    123,593
    
    
    
    68,003
    
    
    
    48,017Net interest margin
    
    
    5.65
    %
    
    
    5.90
    %
    
    
    6.77
    %
    
    
    5.71
    %
    
    
    5.18
    %Efficiency ratio
    
    
    65.3
    %
    
    
    67.9
    %
    
    
    70.4
    %
    
    
    66.6
    %
    
    
    75.0
    %Return on average assets
    
    
    1.28
    %
    
    
    1.28
    %
    
    
    1.37
    %
    
    
    1.04
    %
    
    
    0.68
    %Return on average equity
    
    
    19.6
    %
    
    
    16.6
    %
    
    
    13.6
    %
    
    
    9.9
    %
    
    
    6.5
    %
 
 (1)
    
    Includes loans held for sale.




---



##### 



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.
 Operating Efficiency.
 Critical Accounting Policies
  Allowance for Loan Losses.




---



##### 



Available for Sale Securities. Accounting
for Certain Investments in Debt and Equity Securities,
 Income Taxes.
 Stock Options. Accounting for Stock Issued to Employees, Share-Based Payment




---



##### 



Recent FDIC Findings of Numerous Violations of Banking Laws and Regulations, Numerous Deficiencies
in Internal Controls Related to Regulatory Compliance and Assessment of Penalties
    
    
    correct all violations found and implement procedures to prevent their recurrence;
    
    take action to ensure that the Banks compliance officer receives adequate time
and resources to perform his duties and effect corrective action on discovering
deficiencies and provides monthly reports to the board detailing the actions taken to
comply with the memorandum;
    
    develop and implement a written compliance program and procedures identifying
all regulations and providing bank personnel with information needed to properly
complete and report transactions;
    
    implement procedures to enhance internal monitoring to ensure compliance with
all applicable lending and deposit operations, detect compliance weaknesses and ensure
exceptions are corrected;
    
    provide for an adequate training program for all Bank personnel, including the
board of directors, covering all applicable laws and regulations to be reviewed and
updated at least annually;
    
    strengthen our audit process to cover all areas of compliance risk as needed
for the operations of the Bank with audit results reported to the boards audit
committee and the board and documented in their minutes; and
    
    furnish quarterly progress reports to the Regional Director of the FDIC
detailing the actions taken to secure compliance with the memorandum until the Regional
Director has released the institution, in writing, from submitting further reports.




---



##### 




    
    appointed a chief risk officer to supervise, monitor and plan the compliance process;
    
    arranged additional HMDA training and general compliance training throughout 2006;
    
    conducted a compliance risk assessment and presented it to our boards audit committee;
    
    expanded training for our internal auditor and compliance officer; and
    
    overhauled our regulatory compliance program and procedures and developed a
matrix of potential deficiencies continually monitored by the chief risk officer.
  Results of Operations
  Financial Overview for the Years Ended December 31, 2006 and 2005
 2006
    
    
    2005
    
    
    Increase (Decrease)(Dollars in thousands, except per share data)Consolidated Statement of Earnings Data:Interest income
    
    $
    28,342
    
    
    $
    15,693
    
    
    $
    12,649Interest expense
    
    
    11,785
    
    
    
    5,182
    
    
    
    6,603Net interest income
    
    
    16,557
    
    
    
    10,511
    
    
    
    6,046Provision for loan losses
    
    
    1,523
    
    
    
    1,351
    
    
    
    172Net interest income after provision for loan losses
    
    
    15,034
    
    
    
    9,160
    
    
    
    5,874Non-interest income
    
    
    4,672
    
    
    
    5,241
    
    
    
    (569
    )Non-interest expense
    
    
    13,854
    
    
    
    10,692
    
    
    
    3,162Income before provision for income taxes
    
    
    5,852
    
    
    
    3,709
    
    
    
    2,143Provision for income taxes
    
    
    1,967
    
    
    
    1,297
    
    
    
    670Net income
    
    $
    3,885
    
    
    $
    2,412
    
    
    $
    1,473Earnings per share  basic
    
    $
    1.35
    
    
    $
    0.91
    
    
    $
    0.44Earnings per share  diluted
    
    $
    1.18
    
    
    $
    0.82
    
    
    $
    0.36




---



##### 



Net Interest Income and Net Interest Margin.
      Fiscal Year Ended December 31,2006
    
    
    2005Average
    
    
    
    
    
    
    
    
    
    
    AverageYield
    
    
    
    
    
    
    
    
    
    
    YieldAverage
    
    
    
    
    
    
    or
    
    
    Average
    
    
    
    
    
    
    orBalance
    
    
    Interest
    
    
    Cost
    
    
    Balance
    
    
    Interest
    
    
    Cost(Dollars in thousands)AssetsInterest-earning assets:Loans(1)(2)(3)
    
    $
    276,865
    
    
    $
    27,634
    
    
    
    9.98
    %
    
    $
    161,357
    
    
    $
    15,088
    
    
    
    9.35
    %Investment securities  taxable
    
    
    6,363
    
    
    
    265
    
    
    
    4.16
    %
    
    
    5,003
    
    
    
    202
    
    
    
    4.04
    %Investment securities  non-taxable(3)
    
    
    1,823
    
    
    
    76
    
    
    
    4.17
    %
    
    
    1,736
    
    
    
    62
    
    
    
    3.57
    %Federal funds sold
    
    
    5,915
    
    
    
    282
    
    
    
    4.77
    %
    
    
    8,938
    
    
    
    295
    
    
    
    3.30
    %Other investments(4)
    
    
    1,876
    
    
    
    85
    
    
    
    4.53
    %
    
    
    1,051
    
    
    
    46
    
    
    
    4.38
    %Total interest-earning assets
    
    
    292,842
    
    
    
    28,342
    
    
    
    9.68
    %
    
    
    178,085
    
    
    
    15,693
    
    
    
    8.81
    %Non-earning assets:Cash and due from banks
    
    
    6,272
    
    
    
    
    
    
    
    
    
    
    
    5,312Unearned loan fees
    
    
    (489
    )
    
    
    
    
    
    
    
    
    
    
    (191
    )Allowance for loan losses
    
    
    (3,257
    )
    
    
    
    
    
    
    
    
    
    
    (1,712
    )




---



##### 



Fiscal Year Ended December 31,2006
    
    
    2005Average
    
    
    
    
    
    
    
    
    
    
    AverageYield
    
    
    
    
    
    
    
    
    
    
    YieldAverage
    
    
    
    
    
    
    or
    
    
    Average
    
    
    
    
    
    
    orBalance
    
    
    Interest
    
    
    Cost
    
    
    Balance
    
    
    Interest
    
    
    Cost(Dollars in thousands)Other assets
    
    
    8,748
    
    
    
    
    
    
    
    
    
    
    
    6,217Total assets
    
    $
    304,116
    
    
    
    
    
    
    
    
    
    
    $
    187,711Liabilities and Stockholders EquityInterest-bearing liabilities:DepositsInterest-bearing demand
    
    $
    11,682
    
    
    $
    71
    
    
    
    0.61
    %
    
    $
    10,895
    
    
    $
    44
    
    
    
    0.40
    %Money market
    
    
    114,527
    
    
    
    5,157
    
    
    
    4.50
    %
    
    
    69,722
    
    
    
    2,765
    
    
    
    3.97
    %Savings
    
    
    3,844
    
    
    
    59
    
    
    
    1.53
    %
    
    
    4,474
    
    
    
    44
    
    
    
    0.98
    %Time certificates of deposit
    
    
    117,400
    
    
    
    5,857
    
    
    
    4.99
    %
    
    
    63,576
    
    
    
    2,145
    
    
    
    3.37
    %Total interest-bearing deposits
    
    
    247,453
    
    
    
    11,144
    
    
    
    4.50
    %
    
    
    148,667
    
    
    
    4,998
    
    
    
    3.36
    %Short-term borrowings
    
    
    1,323
    
    
    
    75
    
    
    
    5.67
    %
    
    
    142
    
    
    
    5
    
    
    
    3.52
    %Junior subordinated debt
    
    
    8,248
    
    
    
    566
    
    
    
    6.86
    %
    
    
    3,437
    
    
    
    179
    
    
    
    5.21
    %Total interest-bearing liabilities
    
    
    257,024
    
    
    
    11,785
    
    
    
    4.59
    %
    
    
    152,246
    
    
    
    5,182
    
    
    
    3.40
    %Non-interest-bearing liabilitiesDemand deposits
    
    
    25,736
    
    
    
    
    
    
    
    
    
    
    
    19,884Other liabilities
    
    
    1,526
    
    
    
    
    
    
    
    
    
    
    
    1,031Total liabilities
    
    
    284,286
    
    
    
    
    
    
    
    
    
    
    
    173,161Stockholders equity
    
    
    19,830
    
    
    
    
    
    
    
    
    
    
    
    14,550Total liabilities and stockholders equity
    
    $
    304,116
    
    
    
    
    
    
    
    
    
    
    $
    187,711Net interest income
    
    
    
    
    
    $
    16,557
    
    
    
    
    
    
    
    
    
    
    $
    10,511Net interest spread(5)
    
    
    
    
    
    
    
    
    
    
    5.09
    %
    
    
    
    
    
    
    
    
    
    
    5.41
    %Net interest margin
    
    
    
    
    
    
    
    
    
    
    5.65
    %
    
    
    
    
    
    
    
    
    
    
    5.90
    %
 
 (1)
    
    Includes average non-accrual loans of $50,000 at December 31, 2006 and $39,000 at December
31, 2005.(2)
    
    Loan fees of $5.4 million and $3.1 million are included in the yield computations for fiscal
2006 and 2005, 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.




---



##### 



Year Ended December 31, 2006Compared to YearEnded December 31, 2005Net Change
    
    
    Rate
    
    
    Volume
    
    
    Mix(In thousands)Loans
    
    $
    12,546
    
    
    $
    1,017
    
    
    $
    10,801
    
    
    $
    728Investment securities  taxable
    
    
    63
    
    
    
    6
    
    
    
    55
    
    
    
    2Investment securities  non-taxable
    
    
    14
    
    
    
    10
    
    
    
    3
    
    
    
    1Federal funds sold
    
    
    (13
    )
    
    
    131
    
    
    
    (100
    )
    
    
    (44
    )Other investments
    
    
    39
    
    
    
    2
    
    
    
    36
    
    
    
    1Total interest income
    
    
    12,649
    
    
    
    1,166
    
    
    
    10,795
    
    
    
    688Interest expense:Interest-bearing demand
    
    
    27
    
    
    
    22
    
    
    
    3
    
    
    
    2Money market
    
    
    2,392
    
    
    
    374
    
    
    
    1,777
    
    
    
    241Savings
    
    
    15
    
    
    
    25
    
    
    
    (6
    )
    
    
    (4
    )Time certificates of deposit
    
    
    3,712
    
    
    
    1,027
    
    
    
    1,816
    
    
    
    869Short-term borrowings
    
    
    70
    
    
    
    3
    
    
    
    42
    
    
    
    25Junior subordinated debt
    
    
    387
    
    
    
    57
    
    
    
    251
    
    
    
    79Total interest expense
    
    
    6,603
    
    
    
    1,508
    
    
    
    3,883
    
    
    
    1,212Net interest income
    
    $
    6,046
    
    
    $
    (342
    )
    
    $
    6,912
    
    
    $
    (524
    )
 Provision for Loan Losses.
  Non-Interest Income.
 Year Ended December 31,2006
    
    
    2005
    
    
    Increase (Decrease)(In thousands)Service charges and other income
    
    $
    1,189
    
    
    $
    840
    
    
    $
    349Loan brokerage and referral fees
    
    
    1,574
    
    
    
    1,799
    
    
    
    (225
    )Net gain/(loss) on sale of loans
    
    
    1,909
    
    
    
    2,584
    
    
    
    (675
    )Net gain/(loss) on sale of securities
    
    
    0
    
    
    
    18
    
    
    
    (18
    )Total non-interest income
    
    $
    4,672
    
    
    $
    5,241
    
    
    $
    (569
    )
  Non-Interest Expense.




---



##### 



Year Ended December 31,2006
    
    
    2005
    
    
    Increase (Decrease)(In thousands)Salaries, wages and employee benefits
    
    $
    9,258
    
    
    $
    7,265
    
    
    $
    1,993Occupancy, equipment and depreciation
    
    
    1,462
    
    
    
    1,115
    
    
    
    347Data and item processing
    
    
    512
    
    
    
    363
    
    
    
    149Advertising expense
    
    
    215
    
    
    
    183
    
    
    
    32Printing, stationery and supplies
    
    
    219
    
    
    
    213
    
    
    
    6Telephone expense
    
    
    111
    
    
    
    78
    
    
    
    33Postage and courier
    
    
    132
    
    
    
    109
    
    
    
    23Legal fees
    
    
    45
    
    
    
    28
    
    
    
    17Director fees
    
    
    303
    
    
    
    233
    
    
    
    70Foreclosed assets, net
    
    
    0
    
    
    
    2
    
    
    
    (2
    )Business & occupation taxes
    
    
    274
    
    
    
    188
    
    
    
    86Other
    
    
    1,323
    
    
    
    915
    
    
    
    408Total non-interest expense
    
    $
    13,854
    
    
    $
    10,692
    
    
    $
    3,162
  Provision for Income Taxes.
 Financial Overview for the Years Ended December 31, 2005 and 2004
 Year Ended December 31, 2005 Compared to Year Ended December 31, 2004
 Years Ended December 31,2005
    
    
    2004
    
    
    Increase (Decrease)(Dollars in thousands,except per share data)Consolidated Statement of Earnings Data:Interest income
    
    $
    15,693
    
    
    $
    7,943
    
    
    $
    7,750Interest expense
    
    
    5,182
    
    
    
    1,705
    
    
    
    3,477Net interest income
    
    
    10,511
    
    
    
    6,238
    
    
    
    4,273Provision for loan losses
    
    
    1,351
    
    
    
    654
    
    
    
    697Net interest income after provision for loan losses
    
    
    9,160
    
    
    
    5,584
    
    
    
    3,576Non-interest income
    
    
    5,241
    
    
    
    2,806
    
    
    
    2,435Non-interest expense
    
    
    10,692
    
    
    
    6,370
    
    
    
    4,322Income before provision for income taxes
    
    
    3,709
    
    
    
    2,020
    
    
    
    1,689Provision for income taxes
    
    
    1,297
    
    
    
    680
    
    
    
    617Net income
    
    $
    2,412
    
    
    $
    1,340
    
    
    $
    1,072Earnings per share  basic
    
    $
    0.91
    
    
    $
    0.59
    
    
    $
    0.32Earnings per share  diluted
    
    $
    0.82
    
    
    $
    0.55
    
    
    $
    0.27
  Net Interest Income and Net Interest Margin.




