##### 



Exhibit 13
 PORTIONS OF ANNUAL REPORT TO SHAREHOLDERS FOR THE
YEAR ENDED DECEMBER 31, 2007 INCORPORATED BY REFERENCE
 Managements Discussion and Analysis of Financial Condition and Results of Operations
 You should read the following discussion and analysis of our financial condition and results
of operations together with Summary Consolidated Financial Information and our consolidated
financial statements and related notes appearing elsewhere in this report. This discussion and
analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our
actual results may differ materially from those anticipated in these forward-looking statements as
a result of many factors, including those set forth under Risk Factors and elsewhere in this
report.
 Overview
      13-1




---



##### 



Key Financial MeasuresYears Ended December 31,2007
    
    2006
    
    2005
    
    2004
    
    2003(Dollars in thousands, except per share data)Net income (loss)
    
    $
    (5,200
    )
    
    $
    3,885
    
    
    $
    2,412
    
    
    $
    1,340
    
    
    $
    631Basic earnings (loss) per share
    
    
    (0.93
    )
    
    
    1.35
    
    
    
    0.91
    
    
    
    0.59
    
    
    
    0.36Diluted earnings (loss) per
share
    
    
    (0.93
    )
    
    
    1.18
    
    
    
    0.82
    
    
    
    0.55
    
    
    
    0.35Total assets
    
    
    489,333
    
    
    
    386,754
    
    
    
    249,998
    
    
    
    137,416
    
    
    
    76,012Net loans(1)
    
    
    393,436
    
    
    
    340,208
    
    
    
    207,172
    
    
    
    117,623
    
    
    
    58,222Total deposits
    
    
    421,445
    
    
    
    315,022
    
    
    
    224,167
    
    
    
    123,593
    
    
    
    68,003Net interest margin
    
    
    4.62
    %
    
    
    5.65
    %
    
    
    5.90
    %
    
    
    6.77
    %
    
    
    5.71
    %Efficiency Ratio
    
    
    67.6
    %
    
    
    65.3
    %
    
    
    67.9
    %
    
    
    70.4
    %
    
    
    66.6
    %Return on average assets
    
    
    -1.17
    %
    
    
    1.28
    %
    
    
    1.28
    %
    
    
    1.37
    %
    
    
    1.04
    %Return on average equity
    
    
    -8.4
    %
    
    
    19.6
    %
    
    
    16.6
    %
    
    
    13.6
    %
    
    
    9.9
    %
 
 (1)
    
    Includes loans held for sale. Recent Developments
 Loan Reviews.
  13-2




---



##### 



Regulatory Proceedings.
  FDIC Order
    FRB Notice
 Capital
 13-3




---



##### 



Compliance Efforts
  
    
    Conducting a comprehensive review of the qualifications of management and
existing staff and consideration of potential changes that may be required;
    
    Engaged a management recruiting firm to conduct a nationwide search for a new
chief executive officer, and identified highly qualified candidates for the position;
    
    Retained an independent third party consultant to review and evaluate the loan
portfolio and began implementing many of his recommendations to improve the Banks loan
approval and loan servicing processes;
    
    Added $13.9 million to total provisions for loan losses and unfunded
commitments in the third quarter of 2007 and increased fourth quarter 2007
reserves by $1.7 million;
    
    Strengthened collections and loss recovery teams to accelerate resolution of problem loans.
    
    Began developing a capital management plan to maintain strong capital ratios;
    
    Began implementing new procedures to strengthen the monitoring of lending
activities with particular emphasis on monitoring individual lender/borrower
relationships;
    
    Initiated a review of loan documentation policy and is correcting documentation deficiencies;
    
    Developed a liquidity and funds management plan to address anticipated funding needs;
    
    Increasing internal controls over loan portfolio review;
    
    Establishing a communications procedure for reporting progress in all areas to the FDIC and DFI.
   13-4




---



##### 



Changes in the Mortgage Lending Industry and Real Estate Market.
    Deposits.
 Downsizing of Mortgage Division.
 Gain on Land Sale.
 13-6




---



##### 



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.
 13-7




---



##### 



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.
 13-8




---



##### 



Stock Options. Accounting for Stock Issued to Employees, Share-Based Payment
     Results of Operations
  13-9




---



##### 



Financial Overview for the Years Ended December 31, 2007 and 2006
 2007
    
    
    2006
    
    
    Increase (Decrease)(Dollars in thousands, except per share data)Consolidated Statement of Earnings Data:Interest income
    
    $
    37,396
    
    
    $
    28,342
    
    
    $
    9,054Interest expense
    
    
    17,514
    
    
    
    11,785
    
    
    
    5,729Net interest income
    
    
    19,882
    
    
    
    16,557
    
    
    
    3,325Provision for loan losses
    
    
    15,879
    
    
    
    1,523
    
    
    
    14,356Net interest income after provision for loan losses
    
    
    4,003
    
    
    
    15,034
    
    
    
    (11,031
    )Non-interest income
    
    
    4,531
    
    
    
    4,672
    
    
    
    (141
    )Non-interest expense
    
    
    16,494
    
    
    
    13,854
    
    
    
    2,640Income before provision for income taxes
    
    
    (7,960
    )
    
    
    5,852
    
    
    
    (13,812
    )Provision for income taxes
    
    
    (2,760
    )
    
    
    1,967
    
    
    
    (4,727
    )Net income
    
    $
    (5,200
    )
    
    $
    3,885
    
    
    $
    (9,085
    )Earnings per share  basic
    
    $
    (0.93
    )
    
    $
    1.35
    
    
    $
    (2.28
    )Earnings per share  diluted
    
    $
    (0.93
    )
    
    $
    1.18
    
    
    $
    (2.11
    )
  Net Interest Income and Net Interest Margin.
      13-10




---



##### 



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




---



##### 



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




---



##### 



Non-Interest Expense.
 Year Ended December 31,2007
    
    
    2006
    
    
    Increase (Decrease)(In thousands)Salaries, wages and employee benefits
    
    $
    9,486
    
    
    $
    9,258
    
    
    $
    228Occupancy, equipment and depreciation
    
    
    1,767
    
    
    
    1,462
    
    
    
    305Data and item processing
    
    
    698
    
    
    
    512
    
    
    
    186Advertising expense
    
    
    180
    
    
    
    215
    
    
    
    (35
    )Printing, stationery and supplies
    
    
    191
    
    
    
    219
    
    
    
    (28
    )Telephone expense
    
    
    111
    
    
    
    111
    
    
    
    0Postage and courier
    
    
    155
    
    
    
    132
    
    
    
    23Legal fees
    
    
    301
    
    
    
    45
    
    
    
    256Director fees
    
    
    321
    
    
    
    303
    
    
    
    18Business & occupation taxes
    
    
    344
    
    
    
    274
    
    
    
    70Accounting and audit fees
    
    
    254
    
    
    
    77
    
    
    
    177Consultant fees
    
    
    216
    
    
    
    64
    
    
    
    152OREO losses and expenses, net
    
    
    266
    
    
    
    0
    
    
    
    266Provision for unfunded credit losses
    
    
    361
    
    
    
    0
    
    
    
    361Other
    
    
    1,843
    
    
    
    1,182
    
    
    
    661Total non-interest expense
    
    $
    16,494
    
    
    $
    13,854
    
    
    $
    2,640
  Provision (Benefits) for Income Taxes.
 Financial 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
  13-13




---



##### 



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
    )Other assets
    
    
    8,748
    
    
    
    
    
    
    
    
    
    
    
    6,217Total assets
    
    $
    304,116
    
    
    
    
    
    
    
    
    
    
    $
    187,711
 13-14




---



##### 



Fiscal Year Ended December 31,2006
    
    
    2005Average
    
    
    
    
    
    
    
    
    
    
    AverageYield
    
    
    
    
    
    
    
    
    
    
    YieldAverage
    
    
    
    
    
    
    or
    
    
    Average
    
    
    
    
    
    
    orBalance
    
    
    Interest
    
    
    Cost
    
    
    Balance
    
    
    Interest
    
    
    Cost(Dollars in thousands)Liabilities 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. 13-15




---



##### 



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.
 13-16




---



##### 



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 Condition
  Loans
   December 31,2007
    
    
    2006
    
    
    2005
    
    
    2004
    
    
    2003(In thousands)Real estate loans:Construction
    
    $
    253,188
    
    
    $
    194,709
    
    
    $
    103,772
    
    
    $
    41,211
    
    
    $
    15,592Commercial real estate
    
    
    72,435
    
    
    
    67,224
    
    
    
    46,947
    
    
    
    36,191
    
    
    
    13,987Residential real estate
    
    
    53,198
    
    
    
    63,942
    
    
    
    43,689
    
    
    
    24,659
    
    
    
    13,162Commercial & industrial loans
    
    
    31,377
    
    
    
    15,629
    
    
    
    13,123
    
    
    
    14,549
    
    
    
    14,117Consumer loans
    
    
    3,719
    
    
    
    3,235
    
    
    
    2,484
    
    
    
    2,202
    
    
    
    1,942Gross loans
    
    
    413,917
    
    
    
    344,739
    
    
    
    210,015
    
    
    
    118,812
    
    
    
    58,800
 13-17




---



##### 



December 31,2007
    
    
    2006
    
    
    2005
    
    
    2004
    
    
    2003(In thousands)Allowance for loan losses
    
    
    19,514
    
    
    
    3,972
    
    
    
    2,520
    
    
    
    1,189
    
    
    
