##### Table of Contents



EXHIBIT 13
 PORTIONS OF PSB GROUP, INC.
ANNUAL REPORT TO SHAREHOLDERS




---



##### Table of Contents



PSB Group, Inc.
 
 Consolidated Financial Report
December 31, 2009




---



##### Table of Contents



PSB Group, Inc.
 Contents
 Report Letter
    
    
    1Consolidated Financial StatementsBalance Sheet
    
    
    2Statement of Operations
    
    
    3Statement of Stockholders Equity
    
    
    4Statement of Cash Flows
    
    
    5Notes to Consolidated Financial Statements
    
    
    6-40




---



##### Table of Contents








---



##### Table of Contents



PSB Group, Inc.
 
 Consolidated Balance Sheet
(000s omitted, except per share data)
 December 312009
    
    
    2008AssetsCash and due from banks
    
    $
    8,554
    
    
    $
    12,268Federal funds sold
    
    
    20,706
    
    
    
    Total Cash and Cash Equivalents
    
    
    29,260
    
    
    
    12,268Securities  Available for sale (Note 3)
    
    
    60,031
    
    
    
    52,254Loans (Note 4)
    
    
    354,263
    
    
    
    374,809Less allowance for possible loan losses (Note 4)
    
    
    (9,469
    )
    
    
    (7,116
    )Net loans
    
    
    344,794
    
    
    
    367,693Loans held for sale
    
    
    774
    
    
    
    1,082Bank premises and equipment (Note 5)
    
    
    15,937
    
    
    
    14,107Accrued interest receivable
    
    
    2,244
    
    
    
    2,159Other real estate owned
    
    
    6,235
    
    
    
    8,459Other assets (Note 9)
    
    
    2,754
    
    
    
    2,494Total assets
    
    $
    462,029
    
    
    $
    472,784Liabilities and Stockholders EquityLiabilitiesDeposits:Noninterest-bearing
    
    $
    54,647
    
    
    $
    49,661Interest-bearing (Note 6)
    
    
    388,098
    
    
    
    362,781Total deposits
    
    
    442,745
    
    
    
    412,442Federal Home Loan Bank advances (Note 7)
    
    
    
    
    
    
    15,000ESOP loan debt (Note 7)
    
    
    282
    
    
    
    436Accrued taxes, interest, and other liabilities (Note 9)
    
    
    2,284
    
    
    
    2,536Total liabilities
    
    
    445,311
    
    
    
    430,414Stockholders Equity(Notes 8, 10, 11, 14, and 17)Common stock:Authorized  5,000,000 shares, no par valueIssued and outstanding  3,480,110 shares in 2009 and
3,442,060 shares in 2008
    
    
    23,692
    
    
    
    23,607Unearned ESOP benefits (Note 8)
    
    
    (282
    )
    
    
    (436
    )Common stock held in trust (Note 8)
    
    
    (410
    )
    
    
    (410
    )Deferred compensation obligation (Note 8)
    
    
    410
    
    
    
    410Additional paid in capital  stock options/awards
    
    
    1,096
    
    
    
    707Unearned compensation
    
    
    (1,182
    )
    
    
    (976
    )Retained earnings (Accumulated deficit)
    
    
    (6,740
    )
    
    
    6,191Accumulated other comprehensive income (Note 1)
    
    
    134
    
    
    
    1,009Total stockholders equity
    
    
    16,718
    
    
    
    30,102Total liabilities and stockholders equity
    
    $
    462,029
    
    
    $
    460,516
 
 2




---



##### Table of Contents



PSB Group, Inc.
 
 Consolidated Statement of Operations
(000s omitted, except per share data)
 Year Ended December 312009
    
    
    2008
    
    
    2007Interest IncomeLoans, including fees
    
    $
    21,492
    
    
    $
    25,730
    
    
    $
    29,960Securities:Taxable
    
    
    2,290
    
    
    
    2,418
    
    
    
    1,649Tax-exempt
    
    
    211
    
    
    
    282
    
    
    
    945Federal funds sold
    
    
    29
    
    
    
    7
    
    
    
    28Total interest income
    
    
    24,022
    
    
    
    28,437
    
    
    
    32,582Interest ExpenseDeposits
    
    
    8,423
    
    
    
    9,799
    
    
    
    14,205Short-term borrowings
    
    
    9
    
    
    
    288
    
    
    
    614Long-term debt
    
    
    287
    
    
    
    347
    
    
    
    Total interest expense
    
    
    8,719
    
    
    
    10,434
    
    
    
    14,819Net Interest Income Before provision for loan losses
    
    
    15,303
    
    
    
    18,003
    
    
    
    17,763Provision for Loan Losses(Note 4)
    
    
    16,169
    
    
    
    9,956
    
    
    
    7,663Net Interest Income After provision for loan losses
    
    
    (866
    )
    
    
    8,047
    
    
    
    10,100Other Operating IncomeService charges on deposit accounts
    
    
    2,502
    
    
    
    2,370
    
    
    
    2,350Gain on sale of mortgages
    
    
    582
    
    
    
    473
    
    
    
    655Gain (loss) on sale of available-for-sale securities
    
    
    2,147
    
    
    
    187
    
    
    
    (41
    )Other income
    
    
    1,127
    
    
    
    1,214
    
    
    
    1,537Total other operating income
    
    
    6,358
    
    
    
    4,244
    
    
    
    4,501Other Operating ExpensesSalaries and employee benefits (Note 8)
    
    
    8,105
    
    
    
    9,563
    
    
    
    9,930Occupancy costs (Note 5)
    
    
    3,192
    
    
    
    3,695
    
    
    
    3,981Legal and professional
    
    
    1,725
    
    
    
    1,353
    
    
    
    1,429Other real estate expense
    
    
    2,083
    
    
    
    3,983
    
    
    
    118Goodwill impairment expense
    
    
    
    
    
    
    4,458
    
    
    
    FDIC insurance
    
    
    1,451
    
    
    
    331
    
    
    
    59Marketing expense
    
    
    376
    
    
    
    365
    
    
    
    528Other operating expenses
    
    
    2,768
    
    
    
    2,547
    
    
    
    3,155Total other operating expenses
    
    
    19,700
    
    
    
    26,295
    
    
    
    19,200Loss Before federal income tax benefit
    
    
    (14,208
    )
    
    
    (14,004
    )
    
    
    (4,599
    )Federal Income Tax Benefit(Note 9)
    
    
    (1,277
    )
    
    
    (207
    )
    
    
    (1,857
    )Net Loss
    
    $
    (12,931
    )
    
    $
    (13,797
    )
    
    $
    (2,742
    )Per Share DataWeighted average shares outstanding
    
    
    3,476,188
    
    
    
    3,265,564
    
    
    
    3,064,829Basic earnings(loss)
    
    $
    (3.72
    )
    
    $
    (4.22
    )
    
    $
    (0.89
    )Diluted earnings (loss)
    
    $
    (3.72
    )
    
    $
    (4.22
    )
    
    $
    (0.89
    )
 
 3




---



##### Table of Contents



Consolidated Statement of Stockholders Equity
(000s omitted, except per share data)
 Additional Paid inCapital - Stock
    
    
    
    
    
    
    
    
    
    
    Deferred
    
    
    
    
    
    
    Accumulated Other
    
    
    TotalUnearned ESOP
    
    
    Options and
    
    
    Unearned
    
    
    Common Stock
    
    
    Compensation
    
    
    
    
    
    
    Comprehensive Income
    
    
    StockholdersNumber of Shares
    
    
    Common Stock
    
    
    Benefits
    
    
    Awards
    
    
    Compensation
    
    
    Held in Trust
    
    
    Obligation
    
    
    Retained Earnings
    
    
    (Loss)
    
    
    EquityBalance January 1, 2007
    
    
    3,034,152
    
    
    
    20,496
    
    
    
    (744
    )
    
    
    33
    
    
    
    (45
    )
    
    
    (230
    )
    
    
    230
    
    
    
    25,062
    
    
    
    (556
    )
    
    
    44,246Comprehensive loss (Note 1):Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,742
    )
    
    
    
    
    
    
    (2,742
    )Change in unrealized gain on securities available for sale, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    488
    
    
    
    488Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,254
    )Stock awards
    
    
    37,850
    
    
    
    681
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    681Additional paid in capital  stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    282
    
    
    
    (711
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (429
    )Cash dividends  $0.72 per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,207
    )
    
    
    
    
    
    
    (2,207
    )Earned ESOP benefit
    
    
    
    
    
    
    
    
    
    
    154
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    154Balance December 31, 2007
    
    
    3,072,002
    
    
    
    21,177
    
    
    
    (590
    )
    
    
    315
    
    
    
    (756
    )
    
    
    (230
    )
    
    
    230
    
    
    
    20,113
    
    
    
    (68
    )
    
    
    40,191Comprehensive loss (Note 1):Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (13,797
    )
    
    
    
    
    
    
    (13,797
    )Change in unrealized gain on securities available for sale, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,077
    
    
    
    1,077Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12,720
    )Sale of stock
    
    
    320,893
    
    
    
    2,034
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,034Stock awards
    
    
    49,165
    
    
    
    396
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    396Additional paid in capital  stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    392
    
    
    
    (220
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    172Cash dividends  $0.04 per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (125
    )
    
    
    