---



##### 



Year Ended December 31, 2005
    
    
    Year Ended December 31, 2004Average
    
    
    
    
    
    
    
    
    
    
    AverageYield
    
    
    
    
    
    
    
    
    
    
    YieldAverage
    
    
    
    
    
    
    or
    
    
    Average
    
    
    
    
    
    
    orBalance
    
    
    Interest
    
    
    Cost
    
    
    Balance
    
    
    Interest
    
    
    Cost(Dollars in thousands)AssetsInterest-earning assets:Loans(1)(2)(3)
    
    $
    161,357
    
    
    $
    15,088
    
    
    
    9.35
    %
    
    $
    82,118
    
    
    $
    7,725
    
    
    
    9.41
    %Investment securities  taxable
    
    
    5,003
    
    
    
    202
    
    
    
    4.04
    %
    
    
    3,928
    
    
    
    114
    
    
    
    2.90
    %Investment securities 
non-taxable(3)
    
    
    1,736
    
    
    
    62
    
    
    
    3.57
    %
    
    
    1,297
    
    
    
    45
    
    
    
    3.47
    %Federal funds sold
    
    
    8,938
    
    
    
    295
    
    
    
    3.30
    %
    
    
    4,664
    
    
    
    56
    
    
    
    1.20
    %Other investments(4)
    
    
    1,051
    
    
    
    46
    
    
    
    4.37
    %
    
    
    203
    
    
    
    3
    
    
    
    1.48
    %Total interest-earning assets
    
    
    178,085
    
    
    
    15,693
    
    
    
    8.81
    %
    
    
    92,210
    
    
    
    7,943
    
    
    
    8.61
    %Non-earning assets:Cash and due from banks
    
    
    5,312
    
    
    
    
    
    
    
    
    
    
    
    3,190Unearned loan fees
    
    
    (191
    )
    
    
    
    
    
    
    
    
    
    
    (109
    )Allowance for loan losses
    
    
    (1,712
    )
    
    
    
    
    
    
    
    
    
    
    (778
    )Other assets
    
    
    6,217
    
    
    
    
    
    
    
    
    
    
    
    3,062Total assets
    
    $
    187,111
    
    
    
    
    
    
    
    
    
    
    $
    97,572Liabilities and Stockholders
EquityInterest-bearing liabilities:DepositsInterest-bearing demand
    
    $
    10,895
    
    
    $
    44
    
    
    
    0.40
    %
    
    $
    6,196
    
    
    $
    23
    
    
    
    0.37
    %Money market
    
    
    69,722
    
    
    
    2,765
    
    
    
    3.97
    %
    
    
    23,469
    
    
    
    485
    
    
    
    2.07
    %Savings
    
    
    4,474
    
    
    
    44
    
    
    
    0.98
    %
    
    
    3,841
    
    
    
    30
    
    
    
    0.78
    %Time certificates of deposit
    
    
    63,576
    
    
    
    2,145
    
    
    
    3.37
    %
    
    
    41,748
    
    
    
    1,167
    
    
    
    2.80
    %Total interest-bearing deposits
    
    
    148,667
    
    
    
    4,998
    
    
    
    3.36
    %
    
    
    75,254
    
    
    
    1,705
    
    
    
    2.27
    %Short-term borrowings
    
    
    142
    
    
    
    5
    
    
    
    3.52
    %
    
    
    9
    
    
    
    0
    
    
    
    0.00
    %Junior subordinated debt
    
    
    3,437
    
    
    
    179
    
    
    
    5.21
    %
    
    
    0
    
    
    
    0
    
    
    
    0.00
    %Total interest-bearing liabilities
    
    
    152,246
    
    
    
    5,182
    
    
    
    3.40
    %
    
    
    75,263
    
    
    
    1,705
    
    
    
    2.27
    %Non-interest-bearing liabilities




---



##### 



Year Ended December 31, 2005
    
    
    Year Ended December 31, 2004Average
    
    
    
    
    
    
    
    
    
    
    AverageYield
    
    
    
    
    
    
    
    
    
    
    YieldAverage
    
    
    
    
    
    
    or
    
    
    Average
    
    
    
    
    
    
    orBalance
    
    
    Interest
    
    
    Cost
    
    
    Balance
    
    
    Interest
    
    
    Cost(Dollars in thousands)Demand deposits
    
    
    19,884
    
    
    
    
    
    
    
    
    
    
    
    12,088Other liabilities
    
    
    1,031
    
    
    
    
    
    
    
    
    
    
    
    369Total liabilities
    
    
    173,161
    
    
    
    
    
    
    
    
    
    
    
    87,720Stockholders equity
    
    
    14,550
    
    
    
    
    
    
    
    
    
    
    
    9,852Total liabilities and
stockholders equity
    
    $
    187,711
    
    
    
    
    
    
    
    
    
    
    $
    97,572Net interest income
    
    
    
    
    
    $
    10,511
    
    
    
    
    
    
    
    
    
    
    $
    6,238Net interest spread(5)
    
    
    
    
    
    
    
    
    
    
    5.41
    %
    
    
    
    
    
    
    
    
    
    
    6.34
    %Net interest margin
    
    
    
    
    
    
    
    
    
    
    5.90
    %
    
    
    
    
    
    
    
    
    
    
    6.77
    %
 
 (1)
    
    Includes average non-accrual loans of $39,000 in 2005 and $1,000 in 2004.(2)
    
    Loan fees of $3.1 million and $2.0 million are included in the yield computations for 2005
and 2004, 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.  Year Ended December 31, 2005Compared to Year Ended December 31, 2004Net Change
    
    
    Rate
    
    
    Volume
    
    
    Mix(In thousands)Loans
    
    $
    7,363
    
    
    $
    (46
    )
    
    $
    7,454
    
    
    $
    (45
    )Investment securities  taxable
    
    
    88
    
    
    
    45
    
    
    
    31
    
    
    
    12Investment securities  non-taxable
    
    
    17
    
    
    
    1
    
    
    
    15
    
    
    
    1Federal funds sold
    
    
    239
    
    
    
    98
    
    
    
    51
    
    
    
    90Other investments
    
    
    43
    
    
    
    6
    
    
    
    13
    
    
    
    24Total interest income
    
    
    7,750
    
    
    
    105
    
    
    
    7,564
    
    
    
    81Interest expense:Interest-bearing demand
    
    
    21
    
    
    
    2
    
    
    
    17
    
    
    
    2Money market
    
    
    2,280
    
    
    
    446
    
    
    
    956
    
    
    
    878Savings
    
    
    14
    
    
    
    8
    
    
    
    5
    
    
    
    1Time certificates of deposit
    
    
    978
    
    
    
    242
    
    
    
    610
    
    
    
    126Short-term borrowings
    
    
    5
    
    
    
    0
    
    
    
    0
    
    
    
    5Junior subordinated debt
    
    
    179
    
    
    
    0
    
    
    
    0
    
    
    
    179Total interest expense
    
    
    3,477
    
    
    
    698
    
    
    
    1,588
    
    
    
    1,191Net interest income
    
    $
    4,273
    
    
    $
    (593
    )
    
    $
    5,976
    
    
    $
    (1,110
    )
 Provision for Loan Losses.




---



##### 



Non-Interest Income.
 Years EndedDecember 31,2005
    
    
    2004
    
    
    Increase (Decrease)(In thousands)Service charges and other income
    
    $
    858
    
    
    $
    444
    
    
    $
    414Loan brokerage and referral fees
    
    
    1,799
    
    
    
    1,505
    
    
    
    294Net gain/(loss) on sale of loans
    
    
    2,584
    
    
    
    857
    
    
    
    1,727Total non-interest income
    
    $
    5,241
    
    
    $
    2,806
    
    
    $
    2,435
  Non-Interest Expense.
 Years Ended December 31,2005
    
    
    2004
    
    
    Increase (Decrease)(In thousands)Salaries, wages and employee benefits
    
    $
    7,265
    
    
    $
    4,097
    
    
    $
    3,168Occupancy, equipment and depreciation
    
    
    1,115
    
    
    
    783
    
    
    
    332Data and item processing
    
    
    363
    
    
    
    256
    
    
    
    107Advertising expense
    
    
    183
    
    
    
    136
    
    
    
    47Printing, stationary and supplies
    
    
    213
    
    
    
    132
    
    
    
    81Telephone expense
    
    
    78
    
    
    
    54
    
    
    
    24Postage and courier
    
    
    109
    
    
    
    80
    
    
    
    29Legal fees
    
    
    28
    
    
    
    34
    
    
    
    (6
    )Director fees
    
    
    233
    
    
    
    122
    
    
    
    111Foreclosed assets, net
    
    
    2
    
    
    
    4
    
    
    
    (2
    )Business & occupation taxes
    
    
    188
    
    
    
    130
    
    
    
    58Other
    
    
    915
    
    
    
    542
    
    
    
    373Total non-interest expense
    
    $
    10,692
    
    
    $
    6,370
    
    
    $
    4,322
  Provision for Income Taxes.
 Financial Condition




---



##### 



Loans
   December 31,2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002(In thousands)Real estate loans:Construction
    
    $
    194,709
    
    
    $
    103,772
    
    
    $
    41,211
    
    
    $
    15,592
    
    
    $
    11,408Commercial real estate
    
    
    67,224
    
    
    
    46,947
    
    
    
    36,191
    
    
    
    13,987
    
    
    
    11,986Residential real estate
    
    
    63,942
    
    
    
    43,689
    
    
    
    24,659
    
    
    
    13,162
    
    
    
    11,082Commercial & industrial loans
    
    
    15,629
    
    
    
    13,123
    
    
    
    14,549
    
    
    
    14,117
    
    
    
    4,568Consumer loans
    
    
    3,235
    
    
    
    2,484
    
    
    
    2,202
    
    
    
    1,942
    
    
    
    1,076Gross loans
    
    
    344,739
    
    
    
    210,015
    
    
    
    118,812
    
    
    
    58,800
    
    
    
    40,120Allowance for loan losses
    
    
    3,972
    
    
    
    2,520
    
    
    
    1,189
    
    
    
    578
    
    
    
    351Deferred loan fees, net
    
    
    559
    
    
    
    323
    
    
    
    0
    
    
    
    0
    
    
    
    0Net loans
    
    $
    340,208
    
    
    $
    207,172
    
    
    $
    117,623
    
    
    $
    58,222
    
    
    $
    39,769
   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
    
    $
    167,072
    
    
    $
    19,077
    
    
    $
    8,560
    
    
    $
    194,709
    
    
    $
    14,797
    
    
    $
    12,840Commercial real estate
    
    
    2,473
    
    
    
    9,469
    
    
    
    55,282
    
    
    
    67,224
    
    
    
    11,658
    
    
    
    53,093Residential real estate
    
    
    26,771
    
    
    
    10,834
    
    
    
    26,337
    
    
    
    63,942
    
    
    
    20,215
    
    
    
    16,956Commercial & industrial loans
    
    
    7,431
    
    
    
    4,095
    
    
    
    4,103
    
    
    
    15,629
    
    
    
    4,486
    
    
    
    3,712Consumer & other loans
    
    
    415
    
    
    
    2,602
    
    
    
    218
    
    
    
    3,235
    
    
    
    1,767
    
    
    
    1,053Total
    
    $
    204,162
    
    
    $
    46,077
    
    
    $
    94,500
    
    
    $
    344,739
    
    
    $
    52,923
    
    
    $
    87,654




---



##### 



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
    
    $
    87,969
    
    
    $
    11,972
    
    
    $
    3,831
    
    
    $
    103,772
    
    
    $
    6,811
    
    
    $
    8,992Commercial real estate
    
    
    1,652
    
    
    
    5,570
    
    
    
    39,725
    
    
    
    46,947
    
    
    
    5,465
    
    
    
    39,830Residential real estate
    
    
    14,586
    
    
    
    11,090
    
    
    
    18,013
    
    
    
    43,689
    
    
    
    16,668
    
    
    
    12,435Commercial & industrial loans
    
    
    4,258
    
    
    
    5,201
    
    
    
    3,664
    
    
    
    13,123
    
    
    
    4,036
    
    
    
    4,829Consumer & other loans
    
    
    447
    
    
    
    1,984
    
    
    
    53
    
    
    
    2,484
    
    
    
    2,036
    
    
    
    1Total
    
    $
    108,912
    
    
    $
    35,817
    
    
    $
    65,286
    
    
    $
    210,015
    
    
    $
    35,016
    
    
    $
    66,087
 Concentrations.
    December 31,
    
    
    December 31,2006
    
    
    2005(In thousands)Real estate loans:Construction & land development loansInterest only
    
    $
    168,804
    
    
    $
    84,679Principal and interest
    
    
    27,582
    
    
    
    19,093Commercial real estate loansInterest only
    
    
    13,669
    
    
    
    17,329Principal and interest
    
    
    67,081
    
    
    
    29,618




---



##### 



December 31,
    
    
    December 31,2006
    
    
    2005(In thousands)Residential real estate loansInterest only
    
    
    24,762
    
    
    
    15,034Principal and interest
    
    
    23,918
    
    
    
    28,655Commercial & industrial loansInterest only
    
    
    4,623
    
    
    
    2,592Principal and interest
    
    
    12,114
    
    
    
    10,531Consumer and other loansInterest only
    
    
    258
    
    
    
    312Principal and interest
    
    
    1,928
    
    
    
    2,172Total
    
    $
    344,739
    
    
    $
    210,015
  Non-Performing Assets.
 December 31,2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002(Dollars in thousands)Non-accrual loans, not restructured
    
    $
    219
    
    
    $
    128
    
    
    $
    100
    
    
    $
    
    
    
    $
    110Accruing loans past due 90 days or more
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Restructured loans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total non-performing loans (NPLs)
    
    
    219
    
    
    
    128
    
    
    $
    100
    
    
    
    
    
    
    
    110OREO
    
    
    
    
    
    
    
    
    
    
    30
    
    
    
    30
    
    
    
    30Total non-performing assets (NPAs)
    
    $
    219
    
    
    $
    128
    
    
    $
    130
    
    
    $
    30
    
    
    $
    140Selected ratiosNPLs to total loans
    
    
    0.06
    %
    
    
    0.06
    %
    
    
    0.09
    %
    
    
    0.00
    %
    
    
    0.27
    %NPAs to total assets
    
    
    0.06
    %
    
    
    0.05
    %
    
    
    0.09
    %
    
    
    0.04
    %
    
    
    0.27
    %
 OREO Properties.
  Impaired Loans.




---



##### 



Allowance for Loan Losses
   Specific Allocations.
 General Allowances.