    578Deferred loan fees, net
    
    
    967
    
    
    
    559
    
    
    
    323
    
    
    
    0
    
    
    
    0Net loans
    
    $
    393,436
    
    
    $
    340,208
    
    
    $
    207,172
    
    
    $
    117,623
    
    
    $
    58,222
   Maturity
    
    
    Rate Structure forOne
    
    
    One
    
    
    
    
    
    
    
    
    
    
    Loans Maturing OverYear
    
    
    through
    
    
    Over
    
    
    
    
    
    
    One Yearor
    
    
    Five
    
    
    Five
    
    
    
    
    
    
    Fixed
    
    
    FloatingLess
    
    
    Years
    
    
    Years
    
    
    Total
    
    
    Rate
    
    
    Rate(In thousands)Real estate loans:Construction & land development
    
    $
    220,631
    
    
    $
    21,821
    
    
    $
    10,736
    
    
    $
    253,188
    
    
    $
    16,222
    
    
    $
    16,335Commercial real estate
    
    
    5,781
    
    
    
    10,300
    
    
    
    56,354
    
    
    
    72,435
    
    
    
    14,669
    
    
    
    51,985Residential real estate
    
    
    25,387
    
    
    
    13,146
    
    
    
    14,665
    
    
    
    53,198
    
    
    
    16,155
    
    
    
    11,656Commercial & industrial loans
    
    
    9,538
    
    
    
    9,615
    
    
    
    12,224
    
    
    
    31,377
    
    
    
    12,947
    
    
    
    8,892Consumer & other loans
    
    
    746
    
    
    
    2,843
    
    
    
    130
    
    
    
    3,719
    
    
    
    1,783
    
    
    
    1,190Total
    
    $
    262,083
    
    
    $
    57,725
    
    
    $
    94,109
    
    
    $
    413,917
    
    
    $
    61,776
    
    
    $
    90,058
  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
 Concentrations.
  13-18




---



##### 



December 31,
    
    
    December 31,2007
    
    
    2006(In thousands)Real estate loans:Construction & land development loansInterest only
    
    $
    224,105
    
    
    $
    168,804Principal and interest
    
    
    29,083
    
    
    
    27,582Commercial real estate loansInterest only
    
    
    10,596
    
    
    
    13,669Principal and interest
    
    
    61,839
    
    
    
    67,081Residential real estate loansInterest only
    
    
    21,778
    
    
    
    24,762Principal and interest
    
    
    31,420
    
    
    
    23,918Commercial & industrial loansInterest only
    
    
    9,329
    
    
    
    4,623Principal and interest
    
    
    22,048
    
    
    
    12,114Consumer and other loansInterest only
    
    
    589
    
    
    
    258Principal and interest
    
    
    3,130
    
    
    
    1,928Total
    
    $
    413,917
    
    
    $
    344,739
  Non-Performing Assets.
 13-19




---



##### 



December 31,2007
    
    
    2006
    
    
    2005
    
    
    2004
    
    
    2003(Dollars in thousands)Non-accrual loans
    
    $
    24,923
    
    
    $
    219
    
    
    $
    128
    
    
    $
    100
    
    
    $
    Accruing loans past due 90 days or more
    
    
    399
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total non-performing loans (NPLs)
    
    
    25,322
    
    
    
    219
    
    
    
    128
    
    
    $
    100
    
    
    
    Other real estate owned
    
    
    983
    
    
    
    
    
    
    
    
    
    
    
    30
    
    
    
    30Total non-performing assets (NPAs)
    
    $
    26,305
    
    
    $
    219
    
    
    $
    128
    
    
    $
    130
    
    
    $
    30Selected ratiosNPLs to total loans
    
    
    6.12
    %
    
    
    0.06
    %
    
    
    0.06
    %
    
    
    0.09
    %
    
    
    0.00
    %NPAs to total assets
    
    
    5.38
    %
    
    
    0.06
    %
    
    
    0.05
    %
    
    
    0.09
    %
    
    
    0.04
    %
  OREO Properties.
  Impaired Loans.
  13-20




---



##### 



Year Ended December 31,2007
    
    
    2006Impaired LoansBalance at end of period (1)
    
    $
    25,437,668
    
    
    $
    Total related allowance for losses
    
    $
    5,009,141
    
    
    $
    Average investment in impaired loans
    
    $
    7,375,426
    
    
    $
    Interest income recognized on impaired loans
    
    $
    1,254,832
    
    
    $
    Interest income received on impaired loans
    
    $
    1,094,351
    
    
    $
    
 
 (1)
    
    Includes $11.8 million non-accrual loans.    Loan Commitments.
   Contingent Liabilities for Sold Loans.
 Allowance for Loan Losses
  13-21




---



##### 



Specific Allocations.
 General Allowances.
  Years Ended December 31,2007
    
    
    2006
    
    
    2005
    
    
    2004
    
    
    2003(Dollars in thousands)Allowance for loan losses:Beginning balance
    
    $
    3,972
    
    
    $
    2,520
    
    
    $
    1,189
    
    
    $
    578
    
    
    $
    351Loans charged offReal estate loans:Construction
    
    
    69
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Commercial real estate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Residential real estate
    
    
    156
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20Commercial & industrial loans
    
    
    88
    
    
    
    21
    
    
    
    
    
    
    
    
    
    
    
    Consumer loans
    
    
    26
    
    
    
    4
    
    
    
    1
    
    
    
    22
    
    
    
    Total
    
    
    339
    
    
    
    25
    
    
    
    1
    
    
    
    22
    
    
    
    20Recoveries:Real estate loans:Construction
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Commercial real estate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Residential real estate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13Commercial & industrial loans
    
    
    
    
    
    
    2
    
    
    
    1
    
    
    
    
    
    
    
    12Consumer loans
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    Total
    
    
    2
    
    
    
    2
    
    
    
    1
    
    
    
    1
    
    
    
    25Net loan charge-off (recovery)
    
    
    337
    
    
    
    23
    
    
    
    
    
    
    
    21
    
    
    
    (5
    )Reclassification of unfunded credit
commitments to other liabilities
    
    
    
    
    
    
    (48
    )
    
    
    (20
    )
    
    
    (22
    )
    
    
    (8
    )Provision for loan losses
    
    
    15,879
    
    
    
    1,523
    
    
    
    1,351
    
    
    
    654
    
    
    
    230Ending balance
    
    $
    19,514
    
    
    $
    3,972
    
    
    $
    2,520
    
    
    $
    1,189
    
    
    $
    578Loans
    
    $
    413,917
    
    
    $
    344,739
    
    
    $
    210,015
    
    
    $
    118,812
    
    
    $
    58,800Average loans
    
    
    401,198
    
    
    
    276,865
    
    
    
    161,357
    
    
    
    82,118
    
    
    
    47,535Non-performing loans
    
    
    25,322
    
    
    
    219
    
    
    
    128
    
    
    
    100
    
    
    
    Selected ratios:Net charge-offs to average loans
    
    
    0.08
    %
    
    
    0.01
    %
    
    
    0.00
    %
    
    
    0.03
    %
    
    
    (0.01
    )%
 13-22




---



##### 



Years Ended December 31,2007
    
    
    2006
    
    
    2005
    
    
    2004
    
    
    2003(Dollars in thousands)Provision for loan losses to average loans
    
    
    3.96
    %
    
    
    0.55
    %
    
    
    0.84
    %
    
    
    0.80
    %
    
    
    0.48
    %Allowance for loan losses to loans
outstanding at end of period
    
    
    4.71
    %
    
    
    1.15
    %
    
    
    1.20
    %
    
    
    1.00
    %
    
    
    0.98
    %Allowance for loan losses to
non-performing loans
    
    
    77.1
    %
    
    
    1813.7
    %
    
    
    1968.8
    %
    
    
    1189.0
    %
    
    
    N/A
    December 31,2007
    
    
    2006
    
    
    2005
    
    
    2004
    
    
    2003Percent of
    
    
    
    
    
    
    Percent of
    
    
    
    
    
    
    Percent of
    
    
    
    
    
    
    Percent of
    
    
    
    
    
    
    Percent ofLoans in
    
    
    
    
    
    
    Loans in
    
    
    
    
    
    
    Loans in
    
    
    
    
    
    
    Loans in
    
    
    
    
    
    
    Loans inEach
    
    
    
    
    
    
    Each
    
    
    
    
    
    
    Each
    
    
    
    
    
    
    Each
    
    
    
    
    
    
    EachAllocation
    
    
    Category
    
    
    Allocation
    
    
    Category
    
    
    Allocation
    
    
    Category
    
    
    Allocation
    
    
    Category
    
    
    Allocation
    
    
    Categoryof the
    
    
    to Total
    
    
    of the
    
    
    to Total
    
    
    of the
    
    
    to Total
    
    
    of the
    
    
    to Total
    
    
    of the
    
    
    to TotalAllowance
    
    
    Loans
    
    
    Allowance
    
    
    Loans
    
    
    Allowance
    
    
    Loans
    
    
    Allowance
    
    
    Loans
    
    
    Allowance
    
    
    Loans(Dollars in Thousands)Construction & land development
    
    $
    1,860
    
    
    
    61.2
    %
    
    $
    1,460
    
    
    
    56.5
    %
    
    $
    778
    
    
    
    49.4
    %
    
    
    309
    
    
    
    34.7
    %
    
    $
    117
    
    
    
    26.5
    %Commercial real estate
    
    
    601
    
    
    