    
    
    
    (125
    )Purchase of stock by trust
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (180
    )
    
    
    180
    
    
    
    
    
    
    
    
    
    
    
    Earned ESOP benefit
    
    
    
    
    
    
    
    
    
    
    154
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    154Balance December 31, 2008
    
    $
    3,442,060
    
    
    $
    23,607
    
    
    $
    (436
    )
    
    $
    707
    
    
    $
    (976
    )
    
    $
    (410
    )
    
    $
    410
    
    
    $
    6,191
    
    
    $
    1,009
    
    
    $
    30,102Comprehensive loss (Note 1):Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12,931
    )
    
    
    
    
    
    
    (12,931
    )Change in unrealized gain on securities available for sale, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (875
    )
    
    
    (875
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (13,806
    )Sale of stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock awards
    
    
    38,050
    
    
    
    85
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    85Additional paid in capital  stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    389
    
    
    
    (206
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    183Cash dividends  $0.04 per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Purchase of stock by trust
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Earned ESOP benefit
    
    
    
    
    
    
    
    
    
    
    154
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    154Balance December 31, 2009
    
    $
    3,480,110
    
    
    $
    23,692
    
    
    $
    (282
    )
    
    $
    1,096
    
    
    $
    (1,182
    )
    
    $
    (410
    )
    
    $
    410
    
    
    $
    (6,740
    )
    
    $
    134
    
    
    $
    16,718
  4




---



##### Table of Contents



PSB Group, Inc.
 
 Consolidated Statement of Cash Flows
(000s omitted)
 Year Ended December 312009
    
    
    2008
    
    
    2007Cash Flows from Operating ActivitiesNet loss
    
    $
    (12,931
    )
    
    $
    (13,797
    )
    
    $
    (2,742
    )Adjustments to reconcile net loss to net cash from operating activities:Depreciation and amortization
    
    
    1,173
    
    
    
    1,290
    
    
    
    1,379Goodwill impairment (non-cash)
    
    
    
    
    
    
    4,458
    
    
    
    Provision for loan loss
    
    
    16,169
    
    
    
    9,956
    
    
    
    7,663Non-cash stock options/awards expense
    
    
    320
    
    
    
    568
    
    
    
    252Accretion and amortization of securities
    
    
    496
    
    
    
    (33
    )
    
    
    20Deferred income taxes
    
    
    
    
    
    
    888
    
    
    
    (802
    )(Gain) loss on sale of available-for-sale securities
    
    
    (2,147
    )
    
    
    (187
    )
    
    
    41Origination and purchase of loans held for sale
    
    
    (33,934
    )
    
    
    (28,930
    )
    
    
    (43,789
    )Sale of loans held for sale
    
    
    34,242
    
    
    
    28,730
    
    
    
    46,600(Increase) decrease in accrued interest receivable
    
    
    (85
    )
    
    
    185
    
    
    
    432(Decrease) increase in accrued interest payable and other liabilities
    
    
    (252
    )
    
    
    (444
    )
    
    
    1,571Increase (decrease) in other assets
    
    
    1,964
    
    
    
    (1,651
    )
    
    
    (7,883
    )Net cash provided by operating activities
    
    
    5,015
    
    
    
    1,033
    
    
    
    2,742Cash Flows from Investing ActivitiesPurchase of securities available for sale
    
    
    (98,436
    )
    
    
    (25,841
    )
    
    
    (18,519
    )Proceeds from maturities of securities available for sale
    
    
    10,763
    
    
    
    14,083
    
    
    
    4,011Proceeds from sale of securities available for sale
    
    
    80,672
    
    
    
    24,950
    
    
    
    14,820Net Decrease (increase) in loans
    
    
    6,730
    
    
    
    6,479
    
    
    
    2,296Capital expenditures
    
    
    (3,055
    )
    
    
    (2,039
    )
    
    
    (2,006
    )Net cash provided by (used in) investing activities
    
    
    (3,326
    )
    
    
    17,632
    
    
    
    602Cash Flows from Financing ActivitiesNet (decrease) increase in time deposits
    
    
    (18,389
    )
    
    
    11,935
    
    
    
    7,322Net increase (decrease) in other deposits
    
    
    48,692
    
    
    
    (38,003
    )
    
    
    (2,772
    )Net (decrease) increase in short-term borrowings
    
    
    
    
    
    
    (10,000
    )
    
    
    (6,875
    )Net (decrease) increase in long-term debt
    
    
    (15,000
    )
    
    
    15,000
    
    
    
    Sale of common stock
    
    
    
    
    
    
    2,034
    
    
    
    Cash dividends
    
    
    
    
    
    
    (125
    )
    
    
    (2,207
    )Net cash provided by (used in) financing activities
    
    
    15,303
    
    
    
    (19,159
    )
    
    
    (4,532
    )Net Increase (Decrease) in Cash and Cash Equivalents
    
    
    16,992
    
    
    
    (494
    )
    
    
    (1,188
    )Cash and Cash Equivalents Beginning of year
    
    
    12,268
    
    
    
    12,762
    
    
    
    13,950Cash and Cash Equivalents End of year
    
    $
    29,260
    
    
    $
    12,268
    
    
    $
    12,762Supplemental Information Cash paid forInterest
    
    $
    8,896
    
    
    $
    10,493
    
    
    $
    14,794Income taxes
    
    $
    (1,218
    )
    
    $
    (1,803
    )
    
    $
    400
 5




---



##### Table of Contents



PSB Group, Inc.
 
 Notes to Consolidated Financial Statements
December 31, 2009, 2008, and 2007
 Note 1  Summary of Significant Accounting Policies
 Basis of Presentation and Consolidation- The consolidated financial statements include
the accounts of PSB Group, Inc. (the Corporation) and its wholly owned subsidiaries,
Peoples State Bank, Inc. (the Bank) and PSB Capital, Inc. (Capital). PSB Title
Insurance Agency, Inc. (PSB) is a wholly owned subsidiary of Peoples State Bank, Inc.
Universal Mortgage Company (UMC), previously a wholly owned subsidiary of Peoples State
Bank, was merged into the Bank in September 2008. All significant intercompany
transactions are eliminated in consolidation.
 PSB Group, Inc. was formed on February 28, 2003 as a bank holding company for the
purpose of owning Peoples State Bank, Inc. pursuant to a plan of reorganization adopted
by the Bank and its stockholders. Pursuant to the reorganization, each share of
Peoples State Bank, Inc. stock held by existing stockholders of the Bank was exchanged
for three shares of common stock of PSB Group, Inc.
 Use of Estimates- The accounting and reporting policies of PSB Group, Inc. conform to
accounting principles generally accepted in the United States of America. Management
is required to make significant estimates (such as the allowance for possible loan
losses, deferred taxes, foreclosed assets and intangible assets) and assumptions that
affect the amounts reported in the consolidated financial statements and accompanying
notes. Actual results could differ from these estimates and assumptions.
 Nature of Operations- The Corporation provides full-service banking through 11 branch
offices and two loan origination offices to the Michigan communities of Wayne, Oakland,
Macomb, and Genesee counties.
 Significant Group Concentrations of Credit Risk- Most of the Corporations activities
are with customers located within Southeastern Michigan. Note 3 discuss the types of
securities in which the Corporation invests. Note 4 discusses the types of lending in
which the Corporation engages. The Corporation does not have any significant
concentrations to any one customer, but does have a significant concentration of
lending to non-residential commercial real estate entities.
 Cash and Cash Equivalents- For purposes of the consolidated statement of cash flows,
cash and cash equivalents include cash and balances due from banks, federal funds sold,
and securities purchased under agreements to resell, all of which had original
maturities of 90 days or less.
 6




---



##### Table of Contents



PSB Group, Inc.
 Notes to Consolidated Financial Statements
December 31, 2009, 2008, and 2007
 Note 1  Summary of Significant Accounting Policies (Continued)
 The Bank is required to maintain average balances on hand or with the Federal Reserve
Bank. At December 31, 2009 and 2008, these reserve balances amounted to $3,116,000 and
$2,779,000, respectively.
 Securities- Debt securities that management has the positive intent and the ability to
hold to maturity are classified as held to maturity and recorded at amortized cost.
Securities not classified as held to maturity or trading, including equity securities
with readily determinable fair values, are classified as available for sale and are
recorded at fair value, with unrealized gains and losses, net of related deferred
income taxes, excluded from earnings and reported in other comprehensive income.
 Purchase premiums and discounts are recognized in interest income using the interest
method over the terms of the securities. Declines in the fair values of
held-to-maturity and available-for-sale securities below their cost that are deemed to
be other than temporary are reflected in earnings as realized losses. Gains and losses
on the sale of securities are recorded on the trade date and are determined using the
specific identification method.
 In estimating other-than-temporary impairment losses, management considers (1) the
length of time and the extent to which the fair value has been less than cost, (2) the
financial condition and near-term prospects of the issuer, and (3) the intent and
ability of the Corporation to retain its investment in the issuer for a period of time
sufficient to allow for any anticipated recovery in fair value. Gains and losses on the
sale of securities are recorded on the trade date and are determined using the specific
identification method.
 Loans- The Corporation grants mortgage, commercial, and consumer loans to customers.
Loans are reported at their outstanding unpaid principal balances, adjusted for charge
offs, the allowance for loan losses, and any deferred fees or costs on originated
loans. Interest income is accrued on the unpaid principal balance. Loan origination
fees, net of certain direct origination costs, are recognized as an adjustment of the
related loan yield using the interest method.
 The accrual of interest on loans is discontinued at the time the loan is 90 days
delinquent unless the credit is well-secured and in the process of collection. In all
cases, loans are placed on nonaccrual or charged off at an earlier date if principal or
interest is considered doubtful.
 All interest accrued but not collected for loans that are placed on nonaccrual or
charged off is reversed against interest income. The interest on these loans is
 7