---



##### 



Years Ended December 31,2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002(Dollars in thousands)Allowance for loan losses:Beginning balance
    
    $
    2,520
    
    
    $
    1,189
    
    
    $
    578
    
    
    $
    351
    
    
    $
    290Loans charged off
Real estate loans:Construction
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22Commercial real estate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Residential real estate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20
    
    
    
    Commercial & industrial loans
    
    
    21
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    87Consumer loans
    
    
    4
    
    
    
    1
    
    
    
    22
    
    
    
    
    
    
    
    5Total
    
    
    25
    
    
    
    1
    
    
    
    22
    
    
    
    20
    
    
    
    114Recoveries:Real estate loans:Construction
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Commercial real estate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Residential real estate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13
    
    
    
    Commercial & industrial loans
    
    
    2
    
    
    
    1
    
    
    
    
    
    
    
    12
    
    
    
    30Consumer loans
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    7Total
    
    
    2
    
    
    
    1
    
    
    
    1
    
    
    
    25
    
    
    
    37Net loan charge-off (recovery)
    
    
    23
    
    
    
    
    
    
    
    21
    
    
    
    (5
    )
    
    
    77Reclassification of unfunded credit
commitments to other liabilities
    
    
    (48
    )
    
    
    (20
    )
    
    
    (22
    )
    
    
    (8
    )
    
    
    Provision for loan losses
    
    
    1,523
    
    
    
    1,351
    
    
    
    654
    
    
    
    230
    
    
    
    138Ending balance
    
    $
    3,972
    
    
    $
    2,520
    
    
    $
    1,189
    
    
    $
    578
    
    
    $
    351Loans
    
    $
    344,739
    
    
    $
    210,015
    
    
    $
    118,812
    
    
    $
    58,800
    
    
    $
    40,120Average loans
    
    
    276,378
    
    
    
    161,357
    
    
    
    82,118
    
    
    
    47,535
    
    
    
    38,953Non-performing loans
    
    
    219
    
    
    
    128
    
    
    
    100
    
    
    
    
    
    
    
    110Selected ratios:Net charge-offs to average loans
    
    
    0.01
    %
    
    
    0.00
    %
    
    
    0.03
    %
    
    
    (0.01
    )%
    
    
    0.20
    %Provision for loan losses to average loans
    
    
    0.55
    %
    
    
    0.84
    %
    
    
    0.80
    %
    
    
    0.48
    %
    
    
    0.35
    %Allowance for loan losses to loans
outstanding at end of period
    
    
    1.15
    %
    
    
    1.20
    %
    
    
    1.00
    %
    
    
    0.98
    %
    
    
    0.87
    %Allowance for loan losses to
non-performing loans
    
    
    1813.7
    %
    
    
    1968.8
    %
    
    
    1189.0
    %
    
    
    N/A
    
    
    
    319.1
    %




---



##### 



December 31,2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002Percent
    
    
    
    
    
    
    Percent
    
    
    
    
    
    
    Percent
    
    
    
    
    
    
    Percent
    
    
    
    
    
    
    Percentof
    
    
    
    
    
    
    of
    
    
    
    
    
    
    of
    
    
    
    
    
    
    of
    
    
    
    
    
    
    ofLoans
    
    
    
    
    
    
    Loans
    
    
    
    
    
    
    Loans
    
    
    
    
    
    
    Loans
    
    
    
    
    
    
    Loansin
    
    
    
    
    
    
    in
    
    
    
    
    
    
    in
    
    
    
    
    
    
    in
    
    
    
    
    
    
    inEach
    
    
    
    
    
    
    Each
    
    
    
    
    
    
    Each
    
    
    
    
    
    
    Each
    
    
    
    
    
    
    EachAllocation
    
    
    Category
    
    
    Allocation
    
    
    Category
    
    
    Allocation
    
    
    Category
    
    
    Allocation
    
    
    Category
    
    
    Allocation
    
    
    Categoryof
    
    
    to
    
    
    of
    
    
    to
    
    
    of
    
    
    to
    
    
    of
    
    
    to
    
    
    of
    
    
    tothe
    
    
    Total
    
    
    the
    
    
    Total
    
    
    the
    
    
    Total
    
    
    the
    
    
    Total
    
    
    the
    
    
    TotalAllowance
    
    
    Loans
    
    
    Allowance
    
    
    Loans
    
    
    Allowance
    
    
    Loans
    
    
    Allowance
    
    
    Loans
    
    
    Allowance
    
    
    Loans(Dollars in thousands)Real estate loans:Construction
    
    $
    1,460
    
    
    
    56.5
    %
    
    $
    778
    
    
    
    49.3
    %
    
    $
    310
    
    
    
    34.7
    %
    
    $
    117
    
    
    
    26.5
    %
    
    $
    86
    
    
    
    28.4
    %Commercial real estate
    
    
    504
    
    
    
    19.5
    %
    
    
    351
    
    
    
    22.4
    %
    
    
    271
    
    
    
    30.5
    %
    
    
    105
    
    
    
    23.8
    %
    
    
    90
    
    
    
    29.9
    %Residential real estate
    
    
    160
    
    
    
    18.5
    %
    
    
    109
    
    
    
    20.8
    %
    
    
    62
    
    
    
    20.8
    %
    
    
    33
    
    
    
    22.4
    %
    
    
    28
    
    
    
    27.6
    %Commercial & industrial loans
    
    
    117
    
    
    
    4.5
    %
    
    
    99
    
    
    
    6.3
    %
    
    
    109
    
    
    
    12.2
    %
    
    
    106
    
    
    
    24.0
    %
    
    
    34
    
    
    
    11.4
    %Consumer loans
    
    
    32
    
    
    
    0.9
    %
    
    
    26
    
    
    
    1.2
    %
    
    
    23
    
    
    
    1.8
    %
    
    
    19
    
    
    
    3.3
    %
    
    
    11
    
    
    
    2.7
    %Direct and Unallocated
    
    
    1,698
    
    
    
    
    
    
    
    1,158
    
    
    
    
    
    
    
    414
    
    
    
    
    
    
    
    198
    
    
    
    
    
    
    
    102Total
    
    $
    3,972
    
    
    
    100.0
    %
    
    $
    2,520
    
    
    
    100.0
    %
    
    $
    1,189
    
    
    
    100.0
    %
    
    $
    578
    
    
    
    100.0
    %
    
    $
    351
    
    
    
    100.0
    %




---



##### 



Investments
   Carrying Value at December 31,2006
    
    
    2005
    
    
    2004(In thousands)U.S. government agencies
    
    $
    6,382
    
    
    $
    6,327
    
    
    $
    3,091Obligations of states and political subdivisions
    
    
    1,812
    
    
    
    1,825
    
    
    
    1,310Mortgage-backed securities
    
    
    50
    
    
    
    83
    
    
    
    157Other securities
    
    
    
    
    
    
    
    
    
    
    Total investment securities
    
    $
    8,244
    
    
    $
    8,235
    
    
    $
    4,558
  December 31, 2006After 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
    
    $
    2,298
    
    
    
    4.59
    %
    
    $
    3,093
    
    
    
    4.55
    %
    
    $
    991
    
    
    
    6.66
    %
    
    $
    
    
    
    
    Obligations of states and political subdivisions
    
    
    
    
    
    
    
    
    
    
    246
    
    
    
    3.80
    %
    
    
    809
    
    
    
    4.09
    %
    
    
    757
    
    
    
    4.35
    %Mortgage-backed securities
    
    
    6
    
    
    
    4.64
    %
    
    
    44
    
    
    
    4.64
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total available-for-sale
    
    $
    2,304
    
    
    
    4.59
    %
    
    $
    3,383
    
    
    
    4.50
    %
    
    $
    1,800
    
    
    
    5.56
    %
    
    $
    757
    
    
    
    4.35
    %
 December 31, 2005After 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
    
    $
    
    
    
    
    
    
    
    $
    5,344
    
    
    
    4.27
    %
    
    $
    983
    
    
    
    6.26
    %
    
    $
    
    
    
    
    Obligations of states and political subdivisions
    
    
    
    
    
    
    
    
    
    
    248
    
    
    
    3.80
    %
    
    
    399
    
    
    
    4.25
    %
    
    
    1,178
    
    
    
    4.21Mortgage-backed securities
    
    
    40
    
    
    
    4.59
    %
    
    
    43
    
    
    
    4.31
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total available for sale
    
    $
    40
    
    
    
    4.59
    %
    
    $
    5,635
    
    
    
    4.25
    %
    
    $
    1,382
    
    
    
    5.70
    %
    
    $
    1,178
    
    
    
    4.21
    %




---



##### 



Deposits
   Years Ended December 31,2006
    
    
    2005
    
    
    2004Average
    
    
    Average
    
    
    Average
    
    
    Average
    
    
    Average
    
    
    AverageBalance
    
    
    Rate
    
    
    Balance
    
    
    Rate
    
    
    Balance
    
    
    Rate(Dollars in Thousands)Interest-bearing demand
    
    $
    11,682
    
    
    
    0.61
    %
    
    $
    10,895
    
    
    
    0.40
    %
    
    $
    6,196
    
    
    
    0.37
    %Money market
    
    
    114,527
    
    
    
    4.50
    %
    
    
    69,722
    
    
    
    3.97
    %
    
    
    23,469
    
    
    
    2.07
    %Savings
    
    
    3,844
    
    
    
    1.53
    %
    
    
    4,474
    
    
    
    0.98
    %
    
    
    3,841
    
    
    
    0.78
    %Time certificates of deposit
    
    
    117,400
    
    
    
    4.99
    %
    
    
    63,576
    
    
    
    3.37
    %
    
    
    41,748
    
    
    
    2.80
    %Non-interest bearing deposits
    
    
    25,736
    
    
    
    0.00
    %
    
    
    19,884
    
    
    
    0.00
    %
    
    
    12,088
    
    
    
    0.00
    %Total
    
    $
    273,189
    
    
    
    4.08
    %
    
    $
    168,551
    
    
    
    2.97
    %
    
    $
    87,342
    
    
    
    1.95
    %
  December 31,2006(In thousands)Due in three months or less
    
    $
    10,993Due in over three months through six months
    
    
    1,739Due in over six months through twelve months
    
    
    16,583Due in over twelve months
    
    
    50,002Total
    
    $
    79,317
  Shareholders Equity
 Initial Public Offering.
 December 31, 2006 Overview.
 2005 Overview.




---



##### 



Stock Split.
 Capital Resources
  Regulatory Requirements(Greater than or equal to stated percentage)
    
    Actual at December 31, 2006WSB FinancialAdequately Capitalized
    
    Well Capitalized
    
    Westsound Bank
    
    Group, Inc.Tier 1 leverage capital ratio
    
    
    4.0
    %
    
    
    5.0
    %
    
    
    19.4
    %
    
    
    19.8
    %Tier 1 risk-based capital
    
    
    4.0
    %
    
    
    6.0
    %
    
    
    19.7
    %
    
    
    20.2
    %Total risk-based capital
    
    
    8.0
    %
    
    
    10.0
    %
    
    
    20.9
    %
    
    
    21.4
    %
 Regulatory Requirements(Greater than or equal to stated percentage)
    
    Actual at December 31, 2005WSB FinancialAdequately Capitalized
    
    Well Capitalized
    
    Westsound Bank
    
    Group, Inc.Tier 1 leverage capital ratio
    
    
    4.0
    %
    
    
    5.0
    %
    
    
    10.4
    %
    
    
    9.3
    %Tier 1 risk-based capital
    
    
    4.0
    %
    
    
    6.0
    %
    
    
    11.3
    %
    
    
    10.2
    %Total risk-based capital
    
    
    8.0
    %
    
    
    10.0
    %
    
    
    12.5
    %
    
    
    12.8
    %




---



##### 



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
    
    
    171,672
    
    
    
    76,613
    
    
    
    84,099
    
    
    
    10,960
    
    
    
    Operating lease obligations
    
    
    1,475
    
    
    
    369
    
    
    
    963
    
    
    
    143
    
    
    
    Total
    
    $
    181,395
    
    
    $
    76,982
    
    
    $
    85,062
    
    
    $
    11,103
    
    
    $
    8,248
  Amount of Commitment Expiration PerPeriodLessTotal
    
    
    Than
    
    
    
    
    
    
    
    
    
    
    AfterAmounts
    
    
    1
    
    
    1-3
    
    
    3-5
    
    
    5Other Commitments
    
    Committed
    
    
    Year
    
    
    Years
    
    
    Years
    
    
    Years(In Thousands)Commitments to extend credit
    
    $
    108,309
    
    
    $
    89,543
    
    
    $
    18,766
    
    
    $
    
    
    
    $
    Credit cards
    
    
    2,212
    
    
    
    
    
    
    
    2,212
    
    
    
    
    
    
    
    Standby letters of credit
    
    
    386
    
    
    
    386
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    110,907
    
    
    $
    89,929
    
    
    $
    20,978
    
    
    $
    
    
    
    $
    
 Liquidity




---



##### 



Quantitative and Qualitative Disclosures about Market Risk




---



##### 



Market Value of Portfolio Equity.
  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
    
    $
    54,757
    
    
    
    (8.5
    )%
    
    
    14.2
    %
    
    
    89.18
    %Up 100 basis points
    
    
    57,269
    
    
    
    (4.3
    )%
    
    
    14.8
    %
    
    
    93.27
    %BASE
    
    
    59,873
    
    
    
    
    
    
    
    15.5
    %
    
    
    97.51
    %Down 100 basis points
    
    
    62,665
    
    
    
    4.7
    %
    
    
    16.2
    %
    
    
    102.06
    %Down 200 basis points
    
    
    65,987
    
    
    
    10.2
    %
    
    
    17.1
    %
    
    
    107.47
    %
  Net Interest Income Simulation.