    17.5
    %
    
    
    504
    
    
    
    19.5
    %
    
    
    352
    
    
    
    22.4
    %
    
    
    271
    
    
    
    30.5
    %
    
    
    105
    
    
    
    23.8
    %Residential real estate
    
    
    143
    
    
    
    12.9
    %
    
    
    160
    
    
    
    18.5
    %
    
    
    109
    
    
    
    20.8
    %
    
    
    62
    
    
    
    20.8
    %
    
    
    33
    
    
    
    22.4
    %Commercial & industrial loans
    
    
    149
    
    
    
    7.6
    %
    
    
    117
    
    
    
    4.5
    %
    
    
    98
    
    
    
    6.2
    %
    
    
    109
    
    
    
    12.2
    %
    
    
    106
    
    
    
    24.0
    %Consumer loans
    
    
    42
    
    
    
    0.9
    %
    
    
    32
    
    
    
    0.9
    %
    
    
    25
    
    
    
    1.2
    %
    
    
    22
    
    
    
    1.9
    %
    
    
    19
    
    
    
    3.3
    %Direct and Unallocated
    
    $
    16,719
    
    
    
    
    
    
    $
    1,698
    
    
    
    
    
    
    $
    1.157
    
    
    
    
    
    
    $
    416
    
    
    
    
    
    
    $
    198Total
    
    $
    19,514
    
    
    
    100.0
    %
    
    $
    3,972
    
    
    
    100.0
    %
    
    $
    2,520
    
    
    
    100.0
    %
    
    $
    1,189
    
    
    
    100.0
    %
    
    $
    578
    
    
    
    100.0
    %
   13-23




---



##### 



Investments
   Carrying Value at December 31,2007
    
    
    2006
    
    
    2005(In thousands)U.S. government agencies
    
    $
    6,980
    
    
    $
    6,382
    
    
    $
    6,327Obligations of states and political subdivisions
    
    
    1,813
    
    
    
    1,812
    
    
    
    1,825Mortgage-backed securities
    
    
    39
    
    
    
    50
    
    
    
    83Other securities
    
    
    
    
    
    
    
    
    
    
    Total investment securities
    
    $
    8,832
    
    
    $
    8,244
    
    
    $
    8,235
  December 31, 2007After One Year but
    
    
    After Five Years butWithin One Year
    
    
    within Five Years
    
    
    within Ten Years
    
    
    After Ten YearsAmount
    
    
    Yield
    
    
    Amount
    
    
    Yield
    
    
    Amount
    
    
    Yield
    
    
    Amount
    
    
    Yield(Dollars in thousands)U.S. government agencies
    
    $
    998
    
    
    
    4.52
    %
    
    $
    5,982
    
    
    
    4.95
    %
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    Obligations of states and political subdivisions
    
    
    
    
    
    
    
    
    
    
    502
    
    
    
    3.80
    %
    
    
    1,089
    
    
    
    4.25
    %
    
    
    222
    
    
    
    4.55
    %Mortgage-backed securities
    
    
    8
    
    
    
    4.52
    %
    
    
    31
    
    
    
    4.52
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total available for sale
    
    $
    1,006
    
    
    
    4.52
    %
    
    $
    6,515
    
    
    
    4.86
    %
    
    $
    1,089
    
    
    
    4.25
    %
    
    $
    222
    
    
    
    4.55
    %
 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
    %
 Deposits




---



##### 



Years Ended December 31,2007
    
    
    2006
    
    
    2005Average
    
    
    Average
    
    
    Average
    
    
    Average
    
    
    Average
    
    
    AverageBalance
    
    
    Rate
    
    
    Balance
    
    
    Rate
    
    
    Balance
    
    
    Rate(Dollars in Thousands)Interest-bearing demand
    
    $
    7,542
    
    
    
    1.02
    %
    
    $
    11,682
    
    
    
    0.61
    %
    
    $
    10,895
    
    
    
    0.40
    %Money market
    
    
    99,941
    
    
    
    4.49
    %
    
    
    114,527
    
    
    
    4.50
    %
    
    
    69,722
    
    
    
    3.97
    %Savings
    
    
    7,802
    
    
    
    3.78
    %
    
    
    3,844
    
    
    
    1.53
    %
    
    
    4,474
    
    
    
    0.98
    %Time certificates of deposit
    
    
    226,050
    
    
    
    5.33
    %
    
    
    117,400
    
    
    
    4.99
    %
    
    
    63,576
    
    
    
    3.37
    %Non-interest bearing deposits
    
    
    28,426
    
    
    
    0.00
    %
    
    
    25,736
    
    
    
    0.00
    %
    
    
    19,884
    
    
    
    0.00
    %Total
    
    $
    369,761
    
    
    
    4.57
    %
    
    $
    273,189
    
    
    
    4.08
    %
    
    $
    168,551
    
    
    
    2.97
    %
  December 31,2007(In thousands)Due in three months or less
    
    $
    37,459Due in over three months through six months
    
    
    38,605Due in over six months through twelve months
    
    
    32,092Due in over twelve months
    
    
    41,043Total
    
    $
    149,199
  Shareholders Equity
 Initial Public Offering.
 December 31, 2007 Overview.
 2006 Overview.
 Stock Split.
 13-25




---



##### 



Capital Resources
  Regulatory Requirements(Greater than or equal to
    
    Actual at December 31, 2007stated percentage)
    
    
    
    
    
    WSB FinancialAdequately Capitalized
    
    Well Capitalized
    
    Westsound Bank
    
    Group, Inc.Tier 1 leverage capital ratio
    
    
    4.0
    %
    
    
    5.0
    %
    
    
    13.6
    %
    
    
    13.9
    %Tier 1 risk-based capital
    
    
    4.0
    %
    
    
    6.0
    %
    
    
    15.0
    %
    
    
    15.4
    %Total risk-based capital
    
    
    8.0
    %
    
    
    10.0
    %
    
    
    16.3
    %
    
    
    16.7
    %
 Regulatory Requirements(Greater than or equal to
    
    Actual at December 31, 2006stated percentage)
    
    
    
    
    
    WSB 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
    %
      13-24




---



##### 



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
    
    
    294,826
    
    
    
    205,932
    
    
    
    70,365
    
    
    
    18,529
    
    
    
    Operating lease obligations
    
    
    887
    
    
    
    294
    
    
    
    514
    
    
    
    79
    
    
    
    Total
    
    $
    303,961
    
    
    $
    206,226
    
    
    $
    70,879
    
    
    $
    18,608
    
    
    $
    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
    
    $
    78,580
    
    
    $
    72,024
    
    
    $
    6,556
    
    
    $
    
    
    
    $
    Credit cards
    
    
    2,315
    
    
    
    
    
    
    
    2,315
    
    
    
    
    
    
    
    Standby letters of credit
    
    
    715
    
    
    
    715
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    81,610
    
    
    $
    72,739
    
    
    $
    8,871
    
    
    $
    
    
    
    $
    
  13-27




---



##### 



Liquidity
        Quantitative and Qualitative Disclosures about Market Risk
  13-28




---



##### 



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
    
    $
    58,047
    
    
    
    4.0
    %
    
    
    11.9
    %
    
    
    102.34
    %Up 100 basis points
    
    
    57,172
    
    
    
    2.5
    %
    
    
    11.7
    %
    
    
    100.80
    %BASE
    
    
    55,798
    
    
    
    
    
    
    
    11.4
    %
    
    
    98.37
    %Down 100 basis points
    
    
    56,182
    
    
    
    0.7
    %
    
    
    11.5
    %
    
    
    99.05
    %Down 200 basis points
    
    
    55,362
    
    
    
    (0.8
    )%
    
    
    11.3
    %
    
    
    97.61
    %
  Net Interest Income Simulation.
 13-29




---



##### 



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
    
    $
    15,111
    
    
    
    8.0
    %
    
    
    3.30
    %
    
    
    24Up 100 basis points
    
    
    14,584
    
    
    
    4.2
    %
    
    
    3.19
    %
    
    
    13BASE
    
    
    13,993
    
    
    
    
    
    
    
    3.06
    %
    
    
    Down 100 basis points
    
    
    13,296
    
    
    
    (5.0
    )%
    
    
    2.91
    %
    
    
    (15
    )Down 200 basis points
    
    
    12,746
    
    
    
    (8.9
    )%
    
    
    2.79
    %
    
    
    (27
    )
 
 (1)
    
    These percentages are not comparable to other information discussing the percent of net
interest margin since the income simulation does not take into account loan fees. Gap Analysis.
  13-30




---



##### 



December 31, 2007Amounts 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
    
    $
    2,425
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    7,601
    
    
    $
    10,026Federal funds sold
    
    
    56,900
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    56,900Investment securities
    
    
    1,393
    
    
    
    2,305
    
    
    
    4,246
    
    
    
    785
    
    
    
    103
    
    
    
    8,832Loans
    
    
    180,842
    
    
    
    117,258
    
    
    
    75,436
    
    
    
    15,440
    
    
    
    23,974
    
    
    
    412,950Other assets(2)
    
    
    567
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    58
    
    
    
    625Total assets
    
    $
    242,127
    
    
    $
    119,563
    
    
    $
    79,682
    
    
    $
    16,225
    
    
    $
    31,736
    
    
    $
    489,333Liabilities and Stockholders EquityNon-interest-bearing demand
deposits
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    24,711
    
    
    $
    24,711Interest-bearing demand, money
market and savings
    
    
    12,195
    
    
    
    36,583
    
    
    