---



##### Table of Contents



PSB Group, Inc.
 Notes to Consolidated Financial Statements
December 31, 2009, 2008, and 2007
 Note 1  Summary of Significant Accounting Policies (Continued)
 accounted for on the cash basis or cost recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and
interest amounts contractually due are brought current and future payments are
reasonably assured.
 Loans Held for Sale- Loans originated and intended for sale in the secondary market
are carried at the lower of cost or estimated fair value in the aggregate. Net
unrealized losses, if any, are recognized in a valuation allowance by charges to
income.
 Allowance for Loan Losses- The allowance for loan losses is established as losses are
estimated to have occurred through a provision for loan losses charged to earnings.
Loan losses are charged against the allowance when management believes the
uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are
credited to the allowance.
 The allowance for loan losses is evaluated on a regular basis by management and is
based on managements periodic review of the collectibility of the loans in light of
historical experience, the nature and volume of the loan portfolio, adverse situations
that may affect the borrowers ability to repay, estimated value of any underlying
collateral, and prevailing economic conditions. This evaluation is inherently
subjective as it requires estimates that are susceptible to significant revision as
more information becomes available.
 The allowance consists of specific and general components. The specific components
relate to loans that are classified as doubtful, substandard, or special mention. For
such loans that are also classified as impaired, an allowance is established when the
discounted cash flows (or collateral value or observable market price) of the impaired
loan is lower than the carrying value of that loan. The general component covers
non-classified loans and is based on historical loss experience adjusted for
qualitative factors.
 A loan is considered impaired when, based on current information and events, it is
probable that the Corporation will be unable to collect the scheduled payments of
principal and interest when due according to the contractual terms of the loan
agreement. Factors considered by management in determining impairment include payment
status, collateral value, and the probability of collecting scheduled principal and
interest payments when due. Loans that experience insignificant payment delays and
payment shortfalls generally are not classified as impaired. Management determines the
significance of payment delays and payment shortfalls on a case-by-case basis, taking
into consideration all of the
 8




---



##### Table of Contents



PSB Group, Inc.
 Notes to Consolidated Financial Statements
December 31, 2009, 2008, and 2007
 Note 1  Summary of Significant Accounting Policies (Continued)
 circumstances surrounding the loan and the borrower, including length of the delay, the
reasons for the delay, the borrowers prior payment record, and the amount of the
shortfall in relation to the principal and interest owed.
 Impairment is measured on a loan-by-loan basis for commercial and construction loans by
either the present value of expected future cash flows discounted at the loans
effective interest rate, the loans obtainable market price, or the fair value of the
collateral if the loan is collateral dependent.
 Large groups of homogenous loans are collectively evaluated for impairment.
Accordingly, the Corporation does not separately identify individual consumer and
residential loans for impairment disclosures.
 Off-balance-sheet Instruments- In the ordinary course of business, the Corporation has
entered into commitments to extend credit, including commitments under credit card
arrangements, commercial letters of credit, and standby letters of credit.
 Foreclosed Assets- Assets acquired through, or in lieu of, loan foreclosure are held
for sale and are initially recorded at fair value at the date of the foreclosure,
establishing a new cost basis. Subsequent to foreclosure, valuations are periodically
performed by management and the assets are carried at the lower of carrying amount or
fair value less cost to sell. Revenue and expenses from operations and changes in the
valuation allowance are included in net expenses from foreclosed assets.
 Bank Premises and Equipment- Land is carried at cost. Premises and equipment are
stated at cost, less accumulated depreciation and amortization. Depreciation, computed
on the straight-line method, is charged to operations over the estimated useful lives
of the properties. Leasehold improvements are amortized over the terms of their
respective leases or the estimated useful lives of the improvements, whichever is
shorter.
 Income Taxes- Deferred income tax assets and liabilities are determined using the
liability (or balance sheet) method. Under this method, the net deferred tax asset or
liability is determined based on the tax effect of the various temporary differences
between the book value and tax basis of the various balance sheet assets and
liabilities, and gives the current recognition of changes in tax rates and laws.
Valuation allowances are established when necessary, to reduce deferred tax assets to
the amount expected to be realized.
 9




---



##### Table of Contents



PSB Group, Inc.
 Notes to Consolidated Financial Statements
December 31, 2009, 2008, and 2007
 Note 1  Summary of Significant Accounting Policies (Continued)
 Earnings Per Common Share- Basic earnings per share represents income available to
common stockholders divided by the weighted-average number of common shares outstanding
during the period. Diluted earnings per share reflects additional common shares that
would have been outstanding if dilutive potential common shares had been issued, as
well as any adjustment to income that would result from the assumed issuance.
Potential common shares that may be issued by the Corporation relate solely to
outstanding stock options and stock awards, and are determined using the treasury stock
method. For the years ended December 31, 2009, 2008 and 2007, the outstanding stock
options and awards would have an anti-dilutive effect and therefore have not been
included in the calculation of diluted earnings per share.
 Employee Stock Ownership Plan (ESOP)- Compensation expense is recognized as ESOP
shares are committed to be released. Allocated and committed to be released ESOP shares
are considered outstanding for earnings per share calculation based on debt service
payments. Other ESOP shares are excluded from earnings per share calculation. Dividends
declared on allocated ESOP shares are charged to retained earnings. Dividends declared
on unallocated ESOP shares are used to satisfy debt service. The value of unearned
shares to be allocated to ESOP participants for future services not yet performed is
reflected as a reduction of stockholders equity.
 Comprehensive Income (Loss)- Accounting principles generally require that revenue,
expenses, gains, and losses be included in net income. Certain changes in assets and
liabilities, however, such as unrealized gains and losses on available-for-sale
securities, are reported as a separate component of the equity section of the balance
sheet. Such items, along with net income, are components of comprehensive income.
 10




---



##### Table of Contents



PSB Group, Inc.
 Notes to Consolidated Financial Statements
December 31, 2009, 2008, and 2007
 Note 1  Summary of Significant Accounting Policies (Continued)
 The components of accumulated other comprehensive income (loss) and related tax effects
are as follows (000s omitted):
 2009
    
    
    2008
    
    
    2007Total gains on available-for-sale securities
    
    $
    2,281
    
    
    $
    1,196
    
    
    $
    (144
    )Less: Realized gains(losses) on
available-for-sale securities
    
    
    2,147
    
    
    
    187
    
    
    
    (41
    )Unrealized holding gains(losses) on
available-for-sale securities
    
    
    134
    
    
    
    1,009
    
    
    
    (103
    )Tax effect
    
    
    
    
    
    
    
    
    
    
    (35
    )Accumulated other comprehensive
income
    
    $
    134
    
    
    $
    1,009
    
    
    $
    (68
    )
 Reclassification- Certain amounts appearing in the prior years financial
statements have been reclassified to conform to the current years financial
statements.
 Goodwill- Goodwill results from business acquisitions and represents the excess of the
purchase price over the fair value of acquired tangible assets and liabilities and
identifiable intangible assets. Goodwill is not amortized but it is assessed at least
annually for impairment, and any such impairment will be recognized in the period
identified. During 2008, it was determined that Goodwill was indeed impaired.
Accordingly, 100% of our Goodwill, or $4,458,000 was written-off in the 4th
quarter of 2008.
 Stock Compensation Plans The Corporation applies the recognition and
measurement of stock based compensation accounting rules for stock based
compensation which is referred to as the fair value method. Compensation cost is
based on the fair value of the equity issued to employees. The Company recognizes
compensation expense related to restricted stock awards over the period the
services are performed. In 2009, 44,600 restricted shares were granted compared
to 20,950 restricted shares that were granted in 2008. No new stock options were
granted in 2009, compared to 61,400 options that were granted in 2008.
 11




---



##### Table of Contents



PSB Group, Inc.
 Notes to Consolidated Financial Statements
December 31, 2009, 2008, and 2007
 Note 2  Managements Plan
 The consolidated financial statements have been prepared assuming the Company will
continue as a going concern, which contemplates the realization of assets and the
discharge of liabilities in the normal course of business. On September 28, 2009, the
Bank entered into a Stipulation and Consent to the Issuance of an Order to Cease and
Desist (the Order) with the FDIC and the Office of Financial and Insurance Regulation
for the State of Michigan (OFIR) that, among other things, requires us to increase
and maintain our leverage capital ratio to at least 8% (see Note 16 for additional
details). Failure to increase our capital ratio or further declines in our capital
ratios exposes us to additional restrictions and regulatory actions, including
regulatory take-over. This uncertainty as to our ability to meet existing and future
regulatory requirements raises serious doubt about our ability to continue as a going
concern. The ability of the Company to continue as a going concern is dependent on
many factors, including regulatory action and the ability of management to achieve its
recovery plan which is discussed below. The consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
 The Company has aggressively pursued various available alternatives to improve its
capital ratios, including raising capital, reducing assets, cutting operating costs and
reorganizing management. While we received interest from potential private equity
investors, our Board has determined that consummation of a transaction is not likely in
the near term. Accordingly, our Board determined that the immediate implementation of
our recovery plan, while continuing to seek new capital, is in the best interest of our
stakeholders. The recovery plan is designed to improve the Companys financial health
and capital ratios by downsizing the bank and focusing on reducing our operating costs.
 Key elements of the recovery plan include, but are not limited to:
 