---



##### 



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
    
    $
    15,635
    
    
    
    5.9
    %
    
    
    4.18
    %
    
    
    23Up 100 basis points
    
    
    15,175
    
    
    
    2.8
    %
    
    
    4.06
    %
    
    
    11BASE
    
    
    14,760
    
    
    
    
    
    
    
    3.95
    %
    
    
    Down 100 basis points
    
    
    14,281
    
    
    
    (3.2
    )%
    
    
    3.82
    %
    
    
    (13
    )Down 200 basis points
    
    
    13,818
    
    
    
    (6.4
    )%
    
    
    3.70
    %
    
    
    (25
    )
 
 (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, 2006Amounts 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
    
    $
    3,433
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    5,615
    
    
    $
    9,048Federal funds sold
    
    
    17,150
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,150Investment securities
    
    
    2,450
    
    
    
    1,011
    
    
    
    3,774
    
    
    
    1,009
    
    
    
    
    
    
    
    8,244Loans
    
    
    135,076
    
    
    
    114,354
    
    
    
    73,256
    
    
    
    21,813
    
    
    
    (319
    )
    
    
    344,180Other assets(2)
    
    
    482
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,650
    
    
    
    8,132Total assets
    
    $
    158,591
    
    
    $
    115,365
    
    
    $
    77,030
    
    
    $
    22,822
    
    
    $
    12,946
    
    
    $
    386,754Liabilities and Stockholders EquityNon-interest-bearing demand
deposits
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    26,864
    
    
    $
    26,864Interest-bearing demand, money
market and savings
    
    
    14,127
    
    
    
    39,330
    
    
    
    59,194
    
    
    
    3,835
    
    
    
    
    
    
    
    116,486Time certificates of deposit
    
    
    19,196
    
    
    
    57,418
    
    
    
    88,897
    
    
    
    6,161
    
    
    
    
    
    
    
    171,672Short-term debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Long-term debt
    
    
    8,248
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,248




---



##### 



December 31, 2006Amounts 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)Other liabilities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,827
    
    
    
    1,827Stockholders equity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    61,657
    
    
    
    61,657Total liabilities and
stockholders equity
    
    $
    41,571
    
    
    $
    96,748
    
    
    $
    148,091
    
    
    $
    9,996
    
    
    $
    90,348
    
    
    $
    386,754Period gap
    
    
    117,020
    
    
    
    18,617
    
    
    
    (71,061
    )
    
    
    12,826
    
    
    
    (77,402
    )Cumulative interest-earning
assets
    
    
    158,591
    
    
    
    273,956
    
    
    
    350,986
    
    
    
    373,808Cumulative interest-bearing
liabilities
    
    
    41,571
    
    
    
    138,319
    
    
    
    296,410
    
    
    
    296,406Cumulative gap
    
    
    117,020
    
    
    
    135,637
    
    
    
    64,576
    
    
    
    77,402Cumulative interest-earning
assets to cumulative
interest-bearing liabilities
    
    
    3.81
    %
    
    
    1.98
    %
    
    
    1.23
    %
    
    
    1.26
    %Cumulative gap as a percent of:Total assets
    
    
    30.3
    %
    
    
    35.1
    %
    
    
    16.7
    %
    
    
    20.0
    %Interest-earning assets
    
    
    73.8
    %
    
    
    49.5
    %
    
    
    18.4
    %
    
    
    20.7
    %
 
 (1)
    
    Assets or liabilities and equity which are not interest rate-sensitive.(2)
    
    Allowance for loan losses of $4.0 million as of December 31, 2006 is included in other
assets.   Recent Accounting Pronouncements




---



##### 



Fair Value Measurements.
 Employers Accounting for Defined Benefit
Pension and other Post-retirement Plans
 The Fair Value Option for Financial Assets
and Financial Liabilities




---



##### 



INDEX TO FINANCIAL STATEMENTS
 Report of Independent Registered Public Accounting Firm
    
    
    79Consolidated Statement of Financial Condition
    
    
    80Consolidated Statement of Income
    
    
    81Consolidated Statement of Changes in Stockholders Equity
    
    
    83Consolidated Statement of Cash Flows
    
    
    84Notes to Consolidated Financial Statements
    
    
    85




---



##### 



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




---



##### 



WSB FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
 DECEMBER 31,2006
    
    
    2005ASSETSCASH AND CASH EQUIVALENTSCash and due from banks
    
    $
    9,048,104
    
    
    $
    8,157,828Federal funds sold
    
    
    17,150,000
    
    
    
    18,400,000Total cash and cash equivalents
    
    
    26,198,104
    
    
    
    26,557,828INVESTMENT SECURITIES AVAILABLE FOR SALE, at fair value
    
    
    8,243,643
    
    
    
    8,235,191FEDERAL HOME LOAN BANK STOCK
    
    
    234,200
    
    
    
    234,200LOANS HELD FOR SALE
    
    
    11,007,194
    
    
    
    8,731,863LOANS
    
    
    333,172,808
    
    
    
    200,960,273Less allowance for loan losses
    
    
    (3,971,789
    )
    
    
    (2,520,323
    )Total loans, net
    
    
    329,201,019
    
    
    
    198,439,950PREMISES AND EQUIPMENT, net
    
    
    7,845,740
    
    
    
    6,016,723ACCRUED INTEREST RECEIVABLE
    
    
    1,980,117
    
    
    
    999,022OTHER ASSETS
    
    
    2,044,137
    
    
    
    783,300Total assets
    
    $
    386,754,154
    
    
    $
    249,998,077LIABILITIES AND STOCKHOLDERS EQUITYDEPOSITSNon-interest-bearing deposits
    
    $
    26,864,122
    
    
    $
    21,789,810Interest-bearing deposits
    
    
    288,157,881
    
    
    
    202,376,963Total deposits
    
    
    315,022,003
    
    
    
    224,166,773ACCRUED INTEREST PAYABLE
    
    
    1,108,688
    
    
    
    234,174OTHER LIABILITIES
    
    
    718,335
    
    
    
    1,343,372JUNIOR SUBORDINATED DEBENTURES PAYABLE
    
    
    8,248,000
    
    
    
    8,248,000Total liabilities
    
    
    325,097,026
    
    
    
    233,992,319STOCKHOLDERS EQUITYCommon stock, $1 par value; 15,357,250 shares authorized;
5,545,673 and 2,722,048 shares issued and outstanding
at December 31, 2006 and 2005, respectively
    
    
    5,545,673
    
    
    
    2,722,048Additional paid-in capital
    
    
    48,089,861
    
    
    
    9,052,658Retained earnings
    
    
    8,053,915
    
    
    
    4,295,429Accumulated other comprehensive loss
    
    
    (32,321
    )
    
    
    (64,377
    )Total stockholders equity
    
    
    61,657,128
    
    
    
    16,005,758Total liabilities and stockholders equity
    
    $
    386,754,154
    
    
    $
    249,998,077
 See accompanying notes.




---



##### 



WSB FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
 Year ended December 31,2006
    
    
    2005
    
    
    2004INTEREST INCOMEInterest and fees on loans
    
    $
    27,633,568
    
    
    $
    15,088,071
    
    
    $
    7,725,300Interest on investmentsTaxable
    
    
    265,174
    
    
    
    201,208
    
    
    
    115,058Tax-exempt
    
    
    75,842
    
    
    
    61,692
    
    
    
    44,638Interest on federal funds sold
    
    
    282,055
    
    
    
    295,224
    
    
    
    56,031Other interest income
    
    
    84,466
    
    
    
    46,666
    
    
    
    2,540Total interest income
    
    
    28,341,105
    
    
    
    15,692,861
    
    
    
    7,943,567INTEREST EXPENSEDeposits
    
    
    11,143,894
    
    
    
    4,997,880
    
    
    
    1,705,493Other borrowings
    
    
    75,232
    
    
    
    5,069
    
    
    
    Junior subordinated debentures payable
    
    
    565,486
    
    
    
    178,529
    
    
    
    Total interest expense
    
    
    11,784,612
    
    
    
    5,181,478
    
    
    
    1,705,493NET INTEREST INCOME
    
    
    16,556,493
    
    
    
    10,511,383
    
    
    
    6,238,074PROVISION FOR LOAN LOSSES
    
    
    1,522,917
    
    
    
    1,351,814
    
    
    
    653,735Net interest income after provision for loan losses
    
    
    15,033,576
    
    
    
    9,159,569
    
    
    
    5,584,339NONINTEREST INCOMEService charges on deposit accounts
    
    
    255,659
    
    
    
    178,651
    
    
    
    154,509Other customer fees
    
    
    878,372
    
    
    
    605,984
    
    
    
    284,675Net gain on sale of loans
    
    
    3,483,303
    
    
    
    4,383,487
    
    
    
    2,361,811Other income
    
    
    54,754
    
    
    
    72,674
    
    
    
    4,452Total other income
    
    
    4,672,088
    
    
    
    5,240,796
    
    
    
    2,805,447
 See accompanying notes.




---



##### 



WSB FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME (Continued)
 Year ended December 31,2006
    
    
    2005
    
    
    2004NONINTEREST EXPENSESalaries and employee benefits
    
    
    9,257,885
    
    
    
    7,264,567
    
    
    
    4,096,778Premises lease
    
    
    338,113
    
    
    
    246,222
    
    
    
    200,921Depreciation and amortization expense
    
    
    611,766
    
    
    
    371,273
    
    
    
    257,566Occupancy and equipment
    
    
    511,886
    
    
    
    497,093
    
    
    
    324,773Data and item processing
    
    
    511,610
    
    
    
    362,544
    
    
    
    255,933Advertising expense
    
    
    214,680
    
    
    
    183,163
    
    
    
    135,768Printing, stationery and supplies
    
    
    218,935
    
    
    
    213,338
    
    
    
    131,866Telephone expense
    
    
    110,625
    
    
    
    77,589
    
    
    
    53,650Postage and courier
    
    
    132,320
    
    
    
    108,799
    
    
    
    79,762Legal fees
    
    
    44,570
    
    
    
    28,330
    
    
    
    34,234Director fees
    
    
    303,334
    
    
    
    233,410
    
    
    
    122,418Business and occupation taxes
    
    
    273,522
    
    
    
    187,795
    
    
    
    130,456Other expenses
    
    
    1,324,315
    
    
    
    918,114
    
    
    
    545,527Total other expenses
    
    
    13,853,561
    
    
    
    10,692,237
    
    
    
    6,369,652INCOME BEFORE PROVISION FOR INCOME TAXES
    
    
    5,852,103
    
    
    
    3,708,128
    
    
    
    2,020,134PROVISION FOR INCOME TAXES
    
    
    1,967,420
    
    
    
    1,296,558
    
    
    
    680,173NET INCOME
    
    $
    3,884,683
    
    
    $
    2,411,570
    
    
    $
    1,339,961EARNINGS PER SHAREBasic
    
    $
    1.35
    
    
    $
    0.91
    
    
    $
    0.59Diluted
    
    $
    1.18
    
    
    $
    0.82
    
    
    $
    0.55
 See accompanying notes.




---



##### 



WSB FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY
 AccumulatedCommon Stock
    
    
    Additional
    
    
    
    
    
    
    OtherNumber of
    
    
    
    
    
    
    Paid-In
    
    
    Retained
    
    
    ComprehensiveShares
    
    
    Amount
    
    
    Capital
    
    
    Earnings
    
    
    Loss
    
    
    TotalBALANCE, December 31, 2003
    
    
    2,019,171
    
    
    $
    2,019,171
    
    
    $
    5,342,443
    
    
    $
    543,898
    
    
    $
    (4,474
    )
    
    $
    7,901,038Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,339,961
    
    
    
    
    
    
    
    1,339,961Other comprehensive loss,
net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,674
    )
    
    
    (3,674
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,336,287Stock issued for directors fees
    
    
    18,515
    
    
    
    18,515
    
    
    
    106,917
    
    
    
    
    
    
    
    
    
    
    
    125,432Stock transactions
    
    
    556,799
    
    
    
    556,799
    
    
    
    2,992,006
    
    
    
    
    
    
    
    
    
    
    
    3,548,805BALANCE, December 31, 2004
    
    
    2,594,485
    
    
    $
    2,594,485
    
    
    $
    8,441,366
    
    
    $
    1,883,859
    
    
    $
    (8,148
    )
    
    $
    12,911,562Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,411,570
    
    
    
    
    
    
    
    2,411,570Other comprehensive loss,
net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (56,229
    )
    
    
    (56,229
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,355,341Tax benefit of stock options
exercised
    
    
    
    
    
    
    
    
    
    
    42,670
    
    
    
    
    
    
    
    
    
    
    
    42,670Stock issued for directors fees
    
    
    16,530
    
    
    
    16,530
    
    
    
    135,805
    
    
    
    
    
    
    
    
    
    
    
    152,335Stock options exercised
    
    
    84,772
    
    
    
    84,772
    
    
    
    245,528
    
    
    
    
    
    
    
    
    
    
    
    330,300Issuance of stock
    
    
    26,261
    
    
    
    26,261
    
    
    
    187,289
    
    
    
    
    
    
    
    
    
    
    
    213,550BALANCE, 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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    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
    )
    
    $
    61,657,128
 See accompanying notes.




---



##### 



WSB FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
 Year Ended December 31,2006
    
    
    2005
    
    
    2004CASH FLOWS FROM OPERATING ACTIVITIESNet income
    
    $
    3,884,683
    
    
    $
    2,411,570
    
    
    $
    1,339,961Adjustments to reconcile net income to net cash from
operating activitiesProvision for loan losses
    
    
    1,522,917
    
    
    
    1,351,814
    
    
    
    653,735Depreciation and amortization
    
    
    611,766
    
    
    
    371,273
    
    
    
    257,566Amortization of premiums
    
    
    6,764
    
    
    
    10,288
    
    
    
    48,465Director fees paid by stock in lieu of cash
    
    
    123,933
    
    
    
    152,335
    
    
    
    125,432Excess tax benefits from stock options exercised
    
    
    (375,643
    )
    
    
    (42,670
    )
    
    
    Loss on sale of premises and equipment
    
    
    
    
    
    
    
    
    
    
    5,077Net gain on sale of loans
    
    
    (3,483,303
    )
    
    
    (4,388,487
    )
    
    
    (2,361,811
    )Federal Home Loan Bank stock dividend
    
    
    
    
    
    
    
    
    
    
    (2,700
    )Deferred income taxes
    
    
    (674,367
    )
    
    
    (511,058
    )
    
    
    410,871Net change inAccrued interest receivable
    
    
    (981,095
    )
    
    
    (556,272
    )
    
    
    (143,194
    )Other assets
    
    
    (226,477
    )
    
    
    199,266
    
    
    
    (718,511
    )Loans held for sale
    
    
    1,207,972
    
    
    
    (2,324,265
    )
    
    
    (2,019,111
    )Accrued interest payable
    
    
    874,514
    
    
    
    107,370
    
    
    
    74,390Other liabilities
    
    
    (625,037
    )
    
    
    1,091,667
    
    
    
    295,609Net cash from operating activities
    
    
    1,866,627
    
    
    
    (2,127,169
    )
    
    
    (2,034,221
    )CASH FLOWS FROM INVESTING ACTIVITIESNet change in loans
    
    
    (132,283,986
    )
    
    
    (84,167,657
    )
    
    
    (55,651,579
    )Purchases of investments available-for-sale
    
    
    (1,000,000
    )
    
    
    (3,841,294
    )
    
    
    (1,125,000
    )Proceeds from calls and maturities of investments
available-for-sale
    
    
    1,000,000
    
    
    
    
    
    
    
    2,300,000Principal repayments of mortgage-backed securities
    
    
    32,490
    
    
    
    69,688
    
    
    
    288,035Proceeds from investments held to maturity
    
    
    
    
    
    
    
    
    
    
    200,000Purchase of Federal Home Loan Bank stock
    
    
    
    
    
    
    (133,000
    )
    
    
    (9,800
    )Purchases of premises and equipment
    
    
    (2,440,783
    )
    
    
    (3,835,657
    )
    
    
    (1,277,012
    )Proceeds from the sale of premises and equipment
    
    
    
    
    
    
    
    
    
    
    2,706Net cash from investing activities
    
    
    (134,692,279
    )
    
    
    (91,907,920
    )
    
    
    (55,272,650
    )CASH FLOWS FROM FINANCING ACTIVITIESNet change in non-interest-bearing deposits
    
    
    5,074,312
    
    
    
    7,065,877
    
    
    
    6,510,226Net change in interest-bearing deposits
    
    
    85,780,918
    
    
    
    93,508,104
    
    
    
    49,079,879Proceeds from the issuance of junior subordinated
debentures payable
    
    
    
    
    
    
    8,248,000
    
    
    
    Net proceeds from sale of stock
    
    
    40,236,836
    
    
    
    213,550
    
    
    
    3,442,305Proceeds from exercise of stock options
    
    
    1,186,256
    
    
    