    47,754
    
    
    
    5,376
    
    
    
    
    
    
    
    101,908Time certificates of deposit
    
    
    78,237
    
    
    
    127,846
    
    
    
    76,462
    
    
    
    12,431
    
    
    
    (150
    )
    
    
    294,826Short-term debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Long-term debt
    
    
    8,248
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,248Other liabilities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,920
    
    
    
    2,920Stockholders equity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    56,720
    
    
    
    56,720Total liabilities and
stockholders equity
    
    $
    98,680
    
    
    $
    164,429
    
    
    $
    124,216
    
    
    $
    17,807
    
    
    $
    84,201
    
    
    $
    489,333Period gap
    
    
    143,447
    
    
    
    (44,866
    )
    
    
    (44,534
    )
    
    
    (1,582
    )
    
    
    (52,465
    )Cumulative interest-earning
assets
    
    
    242,127
    
    
    
    361,690
    
    
    
    441,372
    
    
    
    457,597Cumulative interest-bearing
liabilities
    
    
    98,680
    
    
    
    263,109
    
    
    
    387,325
    
    
    
    405,132Cumulative gap
    
    
    143,447
    
    
    
    98,581
    
    
    
    54,047
    
    
    
    52,465Cumulative interest-earning
assets to cumulative
interest-bearing liabilities
    
    
    2.45
    
    
    
    1.37
    
    
    
    1.14
    
    
    
    1.13Cumulative gap as a percent of:Total assets
    
    
    29.3
    %
    
    
    20.1
    %
    
    
    11.0
    %
    
    
    10.7
    %Interest-earning assets
    
    
    59.2
    %
    
    
    27.3
    %
    
    
    12.2
    %
    
    
    11.5
    %
 
 (1)
    
    Assets or liabilities and equity which are not interest rate-sensitive.(2)
    
    Allowance for loan losses of $19.5 million as of December 31, 2007.  13-31




---



##### 



Recent Accounting Pronouncements
  13-32




---



##### 



INDEX TO FINANCIAL STATEMENTS
 Report of Independent Registered Public Accounting FirmConsolidated Statement of Financial ConditionConsolidated Statement of OperationsConsolidated
Statement of Changes in Stockholders Equity and Comprehensive Income (Loss)Consolidated Statement of Cash FlowsNotes to Consolidated Financial Statements
 13-33




---



##### 



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
     
 13-34




---



##### 



WSB FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
 December 31,
    
    
    December 31,2007
    
    
    2006ASSETSCash and cash equivalentsCash and due from banks
    
    $
    10,026,460
    
    
    $
    9,048,104Federal funds sold
    
    
    56,900,000
    
    
    
    17,150,000Total cash and cash equivalents
    
    
    66,926,460
    
    
    
    26,198,104Investment Securities available for sale, at fair value
    
    
    8,832,146
    
    
    
    8,243,643Federal Home Loan Bank stock, at cost
    
    
    318,900
    
    
    
    234,200Loans held for sale
    
    
    
    
    
    
    11,007,194Loans
    
    
    412,949,947
    
    
    
    333,172,808Less allowance for loan losses
    
    
    (19,513,765
    )
    
    
    (3,971,789
    )Total loans, net
    
    
    393,436,182
    
    
    
    329,201,019Premises and equipment, net
    
    
    8,759,750
    
    
    
    7,845,740Accrued interest receivable
    
    
    2,540,554
    
    
    
    1,980,117Other real estate owned
    
    
    983,411
    
    
    
    Deferred tax asset
    
    
    6,496,106
    
    
    
    827,910Other assets
    
    
    1,039,655
    
    
    
    1,216,227Total assets
    
    $
    489,333,164
    
    
    $
    386,754,154LIABILITIES AND STOCKHOLDERS EQUITYDepositsNon-interest-bearing
    
    $
    24,711,246
    
    
    $
    26,864,122Interest-bearing
    
    
    396,733,599
    
    
    
    288,157,881Total deposits
    
    
    421,444,845
    
    
    
    315,022,003Accrued interest payable
    
    
    1,955,434
    
    
    
    1,108,688Other liabilities
    
    
    964,870
    
    
    
    718,335Junior subordinated debentures
    
    
    8,248,000
    
    
    
    8,248,000Total liabilities
    
    
    432,613,149
    
    
    
    325,097,026Stockholders equityCommon stock, $1 par value; 15,357,250 shares
authorized; 5,574,853 and 5,545,673 shares issued and
outstanding at December 31, 2007 and December 31,
2006, respectively
    
    
    5,574,853
    
    
    
    5,545,673Additional paid-in capital
    
    
    48,223,669
    
    
    
    48,089,861Retained earnings
    
    
    2,853,756
    
    
    
    8,053,915Accumulated other comprehensive income (loss)
    
    
    67,737
    
    
    
    (32,321
    )Total stockholders equity
    
    
    56,720,015
    
    
    
    61,657,128Total liabilities and stockholders equity
    
    $
    489,333,164
    
    
    $
    386,754,154
 See accompanying notes.
 13-35




---



##### 



WSB FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
 Year ended December 31,2007
    
    
    2006
    
    
    2005INTEREST INCOMEInterest and fees on loans
    
    $
    35,958,390
    
    
    $
    27,633,568
    
    
    $
    15,088,071Interest on investmentsTaxable
    
    
    316,280
    
    
    
    265,174
    
    
    
    201,208Tax-exempt
    
    
    75,510
    
    
    
    75,842
    
    
    
    61,692Interest on federal funds sold
    
    
    879,040
    
    
    
    282,055
    
    
    
    295,224Other interest income
    
    
    166,581
    
    
    
    84,466
    
    
    
    46,666Total interest income
    
    
    37,395,801
    
    
    
    28,341,105
    
    
    
    15,692,861INTEREST EXPENSEDeposits
    
    
    16,910,386
    
    
    
    11,143,894
    
    
    
    4,997,880Other borrowings
    
    
    1,241
    
    
    
    75,232
    
    
    
    5,069Junior subordinated debentures
    
    
    603,017
    
    
    
    565,486
    
    
    
    178,529Total interest expense
    
    
    17,514,644
    
    
    
    11,784,612
    
    
    
    5,181,478NET INTEREST INCOME
    
    
    19,881,157
    
    
    
    16,556,493
    
    
    
    10,511,383PROVISION FOR LOAN LOSSES
    
    
    15,879,000
    
    
    
    1,522,917
    
    
    
    1,351,814Net interest income after provision for loan losses
    
    
    4,002,157
    
    
    
    15,033,576
    
    
    
    9,159,569NONINTEREST INCOMEService charges on deposit accounts
    
    
    381,380
    
    
    
    255,659
    
    
    
    178,651Other customer fees
    
    
    789,513
    
    
    
    878,372
    
    
    
    605,984Net gain on sale of loans
    
    
    2,845,046
    
    
    
    3,483,303
    
    
    
    4,383,487Other income
    
    
    515,029
    
    
    
    54,754
    
    
    
    72,674Total noninterest income
    
    
    4,530,968
    
    
    
    4,672,088
    
    
    
    5,240,796NONINTEREST EXPENSESalaries and employee benefits
    
    
    9,486,241
    
    
    
    9,257,885
    
    
    
    7,264,567Premises lease
    
    
    328,825
    
    
    
    338,113
    
    
    
    246,222Depreciation and amortization expense
    
    
    824,207
    
    
    
    611,766
    
    
    
    371,273Occupancy and equipment
    
    
    613,537
    
    
    
    511,886
    
    
    
    497,093Data and item processing
    
    
    698,446
    
    
    
    511,610
    
    
    
    362,544Advertising expense
    
    
    180,194
    
    
    
    214,680
    
    
    
    183,163Printing, stationery and supplies
    
    
    191,392
    
    
    
    218,935
    
    
    
    213,338Telephone expense
    
    
    110,757
    
    
    
    110,625
    
    
    
    77,589Postage and courier
    
    
    154,911
    
    
    
    132,320
    
    
    
    108,799Legal fees
    
    
    301,124
    
    
    
    44,570
    
    
    
    28,330Director fees
    
    
    321,000
    
    
    
    303,334
    
    
    
    233,410Business and occupation taxes
    
    
    343,628
    
    
    
    273,522
    
    
    
    187,795Accounting and audit fees
    
    
    253,680
    
    
    
    76,987
    
    
    
    43,170Consultant fees
    
    
    216,127
    
    
    
    63,805
    
    
    
    44,108OREO losses and expense, net
    
    
    265,891
    
    
    
    
    
    
    
    Provision for unfunded credit losses
    
    
    361,400
    
    
    
    
    
    
    
    Other expenses
    
    
    1,841,652
    
    
    
    1,183,523
    
    
    
    830,836Total noninterest expense
    
    
    16,493,012
    
    
    
    13,853,561
    
    
    
    10,692,237INCOME (LOSS) BEFORE PROVISION
(BENEFIT) FOR INCOME TAXES
    
    
    (7,959,887
    )
    
    
    5,852,103
    
    
    
    3,708,128PROVISION (BENEFIT) FOR INCOME TAXES
    
    
    (2,759,728
    )
    
    
    1,967,420
    
    
    
    1,296,558NET INCOME (LOSS)
    
    $
    (5,200,159
    )
    
    $
    3,884,683
    
    
    $
    2,411,570EARNINGS (LOSS) PER SHAREBasic
    
    $
    (0.93
    )
    
    $
    1.35
    
    
    $
    0.91Diluted
    
    $
    (0.93
    )
    