    
    Aggressively manage the banks existing loan portfolios to minimize further
credit losses and to maximize recoveries,
    
    Shrink the banks balance sheet,
    
    Reduce the banks loan portfolio through pay-downs, restructuring and
significantly reducing lending activity, and
    
    Significantly lower operating costs to align with the restructured business
model.
 Our Board has a Strategic Planning Committee, chaired by Mr. Sydney Ross, a director of
both PSB Group and the bank, to ensure implementation and successful execution of the
recovery plan, monitor the progress of capital raising efforts, and to actively engage
the Companys strategic initiatives.
 While implementing the above key elements will not achieve the leverage capital mandate
of 8%, as required by the Cease and Desist Order, these actions are designed to reduce
the capital needs of the bank by reducing its balance sheet and establishing a more
streamlined and focused organization with a reduced infrastructure. However, there is
no assurance that the recovery plan will be acceptable to our regulators, that we will
be able to successfully implement this recovery plan or that the elements
 12




---



##### Table of Contents



PSB Group, Inc.
 Notes to Consolidated Financial Statements
December 31, 2009, 2008, and 2007
  Note 3  Securities
   2009Gross
    
    
    Gross
    
    
    EstimatedAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    MarketCost
    
    
    Gains
    
    
    Losses
    
    
    ValueAvailable-for-sale securities:U.S. Treasury securities and obligations of U.S.
government corporations and agencies
    
    $
    39,946
    
    
    $
    302
    
    
    $
    (93
    )
    
    $
    40,155Obligations of state and political
subdivisions
    
    
    17,919
    
    
    
    116
    
    
    
    (141
    )
    
    
    17,894Other
    
    
    2,032
    
    
    
    
    
    
    
    (50
    )
    
    
    1,982Total available-for-sale securities
    
    $
    59,897
    
    
    $
    418
    
    
    $
    (284
    )
    
    $
    60,031
 2008Gross
    
    
    Gross
    
    
    EstimatedAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    MarketCost
    
    
    Gains
    
    
    Losses
    
    
    ValueAvailable-for-sale securities:U.S. Treasury securities and obligations of U.S.
government corporations and agencies
    
    $
    43,833
    
    
    $
    1,318
    
    
    $
    (5
    )
    
    $
    45,146Obligations of state and political
subdivisions
    
    
    5,380
    
    
    
    6
    
    
    
    (260
    )
    
    
    5,126Other
    
    
    2,032
    
    
    
    
    
    
    
    (50
    )
    
    
    1,982Total available-for-sale securities
    
    $
    51,245
    
    
    $
    1,324
    
    
    $
    (315
    )
    
    $
    52,254
  13




---



##### Table of Contents



PSB Group, Inc.
 Notes to Consolidated Financial Statements
December 31, 2009, 2008, and 2007
 Note 3  Securities (Continued)
 Available for SaleAmortized
    
    
    MarketCost
    
    
    ValueDue in one year or less
    
    $
    22,055
    
    
    $
    22,064Due in one through five years
    
    
    9,021
    
    
    
    9,110Due after five years through ten years
    
    
    4,666
    
    
    
    4,680Due after ten years
    
    
    7,282
    
    
    
    7,162Total
    
    
    43,024
    
    
    
    43,016Federal agency pools
    
    
    14,841
    
    
    
    15,033Other
    
    
    2,032
    
    
    
    1,982Total
    
    $
    59,897
    
    
    $
    60,031
  14




---



##### Table of Contents



PSB Group, Inc.
 Notes to Consolidated Financial Statements
December 31, 2009, 2008, and 2007
 Note 3  Securities (Continued)
  2009Less Than Twelve Months
    
    
    Over Twelve MonthsGross
    
    
    
    
    
    
    GrossUnrealized
    
    
    
    
    
    
    UnrealizedLosses
    
    
    Fair Value
    
    
    Losses
    
    
    Fair ValueAvailable-for-sale securities:U.S. Treasury securities and obligations of
U.S. government corporations and agencies
    
    $
    93
    
    
    $
    9,329
    
    
    $
    
    
    
    $
    Obligations of state and political subdivisions
    
    
    141
    
    
    
    5,441
    
    
    
    
    
    
    
    Other
    
    
    
    
    
    
    
    
    
    
    50
    
    
    
    450Total available-for-sale securities
    
    $
    234
    
    
    $
    14,770
    
    
    $
    50
    
    
    $
    450
 2008Less Than Twelve Months
    
    
    Over Twelve MonthsGross
    
    
    
    
    
    
    GrossUnrealized
    
    
    
    
    
    
    UnrealizedLosses
    
    
    Fair Value
    
    
    Losses
    
    
    Fair ValueAvailable-for-sale securities:U.S. Treasury securities and obligations of
U.S. government corporations and agencies
    
    $
    5
    
    
    $
    375
    
    
    $
    
    
    
    $
    Obligations of state and political subdivisions
    
    
    242
    
    
    
    3,653
    
    
    
    18
    
    
    
    396Other
    
    
    50
    
    
    
    450
    
    
    
    
    
    
    
    Total available-for-sale securities
    
    $
    297
    
    
    $
    4,478
    
    
    $
    18
    
    
    $
    396
 15




---



##### Table of Contents



PSB Group, Inc.
 Notes to Consolidated Financial Statements
December 31, 2009, 2008, and 2007
 Note 3  Securities (Continued)
  Note 4  Loans
  2009
    
    
    2008Mortgage loans on real estate:Residential 1-4 family
    
    $
    63,586
    
    
    $
    58,399Commercial
    
    
    216,860
    
    
    
    234,121Construction
    
    
    13,109
    
    
    
    14,964Second mortgages
    
    
    7,551
    
    
    
    9,918Equity lines of credit
    
    
    11,108
    
    
    
    13,260Total mortgage loans
    
    
    312,214
    
    
    
    330,662Commercial loans
    
    
    36,314
    
    
    
    37,305Consumer installment loans
    
    
    6,055
    
    
    
    7,296Subtotal
    
    
    354,583
    
    
    
    375,263Less allowances for loan losses
    
    
    (9,469
    )
    
    
    (7,116
    )Net deferred loan fees
    
    
    (320
    )
    
    
    (454
    )Loans  Net
    
    $
    344,794
    
    
    $
    367,693
 16




---



##### Table of Contents



PSB Group, Inc.
 Notes to Consolidated Financial Statements
December 31, 2009, 2008, and 2007
 Note 4  Loans (Continued)
  2009
    
    
    2008
    
    
    2007Balance  Beginning of year
    
    $
    7,116
    
    
    $
    5,184
    
    
    $
    4,257Loan loss provision
    
    
    16,169
    
    
    
    9,956
    
    
    
    7,663Loan losses
    
    
    (14,270
    )
    
    
    (8,387
    )
    
    
    (7,185
    )Loan loss recoveries
    
    
    454
    
    
    
    363
    
    
    
    449Balance  End of year
    
    $
    9,469
    
    
    $
    7,116
    
    
    $
    5,184As a percentage of total loans
    
    
    2.67
    
    
    
    1.90
    
    
    
    1.33
  2009
    
    
    2008Impaired loans without a valuation allowance
    
    $
    22,054
    
    
    $
    8,245Impaired loans with a valuation allowance
    
    
    34,968
    
    
    
    8,260Total impaired loans
    
    $
    57,022
    
    
    $
    16,505Valuation allowance related to impaired loans
    
    $
    2,712
    
    
    $
    2,334Total non-accrual loans
    
    $
    38,026
    
    
    $
    11,955Total loans past due 90 days or more and still accruing
    
    $
    8
    
    
    $
    575
 2009
    
    
    2008
    
    
    2007Average investment in impaired loans
    
    $
    25,296
    
    
    $
    13,174
    
    
    $
    12,809Interest income recognized on impaired loans
    
    $
    594
    
    
    $
    815
    
    
    $
    637Interest income recognized on a cash basis
on impaired loans$
    594
    
    
    $
    815
    
    
    $
    637
 17




---



##### Table of Contents



PSB Group, Inc.
 Notes to Consolidated Financial Statements
December 31, 2009, 2008, and 2007
 Note 4  Loans (Continued)
  Note 5  Bank Premises and Equipment
  2009
    
    
    2008Land
    
    $
    6,266
    
    
    $
    3,480Buildings and improvements
    
    
    12,428
    
    
    
    12,382Furniture, fixtures, and equipment
    
    
    12,306
    
    
    
    12,153Total bank premises and equipment
    
    
    31,000
    
    
    
    28,015Less accumulated depreciation and amortization
    
    
    15,063
    
    
    