    330,300
    
    
    
    106,500Excess tax benefits from stock options exercised
    
    
    375,643
    
    
    
    42,670
    
    
    
    Fractional share payout
    
    
    (2,994
    )
    
    
    
    
    
    
    Stock repurchases
    
    
    (185,043
    )
    
    
    
    
    
    
    Net cash from financing activities
    
    
    132,465,928
    
    
    
    109,408,501
    
    
    
    59,138,910NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    (359,724
    )
    
    
    15,373,412
    
    
    
    1,832,039CASH AND CASH EQUIVALENTS, beginning of year
    
    
    26,557,828
    
    
    
    11,184,416
    
    
    
    9,352,377CASH AND CASH EQUIVALENTS, end of year
    
    $
    26,198,104
    
    
    $
    26,557,828
    
    
    $
    11,184,416SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATIONCash paid for interest
    
    $
    10,910,098
    
    
    $
    5,074,108
    
    
    $
    1,631,103Income taxes paid
    
    $
    2,550,000
    
    
    $
    555,000
    
    
    $
    727,900
 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- On March 12, 1999, Westsound Bank (the
Bank) was granted a state charter as a commercial bank whose principal activity is to engage
in general commercial banking business in the Bremerton area of Kitsap County, Washington.
The Bank generates commercial, mortgage and consumer loans and receives deposits from
customers located primarily in Bremerton, Washington. As a Washington State chartered
financial institution, the Bank is subject to regulations by the Washington State Banking
Department of Financial Institutions and the Federal Deposit Insurance Corporation.
Westsound Bank has branches and/or loan production offices in Bremerton, Silverdale, Port
Angeles, Port Orchard, Sequim, Gig Harbor, Poulsbo, Belfair, Federal Way, and Port Townsend,
Washington.The Bank is located in an area that has a significant U.S. Department of Defense presence.
Closure or downsizing of one of the two large bases could affect operating results
adversely. No such indication of closure or downsizing has been made in Department of
Defense plans as indicated in budgets.In July, 2005, WSB Financial Group, Inc. (the Company), a bank holding company, was issued a
certificate of incorporation as a Washington Profit Corporation. During 2005, the Federal
Reserve Bank of San Francisco granted authority to WSB Financial Group, Inc. to become a
bank holding company through a reorganization of the ownership interests of Westsound Bank.WSB Financial Group Trust I (Trust), a subsidiary of WSB Financial Group, Inc., was formed
in July 2005 for the exclusive purpose of issuing Trust Preferred Securities and common
securities and using the $8 million in proceeds from the issuance to acquire junior
subordinated debentures issued by WSB Financial Group, Inc. In accordance with
Interpretation No. 46, Consolidation of Variable Interest Entities, the Trust is not
consolidated in the Companys financial statements.The consolidated financial statements include the accounts of WSB Financial Group, Inc. and
its wholly owned subsidiaries, excluding the Trust, after eliminating all inter-company
transactions. All share and per share information has been retroactively adjusted to reflect
split effective August 15, 2006 (See Note 16).Use of estimates- The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reporting amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates. A material estimate that is particularly susceptible to
significant change relates to the determination of the allowance for loan losses.Cash and cash equivalents- For purposes of reporting cash flows, cash and cash equivalents
are cash on hand, amounts due from banks, and federal funds sold, and have maturities of
three months or less. The Bank places its cash with high credit quality institutions. The
amounts on deposit fluctuate and, at times, exceed the insured limit by the U.S. Federal
Deposit Insurance Corporation, which potentially subjects the Bank to credit risk.
Generally, federal funds are purchased and sold for one-day periods.Investment securities-Investment securities are classified into one of three categories:
(1) held-to-maturity, (2) available-for-sale, or (3) trading. Investment securities are
categorized as held-to-maturity when the Bank has the positive intent and ability to hold
those securities to maturity. Securities which are held-to-maturity are stated at cost and
adjusted for amortization of premiums and accretion of discounts, which are recognized as
adjustments to interest income. The Bank had no securities classified as held-to-maturity as
of December 31, 2006 and 2005. The Bank had no trading securities as of December 31, 2006
and 2005.




---



##### 



WSB FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 Note 1  Summary of Significant Accounting Policies (continued)
 Investment securities categorized as available-for-sale are generally held for investment
purposes (to maturity), although unanticipated future events may result in the sale of some
securities. Available-for-sale securities are recorded at estimated fair value, with the net
unrealized gain or loss included in comprehensive income, net of the related tax effect.
Realized gains or losses on dispositions are based on the net proceeds and the adjusted
carrying amount of securities sold, using the specific identification method.Declines in the fair value of individual held-to-maturity, and available-for-sale securities
below their cost that are other than temporary are recognized by write-downs of the
individual securities to their fair value. Such write-downs would be included in earnings as
realized losses. In estimating other-than-temporary impairment losses, management considers
(1) the length of time and the extent to which the fair value has been less than cost, (2)
the financial condition and near-term prospects of the issuer, and (3) the intent and
ability of the Bank to retain its investment in the issuer for a period of time sufficient
to allow for any anticipated recovery in fair value. Gains and losses on the sale of
securities are recorded on the trade date and are determined using the specific
identification method.Premiums and discounts are recognized in interest income using the interest method over
the period to maturity.Federal Home Loan Bank stock- The Banks investment in Federal Home Loan Bank (the FHLB)
stock is carried at par value ($100 per share), which reasonably approximates its fair
value. As a member of the FHLB system, the Bank is required to maintain a minimum level of
investment in FHLB stock based on specified percentages of its outstanding FHLB advances.
The Bank may request redemption at par value of any stock in excess of the amount the Bank
is required to hold. Stock redemptions are at the discretion of the FHLB.Loans held for sale- Loans originated and intended for sale in the secondary market are
carried at the lower of aggregate cost or fair value, as determined by aggregate outstanding
commitments from investors or current investor yield requirements. Net unrealized losses are
recognized through a valuation allowance by charges to income.Mortgage loans held for sale are generally sold with the mortgage servicing rights released
by the Bank. Gains or losses on sales of mortgage loans are recognized based on the
difference between the selling price and the carrying value of the related mortgage loans
sold.Accounting for derivatives- The Company is engaged in the production of loans for sale to
buyers and investors in the secondary mortgage market. These loan production activities
expose the Company to risk that a loans market value may decline between the date the
Company enters into an interest rate lock commitment with a borrower to fund a loan, or with
a seller to purchase a loan, and the loans ultimate sale into the secondary market. The
Company reduces its exposure to this risk by entering into contracts to sell loans to buyers
at specified prices to hedge against the economic risk of market value declines. The Company
considers its commitments to extend secondary market qualifying loans (the pipeline) with
interest rate lock commitments to be derivatives, as well as its firm commitments to deliver
loans, all of which are recognized at their estimated fair values. The fair value and
notional amount of interest rate locked loan commitments was approximately $(6,200), and
$6,506,000, respectively, at December 31, 2006. The fair value and notional amount of
forward sale commitments was approximately $6,200 and $6,506,000, respectively, at December
31, 2006.




---



##### 



WSB FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 Note 1  Summary of Significant Accounting Policies (continued)
 Loans and allowances for loan losses- Loans that management has the intent and ability to
hold for the foreseeable future or until maturity or pay-off are reported at their
outstanding principal adjusted for any charge-offs, the allowance for loan losses, any
deferred fees or costs on originated loans and unamortized premiums or discounts on
purchased loans. Interest income is accrued on the unpaid principal balance. Loan
origination fees, net of certain direct origination costs, are deferred and recognized as an
adjustment of the related loan yield using the interest method.The Bank considers loans impaired when it is probable the Bank will be unable to collect all
amounts as scheduled under the loan agreement. Impaired loans are measured based on the
present value of expected future cash flows discounted at the loans effective interest
rate, or, as a practical expedient, at the loans observable market price or the fair value
of the collateral, if the loan is collateral dependent. Changes in these values will be
reflected in income and as adjustments to the allowance for possible credit losses.The accrual of interest on impaired loans is discontinued at the time the loan is 90 days
past due or when, in managements opinion, the borrower may be unable to meet payments as
they become due. Factors considered by management in determining impairment include payment
status, collateral value and the probability of collecting scheduled principal and interest
payments when due. Loans that experience insignificant payment delays and payment shortfalls
generally are not classified as impaired. Management determines the significance of payment
delays and payment shortfalls on a case-by-case basis, taking into consideration all of the
circumstances surrounding the loan and the borrower, including the length of the delay, the
reasons for the delay, the borrowers prior payment record and the amount of the shortfall
in relation to the principal and interest owed. When interest accrual is discontinued, all
unpaid accrued interest is reversed. Interest income is subsequently recognized only to the
extent cash payments are received, or payment is considered certain. Loans are returned to
accrual status when all the principal and interest amounts contractually due are brought
current and future payments are reasonably assured.The allowance for loan loss is maintained at a level management believes is adequate to
provide for potential loan, loan commitment and standby letter of credit losses. The
allowance is based on a continuing review of loans and loan commitments which includes
consideration of actual loss experience, changes in the size and character of the portfolio,
identification of individual problem situations which may affect the borrowers ability to
repay, and evaluations of the prevailing and anticipated economic conditions. This
evaluation is inherently subjective, as it requires estimates that are susceptible to
significant revision, as more information becomes available.The allowance for loan losses is increased by charges to income and decreased by charge-offs
(net of recoveries). Management believes the allowance for loan losses is adequate. While
management uses available information to recognize losses on loans, changes in economic
conditions may necessitate revision of the estimate in future years. In addition, various
regulatory agencies, as an integral part of their examination processes, periodically review
the Banks allowance for loan losses. Such agencies may require the Bank to recognize
additional losses based on their judgment using information available to them at the time of
their examination.




---



##### 



WSB FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 Note 1  Summary of Significant Accounting Policies (continued)
 The allowance consists of specific, general and unallocated components. The specific
component relates to loans that are classified as doubtful, substandard or special mention.
For such loans that are also classified as impaired, an allowance is established when the
discounted cash flows (or collateral value or observable market price) of the impaired loan
are lower than the carrying value of that loan. The general component covers non-classified
loans and is based on historical loss experience adjusted for qualitative factors. An
unallocated component is maintained to cover uncertainties that could affect managements
estimate of probable losses. The unallocated component of the allowance reflects the margin
of imprecision inherent in the underlying assumptions used in the methodologies for
estimating specific and general losses in the portfolio.Large groups of smaller balance homogeneous loans are collectively evaluated for impairment.
Accordingly, the Bank does not separately identify individual consumer and residential loans
for impairment disclosures, unless such loans are the subject of a restructuring agreement.Transfers of financial assets- Transfers of financial assets are accounted for as sales,
when control over the assets has been surrendered. Control over transferred assets is deemed
to be surrendered when (1) the assets have been isolated from the Bank, (2) the transferee
obtains the right (free of conditions that constrain it from taking advantage of that right)
to pledge or exchange the transferred assets, and (3) the Bank does not maintain effective
control over the transferred assets through an agreement to repurchase them before their
maturity.Premises and equipment- Land is carried at cost. Other premises and equipment are carried
at cost net of accumulated depreciation. Depreciation is computed using the straight-line
method based on the estimated useful lives of the related assets, ranging from 3 to 25
years. Maintenance and repairs are expensed as incurred while major additions and
improvements are capitalized. Leasehold improvements are amortized over the life of the
building lease.Foreclosed assets- Assets acquired through, or in lieu of, loan foreclosure are held for
sale and are initially recorded at fair value at the date of foreclosure, establishing a new
cost basis. Subsequent to foreclosure, valuations are periodically performed by management
and the assets are carried at the lower of carrying amount or fair value less cost to sell.
Revenue and expenses from operations and changes in the valuation allowance are included in
net expenses from foreclosed assets.Income taxes- Income taxes are provided for the tax effects of the transactions reported in
the financial statements and consist of taxes currently due plus deferred taxes related
primarily to differences between the basis of the allowance for loan losses, organization
costs, depreciation, and benefit associated with net operating losses. The deferred tax
assets and liabilities are determined using the liability method and represent the future
tax return consequences of those differences, which will either be taxable or deductible
when the assets and liabilities are recovered or settle. Deferred tax assets and liabilities
are reflected at income tax rates applicable to the period in which the deferred tax assets
or liabilities are expected to be realized or settle. As changes in the tax laws or rates
are enacted, deferred tax assets and liabilities are adjusted through the provision for
income taxes.Off-balance sheet credit related financial instruments- In the ordinary course of business,
the Bank has entered into commitments to extend credit, including commitments under credit
card arrangements, commercial letters of credit, and standby letters of credit. Such
financial instruments are recorded when they are funded.




---



##### 



WSB FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 Note 1  Summary of Significant Accounting Policies (continued)
 Stock option plans Effective January 1, 2006, the Bank adopted Statement of Financial
Accounting Standards No. 123(R), Share-Based Payment,which is a revision of FASB Statement
No. 123, Accounting for Stock-Based Compensation.Statement 123(R) supersedes Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and amends FASB
Statement No. 95, Statement of Cash Flows. Generally, the approach in Statement 123(R) is
similar to the approach described in Statement 123. However, Statement 123(R) requires all
share-based payments to employees, including grants of employee stock options, to be
recognized in the income statement based on their fair values. There were no options granted
in 2006.Prior to the Banks adoption of SFAS 123(R) on January 1, 2006, employee stock options were
accounted from under the intrinsic value method as allowed under Accounting Principles Board
Opinion (APB) No. 25. Stock options are generally granted at exercise prices not less than
the fair market value of common stock on the date of grant. Under APB No. 25, no
compensation expense was recognized pursuant to the Banks stock option plans for stock
options that are granted at exercise prices not less than the fair market value of common
stock on the date of grant.The pro forma effect on the Banks earnings as a result of option issuances (determined
using the minimum value method) for the years ended December 31, 2005 and 2004 is as
follows:
 2005
    
    
    2004Net income as reported
    
    $
    2,411,570
    
    
    $
    1,339,961Additional compensation for fair
value of stock options, net of tax
    
    
    (501,686
    )
    
    
    (296,133
    )Pro forma net income
    
    $
    1,909,884
    
    
    $
    1,043,828Basic earnings per shareAs reported
    
    $
    0.91
    
    
    $
    0.59Pro forma
    
    $
    0.72
    
    
    $
    0.46Diluted earnings per share
    
    $
    0.82
    
    
    $
    0.55Pro forma
    
    $
    0.65
    
    
    $
    0.43
 Earnings per common share- Basic earnings per share represents income available to common
stockholders divided by the weighted-average number of common shares outstanding during the
period. Diluted earnings per share reflect additional common shares that would have been
outstanding if dilutive potential common shares had been issued, as well as any adjustment
to income that would result from the assumed issuance. Potential common shares that may be
issued by the Company relate solely to outstanding stock options, and are determined using
the treasury stock method.