    $
    1.18
    
    
    $
    0.82Weighted-average number of common shares outstanding
    
    
    5,565,123
    
    
    
    2,870,022
    
    
    
    2,642,628Weighted-average number of dilutive shares outstanding
    
    
    5,565,123
    
    
    
    3,285,622
    
    
    
    2,925,092
 See accompanying notes.
 13-36




---



##### 



WSB FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY AND
COMPREHENSIVE INCOME (LOSS)
 AccumulatedCommon Stock
    
    
    Additional
    
    
    
    
    
    
    OtherNumber
    
    
    
    
    
    
    Paid-In
    
    
    Retained
    
    
    Comprehensiveof Shares
    
    
    Amount
    
    
    Capital
    
    
    Earnings
    
    
    Income (Loss)
    
    
    TotalBalance, 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 of $28,164
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (56,229
    )
    
    
    (56,229
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,355,341Tax benefit of stock options
exercised
    
    
    
    
    
    
    
    
    
    
    42,670
    
    
    
    
    
    
    
    
    
    
    
    42,670Stock issued for director 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 of ($15,710)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    32,056
    
    
    
    32,056Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,916,739Tax benefit of stock options
exercised
    
    
    
    
    
    
    
    
    
    
    375,643
    
    
    
    
    
    
    
    
    
    
    
    375,643Fractional shares repurchased
    
    
    (228
    )
    
    
    (228
    )
    
    
    (758
    )
    
    
    (2,008
    )
    
    
    
    
    
    
    (2,994
    )Stock repurchases
    
    
    (14,068
    )
    
    
    (14,068
    )
    
    
    (46,786
    )
    
    
    (124,189
    )
    
    
    
    
    
    
    (185,043
    )Stock issued for director fees
    
    
    10,473
    
    
    
    10,473
    
    
    
    113,460
    
    
    
    
    
    
    
    
    
    
    
    123,933Stock options exercised
    
    
    182,448
    
    
    
    182,448
    
    
    
    1,003,808
    
    
    
    
    
    
    
    
    
    
    
    1,186,256Net proceeds from issuance of
common stock in public
offering
    
    
    2,645,000
    
    
    
    2,645,000
    
    
    
    37,591,836
    
    
    
    
    
    
    
    
    
    
    
    40,236,836Balance, December 31, 2006
    
    
    5,545,673
    
    
    $
    5,545,673
    
    
    $
    48,089,861
    
    
    $
    8,053,915
    
    
    $
    (32,321
    )
    
    $
    61,657,128Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,200,159
    )
    
    
    
    
    
    
    (5,200,159
    )Other comprehensive income, net
of tax of ($51,545)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    100,058
    
    
    
    100,058Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,100,101
    )Stock based compensation expense
    
    
    
    
    
    
    
    
    
    
    26,484
    
    
    
    
    
    
    
    
    
    
    
    26,484Stock options exercised
    
    
    29,180
    
    
    
    29,180
    
    
    
    107,324
    
    
    
    
    
    
    
    
    
    
    
    136,504Balance, December 31, 2007
    
    
    5,574,853
    
    
    $
    5,574,853
    
    
    $
    48,223,669
    
    
    $
    2,853,756
    
    
    $
    67,737
    
    
    $
    56,720,015
 See accompanying notes.
 13-37




---



##### 



WSB FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
 Year Ended December 31,2007
    
    
    2006
    
    
    2005CASH FLOWS FROM OPERATING ACTIVITIESNet (loss) income
    
    $
    (5,200,159
    )
    
    $
    3,884,683
    
    
    $
    2,411,570Adjustments to reconcile net (loss) income to net cash
from operating activitiesProvision for loan losses
    
    
    15,879,000
    
    
    
    1,522,917
    
    
    
    1,351,814Provision for unfunded credit losses
    
    
    361,400
    
    
    
    
    
    
    
    Provision for OREO write-down
    
    
    186,312
    
    
    
    
    
    
    
    Depreciation and amortization
    
    
    824,207
    
    
    
    611,766
    
    
    
    371,273Amortization (accretion) of premiums/discounts
    
    
    (2,318
    )
    
    
    6,764
    
    
    
    10,288Director fees paid by stock in lieu of cash
    
    
    
    
    
    
    123,933
    
    
    
    152,335Excess tax benefits from stock options exercised
    
    
    
    
    
    
    (375,643
    )
    
    
    (42,670
    )Stock based compensation
    
    
    26,484
    
    
    
    
    
    
    
    Net gain on sale of premises and equipment and OREO
    
    
    (410,049
    )
    
    
    
    
    
    
    Origination of loans held for sale
    
    
    (93,986,895
    )
    
    
    (122,304,063
    )
    
    
    (144,919,748
    )Proceeds from sale of loans held for sale
    
    
    107,839,135
    
    
    
    123,512,035
    
    
    
    142,595,483Net gain on sale of loans
    
    
    (2,845,046
    )
    
    
    (3,483,303
    )
    
    
    (4,388,487
    )Deferred income tax benefit
    
    
    (5,719,741
    )
    
    
    (674,367
    )
    
    
    (511,058
    )Net change inAccrued interest receivable
    
    
    (560,437
    )
    
    
    (981,095
    )
    
    
    (556,272
    )Other assets
    
    
    176,572
    
    
    
    (226,477
    )
    
    
    199,266Accrued interest payable
    
    
    846,746
    
    
    
    874,514
    
    
    
    107,370Other liabilities
    
    
    (114,865
    )
    
    
    (625,037
    )
    
    
    1,091,667Net cash from operating activities
    
    
    17,300,346
    
    
    
    1,866,627
    
    
    
    (2,127,169
    )CASH FLOWS FROM INVESTING ACTIVITIESNet change in loans
    
    
    (82,247,717
    )
    
    
    (132,283,986
    )
    
    
    (84,167,657
    )Purchases of investments available-for-sale
    
    
    (5,745,804
    )
    
    
    (1,000,000
    )
    
    
    (3,841,294
    )Proceeds from calls and maturities of investments
available-for-sale
    
    
    5,300,000
    
    
    
    1,000,000
    
    
    
    Principal repayments of mortgage-backed securities
    
    
    11,222
    
    
    
    32,490
    
    
    
    69,688Purchase of Federal Home Loan Bank stock
    
    
    (84,700
    )
    
    
    
    
    
    
    (133,000
    )Proceeds from sale of other real estate owned
    
    
    980,193
    
    
    
    
    
    
    
    Purchases of premises and equipment
    
    
    (2,713,201
    )
    
    
    (2,440,783
    )
    
    
    (3,835,657
    )Proceeds from sale of premises and equipment
    
    
    1,368,671
    
    
    
    
    
    
    
    Net cash from investing activities
    
    
    (83,131,336
    )
    
    
    (134,692,279
    )
    
    
    (91,907,920
    )CASH FLOW FROM FINANCING ACTIVITIESNet change in non-interest-bearing deposits
    
    
    (2,152,876
    )
    
    
    5,074,312
    
    
    
    7,065,877Net change in interest-bearing deposits
    
    
    108,575,718
    
    
    
    85,780,918
    
    
    
    93,508,104Proceeds from the issuance of junior subordinated
debentures payable
    
    
    
    
    
    
    
    
    
    
    8,248,000Net proceeds from sale of stock
    
    
    
    
    
    
    40,236,836
    
    
    
    213,550Proceeds from exercise of stock options
    
    
    136,504
    
    
    
    1,186,256
    
    
    
    330,300Excess tax benefit from stock options exercised
    
    
    
    
    
    
    375,643
    
    
    
    42,670Fractional share payout
    
    
    
    
    
    
    (2,994
    )
    
    
    Stock repurchases
    
    
    
    
    
    
    (185,043
    )
    
    
    Net cash from financing activities
    
    
    106,559,346
    
    
    
    132,465,928
    
    
    
    109,408,501NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    40,728,356
    
    
    
    (359,724
    )
    
    
    15,373,412CASH AND CASH EQUIVALENTS, beginning of period
    
    
    26,198,104
    
    
    
    26,557,828
    
    
    
    11,184,416CASH AND CASH EQUIVALENTS, end of period
    
    $
    66,926,460
    
    
    $
    26,198,104
    
    
    $
    26,557,828SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATIONCash paid for interest
    
    $
    16,667,898
    
    
    $
    10,910,098
    
    
    $
    5,074,108Income taxes paid
    
    $
    2,790,000
    
    
    $
    2,550,000
    
    
    $
    555,000NON-CASH INVESTING ACTIVITIESReal estate acquired through foreclosure in settlement of loans
    
    $
    2,133,554
    
    
    
    
    
    
    
    
 See accompanying notes.
 13-38






---



##### 



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




---



##### 



WSB FINANCIAL GROUP, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 Note 1  Summary of Significant Accounting Policies (continued)
    Federal Home Loan Bank stock
 Loans held for sale
  Accounting for derivatives
 13-40




---



##### 



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
       13-41




---



##### 



WSB FINANCIAL GROUP, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 Note 1  Summary of Significant Accounting Policies (continued)
 Transfers of financial assets
 Premises and equipment
 Foreclosed assets
 Income taxes
 Stock option plans Share-Based Payment, Accounting for Stock-Based Compensation. Accounting for Stock Issued to Employees Statement of Cash Flows
  13-42




---



##### 



WSB FINANCIAL GROUP, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 Note 1  Summary of Significant Accounting Policies (continued)
  2005Net income as reported
    