    13,908Net carrying amount
    
    $
    15,937
    
    
    $
    14,107
   2010
    
    $
    3502011
    
    
    2852012
    
    
    1452013
    
    
    1382014
    
    
    138Thereafter
    
    
    115Total
    
    $
    1,171
  18




---



##### Table of Contents



PSB Group, Inc.
 Notes to Consolidated Financial Statements
December 31, 2009, 2008, and 2007
 Note 6  Deposits
  2009
    
    
    2008NOW accounts
    
    $
    34,105
    
    
    $
    29,128Savings
    
    
    33,108
    
    
    
    110,707Money market demand
    
    
    132,226
    
    
    
    15,898Time:$100,000 and over
    
    
    93,356
    
    
    
    102,835Under $100,000
    
    
    95,303
    
    
    
    104,213Total interest-bearing deposits
    
    $
    388,098
    
    
    $
    362,781
  Under
    
    
    $100,000$100,000
    
    
    and Over2010
    
    $
    72,720
    
    
    $
    73,2882011
    
    
    17,573
    
    
    
    13,9592012
    
    
    2,010
    
    
    
    2,2602013
    
    
    947
    
    
    
    1052014
    
    
    1,111
    
    
    
    2,756Thereafter
    
    
    942
    
    
    
    988Total
    
    $
    95,303
    
    
    $
    93,356
 19




---



##### Table of Contents



PSB Group, Inc.
 Notes to Consolidated Financial Statements
December 31, 2009, 2008, and 2007
 Note 7  Borrowing Arrangements
    2010
    
    $
    1542011
    
    
    128Total
    
    $
    282
  Note 8  Benefit Plans
  20




---



##### Table of Contents



PSB Group, Inc.
 Notes to Consolidated Financial Statements
December 31, 2009, 2008, and 2007
 Note 8  Benefit Plans (Continued)
   Allocated
    
    
    63,502Committed to be allocated
    
    
    Unallocated
    
    
    14,117Total
    
    
    77,619
   21




---



##### Table of Contents



PSB Group, Inc.
 Notes to Consolidated Financial Statements
December 31, 2009, 2008, and 2007
 Note 9

    - Federal Income Taxes
 The provision for federal income taxes reflected in the consolidated statement of
operations for the years ended December 31, 2009, 2008, and 2007 consisted of the following
(000s omitted):
 2009
    
    
    2008
    
    
    2007Current (benefit) expense
    
    $
    (1,277
    )
    
    $
    (1,055
    )
    
    $
    947Deferred (benefit) expense
    
    
    
    
    
    
    (802
    )
    
    
    (53
    )Total income tax expense
    
    $
    (1,277
    )
    
    $
    (1,857
    )
    
    $
    894
 A reconciliation of the difference between total federal income tax expense and
the amount computed by applying the statutory tax rates to income before income taxes
follows:
 Percent of Pretax Income2009
    
    
    2008
    
    
    2007Amount computed at statutory rates
    
    
    (34
    )
    
    
    (34
    )
    
    
    34Increase (decrease) resulting from:Tax-exempt municipal interest
    
    
    (1
    )
    
    
    (6
    )
    
    
    (11
    )Goodwill impairment
    
    
    
    
    
    
    32
    
    
    
    Change in deferred tax asset valuation allowance
    
    
    25
    
    
    
    22
    
    
    
    Other
    
    
    1
    
    
    
    (15
    )
    
    
    1Effective tax rate
    
    
    (9
    )
    
    
    (1
    )
    
    
    24
 22




---



##### Table of Contents



PSB Group, Inc.
 Notes to Consolidated Financial Statements
December 31, 2009, 2008, and 2007
 Note 9

    - Federal Income Taxes (Continued)
 The details of the net deferred tax asset (liability) at
December 31, 2009 and 2008 are as follows (000s omitted):
 2009
    
    
    2008Deferred tax assets:Provision for loan losses
    
    $
    3,060
    
    
    $
    2,008Net deferred loan fees
    
    
    106
    
    
    
    152Accrued employee benefits
    
    
    57
    
    
    
    63Deferred compensation
    
    
    284
    
    
    
    279Unrealized losses on investment securities
available for sale
    
    
    
    
    
    
    Net operating loss
    
    
    2,783
    
    
    
    500Other real estate owned
    
    
    1,229
    
    
    
    1,230Other
    
    
    230
    
    
    
    230Total deferred tax assets
    
    
    7,749
    
    
    
    4,462Less: Valuation allowance
    
    
    (6,619
    )
    
    
    (3,113
    )Deferred tax liabilities:Property and equipment
    
    
    349
    
    
    
    361Original issue discount
    
    
    382
    
    
    
    552Other
    
    
    399
    
    
    
    436Total deferred tax liabilities
    
    
    1,130
    
    
    
    1,349Net deferred tax asset
    
    $
    
    
    
    $
    
 23




---



##### Table of Contents



PSB Group, Inc.
 Notes to Consolidated Financial Statements
December 31, 2009, 2008, and 2007
 Note 10

    - Stock-based Compensation
 During 2004, the Corporation adopted the PSB Group, Inc. 2004 Stock Compensation Plan
and has reserved 450,000 shares of common stock for issuance under the plan. For
stock options granted, vesting is to be specified at the time of grant and options
will expire 10 years after the grant date. The exercise price of each option granted
will not be below the fair market value of the Corporations common stock on the date
of the grant.The fair value of options granted during the years 2009
and 2008 was $0 and $90,000, respectively. That cost is
expected to be recognized over a weighted-average period of 1.1 years.A summary of the Corporations option activity for the year ended December 31, 2009
is as follows:
 2008WeightedAverageWeighted
    
    
    RemainingNumber
    
    
    Average
    
    
    Contractual
    
    
    Aggregateof
    
    
    Exercise
    
    
    Term (in
    
    
    InstrinsicShares
    
    
    Price
    
    
    years)
    
    
    ValueOptions outstanding  Beginning
of year
    
    
    94,893
    
    
    $
    19.70
    
    
    
    8.5
    
    
    
    Options granted
    
    
    61,400
    
    
    
    10.50
    
    
    
    9.5
    
    
    
    Options exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Options forfeited
    
    
    11,000
    
    
    
    14.49
    
    
    
    9.5
    
    
    
    Options outstanding  End of year
    
    
    145,293
    
    
    $
    16.21
    
    
    
    8.5
    
    
    
    Exercisable at end of year
    
    
    54,365
    
    
    $
    20.85
    
    
    
    7.5
    
    
    
    
 24




---



##### Table of Contents



PSB Group, Inc.
 Notes to Consolidated Financial Statements
December 31, 2009, 2008, and 2007
 Note 10

    - Stock-based Compensation (Continued)
 Shares
    
    
    Price
    
    

(years)
    
    
    ValueOptions outstanding  Beginning
of year
    
    
    145,293
    
    
    $
    16.21
    
    
    
    8.5
    
    
    
    Options granted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Options exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Options forfeited
    
    
    14,000
    
    
    
    16.70
    
    
    
    7.5
    
    
    
    Options outstanding  End of year
    
    
    131,293
    
    
    $
    16.26
    
    
    
    7.5
    
    
    
    Exercisable at end of year
    
    
    85,762
    
    
    $
    18.21
    
    
    
    7.0
    
    
    
    
 Information pertaining to options outstanding at
December 31, 2009 is as follows:
 OptionsOptions Outstanding
    
    ExercisableWeightedAverageExercise
    
    Number
    
    Remaining
    
    NumberPrice
    
    Outstanding
    
    Contractual Life
    
    Outstanding$24.42
    
    
    22,100
    
    
    
    5.5
    
    
    
    22,100$18.00
    
    
    59,793
    
    
    
    7.0
    
    
    
    47,195$10.50
    
    
    49,400
    
    
    
    8.5
    
    
    
    16,467
 25




---



##### Table of Contents



PSB Group, Inc.
 Notes to Consolidated Financial Statements
December 31, 2009, 2008, and 2007
 Note 10

    - Stock-based Compensation (Continued)
 In addition to the stock options granted, there were stock awards of 44,600
shares granted in 2009 and 20,950 shares awarded in 2008.
 The following table summarizes the activity of
restricted stock awards:
 Year Ended December 31,2009
    
    
    2008Beginning of period
    
    
    53,764
    
    
    
    39,650Granted
    
    
    44,600
    
    
    
    20,950Vested
    
    
    (844
    )
    
    
    (3,686
    )Forfeited
    
    
    (6,550
    )
    
    
    (3,150
    )Non-vested, end of period
    
    
    90,970
    
    
    
    53,764
 The stock awards were issued under the same stock based compensation plan as the
options. The stock awards were valued no less than market value and the vesting
period varies by issuance. Total share-based compensation cost for both the stock
options and awards that has been charged against income was $319,000
and $349,000 for 2009
and 2008,
respectively. As of December 31, 2009, there was approximately $297,600 of total
unrecognized share based compensation cost related to options and awards granted under
the plan.
 Note 11  Off-balance-sheet Activities
 Credit-related Financial Instruments- The Corporation is a party to credit-related
financial instruments with off-balance-sheet risk in the normal course of business to
meet the financing needs of its customers. These financial instruments include
commitments to extend credit, standby letters of credit, and commercial letters of
credit. Such commitments involve, to varying degrees, elements of credit and interest
rate risk in excess of the amount recognized in the consolidated balance sheet.The Corporations exposure to credit loss is represented by the contractual amount of
these commitments. The Corporation follows the same credit policies in making
commitments as it does for on-balance-sheet instruments.
 26