---



##### 



WSB FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 Note 1  Summary of Significant Accounting Policies (continued)
 Earnings per common share have been computed based on the following:
 2006
    
    
    2005
    
    
    2004Numerator
    
    $
    3,884,683
    
    
    $
    2,411,570
    
    
    $
    1,339,961Net incomeDenominatorWeighted-average number of common shares
outstanding
    
    
    2,870,022
    
    
    
    2,642,628
    
    
    
    2,270,211Incremental shares assumed for stock options
    
    
    415,600
    
    
    
    282,464
    
    
    
    159,366Weighted-average number of dilutive shares
outstanding
    
    
    3,285,622
    
    
    
    2,925,092
    
    
    
    2,429,577Basic earnings per common share
    
    $
    1.35
    
    
    $
    0.91
    
    
    $
    0.59Diluted earnings per common share
    
    $
    1.18
    
    
    $
    0.82
    
    
    $
    0.55
 There were no anti-dilutive options at December 31, 2006, 2005, or 2004.Comprehensive income- Accounting principles generally require that recognized revenue,
expenses, gains and losses be included in net income. Although certain changes in assets and
liabilities, such as unrealized gains and losses on available-for-sale securities, are
reported as a separate component of the equity section of the balance sheet, such items,
along with net income, are components of comprehensive income.The components of other comprehensive income (loss) and related tax effects are as follows:
 2006
    
    
    2005
    
    
    2004Unrealized holding gain (loss) on
available-for-sale securities
    
    $
    47,766
    
    
    $
    (84,393
    )
    
    $
    (7,871
    )Tax provision (benefit)
    
    
    (15,710
    )
    
    
    28,164
    
    
    
    4,197Net-of-tax-amount
    
    $
    32,056
    
    
    $
    (56,229
    )
    
    $
    (3,674
    )
 The components of accumulated other comprehensive loss, included in stockholders equity are
as follows:
 2006
    
    
    2005
    
    
    2004Unrealized holding (loss) on
available-for-sale securities
    
    $
    (48,971
    )
    
    $
    (96,737
    
    
    $
    (12,345
    )Tax benefit
    
    
    16,650
    
    
    
    32,360
    
    
    
    4,197Net-of-tax-amount
    
    $
    (32,321
    )
    
    $
    (64,377
    )
    
    $
    (8,148
    )




---



##### 



WSB FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 Note 1  Summary of Significant Accounting Policies (continued)
 Advertisingcosts- Advertising costs are expensed when incurred. Total advertising expenses
were $214,680, $183,163, and $135,768 in 2006, 2005 and 2004, respectively.Recent accounting pronouncements- In July 2006, the FASB issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes(FIN No. 48). This pronouncement requires a
certain methodology for measuring and reporting uncertain tax positions, as well as
disclosures. Adoption may result in a cumulative adjustment to income tax liabilities and
retained earnings, if applicable. This statement will be effective as of January 1, 2007,
and is not expected to have a material effect on the Company.In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial
Instruments,an amendment of SFAS No. 133 and SFAS No. 140. This statement addresses the
accounting for certain hybrid financial instruments (a financial instrument with an embedded
derivative) and also clarifies which interest-only strips and principal-only strips are not
subject to the requirements of SFAS No. 133. SFAS No. 155 allows combined valuation and
accounting. This statement will be effective as of January 1, 2007. SFAS No. 155 is not
expected to have a material effect on the Company.In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets,
an amendment of SFAS No. 140(SFAS No. 156). This pronouncement requires the recognition of
a servicing asset or liability under specified circumstances, and if practicable, all
separately recognized servicing assets and liabilities to be initially measured at fair
value. Additionally, the pronouncement allows an entity to choose one of two methods when
subsequently measuring its servicing assets and liabilities: the amortization method or the
fair value method. The amortization method provided under SFAS No. 140, employs lower of
cost or market (locom) valuation. The new fair value method allows mark ups, in addition to
the mark downs under locom. SFAS No. 156 permits a one-time reclassification of
available-for-sale securities to the trading classification. SFAS No. 156 is not expected to
have a material effect on the Company.In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements.This Statement
defines fair value, establishes a framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value measurements. This Statement
applies under other accounting pronouncements that require or permit fair value
measurements. Accordingly, this Statement does not require any new fair value measurements.
This Statement is effective for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. SFAS No. 157 is not
expected to have a material impact on the Company.




---



##### 



WSB FINANCIAL GROUP, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 Note 1  Summary of Significant Accounting Policies (continued)
 In September 2006, the FASB issued SFAS No. 158, Employers Accounting for Defined Benefit
Pension and other Post-retirement Plans an amendment of FASB Statements No. 87, 88, 106,
and 132(R). This Statement improves financial reporting by requiring an employer to
recognize the overfunded or underfunded status of a defined benefit post-retirement plan as
an asset or liability in its statement of financial position and to recognize changes in
that funded status in the year in which the changes occur through comprehensive income of a
business entity or changes in unrestricted net assets of a not-for-profit organization. This
Statement also improves financial reporting by requiring an employer to measure the funded
status of a plan as of the date of its year-end statement of financial position, with
limited exceptions. An employer with publicly traded equity securities is required to
initially recognize the funded status of a defined benefit post-retirement plan and to
provide the required disclosures as of the end of the fiscal year ending after December 15,
2006. The requirement to measure plan assets and benefit obligations as of the date of the
employers fiscal year-end statement of financial position is effective for fiscal years
ending after December 15, 2008. SFAS No. 158 is not expected to have a material impact on
the Company.In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities an amendment of FASB Statement No. 115. This Statement
permits entities to choose to measure many financial instruments and certain other items at
fair value. The objective is to improve financial reporting by providing entities with the
opportunity to mitigate volatility in reporting earnings caused by measuring related assets
and liabilities differently without having to apply complex hedge accounting provisions.
This statement is effective as of the beginning of an entitys first fiscal year that begins
after November 15, 2007. SFAS No. 159 is not expected to have a material impact on the
Company.Reclassifications Certain amounts in the prior years financial statements have been
reclassified to conform to the years presentation.
 Note 2  Investment Securities
 Amortized cost and approximate fair values of investment securities at December 31, 2006 and
2005 are summarized as follows:
 Gross Unrealized LossesGross
    
    
    Less Than 12
    
    
    12 Months orAmortized Cost
    
    
    Unrealized Gain
    
    
    Months
    
    
    Longer
    
    
    Fair ValueDecember 31, 2006Available for saleMunicipal securities
    
    $
    1,818,774
    
    
    $
    7,238
    
    
    
    
    
    
    $
    (14,487
    )
    
    $
    1,811,525Mortgage-backed
    
    
    50,752
    
    
    
    
    
    
    $
    (551
    )
    
    
    
    
    
    
    50,201Federal agencies
    
    
    6,423,088
    
    
    
    
    
    
    
    (1,654
    )
    
    
    (39,517
    )
    
    
    6,381,917$
    8,292,614
    
    
    $
    7,238
    
    
    $
    (2,205
    )
    
    $
    (54,004
    )
    
    $
    8,243,643December 31, 2005Available for saleMunicipal securities
    
    $
    1,826,974
    
    
    $
    9,757
    
    
    
    
    
    
    $
    (11,839
    )
    
    $
    1,824,892Mortgage-backed
    
    
    83,870
    
    
    
    
    
    
    
    (1,191
    )
    
    
    
    
    
    
    82,679Federal agencies
    
    
    6,421,084
    
    
    
    
    
    
    
    (59,052
    )
    
    
    (34,412
    )
    
    
    6,327,620$
    8,331,928
    
    
    $
    9,757
    
    
    $
    (60,243
    )
    
    $
    (46,251
    )
    
    $
    8,235,191




---



##### 



WSB FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 Note 2  Investment Securities (continued)
 The amortized cost and estimated fair value of investment securities available for sale at
December 31, 2006, by contractual maturity, are as follows:
 Available-for-saleAmortized Cost
    
    
    Fair ValueAccounts maturing inOne year or less
    
    $
    2,305,915
    
    
    $
    2,304,194After one year through five years
    
    
    3,412,122
    
    
    
    3,381,870After five years through ten years
    
    
    1,807,676
    
    
    
    1,800,299After ten years
    
    
    766,901
    
    
    
    757,280$
    8,292,614
    
    
    $
    8,243,643
 Expected maturities will differ from contractual maturities because issuers may have the
right to call obligation with or without penalties.There were no sales of securities available for sale in 2006, 2005, and 2004.Investment securities valued at $1,273,230 and $2,262,823 have been pledged at December 31,
2006 and 2005, respectively, to secure certain deposits.Management evaluates securities for other-than-temporary impairment at least on an annual
basis, and more frequently when economic or market concerns warrant such evaluation.
Consideration is given to (1) the length of time and the extent to which the fair value has
been less than cost, (2) the financial condition and near-term prospects of the issuer, and
(3) the intent and ability of the Bank to retain its investment in the issuer for a period
of time sufficient to allow for any anticipated recovery in fair value.At December 31, 2006, 13 investment securities have fair values less than amortized cost and
therefore contain unrealized losses. The Bank has evaluated these securities and has
determined that the decline in value is temporary, and is related to the change in market
interest rates since purchase. The decline in value is not related to any company or
industry specific event. The Bank anticipates full recovery of amortized cost with respect
to these securities at maturity or sooner in the event of a more favorable market interest
rate environment.




---



##### 



WSB FINANCIAL GROUP, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 Note 3  Loans and Allowance for Loan Losses
  2006
    
    
    2005Real estate loans
    
    $
    314,869,567
    
    
    $
    185,675,928Commercial and industrial loans
    
    
    15,628,593
    
    
    
    13,123,344Individual loans for household and
other personal expenditures
    
    
    2,186,922
    
    
    
    1,712,179Other loans
    
    
    1,046,687
    
    
    
    772,009Deferred fees
    
    
    (558,961
    )
    
    
    (323,187
    )$
    333,172,808
    
    
    $
    200,960,273
 2006
    
    
    2005
    
    
    2004Allowance for loan lossesBalances, beginning of period
    
    $
    2,520,323
    
    
    $
    1,188,939
    
    
    $
    578,298Provision for losses
    
    
    1,522,917
    
    
    
    1,351,814
    
    
    
    653,735Recoveries
    
    
    1,851
    
    
    
    524
    
    
    
    650Loans charged off
    
    
    (24,702
    )
    
    
    (954
    )
    
    
    (21,744
    )Reclassification of allowance
for unfunded credit
commitments to other
liabilities
    
    
    (48,600
    )
    
    
    (20,000
    )
    
    
    (22,000
    )Balances, end of period
    
    $
    3,971,789
    
    
    $
    2,520,323
    
    
    $
    1,188,939
  2006
    
    
    2005Total non-accrual loans
    
    $
    219,129
    
    
    $
    127,990Total loans 90 days or more
past due and still accruing
    
    
    
    
    
    
    
 The Bank has entered into transactions with certain directors and executive officers. Such
transactions were made in the ordinary course of business on substantially the same terms
and conditions, including interest rates and collateral, as those prevailing at the same
time for comparable transactions with other customers, and did not, in the opinion of
management, involve more than normal credit risk or present other unfavorable features.




---



##### 



WSB FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 Note 3  Loans and Allowance for Loan Losses (continued)
 The aggregate balances and activity for loans to such related parties for 2006 and 2005 are
as follows:
 2006
    
    
    2005Balance at beginning of year
    
    $
    3,668,984
    
    
    $
    3,477,190New loans or advances
    
    
    4,710,063
    
    
    
    2,028,044Payoffs/Repayments
    
    
    (817,663
    )
    
    
    (11,836,650
    )Balance at end of year
    
    $
    7,561,384
    
    
    $
    3,668,984
 The Bank held in the loan portfolio approximately $212,000,000 in interest-only loans at
December 31, 2006 and $120,000,000 at December 31, 2005. These loans consist primarily of
short-term real estate construction loans and land development loans.
 Note 4  Premises and Equipment
 A summary of premises and equipment at December 31, 2006 and 2005 is as follows:
 2006
    
    
    2005Leasehold improvements
    
    $
    384,098
    
    
    $
    382,840Equipment, furniture, and software
    
    
    2,614,195
    
    
    
    1,680,444Land and buildings
    
    
    6,436,811
    
    
    
    4,931,038$
    9,435,104
    
    
    $
    6,994,322Accumulated depreciation
    
    
    (1,589,364
    )
    
    
    (977,599
    )$
    7,845,740
    
    
    $
    6,016,723
 Depreciation and amortization expense was $611,766, $371,273 and $257,566 in 2006, 2005, and
2004 respectively.




---



##### 



WSB FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 Note 5  Deposits
 Deposit account balances at December 31, 2006 and 2005 are summarized as follows:
 2006
    
    
    2005Non-interest-bearing
    
    $
    26,864,122
    
    
    $
    21,789,810Interest-bearing demand
    
    
    8,810,738
    
    
    
    16,586,348Money market accounts
    
    
    104,221,222
    
    
    
    115,006,053Savings deposits
    
    
    3,454,168
    
    
    
    4,394,654Certificates of deposit exceeding $100,000
    
    
    79,317,401
    
    
    
    24,142,814Certificates of deposit less than $100,000
    
    
    92,354,352
    
    
    
    42,247,094$
    315,022,003
    
    
    $
    224,166,773
 Scheduled maturities of certificates are as follows for the years ending December 31:
 2007
    
    $
    76,612,6452008
    
    
    71,398,9452009
    
    
    12,699,7712010
    
    
    4,799,6442011
    
    
    6,160,748$
    171,671,753
 The Bank held related party deposits of $2,210,089 and $4,224,642 at December 31, 2006 and
2005, respectively.
 Note 6  Advances and Junior Subordinated Debentures Payable
 At December 31, 2006, committed lines of credit arrangements totaling $7,000,000, $3,000,000
and $5,000,000 were available to the Bank from unaffiliated banks with maturities dated June
30, 2007. These lines provide for interest at the then existing federal funds rate. There
were no borrowings outstanding under these credit arrangements at December 31, 2006 or 2005.The Bank is a member of the FHLB of Seattle and, as such, has a committed credit line up to
10% of total eligible assets. Borrowings generally provide for interest at the then current
published rates. There were no borrowings outstanding under this credit line at December 31,
2006 or 2005.In order to manage the capital position more efficiently, the Company formed the Trust, a
Delaware statutory trust formed with capital of $248,000, for the sole purpose of issuing
trust preferred securities. During the third quarter of 2005, the Trust issued 8,000 Capital
Securities, or the trust preferred securities, with liquidation value of $1,000 per
security, for gross proceeds of $8.0 million. The entire proceeds of the issuance were
invested by the Trust in $8.248 million of Junior Subordinated Deferrable Interest
Debentures, or the junior subordinated debentures payable, issued by the Company, with
identical maturity, repricing and payment terms as the trust preferred securities. The
subordinated debentures represent the sole assets of the Trust. The subordinated debentures
mature on September 15, 2035, and bear an interest rate at December 31, 2006 of 7.09% (based
on 3-month LIBOR plus 1.73%), with repricing occurring and interest payments due quarterly.
The Company injected $7.9 million of the net proceeds from the sale of the subordinated
debentures into the Bank and retained the remaining proceeds.