    $
    2,411,570Additional compensation for fair
value of stock options, net of tax
    
    
    (501,686
    )Pro forma net income
    
    $
    1,909,884Basic earnings per shareAs reported
    
    $
    0.91Pro forma
    
    $
    0.72Diluted earnings per share
    
    $
    0.82Pro forma
    
    $
    0.65
 Earnings per common share
  2007
    
    
    2006
    
    
    2005NumeratorNet (loss) income
    
    $
    (5,200,159
    )
    
    $
    3,884,683
    
    
    $
    2,411,570DenominatorWeighted-average number of
common shares outstanding
    
    
    5,565,123
    
    
    
    2,870,022
    
    
    
    2,642,628Incremental shares assumed
for stock options (1)
    
    
    
    
    
    
    415,600
    
    
    
    282,464Weighted-average number of dilutive
shares outstanding
    
    
    5,565,123
    
    
    
    3,285,622
    
    
    
    2,925,092Basic earnings (loss) per common share
    
    $
    (0.93
    )
    
    $
    1.35
    
    
    $
    0.91Diluted earnings (loss) per common share (2)
    
    $
    (0.93
    )
    
    $
    1.18
    
    
    $
    0.82
 
 (1)
    
    There were no anti-dilutive options at December 31, 2007, December 31, 2006, or
December 31, 2005.(2)
    
    Excludes all stock options as anti-dilutive in periods with net losses. 13-43




---



##### 



WSB FINANCIAL GROUP, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 Note 1  Summary of Significant Accounting Policies (continued)
 Comprehensive income
  2007
    
    
    2006
    
    
    2005Unrealized holding gain (loss) on available-for-sale securities
    
    $
    151,603
    
    
    $
    47,766
    
    
    $
    (84,393
    )Tax (provision) benefit
    
    
    (51,545
    )
    
    
    (15,710
    )
    
    
    28,164Net-of-tax-amount
    
    $
    100,058
    
    
    $
    32,056
    
    
    $
    (56,229
    )
  2007
    
    
    2006
    
    
    2005Unrealized holding gain (loss) on available-for-sale securities
    
    $
    102,631
    
    
    $
    (48,971
    )
    
    $
    (96,737
    )Tax (provision) benefit
    
    
    (34,894
    )
    
    
    16,650
    
    
    
    32,360Net-of-tax-amount
    
    $
    67,737
    
    
    $
    (32,321
    )
    
    $
    (64,377
    )
 Advertising costs
 Recent accounting pronouncements
 Fair Value Measurements
 13-44




---



##### 



WSB FINANCIAL GROUP, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 Note 1  Summary of Significant Accounting Policies (continued)
 Employers Accounting for Defined Benefit
Pension and other Post-retirement Plans an amendment of FASB Statements No. 87, 88, 106, and
132(R)
 The Fair Value Option for Financial Assets
and Financial Liabilities an amendment of FASB Statement No. 115
 Noncontrolling Interests in Consolidated
Financial Statements  an amendment of ARB No. 51
 Business Combinations
 Reclassifications
 13-45




---



##### 



WSB FINANCIAL GROUP, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 Note 2  Regulatory Actions
 FDIC Order
    FRB Notice
 13-46




---



##### 



WSB FINANCIAL GROUP, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 Note 2  Regulatory Actions (continued)
 Capital
  Compliance Efforts
  
    
    Conducting a comprehensive review of the qualifications of management and
existing staff and consideration of potential changes that may be required;
    
    Engaged a management recruiting firm to conduct a nationwide search for a new
chief executive officer, and identified highly qualified candidates
for the position which is expected to be filled by April 30, 2008
subject to regulatory approval;
    
    Retained an independent third party consultant to review and evaluate the loan
portfolio and began implementing many of his recommendations to improve the Banks loan
approval and loan servicing processes;
    
    Added $13.9 million to total provisions for loan losses and unfunded
commitments in the third quarter of 2007 and increased fourth quarter 2007
reserves by $1.7 million;
    
    Strengthened collections and loss recovery teams to accelerate resolution of problem loans.
    
    Began developing a capital management plan to maintain strong capital ratios;
    
    Began implementing new procedures to strengthen the monitoring of lending
activities with particular emphasis on monitoring individual lender/borrower
relationships;
    
    Initiated a review of loan documentation policy and is correcting documentation deficiencies;
    
    Developed a liquidity and funds management plan to address anticipated funding needs;
    
    Increasing internal controls over loan portfolio review;
    
    Establishing a communications procedure for reporting progress in all areas to the FDIC and DFI.
 13-47




---



##### 



WSB FINANCIAL GROUP, INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 Note 2  Regulatory Actions (continued)
  Note 3  Investment Securities
  Gross
    
    
    Gross Unrealized LossesAmortized
    
    
    Unrealized
    
    
    Less Than 12
    
    
    12 Months orCost
    
    
    Gain
    
    
    Months
    
    
    Longer
    
    
    Fair ValueDecember 31, 2007Available for saleMunicipal securities
    
    $
    1,810,241
    
    
    $
    17,213
    
    
    
    
    
    
    $
    (14,631
    )
    
    $
    1,812,823Mortgage-backed
    
    
    39,136
    
    
    
    
    
    
    
    
    
    
    
    (22
    )
    
    
    39,114Federal agencies
    
    
    6,880,138
    
    
    
    102,311
    
    
    
    (457
    )
    
    
    (1,783
    )
    
    
    6,980,209$
    8,729,515
    
    
    $
    119,524
    
    
    $
    (457
    )
    
    $
    (16,436
    )
    
    $
    8,832,146December 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
    )
    
    $
    8,243.643
  Available-for-saleAmortized Cost
    
    
    Fair ValueAccounts maturing inOne year or less
    
    $
    1,008,302
    
    
    $
    1,006,570After one year through five years
    
    
    6,403,650
    
    
    
    6,514,484After five years through ten years
    
    
    1,099,499
    
    
    
    1,089,372After ten years
    
    
    218,064
    
    
    
    221,720$
    8,729,515
    
    
    $
    8,832,146
   13-48




---



##### 



WSB FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 Note 3  Investment Securities (continued)
     Less than 12 Months
    
    
    12 Months or More
    
    
    TotalGross
    
    
    
    
    
    
    Gross
    
    
    
    
    
    
    GrossUnrealized
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    UnrealizedLosses
    
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    Losses
    
    
    Fair ValueDecember 31, 2007Available for saleMunicipal securities
    
    $
    
    
    
    
    
    
    
    $
    (14,631
    )
    
    $
    404,392
    
    
    $
    (14,631
    )
    
    $
    404,392Mortgage-backed
    
    
    
    
    
    
    
    
    
    
    (22
    )
    
    
    39,114
    
    
    
    (22
    )
    
    
    39,114Federal agencies
    
    
    (457
    )
    
    
    623,426
    
    
    
    (1,783
    )
    
    
    498,217
    
    
    
    (2,240
    )
    
    
    1,121,643$
    (457
    )
    
    $
    623,426
    
    
    $
    (16,436
    )
    
    $
    941,723
    
    
    $
    (16,893
    )
    
    $
    1,565,149December 31, 2006Available for saleMunicipal securities
    
    $
    
    
    
    
    
    
    
    $
    (14,487
    )
    
    $
    945,681
    
    
    $
    (14,487
    )
    
    $
    945,681Mortgage-backed
    
    
    (551
    )
    
    
    50,201
    
    
    
    
    
    
    
    
    
    
    
    (551
    )
    
    
    50,201Federal agencies
    
    
    (1,654
    )
    
    
    2,298,110
    
    
    
    (39,517
    )
    
    
    3,083,806
    
    
    
    (41,171
    )
    
    
    5,381,916$
    (2,205
    )
    
    $
    2,348,311
    
    
    $
    (54,004
    )
    
    $
    4,029,487
    
    
    $
    (56,209
    )
    
    $
    6,377,798
 13-49




---



##### 



WSB FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 Note 4  Loans and Allowance for Loan Losses
  2007
    
    
    2006Real estate loans
    
    $
    378,820,821
    
    
    $
    314,869,567Commercial and industrial loans
    
    
    31,376,932
    
    
    
    15,628,593Individual loans for household
and
other personal expenditures
    
    
    2,612,883
    
    
    
    2,186,922Other loans
    
    
    1,105,922
    
    
    
    1,046,687Deferred fees
    
    
    (966,611
    )
    
    
    (558,961
    )$
    412,949,947
    
    
    $
    333,172,808
 2007
    
    
    2006
    
    
    2005Allowance for loan lossesBalances, beginning of period
    
    $
    3,971,789
    
    
    $
    2,520,323
    
    
    $
    1,188,939Provision for losses
    
    
    15,879,000
    
    
    
    1,522,917
    
    
    
    1,351,814Recoveries
    
    
    2,064
    
    
    
    1,851
    
    
    
    524Loans charged off
    
    
    (339,088
    )
    
    
    (24,702
    )
    
    
    (954
    )Reclassification of allowance
for unfunded credit
commitments to other
liabilities
    
    
    
    
    
    
    (48,600
    )
    
    
    (20,000
    )Balances, end of period
    
    $
    19,513,765
    
    
    $
    3,971,789
    
    
    $
    2,520,323
  2007
    
    
    2006Total non-accrual loans
    
    $
    24,923,234
    
    
    $
    219,129Total loans 90 days or more
past due and still accruing
    
    $
    399,438
    
    
    