---



##### Table of Contents



PSB Group, Inc.
 Notes to Consolidated Financial Statements
December 31, 2009, 2008, and 2007
 Note 11  Off-balance-sheet Activities (Continued)
 At December 31, 2009 and 2008, the following financial instruments were outstanding
whose contract amounts represent credit risk (000s omitted):
 2009
    
    
    2008Commitments to grant loans
    
    $
    2,660
    
    
    $
    3,139Unfunded commitments under lines of credit
    
    
    27,219
    
    
    
    32,541Commercial and standby letters of credit
    
    
    2,488
    
    
    
    2,606
 Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may require
payment of a fee. The commitments for equity lines of credit may expire without being
drawn upon. Therefore, the total commitment amounts do not necessarily represent
future cash requirements. The amount of collateral obtained, if it is deemed
necessary by the Corporation, is based on managements credit evaluation of the
customer.
 Unfunded commitments under commercial lines of credit, revolving credit lines, and
overdraft protection agreements are commitments for possible future extensions of
credit to existing customers. These lines of credit are generally collateralized and
usually do not contain a specified maturity date and may not be drawn upon to the
total extent to which the Corporation is committed.
 Commercial and standby letters of credit are conditional commitments issued by the
Corporation to guarantee the performance of a customer to a third party. These
letters of credit are primarily used to support public and private borrowing
arrangements. Essentially all letters of credit issued have expiration dates within
one year.
 Almost all of the standby letters of credit are secured and, in the event of
nonperformance by the customers, the Corporation has rights to the underlying
collateral provided including commercial real estate, physical plant and property,
inventory, receivables, cash, and marketable securities.
 Collateral Requirements- To reduce credit risk related to the use of credit-related
financial instruments, the Corporation might deem it necessary to obtain collateral.
The amount and nature of the collateral obtained are based on the Banks credit
evaluation of the customer. Collateral held varies, but may include cash, securities,
accounts receivable, inventory, property, plant, and equipment, and real estate.
 27




---



##### Table of Contents



PSB Group, Inc.
 Notes to Consolidated Financial Statements
December 31, 2009, 2008, and 2007
 
 Note 12  Legal Contingencies
 Various legal claims also arise from time to time in the normal course of business
which, in the opinion of management, will have no material effect on the Corporations
consolidated financial statements.
 Note 13  Restrictions on Dividends, Loans, and Advances
 Federal and state banking regulations place certain restrictions on dividends paid and
loans or advances made by the Bank. The total amount of dividends that may be paid at
any date is generally limited to the retained earnings of the Bank, and loans or
advances are limited to 10 percent of the Banks capital stock and surplus on a
secured basis.
 At December 31, 2009, the Bank had no retained earnings available for the payment of
dividends. Accordingly, all $17,388,000 of the Corporations equity in the net assets
of the Bank was restricted at December 31, 2009. Funds available for loans or
advances by the Bank to the Corporation amounted to $2,672,000.
 On September 28, 2009, the Bank entered into a Stipulation and Consent to the Issuance
of an Order to Cease and Desist (the Order) with the FDIC and the Office of
Financial and Insurance Regulation for the State of Michigan (OFIR).
 Among other restrictions, the Order states that the Bank may not declare or pay any
cash dividend without prior written consent of the FDIC and OFIR. The Corporation
may be restricted in its ability to pay dividends to shareholders since its sole
source of income is dividends from the Bank. See Note 16 for additional restrictions.
 Note 14  Related Party Transactions
 In the ordinary course of business, the Corporation has granted loans to principal
officers and directors and their affiliates amounting to $1,255,000 at December 31,
2009 and $1,374,000 at December 31, 2008. During the year ended December 31, 2009,
total principal additions were $28,000 and total principal payments were $147,000.
 Deposits from related parties held by the Corporation at December 31, 2009 and 2008
amounted to $1,239,000 and $769,000, respectively.
 28




---



##### Table of Contents



PSB Group, Inc.
 Notes to Consolidated Financial Statements
December 31, 2009, 2008, and 2007
 
 Note 15  Fair Value of Financial Instruments
 The fair value of a financial instrument is the current amount that would be exchanged
between willing parties, other than in a forced liquidation. Fair value is best
determined based on quoted market prices. However, in many instances, there are no
quoted market prices for the Corporations various financial instruments. In cases
where quoted market prices are not available, fair values are based on estimates using
present value or other valuation techniques. Those techniques are significantly
affected by the assumptions used, including the discount rate and estimates of future
cash flows. Accordingly, the fair value estimates may not be realized in an immediate
settlement of the instrument. This disclosure excludes all nonfinancial instruments
from its disclosure requirements. Accordingly, the aggregate fair value amounts
presented may not necessarily represent the underlying fair value of the Corporation.
 The following methods and assumptions were used by the Corporation in estimating fair
value disclosures for financial instruments:
 Cash and Cash Equivalents- The carrying amounts of cash and short-term instruments
approximate fair values.
 Securities- Fair values for securities are based on quoted market prices. (See Note
17 for further information.)
 Loans Held for Sale- Fair values for loans held for sale are based on commitments on
hand from investors or prevailing market prices.
 Loans Receivable- For variable-rate loans that re-price frequently and with no
significant change in credit risk, fair values are based on carrying values. Fair
values for certain mortgage loans (e.g., one- to four-family residential), credit
card loans, and other consumer loans are based on quoted market prices of similar
loans sold in conjunction with securitization transactions, adjusted for differences
in loan characteristics. Fair values for other loans (e.g., commercial real estate
and investment property mortgage loans, commercial, and industrial loans) are
estimated using discounted cash flow analyses, using interest rates currently being
offered for loans with similar terms to borrowers of similar credit quality. Fair
values for nonperforming loans are estimated using discounted cash flow analyses or
underlying collateral values, where applicable.
 29




---



##### Table of Contents



PSB Group, Inc.
 Notes to Consolidated Financial Statements
December 31, 2009, 2008, and 2007
 
 Note 15  Fair Value of Financial Instruments (Continued)
 Deposit Liabilities- The fair values disclosed for demand deposits (e.g., interest
and noninterest checking, passbook savings, and certain types of money market
accounts) are, by definition, equal to the amount payable on demand at the reporting
date (i.e., their carrying amounts). The carrying amounts of variable-rate,
fixed-term money market accounts and certificates of deposit approximate their fair
values at the reporting date. Fair values for fixed-rate certificates of deposit are
estimated using a discounted cash flow calculation that applies interest rates
currently being offered on certificates to a schedule of aggregated expected monthly
maturities on time deposits.
 Long-term Borrowings- The fair values of the Corporations long-term borrowings are
estimated using discounted cash flow analyses based on the Banks current incremental
borrowing rates for similar types of borrowing arrangements.
 Short-term Borrowings- The carrying amounts of federal funds purchased, borrowings
under repurchase agreements, and other short-term borrowings maturing within 90 days
approximate their fair values. Fair values of other short-term borrowings are
estimated using discounted cash flow analyses based on the Corporations current
incremental borrowing rates for similar types of borrowing arrangements.
 Accrued Interest- The carrying amounts of accrued interest approximate fair value.
 Other Instruments- The fair values of other financial instruments, including loan
commitments and unfunded letters of credit, based on a discounted cash flow analyses,
are not material.
 30




---



##### Table of Contents



PSB Group, Inc.
 Notes to Consolidated Financial Statements
December 31, 2009, 2008, and 2007
 
 Note 15  Fair Value of Financial Instruments (Continued)
 The estimated fair values and related carrying or notional amounts of the
Corporations financial instruments are as follows (000s omitted):
 2009
    
    
    2008Carrying
    
    
    Estimated
    
    
    Carrying
    
    
    EstimatedAmount
    
    
    Fair Value
    
    
    Amount
    
    
    Fair ValueAssets:Cash and short-term
investments
    
    $
    29,260
    
    
    $
    29,260
    
    
    $
    12,268
    
    
    $
    12,268Securities
    
    
    60,031
    
    
    
    60,031
    
    
    
    52,254
    
    
    
    52,254Loans
    
    
    344,794
    
    
    
    357,800
    
    
    
    367,693
    
    
    
    380,415Loans held for sale
    
    
    774
    
    
    
    794
    
    
    
    1,082
    
    
    
    1,100Accrued interest receivable
    
    
    2,244
    
    
    
    2,244
    
    
    
    2,159
    
    
    
    2,159Liabilities:Noninterest-bearing deposits
    
    
    54,647
    
    
    
    54,647
    
    
    
    49,661
    
    
    
    49,661Interest-bearing deposits
    
    
    388,098
    
    
    
    390,331
    
    
    
    362,781
    
    
    
    366,465Long-term debt
    
    
    282
    
    
    
    282
    
    
    
    15,436
    
    
    
    15,924Accrued interest payable
    
    
    221
    
    
    
    221
    
    
    
    398
    
    
    
    398
 Note 16  Regulatory Matters
 A bank that has a risk-based capital ratio less than 8%, or a Tier 1 risk-based
capital ratio less than 4%, or a leverage ratio less than 4% is considered to be
undercapitalized. The FDIC is required to take certain supervisory actions against
undercapitalized institutions, the severity of which depends upon the institutions
degree of undercapitalization.
 On September 28, 2009, the Bank entered into a Stipulation and Consent to the Issuance
of an Order to Cease and Desist (the Order) with the FDIC and the Office of
Financial and Insurance Regulation for the State of Michigan (OFIR).
 The Order required the Bank to take action in the following areas:
 
    
    The Bank must have and retain qualified management.
 