---



##### 



WSB FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 Note 6  Advances and Junior Subordinated Debentures Payable (continued)
 The subordinated debentures are redeemable by the Company, subject to receipt of prior
approval from the Federal Reserve Bank of San Francisco, on any March 15, June 15, September
15 or December 15 on or after September 15, 2010.The redemption price is par plus accrued and unpaid interest, except in the case of
redemption under a special event which is defined in the debenture occurring prior to
September 15, 2010. The trust preferred securities are subject to mandatory redemption to
the extent of any early redemption of the subordinated debentures and upon maturity of the
subordinated debentures on September 15, 2035.Holders of the trust preferred securities are entitled to a cumulative cash distribution on
the liquidation amount of $1,000 per security at an interest rate at December 31, 2006 of
7.09%. For each successive period beginning on March 15 of each year, the rate will be
adjusted to equal the 3-month LIBOR plus 1.73%. The Trust has the option to defer payment of
the distributions for a period of up to five years, as long as we are not in default on the
payment of interest on the subordinated debentures. The Company has guaranteed, on a
subordinated basis, distributions and other payments due on the trust preferred securities.
For financial reporting purposes, the Trust is accounted for under the equity method and is
included in other assets on the accompanying consolidated statement of financial condition.
The subordinated debentures issued and guaranteed by the Company and held by the Trust are
reflected on the consolidated statement of financial condition in accordance with provisions
of Interpretation No. 46 issued by the Financial Accounting Standards Board, or FASB, No.
46, Consolidation of Variable Interest Entities. Under applicable regulatory guidelines, all
of the trust preferred securities currently qualify as Tier 1 capital, although this
classification may be subject to future change.
 Note 7  Income Taxes
 The components of the provision for income taxes for 2006, 2005, and 2004 are as follows:
 2006
    
    
    2005
    
    
    2004Current
    
    $
    2,641,787
    
    
    $
    1,807,616
    
    
    $
    269,302Deferred
    
    
    (674,367
    )
    
    
    (511,058
    )
    
    
    410,871Income tax expense
    
    $
    9,967,420
    
    
    $
    1,296,558
    
    
    $
    680,173
 The provision for income tax differs from that computed by applying the U.S. Federal income
tax rate of 34% to pretax income as a result of the following:
 2006
    
    
    2005
    
    
    2004Percent of
    
    
    
    
    
    
    Percent of
    
    
    
    
    
    
    Percent ofPretax
    
    
    
    
    
    
    Pretax
    
    
    
    
    
    
    PretaxAmount
    
    
    Income
    
    
    Amount
    
    
    Income
    
    
    Amount
    
    
    IncomeIncome tax at statutory rate
    
    $
    1,989,715
    
    
    
    34.0
    %
    
    
    1,260,764
    
    
    
    34.0
    %
    
    $
    686,846
    
    
    
    34.0
    %Increase (decrease) resulting fromTax-exempt income
    
    $
    (21,407
    )
    
    
    -0.4
    %
    
    $
    (18,237
    )
    
    
    -0.5
    %
    
    $
    (13,767
    )
    
    
    -0.7
    %Other
    
    
    (888
    )
    
    
    0.0
    %
    
    
    54,031
    
    
    
    1.5
    %
    
    
    7,094
    
    
    
    0.4
    %Total provision for income tax
    
    $
    1,967,420
    
    
    
    33.6
    %
    
    $
    1,296,558
    
    
    
    35.0
    %
    
    $
    680,173
    
    
    
    33.7
    %




---



##### 



WSB FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 Note 7  Income Taxes (continued)
 The nature and components of the Banks net deferred tax asset, established at a tax rate of
34% is as follows:
 2006
    
    
    2005Deferred tax assetsAllowance for loan losses
    
    $
    1,385,632
    
    
    $
    856,678Unrealized loss on securities
    
    
    16,650
    
    
    
    32,360Total deferred tax assets
    
    
    1,402,282
    
    
    
    889,038Deferred tax liabilitiesDeferred loan fees and costs
    
    
    517,121
    
    
    
    602,974Depreciation
    
    
    9,368
    
    
    
    74,975Other
    
    
    47,883
    
    
    
    41,836Total deferred tax liabilities
    
    
    574,372
    
    
    
    719,785Net deferred tax asset
    
    $
    827,910
    
    
    $
    169,253
 The Bank believes, based upon available information, that the net deferred tax asset will be
realized in the normal course of operations.
 Note 8  Financial Instruments with Off-Balance-Sheet Risk
 In the normal course of business, the Bank has outstanding commitments and contingent
liabilities, such as commitments to extend credit and unused credit card lines, which are
not included in the accompanying financial statements. The Banks exposure to credit loss in
the event of nonperformance by other parties to the financial instruments for commitments to
extend credit and unused credit card lines is represented by the contractual or notional
amount of those instruments. The Bank uses the same credit policies in making such
commitments as it does for instruments that are included in the balance sheet.Financial instruments whose contract amount represents credit risk were as follows:
 2006
    
    2005Commitments to extend credit
    
    $
    108,695,569
    
    
    $
    55,155,516Unused credit card lines
    
    $
    2,211,590
    
    
    $
    3,162,232
 Commitments to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of a fee. The
commitments for equity lines of credit may expire without being drawn upon. Therefore, the
total commitment amounts do not necessarily represent future cash requirements. The amount
of collateral obtained, if it is deemed necessary by the Bank, is based on managements
credit evaluation of the customer.




---



##### 



WSB FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 Note 8  Financial Instruments with Off-Balance-Sheet Risk (continued)
 Unused credit card lines are commitments for possible future extensions of credit to
existing customers. These lines-of-credit are uncollateralized and usually do not contain a
specified maturity date and may not be drawn upon to the total extent to which the Bank is
committed.In the ordinary course of business, the Bank sells loans without recourse that may have to
be subsequently repurchased due to defects that occurred during the origination of the loan.
The defects are categorized as documentation errors, underwriting errors, early payment
defaults and fraud. When a loan sold to an investor without recourse fails to perform, the
investor will typically review the loan file to determine whether defects in the origination
process occurred. If a defect is identified, the Bank may be required to either repurchase
the loan or indemnify the investor for losses sustained. If there are no defects, the Bank
has no commitment to repurchase the loan.
 Note 9  Stockholders Equity and Regulatory Matters
 The Company (on a consolidated basis) and the Bank are subject to various regulatory capital
requirements administered by the Federal banking agencies. Failure to meet the minimum
regulatory capital requirements can initiate certain mandatory and possible additional
discretionary actions by regulators that if undertaken, could have a direct material effect
on the Companys and Banks financial statements. Under the regulatory capital adequacy
guidelines and regulatory framework for prompt corrective action, the Company and the Bank
must meet specific capital guidelines involving quantitative measures of their assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory accounting
practices. The capital amounts and classification under the prompt corrective action
guidelines are also subject to qualitative judgments by the regulators about components,
risk weightings, and other factors. Prompt corrective action provisions are not applicable
to bank holding companies.Quantitative measures established by regulation to ensure capital adequacy require the
Company and the Bank to maintain minimum amounts and ratios of total risk-based capital and
Tier 1 capital to risk-weighted assets (as defined in the regulations), and Tier 1 capital
to adjusted total assets (as defined). Management believes, as of December 31, 2006 that the
Company and Bank meet all the capital adequacy requirements to which they are subject.At December 31, 2006, the most recent notification from the FDIC, the Bank was categorized
as well capitalized under the regulatory framework for prompt corrective action. To be
categorized as well capitalized, an institution must maintain minimum total risk-based, Tier
1 risk-based, and Tier 1 leverage ratios as disclosed in the table below. There are no
conditions or events since the notification that management believes have changed the Banks
category.




---



##### 



WSB FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 Note 9  Stockholders Equity and Regulatory Matters (continued)
 The Banks actual and required capital amounts and ratios are as follows (dollars in
thousands):
 To Be Well CapitalizedUnder the PromptFor Capital Adequacy
    
    Corrective ActionActual
    
    Purposes
    
    ProvisionsAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    RatioAs of December 31, 2006Total Risk-Based Capital(to Risk-Weighted Assets)Consolidated
    
    $
    74,013
    
    
    
    21.4
    %
    
    $
    27,655
    
    
    
    3 8.0
    %
    
    NA
    
    NAWestsound Bank
    
    $
    72,262
    
    
    
    20.9
    %
    
    $
    27,647
    
    
    
    3 8.0
    %
    
    $
    34,559
    
    
    
    3 10.0
    %Tier 1 Capital(to Risk-Weighted Assets)Consolidated
    
    $
    69,937
    
    
    
    20.2
    %
    
    $
    27,657
    
    
    
    3 8.0
    %
    
    NA
    
    NAWestsound Bank
    
    $
    68,186
    
    
    
    19.7
    %
    
    $
    13,824
    
    
    
    3 4.0
    %
    
    $
    20,736
    
    
    
    3 6.0
    %Tier 1 Capital(to Average Assets)Consolidated
    
    $
    69,937
    
    
    
    19.8
    %
    
    $
    28,243
    
    
    
    3 8.0
    %
    
    NA
    
    NAWestsound Bank
    
    $
    68,186
    
    
    
    19.4
    %
    
    $
    14,095
    
    
    
    3 4.0
    %
    
    $
    17,619
    
    
    
    3 5.0
    %As of December 31, 2005Total Risk-Based Capital(to Risk-Weighted Assets)Consolidated
    
    $
    26,851
    
    
    
    12.8
    %
    
    $
    16,782
    
    
    
    3 8.0
    %
    
    NA
    
    NAWestsound Bank
    
    $
    26,316
    
    
    
    12.5
    %
    
    $
    16,842
    
    
    
    3 8.0
    %
    
    $
    21,053
    
    
    
    3 10.0
    %Tier 1 Capital(to Risk-Weighted Assets)Consolidated
    
    $
    21,295
    
    
    
    10.2
    %
    
    $
    16,702
    
    
    
    3 8.0
    %
    
    NA
    
    NAWestsound Bank
    
    $
    23,740
    
    
    
    11.3
    %
    
    $
    8,404
    
    
    
    3 4.0
    %
    
    $
    12,605
    
    
    
    3 6.0
    %Tier 1 Capital(to Average Assets)Consolidated
    
    $
    21,295
    
    
    
    9.3
    %
    
    $
    18,318
    
    
    
    3 8.0
    %
    
    NA
    
    NAWestsound Bank
    
    $
    23,740
    
    
    
    10.4
    %
    
    $
    9,131
    
    
    
    3 4.0
    %
    
    $
    11,413
    
    
    
    3 5.0
    %
 Federal Reserve Board Regulations require maintenance of certain minimum reserve
balances on deposit with the Federal Reserve Bank. The minimum reserve requirement at
December 31, 2006 and 2005 was $707,000 and $779,000 respectively. Also, under Washington
State law, approval from the state banking regulators is required prior to declaring cash
dividends.
 Note 10  Commitments
 The Bank leases space for branches and operations. These leases run for a period ranging
from two to ten years and allow for established rent increases each year. All leases require
the Bank to pay all taxes, maintenance and utility costs, as well as maintain certain types
of insurance.




---



##### 



WSB FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 Note 10  Commitments (continued)
 The minimum lease payments for each of the next five years are as follows:
 2007
    
    $
    368,5442008
    
    
    361,4182009
    
    
    359,3292010
    
    
    242,0392011
    
    
    143,076
 Rent expense for 2006, 2005, and 2004 was $338,113, $246,224 and $200,604 respectively.
Rental income for 2006, 2005 and 2004 was $9,534, $31,753 and $0 respectively.The Silverdale branch and adjacent mortgage office is leased from a Director. The lease is
for ten years and commenced on October 1, 2001. The lease contains two five-year renewal
options. Monthly rent expense for the Silverdale branch is approximately $12,000 per month.
In 2006, the Bank paid a director $56,000 to provide consulting services related to new
branch locations.
 Note 11  Employee Benefits
 Incentive stock option plan- The Companys stockholders approved an Incentive Stock Option
Plan on May 19, 1999. The purpose of the plan is to increase ownership interest in the
Company by employees and directors of the Company, and to provide an incentive to serve as
an employee and/or director of the Company. The stockholders originally approved 184,287
shares of common stock to the Plan. In 2002, the stockholders approved an additional
allocation of 184,287 shares. The stockholders approved additional allocations of 614,290
shares in 2005 and 614,290 shares in 2004. The maximum term of a stock option granted under
the plan is ten years. Incentive stock options generally vest over a five year period while
non-qualified stock options generally vest immediately.The following assumptions were used to estimate the fair value of the options granted, which
management estimated using the minimum value approach for the years ended:
 2005
    
    2004Risk-free interest rate
    
    
    4.31
    %
    
    
    3.65
    %Dividend yield rate
    
    
    0.00
    %
    
    
    0.00
    %Weighted average expected life of options
    
    5 years
    
    7 years
 Management believes that the assumptions used in the option pricing model are highly
subjective and represent only one estimate of possible value.




---



##### 



WSB FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 Note 11  Employee Benefits (continued)
 Stock option transactions are summarized in the following table. Amounts have been adjusted
to reflect a 6.1429-for-1 common stock split in August 2006:
 WeightedWeighted
    
    AverageAverage
    
    RemainingExercise
    
    Contractual
    
    AggregatePrice Per
    
    Term (in
    
    IntrinsicOptions
    
    Share
    
    years)
    
    ValueOutstanding as of December 31, 2005
    
    
    1,125,686
    
    
    $
    7.43Authorized
    
    
    
    
    
    
    Granted
    
    
    
    
    
    
    Exercised
    
    
    (182,448
    )
    
    
    6.50Forfeited
    
    
    (3,066
    )
    
    
    7.57Outstanding as of December 31, 2006
    
    
    940,172
    
    
    $
    7.61
    
    
    
    7.66
    
    
    $
    10,896,249Exercisable as of December 31, 2006
    
    
    755,578
    
    
    $
    7.42
    
    
    
    7.56
    
    
    $
    8,900,239
 The weighted average remaining terms for outstanding and exercisable stock options at
December 31, 2006 were approximately 8 years each. The aggregate intrinsic value at December
31, 2006 was approximately $10.9 million for stock options outstanding and $8.9 million for
stock options exercisable. The intrinsic value for stock options is calculated based on the
exercise price of the underlying awards and the market price of our common stock as of the
reporting date.The intrinsic value of stock options exercised during the year ended December 31, 2006 was
$1,331,943. The intrinsic value of stock options exercised during the year ended December
31, 2005 was $469,826.401(k)Plan- The Bank established a retirement savings 401(k) plan in 2002 in which all
employees may participate after attaining the age of 18. The Bank may, at its sole
discretion, contribute and allocate to each eligible participants account, a percentage of
the participants elective deferral or it may make non-elective contributions to the
participants accounts The Bank made contributions of $75,000, $46,000 and $0 in 2006, 2005
and 2004 respectively.
 Note 12  Fair Value of Financial Instruments
 SFAS No. 107, Disclosures about Fair Value of Financial Instruments, requires disclosure of
fair value information about financial instruments for which it is practicable to estimate
fair value. As defined by SFAS No. 107, financial instruments include the categories listed
below. It does not include the value of premises and equipment, and intangible assets such
as customer relationships and core deposit intangibles. Fair values of off-statement
condition lending commitments standby letters of credit and guarantees are based on fees
currently charged to enter into similar agreements, taking into account the remaining terms
of the agreements and the counter parties credit standing. The fair value of the fees at
December 31, 2006, was insignificant. See Note 8 for the notional amount of the commitments
to extend credit.