    
 Provision for Loan Losses.
   13-50




---



##### 



WSB FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 Note 4  Loans and Allowance for Loan Losses (continued)
  December 31,2007
    
    
    2006Impaired LoansBalance at end of period (1)
    
    $
    25,437,668
    
    
    $
    Total related allowance for losses
    
    $
    5,009,141
    
    
    $
    Average investment in impaired loans
    
    $
    7,375,426
    
    
    $
    Interest income recognized on impaired loans
    
    $
    1,245,832
    
    
    $
    Interest income received on impaired loans
    
    $
    1,094,351
    
    
    $
    
 
 (1)
    
    Includes $11.8 million non-accrual loans.   2007
    
    
    2006Balance at beginning of year
    
    $
    7,561,384
    
    
    $
    3,668,984New loans or advances
    
    
    2,056,363
    
    
    
    4,710,063Payoffs/Repayments
    
    
    (3,048,864
    )
    
    
    (817,663
    )Balance at end of year
    
    $
    6,568,883
    
    
    $
    7,561,384
  13-51




---



##### 



WSB FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 Note 5  Premises and Equipment
  2007
    
    
    2006Leasehold improvements
    
    $
    505,474
    
    
    $
    384,098Equipment, furniture, and software
    
    
    2,949,445
    
    
    
    2,614,195Land and buildings
    
    
    7,482,389
    
    
    
    6,436,811$
    10,937,308
    
    
    $
    9,435,104Accumulated depreciation
    
    
    (2,177,558
    )
    
    
    (1,589,364
    )$
    8,759,750
    
    
    $
    7,845,740
  Gain on Land Sale.
 Note 6  Deposits
  2007
    
    
    2006Non-interest-bearing
    
    $
    24,711,246
    
    
    $
    26,864,122Interest-bearing demand
    
    
    12,350,558
    
    
    
    8,810,738Money market accounts
    
    
    79,218,421
    
    
    
    104,221,222Savings deposits
    
    
    10,338,768
    
    
    
    3,454,168Certificates of deposit exceeding $100,000
    
    
    149,198,911
    
    
    
    79,317,401Certificates of deposit less than $100,000
    
    
    145,626,941
    
    
    
    92,354,352$
    421,444,845
    
    
    $
    315,022,003
  2008
    
    $
    205,932,4822009
    
    
    64,417,5762010
    
    
    5,946,4152011
    
    
    6,098,2982012
    
    
    12,431,081$
    294,825,852
  13-52




---



##### 



WSB FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 Note 7  Advances and Junior Subordinated Debentures Payable
      Consolidation of Variable Interest Entities
  13-53




---



##### 



WSB FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 Note 8  Income Taxes
  2007
    
    
    2006
    
    
    2005Current
    
    $
    2,960,013
    
    
    $
    2,641,787
    
    
    $
    1,807,616Deferred
    
    
    (5,719,741
    )
    
    
    (674,367
    )
    
    
    (511,058
    )Income tax expense (benefit)
    
    $
    (2,759,728
    )
    
    $
    1,967,420
    
    
    $
    1,296,558
  2007
    
    
    2006
    
    
    2005Percent of
    
    
    
    
    
    
    Percent of
    
    
    
    
    
    
    Percent ofPretax
    
    
    
    
    
    
    Pretax
    
    
    
    
    
    
    PretaxAmount
    
    
    Income
    
    
    Amount
    
    
    Income
    
    
    Amount
    
    
    IncomeIncome tax at statutory rate
    
    $
    (2,706,362
    )
    
    
    34.0
    %
    
    
    1,989,715
    
    
    
    34.0
    %
    
    $
    1,260,764
    
    
    
    34.0
    %Increase (decrease) resulting from
Tax-exempt income
    
    $
    (20,949
    )
    
    
    0.3
    %
    
    $
    (21,407
    )
    
    
    -0.4
    %
    
    $
    (18,237
    )
    
    
    -0.5
    %Other
    
    
    (32,417
    )
    
    
    0.4
    %
    
    
    (888
    )
    
    
    0.0
    %
    
    
    54,031
    
    
    
    1.5
    %Total provision (benefit) for
income tax
    
    $
    (2,759,728
    )
    
    
    34.7
    %
    
    $
    1,967,420
    
    
    
    33.6
    %
    
    $
    1,296,558
    
    
    
    35.0
    %
  2007
    
    
    2006Deferred tax assetsAllowance for loan losses
    
    $
    6,792,780
    
    
    $
    1,385,632Unrealized loss on securities
    
    
    
    
    
    
    16,650Depreciation
    
    
    24,749
    
    
    
    (9,368
    )Other
    
    
    287,162
    
    
    
    (47,883
    )Total deferred tax assets
    
    
    7,104,691
    
    
    
    1,345,031Deferred tax liabilitiesDeferred loan fees and costs
    
    
    573,690
    
    
    
    517,121Unrealized gain on securities
    
    
    34,895
    
    
    
    Total deferred tax liabilities
    
    
    608,585
    
    
    
    517,121Net deferred tax asset
    
    $
    6,496,106
    
    
    $
    827,910
 13-54




---



##### 



WSB FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 Note 8  Income Taxes (continued)
  Accounting for Uncertainty
in Income Taxes
   Note 9  Loan Commitments and Contingent Liabilities
 Loan Commitments.
  December 31, 2007
 Amount of Commitment Expiration Per PeriodTotalAmounts
    
    
    Less Than
    
    
    
    
    
    
    
    
    
    
    AfterCommitted
    
    
    1 Year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    5 Years(In thousands)Other CommitmentsCommitments to extend
credit
    
    $
    78,580
    
    
    $
    72,024
    
    
    $
    6,556
    
    
    
    
    
    
    
    Unused credit card lines
    
    
    2,315
    
    
    
    
    
    
    
    2,315
    
    
    
    
    
    
    
    Standby letters of credit
    
    
    715
    
    
    
    715
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    81,610
    
    
    $
    72,739
    
    
    $
    8,871
    
    
    
    
    
    
    
    
 13-55




---



##### 



WSB FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 Note 9  Loan Commitments and Contingent Liabilities (continued)
 December 31, 2006
 Amount of Commitment Expiration Per PeriodTotalAmounts
    
    
    Less Than
    
    
    
    
    
    
    
    
    AfterCommitted
    
    
    1 Year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    5 Years(In thousands)Other CommitmentsCommitments to extend
credit
    
    $
    108,309
    
    
    $
    89,543
    
    
    $
    18,766
    
    
    
    
    
    
    
    Unused credit card lines
    
    
    2,212
    
    
    
    
    
    
    
    2,212
    
    
    
    
    
    
    
    Standby letters of credit
    
    
    386
    
    
    
    386
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    110,907
    
    
    $
    89,929
    
    
    $
    20,978
    
    
    
    
    
    
    
    
  Contingent Liabilities for Sold Loans.
 Note 10  Stockholders Equity and Regulatory Matters
   13-56




---



##### 



WSB FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 Note 10  Stockholders Equity and Regulatory Matters (continued)
  To Be Well CapitalizedUnder the PromptFor Capital Adequacy
    
    Corrective ActionActual
    
    Purposes
    
    ProvisionsAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    RatioAs of December 31, 2007Total Risk-Based Capital
(to Risk-Weighted Assets)Consolidated
    
    $
    70,364
    
    
    
    16.7
    %
    
    $
    33,809
    
    
    3
    8.0
    %
    
    NA    

    NAWestsound Bank
    
    $
    68,761
    
    
    
    16.3
    %
    
    $
    33,810
    
    
    3
    8.0
    %
    
    $
    42,262
    
    
    3
    10.0
    %Tier 1 Capital
(to Risk-Weighted Assets)Consolidated
    
    $
    64,900
    
    
    
    15.4
    %
    
    $
    33,802
    
    
    3
    8.0
    %
    
    NA    
    
    NAWestsound Bank
    
    $
    63,297
    
    
    
    15.0
    %
    
    $
    16,902
    
    
    3
    4.0
    %
    
    $
    25,353
    
    
    3
    6.0
    %Tier 1 Capital
(to Average Assets)Consolidated
    
    $
    64,900
    
    
    
    13.9
    %
    
    $
    37,299
    
    
    3
    8.0
    %
    
    NA    
    
    NAWestsound Bank
    
    $
    63,297
    
    
    
    13.6
    %
    
    $
    18,589
    
    
    3
    4.0
    %
    
    $
    23,237
    
    
    3
    5.0
    %As 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
    %
  13-57




---



##### 



WSB FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 Note 10  Stockholders Equity and Regulatory Matters (continued)
   Note 11  Commitments
   2008
    
    $
    293,9862009
    
    
    288,7902010
    
    
    224,8492011
    
    
    78,7402012
    
    
    
   Note 12  Employee Benefits
 Incentive stock option plan
 13-58




---



##### 



WSB FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 Note 12  Employee Benefits (continued)
  2007
    
    2006
    
    2005Risk-free interest rate
    
    
    4.74
    %
    
    
    N/A
    
    
    
    4.31
    %Dividend yield rate
    
    
    0.00
    %
    
    
    N/A
    
    
    
    0.00
    %Weighted average expected life of options
    
    6.5 years
    
    
    N/A
    
    
    5 years
   WeightedWeighted
    
    AverageAverage
    
    RemainingExercise
    
    Contractual
    
    AggregatePrice Per
    
    Term
    
    IntrinsicOptions
    
    Share
    
    (in years)
    
    ValueOutstanding as of December 31, 2006
    
    
    940,172
    
    
    $
    7.61Authorized
    
    
    