    
    The board of directors was required to assume full responsibility for the approval
of sound policies and objectives and for the supervision of all of the Banks
activities.
 
    
    Increase the Banks level of Tier 1 capital as a percentage of total assets to at
least 8 percent.
 
    
    Charge off any loans classified as loss.
 31




---



##### Table of Contents



PSB Group, Inc.
 Notes to Consolidated Financial Statements
December 31, 2009, 2008, and 2007
 
 Note 16  Regulatory Matters (Continued)
 
    
    Prohibit the extension of credit to borrowers that have had loans with the Bank
that were classified substandard, doubtful or special mention without prior
Board approval.
 
    
    Prohibit the extension of credit to borrowers that have had loans charged off or
classified as loss in exam reports.
 
    
    The Bank may not declare or pay any cash dividend without prior written consent of
the FDIC and OFIR.
 
    
    Prior to submission or publication of all Reports of Condition, the board shall
review the adequacy of the Banks Allowance for Loan and Lease Losses, (ALLL).
 
    
    Within 30 days of the effective date of the Order, the Bank was required to
eliminate and/or correct all violations of law, rule, and regulations.
 
    
    Within 60 days from the effective date of the Order, the Bank was required to
correct all deficiencies in the loans listed for Special Mention.
 
    
    Prepare and submit progress reports the FDIC and OFIR.
 The Order is required to remain in effect until it is modified or terminated by the
FDIC and OFIR. As of December 31, 2009, the Bank was out of compliance with the
Orders requirement that the Bank increase its level of Tier 1 capital as a percentage
of total assets to at least 8 percent. Non-compliance with the Order requirements may
cause the Bank to become subject to further enforcement actions by the FDIC and the
OFIR.
 32




---



##### Table of Contents



PSB Group, Inc.
 Notes to Consolidated Financial Statements
December 31, 2009, 2008, and 2007
 Note 16  Regulatory Matters (Continued)
 The Corporations and the Banks actual capital amounts and ratios as of December 31,
2009 and 2008 are presented in the table.
 For Capital
    
    
    To Be Well-Actual
    
    
    Adequacy Purposes
    
    
    capitalizedAmount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio
    
    
    Amount
    
    
    RatioAs of December 31, 2009:Total capital
(to risk-weighted assets)PSB Group, Inc.
    
    $
    21,085
    
    
    
    5.94
    %
    
    $
    28,400
    >

    
    
    8.0
    %
    
    
    N/A
        >
    
    
    N/APeoples State Bank, Inc.
    
    $
    21,755
    
    
    
    6.13
    %
    
    $
    28,400
    >
    
    
    8.0
    %
    
    $
    35,500
    >
    
    
    10.0
    %Tier I capital
(to risk-weighted assets)PSB Group, Inc.
    
    $
    16,584
    
    
    
    4.67
    %
    
    $
    14,200
    >
    
    
    4.0
    %
    
    
    N/A
    >
    
    
    N/APeoples State Bank, Inc.
    
    $
    17,254
    
    
    
    4.86
    %
    
    $
    14,200
    >
    
    
    4.0
    %
    
    $
    21,300
    >
    
    
    6.0
    %Tier I capital
(to average assets)PSB Group, Inc.
    
    $
    16,584
    
    
    
    3.48
    %
    
    $
    19,000
    >
    
    
    4.0
    %
    
    
    N/A
    >
    
    
    N/APeoples State Bank, Inc.
    
    $
    17,254
    
    
    
    3.63
    %
    
    $
    19,000
    >
    
    
    4.0
    %
    
    $
    23,800
    >
    
    
    5.0
    %As of December 31, 2008:Total capital
(to risk-weighted assets)PSB Group, Inc.
    
    $
    33,812
    
    
    
    9.01
    %
    
    $
    30,300
    >
    
    
    8.0
    %
    
    
    N/A
    >
    
    
    N/APeoples State Bank, Inc.
    
    $
    34,236
    
    
    
    9.13
    %
    
    $
    30,300
    >
    
    
    8.0
    %
    
    $
    37,900
    >
    
    
    10.0
    %Tier I capital
(to risk-weighted assets)PSB Group, Inc.
    
    $
    29,093
    
    
    
    7.76
    %
    
    $
    15,100
    >
    
    
    4.0
    %
    
    
    N/A
    >
    
    
    N/APeoples State Bank, Inc.
    
    $
    29,518
    
    
    
    7.87
    %
    
    $
    15,100
    >
    
    
    4.0
    %
    
    $
    22,700
    >
    
    
    6.0
    %Tier I capital
(to average assets)PSB Group, Inc.
    
    $
    29,093
    
    
    
    6.19
    %
    
    $
    18,700
    >
    
    
    4.0
    %
    
    
    N/A
    >
    
    
    N/APeoples State Bank, Inc.
    
    $
    29,518
    
    
    
    6.29
    %
    
    $
    18,700
    >
    
    
    4.0
    %
    
    $
    23,300
    >
    
    
    5.0
    %
 Note 17  Fair Value Measurement
 The following tables contain information about the Corporations assets and
liabilities measured at fair value on a recurring basis at December 31, 2009, and the
valuation techniques used by the Corporation to determine those fair values.
 In general, fair values determined by Level 1 inputs use quoted prices in active
markets for identical assets or liabilities that the Company has the ability to
access.
 Fair values determined by Level 2 inputs use other inputs that are observable, either
directly or indirectly. These Level 2 inputs include quoted prices for similar assets
and liabilities in active markets, and other inputs such as interest rates and yield
curves that are observable at commonly quoted intervals.
 33




---



##### Table of Contents



PSB Group, Inc.
 Notes to Consolidated Financial Statements
December 31, 2009, 2008, and 2007
 Note 17  Fair Value Measurement (Continued)
 Level 3 inputs are unobservable inputs, including inputs that are available in
situations where there is little, if any, market activity for the related asset or
liability.
 In instances where inputs used to measure fair value fall into different levels in the
above fair value hierarchy, fair value measurements in their entirety are categorized
based on the lowest level input that is significant to the valuation. The
Corporations assessment of the significance of particular inputs to these fair value
measurements requires judgment and considers factors specific to each asset or
liability.
 Assets and Liabilities Measured at Fair Value on a Recurring Basis at December 31, 2009
(dollars in thousands)
 SignificantQuoted Prices in
    
    
    Other
    
    
    SignificantActive Markets
    
    
    Observable
    
    
    Unobservablefor Identical Assets
    
    
    Inputs
    
    
    Inputs
    
    
    Balance at(Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    December 31, 2009AssetsInvestment securities  AFS
    
    $
    1,005
    
    
    $
    58,576
    
    
    $
    450
    
    
    $
    60,031
 Assets and Liabilities Measured at Fair Value on a Recurring Basis at December 31, 2008
(dollars in thousands)
 SignificantQuoted Prices in
    
    
    Other
    
    
    SignificantActive Markets
    
    
    Observable
    
    
    Unobservablefor Identical Assets
    
    
    Inputs
    
    
    Inputs
    
    
    Balance at(Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    December 31, 2009AssetsInvestment securities  AFS
    
    $
    
    
    
    $
    51,524
    
    
    $
    730
    
    
    $
    52,254
 34




---



##### Table of Contents



PSB Group, Inc.
 Notes to Consolidated Financial Statements
December 31, 2009, 2008, and 2007
 Note 17  Fair Value Measurement (Continued)
 Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis
(dollars in thousands)
 Investment Securities -AFSBalance at January 1, 2008
    
    
    795Total realized and unrealized gains (losses) included in incomeTotal unrealized gains (losses) included in other comprehensive income
    
    
    (40
    )Net purchases, sales, calls and maturities
    
    
    (25
    )Net transfers in/out of Level 3Balance at December 31, 2008
    
    
    730Total realized and unrealized gains (losses) included in incomeTotal unrealized gains (losses) included in other comprehensive incomeNet purchases, sales, calls and maturitiesNet transfers in/out of Level 3
    
    $
    (280
    )Balance at December 31, 2009
    
    $
    450
 Investment Securities Available for Sale. Investment securities available for
sale are recorded at fair value on a recurring basis. Fair value measurement is based
upon quoted prices for similar assets, if available. If quoted prices are not
available, fair values are measured using matrix pricing models, or other model-based
valuation techniques requiring observable inputs other than quoted prices such as
yield curves, prepayment speeds, and default rates. Recurring Level 1 securities would
include U.S. Treasury securities that are traded by dealers or brokers in active
over-the-counter markets. Recurring Level 2 securities include U.S. government agency
securities, U.S. government sponsored agency securities, mortgage-backed securities,
collateralized mortgage obligations and municipal bonds. Where Level 1 or Level 2
inputs are not available, securities are classified within Level 3 of the hierarchy.
Changes in fair market value are recorded in other comprehensive income as the
securities are available for sale.
 Of the Level 3 assets that were still held by the Corporation at December 31, 2009,
there was $50 thousand in unrealized losses included in other comprehensive income in
the consolidated balance sheet. There were no gains or losses realized through the
income statement for these assets during 2009.
 Both observable and unobservable inputs may be used to determine the fair value of
positions classified as Level 3 assets and liabilities. As a result, the unrealized
gains and losses for these assets and liabilities presented in the tables above may
include changes in the fair value that were attributable to both observable and
unobservable inputs.
 35