---



##### 



WSB FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 Note 12  Fair Value of Financial Instruments (continued)
 The following table summarizes carrying amounts, estimated fair values and assumptions used
by the Bank to estimate fair value as of December 31, 2006 and 2005:
 Carrying Amount
    
    Estimated Fair Value2006AssetsCash and cash equivalents
    
    $
    26,198,104
    
    
    $
    26,198,104Securities available for sale
    
    $
    8,243,643
    
    
    $
    8,243,643Loans receivable
    
    $
    333,172,808
    
    
    $
    329,855,000Loans held for sale
    
    $
    11,007,194
    
    
    $
    11,007,194Accrued interest receivable
    
    $
    1,980,117
    
    
    $
    1,980,117FHLB Stock
    
    $
    234,200
    
    
    $
    234,200LiabilitiesChecking, savings and money market
    
    $
    143,350,250
    
    
    $
    143,350,250Certificates of deposit
    
    $
    171,671,753
    
    
    $
    171,477,000Accrued interest payable
    
    $
    1,108,688
    
    
    $
    1,108,688Junior subordinated debentures payable
    
    $
    8,248,000
    
    
    $
    8,248,0002005Cash and cash equivalents
    
    $
    26,557,828
    
    
    $
    26,557,828Securities available for sale
    
    $
    8,235,191
    
    
    $
    8,235,191Loans receivable
    
    $
    200,960,273
    
    
    $
    199,882,950Loans held for sale
    
    $
    8,731,863
    
    
    $
    8,731,863Accrued interest receivable
    
    $
    999,022
    
    
    $
    999,022FHLB Stock
    
    $
    234,200
    
    
    $
    234,200LiabilitiesChecking, savings and money market
    
    $
    157,776,865
    
    
    $
    157,776,865Certificates of deposit
    
    $
    66,389,908
    
    
    $
    66,748,110Accrued interest payable
    
    $
    234,174
    
    
    $
    234,174Junior subordinated debentures payable
    
    $
    8,248,000
    
    
    $
    8,248,000
 The following methods and assumptions were used to estimate the fair value of financial
instruments:Cash and cash equivalents- The carrying amount of these items is a reasonable estimate of
their fair value.Investment securities available for sale- The fair value is based on quoted market prices,
if available. If quoted market prices are not available, the fair value is based on a matrix
pricing model provided by an outside independent source.Loans receivable- The fair value is estimated by discounting the future cash flows and
estimated prepayments using the current rates at which similar loans would be made to
borrowers with similar credit ratings and for the same remaining term. Some loan types were
valued at carrying value because of their floating rate or expected maturity
characteristics.




---



##### 



WSB FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 Note 12  Fair Value of Financial Instruments (continued)
 Loans held for sale- The carrying amount of these items is a reasonable estimate of their
fair value.FHLB stock- The fair value is based upon the redemption value of the stock, which equates
to its carrying value.Customer accounts- The fair value of demand deposits, savings accounts, and money market
accounts is the amount payable on demand at the reporting date. The fair value of
fixed-maturity certificates is estimated by discounting the estimated future cash flows
using the rates currently offered for deposits with similar remaining maturities.Accrued interest receivable and payable The carrying amounts reported in the consolidated
financial statement for accrued interest receivable and payable approximate their fair
value.Junior subordinated debentures payable- The carrying amount of junior subordinated
debentures payable is a reasonable estimate of the fair value.
 Note 13  Significant Concentrations of Credit Risk
 The Bank has concentrated credit risk exposure, including off-balance-sheet credit risk
exposure, related to real estate loans as disclosed in Notes 3 and 8. The ultimate
collectibility of a substantial portion of the loan portfolio is susceptible to changes in
economic and market conditions in the region. The Bank generally requires collateral on all
real estate lending arrangements and typically maintains loan-to-value ratios of no greater
than 80%.Investments in state and municipal securities generally involve governmental entities within
Washington State. Loans are generally limited, by state banking regulation, to 20% of the
Banks stockholders equity, excluding accumulated other comprehensive income (loss).The contractual amounts of credit-related financial instruments such as commitments to
extend credit and credit-card arrangements represent the amounts of potential accounting
loss should the contract be fully drawn upon, the customer defaults, and the value of any
existing collateral becomes worthless.
 Note 14  Restrictions on Dividends, Loans and Advances
 Federal and state banking regulations place certain restrictions on dividends paid and loans
or advances made by the Bank to the holding company. The total amount of dividends which may
be paid at any date is generally limited to the retained earnings of the Bank, and loans or
advances are limited to 10 percent of the Banks capital stock and surplus on a secured
basis.The Banks retained earnings available for the payment of dividends was $8,333,000 at
December 31, 2006 and $4,480,000 at December 31, 2005. Accordingly, $59,821,000 of the
Corporations equity in the net assets of the Bank was restricted at December 31, 2006 and
$19,196,000 December 31, 2005. Funds available for loans or advances by the Bank to the
holding company amounted to $13,631,000 at December 31, 2006, compared to $4,735,000 at
December 31, 2005.In addition, dividends paid by the Bank to the holding company would be prohibited if the
effect thereof would cause the Banks capital to be reduced below applicable minimum capital
requirements.




---



##### 



WSB FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 Note 15  Condensed Financial Statements of Parent Company
 Financial information pertaining only to WSB Financial Group, Inc. is as follows:
 Statement of Financial ConditionDecember 31, 2006
    
    
    December 31, 2005AssetsCash and cash equivalents
    
    $
    1,055,676
    
    
    $
    134,434Investments in common stock of Westsound Bank
    
    
    68,154,370
    
    
    
    23,614,319Other assets
    
    
    813,543
    
    
    
    505,005Total assets
    
    $
    70,023,589
    
    
    $
    24,253,758Liabilities and stockholders equityAccounts Payable
    
    $
    118,461
    
    
    
    Junior subordinated debentures payable
    
    
    8,248,000
    
    
    $
    8,248,000Stockholders equity
    
    
    61,657,128
    
    
    
    16,005,758Total liabilities and stockholders equity
    
    $
    70,023,589
    
    
    $
    24,253,758




---



##### 



WSB FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 Note 15  Condensed Financial Statements of Parent Company (continued)
 Statement of Cash FlowsFor the Periodfrom inception(July 25, 2005)Year Ended
    
    
    toDecember 31,
    
    
    December 31,2006
    
    
    2005Cash flows from operating activitiesNet income
    
    $
    3,884,683
    
    
    $
    687,683Adjustments to reconcile net income to net cash
from operating activitiesEquity in undistributed net income of Westsound Bank
    
    
    (4,253,324
    )
    
    
    (810,100
    )Stock issued for director fees
    
    
    123,933
    
    
    
    Excess tax benefits from stock options exercised
    
    
    (375,643
    )
    
    
    (42,670
    )Increase in other assets
    
    
    (37,566
    )
    
    
    (214,335
    )Increase in other liabilities
    
    
    118,461
    
    
    
    Net cash from operating activities
    
    
    (539,456
    )
    
    
    (379,422
    )Cash Flows from Investing ActivitiesInvestment in Westsound Bank
    
    
    (40,150,000
    )
    
    
    (7,900,000
    )Cash flows from financing activitiesProceeds from issuance of junior subordinated debenture
payable
    
    
    
    
    
    
    8,000,000Proceeds from public offering, net
    
    
    40,236,836
    
    
    
    Proceeds from exercise of stock options and stock issued
    
    
    1,186,256
    
    
    
    371,186Excess tax benefits from stock options exercised
    
    
    375,643
    
    
    
    42,670Fractional share payout
    
    
    (2,994
    )
    
    
    Stock repurchases
    
    
    (185,043
    )
    
    
    Net cash from financing activities
    
    
    41,610,698
    
    
    
    8,413,856Net increase in cash and cash equivalents
    
    
    921,242
    
    
    
    134,434Cash and cash equivalents, beginning of year
    
    
    134,434
    
    
    
    Cash and cash equivalents, end of year
    
    $
    1,055,676
    
    
    $
    134,434Supplemental disclosures of cash flow informationNon-cash investment in WSB Financial Group Trust
    
    
    
    
    
    $
    248,000




---



##### 



WSB FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 Note 16  Stock Split
 Effective August 15, 2006 the Companys Board of Directors approved a 6.1429-for-1 common
stock split for shareholders of record on August 15, 2006. All share and per share
information has been retroactively adjusted to reflect this stock split. The Board of
Directors also approved an amendment to the Articles of Incorporation increasing the
authorized shares from 2,500,000 to 15,357,250.
 Note 17  Initial Public Offering
 On December 12, 2006, the Companys Registration Statement on Form S-1 covering the offering
of 2,300,000 shares of the Companys common stock, Commission file number 333-137038 was
declared effective. The Company signed the underwriting agreement on December 12, 2006 and
the offering closed on December 19, 2006. As of the date of the filing of this report, all
offered securities have been sold and the offering has terminated. The offering was managed
by D.A. Davidson & Co., the underwriter.On December 18, 2006, the underwriter exercised an over-allotment option to purchase an
additional 345,000 shares of the Companys common stock. The total price to the public for
the shares offered and sold by the Company, including the over-allotment, was $43.6 million.
The amount of expenses incurred for the Companys account in connection with the offering
includes approximately $2.5 million of underwriting discounts and commissions and offering
expenses of approximately $.9 million.
 Note 18  Contingencies
 At periodic intervals, the Washington State Department of Financial Institutions and the
Federal Deposit Insurance Corporation routinely examine the Companys financial statements
as part of their legally prescribed oversight of the banking industry. Based on these
examinations, the regulators can direct that the Companys financial statements be adjusted
in accordance with their findings.




---



##### 



WSB FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 Note 19  Selected Quarterly Financial Data (Unaudited)
 QUARTER ENDEDMarch 31,
    
    
    June, 30,
    
    
    September 30,
    
    
    December 31,(Dollars in thousands except per share data)
    
    2006
    
    
    2006
    
    
    2006
    
    
    2006
    
    
    TotalInterest income
    
    $
    5,690
    
    
    $
    6,713
    
    
    $
    7,688
    
    
    $
    8,251
    
    
    $
    28,342Interest expense
    
    
    2,238
    
    
    
    2,599
    
    
    
    3,261
    
    
    
    3,687
    
    
    
    11,785Net interest income
    
    
    3,452
    
    
    
    4,114
    
    
    
    4,427
    
    
    
    4,564
    
    
    
    16,557Provision for loan losses
    
    
    305
    
    
    
    498
    
    
    
    464
    
    
    
    256
    
    
    
    1,523Net interest income after provision for loan losses
    
    
    3,147
    
    
    
    3,616
    
    
    
    3,963
    
    
    
    4,308
    
    
    
    15,034Noninterest income
    
    
    1,221
    
    
    
    1,099
    
    
    
    1,224
    
    
    
    1,128
    
    
    
    4,672Noninterest expense
    
    
    2,949
    
    
    
    3,207
    
    
    
    3,446
    
    
    
    4,252
    
    
    
    13,854Income before federal income tax expense
    
    
    1,419
    
    
    
    1,508
    
    
    
    1,741
    
    
    
    1,184
    
    
    
    5,852Provision for federal income tax
    
    
    519
    
    
    
    461
    
    
    
    581
    
    
    
    406
    
    
    
    1,967Net income
    
    $
    900
    
    
    $
    1,047
    
    
    $
    1,160
    
    
    $
    778
    
    
    $
    3,885Earnings per shareBasic
    
    $
    0.33
    
    
    $
    0.38
    
    
    $
    0.42
    
    
    $
    0.24
    
    
    $
    1.35Diluted
    
    $
    0.29
    
    
    $
    0.33
    
    
    $
    0.36
    
    
    $
    0.21
    
    
    $
    1.18Weighted average shares outstandingBasic
    
    
    2,727,645
    
    
    
    2,736,244
    
    
    
    2,752,163
    
    
    
    3,259,489
    
    
    
    2,870,022Diluted
    
    
    3,089,106
    
    
    
    3,152,021
    
    
    
    3,203,347
    
    
    
    3,693,464
    
    
    
    3,285,622
 QUARTER ENDEDMarch 31,
    
    
    June, 30,
    
    
    September 30,
    
    
    December 31,(Dollars in thousands except per share data)
    
    2005
    
    
    2005
    
    
    2005
    
    
    2005
    
    
    TotalInterest income
    
    $
    2,854
    
    
    $
    3,635
    
    
    $
    4,326
    
    
    $
    4,878
    
    
    $
    15,693Interest expense
    
    
    829
    
    
    
    1,054
    
    
    
    1,480
    
    
    
    1,819
    
    
    
    5,182Net interest income
    
    
    2,025
    
    
    
    2,581
    
    
    
    2,846
    
    
    
    3,059
    
    
    
    10,511Provision for loan losses
    
    
    209
    
    
    
    356
    
    
    
    310
    
    
    
    476
    
    
    
    1,351Net interest income after provision for loan losses
    
    
    1,816
    
    
    
    2,225
    
    
    
    2,536
    
    
    
    2,583
    
    
    
    9,160Noninterest income
    
    
    924
    
    
    
    1,268
    
    
    
    1,516
    
    
    
    1,533
    
    
    
    5,241Noninterest expense
    
    
    2,027
    
    
    
    2,473
    
    
    
    2,752
    
    
    
    3,440
    
    
    
    10,692Income before federal income tax expense
    
    
    713
    
    
    
    1,020
    
    
    
    1,300
    
    
    
    676
    
    
    
    3,709Provision for federal income tax
    
    
    255
    
    
    
    325
    
    
    
    471
    
    
    
    246
    
    
    
    1,297Net income
    
    $
    458
    
    
    $
    695
    
    
    $
    829
    
    
    $
    430
    
    
    $
    2,412Earnings per shareBasic
    
    $
    0.18
    
    
    $
    0.27
    
    
    $
    0.31
    
    
    $
    0.16
    
    
    $
    0.91Diluted
    
    $
    0.16
    
    
    $
    0.24
    
    
    $
    0.28
    
    
    $
    0.14
    
    
    $
    0.82Weighted average shares outstandingBasic
    
    
    2,596,887
    
    
    
    2,605,846
    
    
    
    2,660,988
    
    
    
    2,705,397
    
    
    
    2,642,628Diluted
    
    
    2,779,656
    
    
    
    2,892,872
    
    
    
    2,961,331
    
    
    
    3,056,067
    
    
    
    2,925,092