    
    
    
    Granted
    
    
    24,000
    
    
    
    19.00Exercised
    
    
    (29,180
    )
    
    
    4.68Forfeited
    
    
    (47,912
    )
    
    
    8.02Outstanding as of December 31, 2007
    
    
    887,080
    
    
    $
    7.99
    
    
    
    6.74
    
    
    $
    0Exercisable as of December 31, 2007
    
    
    760,493
    
    
    $
    7.55
    
    
    
    6.61
    
    
    $
    0
  13-59




---



##### 



WSB FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 Note 12  Employee Benefits (continued)
   4 01(k) Plan
 Note 13  Fair Value of Financial Instruments
 Disclosures about Fair Value of Financial Instruments
 13-60




---



##### 



WSB FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 Note 13  Fair Value of Financial Instruments (continued)
  Carrying Amount
    
    Estimated Fair Value2007AssetsCash and cash equivalents
    
    $
    66,926,460
    
    
    $
    66,926,460Securities available for sale
    
    $
    8,832,146
    
    
    $
    8,832,146Loans receivable
    
    $
    412,949,947
    
    
    $
    412,545,000Accrued interest receivable
    
    $
    2,540,554
    
    
    $
    2,540,554FHLB Stock
    
    $
    318,900
    
    
    $
    318,900LiabilitiesChecking, savings and money market
    
    $
    126,618,993
    
    
    $
    126,618,993Certificates of deposit
    
    $
    294,825,852
    
    
    $
    295,593,692Accrued interest payable
    
    $
    1,955,434
    
    
    $
    1,955,434Junior subordinated debentures payable
    
    $
    8,248,000
    
    
    $
    8,248,0002006Cash 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
    
    
    $
    8,248,000
  Cash and cash equivalents
 Investment securities available for sale
 Loans receivable
 Loans held for sale
 13-61




---



##### 



WSB FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 Note 13  Fair Value of Financial Instruments (continued)
 FHLB stock
 Customer accounts
 Accrued interest receivable and payable -
 Junior subordinated debentures payable
 Note 14  Loan Concentrations
      13-62




---



##### 



WSB FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 Note 15  Restrictions on Dividends, Loans and Advances
     Note 16  Condensed Financial Statements of Parent Company
  Statement of Financial ConditionDecember 31, 2007
    
    
    December 31, 2006AssetsCash and cash equivalents
    
    $
    654,340
    
    
    $
    1,055,676Investments in common stock of Westsound Bank
    
    
    63,365,254
    
    
    
    68,154,370Other assets
    
    
    948,421
    
    
    
    813,543Total assets
    
    $
    64,968,015
    
    
    $
    70,023,589Liabilities and stockholders equityAccounts Payable
    
    
    
    
    
    $
    118,461Junior subordinated debentures payable
    
    $
    8,248,000
    
    
    
    8,248,000Stockholders equity
    
    
    56,720,015
    
    
    
    61,657,128Total liabilities and stockholders equity
    
    $
    64,968,015
    
    
    $
    70,023,589
 13-63




---



##### 



WSB FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 Note 16  Condensed Financial Statements of Parent Company (continued)
 Statement of OperationsYear ended December 31,2007
    
    
    2006IncomeInterest income
    
    $
    18,131
    
    
    $
    17,003Dividend income from Westsound Bank
    
    
    700,000
    
    
    
    400,000Total income
    
    
    718,131
    
    
    
    417,003Operating expensesInterest expense junior subordinated debentures
    
    
    603,018
    
    
    
    565,486Salaries and employee benefits
    
    
    191,712
    
    
    
    Travel and entertainment
    
    
    9,687
    
    
    
    Legal expenses
    
    
    118,208
    
    
    
    6,271Accounting an audit fees
    
    
    134,198
    
    
    
    Other expense
    
    
    107,172
    
    
    
    3,787Total operating expenses
    
    
    1,163,995
    
    
    
    575,544Net loss before income tax benefit
    
    
    (445,864
    )
    
    
    (158,541
    )Income tax benefit
    
    
    134,879
    
    
    
    189,900Income (loss) before equity in undistributed net income
(loss) of Westsound Bank
    
    
    (310,985
    )
    
    
    31,359Equity in undistributed net income (loss) of Westsound Bank
    
    
    (4,889,174
    )
    
    
    3,853,324Net income (loss)
    
    $
    (5,200,159
    )
    
    $
    3,884,683
 13-64




---



##### 



WSB FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 Note 16  Condensed Financial Statements of Parent Company (continued)
 Statement of Cash FlowsYear ended December 31,2007
    
    
    2006Cash flows from operating activitiesNet (loss) income
    
    $
    (5,200,159
    )
    
    $
    3,884,683Adjustments to reconcile net income (loss) to net cash
from operating activitiesEquity in undistributed net (income) loss of Westsound Bank
    
    
    4,889,174
    
    
    
    (3,853,324
    )Dividend income from Westsound Bank
    
    
    (700,000
    )
    
    
    (400,000
    )Stock issued for director fees
    
    
    
    
    
    
    123,933Stock based compensation
    
    
    26,484
    
    
    
    Excess tax benefits from stock options exercised
    
    
    
    
    
    
    (375,643
    )Increase in other assets
    
    
    (134,878
    )
    
    
    (37,566
    )Increase (decrease) in other liabilities
    
    
    (118,461
    )
    
    
    118,461Net cash from operating activities
    
    
    (1,237,840
    )
    
    
    (539,456
    )Cash Flows from Investing ActivitiesInvestment in Westsound Bank
    
    
    
    
    
    
    (40,550,000
    )Cash flows from financing activitiesProceeds from public offering, net
    
    
    
    
    
    
    40,236,836Dividends received from Westsound Bank
    
    
    700,000
    
    
    
    400,000Proceeds from exercise of stock options and stock issued
    
    
    136,504
    
    
    
    1,186,256Excess tax benefits from stock options exercised
    
    
    
    
    
    
    375,643Fractional share payout
    
    
    
    
    
    
    (2,994
    )Stock repurchases
    
    
    
    
    
    
    (185,043
    )Net cash from financing activities
    
    
    836,504
    
    
    
    42,010,698Net increase (decrease) in cash and cash equivalents
    
    
    (401,336
    )
    
    
    921,242Cash and cash equivalents, beginning of year
    
    
    1,055,676
    
    
    
    134,434Cash and cash equivalents, end of year
    
    $
    654,340
    
    
    $
    1,055,676
 Note 17  Stock Split
  13-65




---



##### 



WSB FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 Note 18  Initial Public Offering
  Note 19  Pending Litigation
     Note 20  Downsizing of Mortgage Division
  13-66




---



##### 



WSB FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 Note 21  Selected Quarterly Financial Data (Unaudited)
 Quarter EndedMarch 31,
    
    
    June 30,
    
    
    September 30,
    
    
    December 31,(Dollars in thousands except per share data)
    
    2007
    
    
    2007
    
    
    2007
    
    
    2007
    
    
    TotalInterest income
    
    $
    8,641
    
    
    $
    9,715
    
    
    $
    10,142
    
    
    $
    8,898
    
    
    $
    37,396Interest expense
    
    
    3,809
    
    
    
    4,332
    
    
    
    4,666
    
    
    
    4,707
    
    
    
    17,514Net interest income
    
    
    4,832
    
    
    
    5,383
    
    
    
    5,476
    
    
    
    4,191
    
    
    
    19,882Provision for loan losses
    
    
    491
    
    
    
    326
    
    
    
    13,362
    
    
    
    1,700
    
    
    
    15,879Net interest income (loss) after
provision for loan losses
    
    
    4,341
    
    
    
    5,057
    
    
    
    (7,886
    )
    
    
    2,491
    
    
    
    4,003Noninterest income
    
    
    1,345
    
    
    
    1,231
    
    
    
    1,025
    
    
    
    930
    
    
    
    4,531Noninterest expense
    
    
    4,059
    
    
    
    4,150
    
    
    
    4,768
    
    
    
    3,517
    
    
    
    16,494Income (loss) before federal income tax
expense (benefit)
    
    
    1,627
    
    
    
    2,138
    
    
    
    (11,629
    )
    
    
    (96
    )
    
    
    (7,960
    )Provision (benefit) for federal income tax
    
    
    545
    
    
    
    708
    
    
    
    (3,877
    )
    
    
    (136
    )
    
    
    (2,760
    )Net income (loss)
    
    $
    1,082
    
    
    $
    1,430
    
    
    $
    (7,752
    )
    
    $
    40
    
    
    $
    (5,200
    )Earnings (loss) per shareBasic
    
    $
    0.20
    
    
    $
    0.26
    
    
    $
    (1.39
    )
    
    $
    0.01
    
    
    $
    (0.93
    )Diluted
    
    $
    0.18
    
    
    $
    0.24
    
    
    $
    (1.39
    )
    
    $
    0.01
    
    
    $
    (0.93
    )Weighted-average shares outstandingBasic
    
    
    5,548,283
    
    
    
    5,563,887
    
    
    
    5,573,089
    
    
    
    5,574,853
    
    
    
    5,565,123Diluted
    
    
    6,109,233
    
    
    
    5,926,369
    
    
    
    5,573,089
    
    
    
    5,650,715
    
    
    
    5,565,123
 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 (loss)
    
    $
    900
    
    
    $
    1,047
    
    
    $
    1,160
    
    
    $
    778
    
    
    $
    3,885Earnings (loss) 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
 13-67