---



##### Table of Contents



PSB Group, Inc.
 Notes to Consolidated Financial Statements
December 31, 2009, 2008, and 2007
 Note 17  Fair Value Measurement (Continued)
 Available-for-sale investment securities categorized as Level 3 assets consist of a
trust preferred investment issued by a local area bank holding company. The
Corporation estimates fair value of these investments on the present value of expected
future cash flows using managements best estimate of key assumptions.
 The Corporation also has assets that under certain conditions are subject to
measurement at fair value on a non-recurring basis. These assets are impaired loans
accounted for under FASB ASC Topic 310: Accounting by Creditors for Impairment of a
Loan. The Corporation has estimated the fair value of these assets using Level 2
inputs, including discounted cash flow projections and estimated realizable value of
the underlying collateral (typically based on outside appraisals).
 Assets Measured at Fair Value on a Nonrecurring Basis at December 31, 2009
 Quoted Prices
    
    
    Significant Other
    
    
    Significant
    
    
    Total Lossesin Active Markets
    
    
    Observable
    
    
    Unobservable
    
    
    for the periodBalance at
    
    
    for Identical Assets
    
    
    Inpute
    
    
    Inputs
    
    
    endedDecember 31, 2009
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    December 31, 2009AssetsImpaired
Loans accounted for under FAS 114
    
    $
    42,072
    
    
    $
    
    
    
    $
    
    
    
    $
    42,072
    
    
    $
    5,001Other Real Estate Owned
    
    $
    6,235
    
    
    $
    
    
    
    $
    6,235
    
    
    $
    
    
    
    $
    1,311
 Impaired Loans The Corporation does not record loans at fair value on a
recurring basis. However, on occasion, a loan is considered impaired and an allowance
for loan loss is established. A loan is considered impaired when it is probable that
all of the principal and interest due under the original terms of the loan may not be
collected. Once a loan is identified as individually impaired, management measures
impairment in accordance with FASB ASC Topic 310: Accounting by Creditors for
Impairment of a Loan. The fair value of impaired loans is estimated using one of
several methods, including collateral value, market value of similar debt, enterprise
value, liquidation value and discounted cash flows. Those impaired loans not requiring
an allowance represent loans for which the fair value of the expected repayments or
collateral exceed the recorded investments in such loans. In accordance with FASB ASC
Topic 825: The Fair Value Option for Financial Assets and Liabilities, impaired loans
where an allowance is established based on the fair value of collateral requires
classification in the fair value hierarchy. When the fair value of the collateral is
based on an observable
 36




---



##### Table of Contents



PSB Group, Inc.
 Notes to Consolidated Financial Statements
December 31, 2009, 2008, and 2007
 Note 17  Fair Value Measurement (Continued)
 market price or a current appraised value, the Corporation records the impaired loan
as nonrecurring Level 2. When an appraised value is not available or management
determines the fair value of the collateral is further impaired below the appraised
value and there is no observable market price, the Corporation records the impaired
loan as nonrecurring Level 3.
 Other Real Estate- Other real estate is carried at the lower of (1) the fair value of
the asset, determined by current appraisal, less the estimated costs to sell the asset
or (2) the remaining balance of the related loan.
 Other assets, including goodwill and other intangible assets, are also subject to
periodic impairment assessments under other accounting principles generally accepted
in the United States of America. These assets are not considered financial
instruments. Accordingly, these assets have been omitted from the above disclosures.
 37




---



##### Table of Contents



PSB Group, Inc.
 Notes to Consolidated Financial Statements
December 31, 2009, 2008, and 2007
 Note 18  Condensed Financial Statements of Parent Company
 The following represents the condensed financial statements of PSB Group, Inc. (the
Parent) only. The Parent-only financial information should be read in conjunction
with the Corporations consolidated financial statements.
 The condensed balance sheet at December 31 is as follows (000s omitted):
 2009
    
    
    2008AssetsCash at subsidiary bank
    
    $
    18
    
    
    $
    308Investment in subsidiaries
    
    
    17,389
    
    
    
    30,528Other
    
    
    18
    
    
    
    111Total assets
    
    $
    17,425
    
    
    $
    30,947LiabilitiesBorrowings  ESOP
    
    $
    282
    
    
    $
    436Deferred Compensation
    
    
    425
    
    
    
    409Total liabilities
    
    
    707
    
    
    
    845Stockholders Equity
    
    
    16,718
    
    
    
    30,102Liabilities and Stockholders Equity
    
    $
    17,425
    
    
    $
    30,947
 38




---



##### Table of Contents



PSB Group, Inc.
 Notes to Consolidated Financial Statements
December 31, 2009, 2008, and 2007
 Note 18  Condensed Financial Statements of Parent Company (Continued)
 The condensed statement of operations for the years ended December 31, 2009, 2008 and
2007 is as follows (000s omitted):
 2009
    
    
    2008
    
    
    2007Operating income  dividends from subsidiaries
    
    $
    
    
    
    $
    
    
    
    $
    1,560Operating expense
    
    
    (327
    )
    
    
    (300
    )
    
    
    (352
    )Income (loss)  Before income taxes and equity in
undistributed income (loss) of subsidiaries
    
    
    (327
    )
    
    
    (300
    )
    
    
    1,208Income tax expense(benefit)
    
    
    21
    
    
    
    (102
    )
    
    
    (120
    )Income (loss)  Before equity in undistibuted
income (loss) of subsidiaries
    
    
    (348
    )
    
    
    (198
    )
    
    
    1,328Equity in undistributed income(loss) of subsidiaries
    
    
    (12,583
    )
    
    
    (13,599
    )
    
    
    (4,070
    )Net loss
    
    $
    (12,931
    )
    
    $
    (13,797
    )
    
    $
    (2,742
    )
 39




---



##### Table of Contents



PSB Group, Inc.
 Notes to Consolidated Financial Statements
December 31, 2009, 2008, and 2007
 Note 18  Condensed Financial Statements of Parent Company (Continued)
  2009
    
    
    2008
    
    
    2007Cash Flows from Operating ActivitiesNet loss
    
    $
    (12,931
    )
    
    $
    (13,797
    )
    
    $
    (2,742
    )Adjustments to reconcile net loss to net cash
from operating activities:Equity in loss of subsidiaries
    
    
    12,584
    
    
    
    13,599
    
    
    
    2,510Net change in other assets
    
    
    41
    
    
    
    (47
    )
    
    
    232Net change in other liabilities
    
    
    16
    
    
    
    (159
    )
    
    
    111Net cash (used in) provided
by operating activities
    
    
    (290
    )
    
    
    (404
    )
    
    
    111Cash Flows from Investing Activities Dividend from subsidiaries
    
    
    
    
    
    
    
    
    
    
    1,560Investment in subsidiaries
    
    
    
    
    
    
    (1,334
    )
    
    
    Net cash (used in) provided
by investing activities
    
    
    
    
    
    
    (1,334
    )
    
    
    1,560Cash Flows from Financing ActivitiesSale of common stock
    
    
    
    
    
    
    2,034
    
    
    
    Cash dividends
    
    
    
    
    
    
    (125
    )
    
    
    (2,207
    )Net cash (used in) provided
by financing activities
    
    
    
    
    
    
    1,909
    
    
    
    (2,207
    )Net Increase (Decrease) in Cash and
Cash Equivalents
    
    
    (290
    )
    
    
    171
    
    
    
    (536
    )Cash and Cash Equivalents Beginning of year
    
    
    308
    
    
    
    137
    
    
    
    673Cash and Cash Equivalents  End of year
    
    $
    18
    
    
    $
    308
    
    
    $
    137
 40




---



##### 



PSB Group, Inc.
 Management Financial Report
 December 31, 2009
 Table of Contents
 Managements Discussion and Analysis
    
    
    42-55Market Information
    
    
    56
 Information Concerning Forward-Looking Statements
 Statements contained in this report which are not historical facts are forward-looking
statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange
Act of 1934. These statements involve important known and unknown risks, uncertainties and
other factors
and can be identified by phrases using estimate, anticipate, believe, project,
expect, intend, predict, potential, future, may, should and similar expressions or
words. Such forward-looking statements are subject to risk and uncertainties which
could cause actual results to differ materially from those projected. Such risks and uncertainties
include potential changes in interest rates, competitive factors in the
financial services industry, general economic conditions, the effect of new legislation and
other risks detailed
in documents filed by the Company with the Securities and Exchange Commission from time to
time.
  41




---



##### Table of Contents



Managements Discussion and Analysis of Financial Condition and Results of Operations
 Basis of Presentation.
 Overview .
   Financial Condition
   42




---



##### Table of Contents



Loans
     December 31,2009
    
    
    2008
    
    
    2007
    
    
    2006
    
    
    2005(in thousands)Mortgages on real estate
    
    $
    311,940
    
    
    $
    330,271
    
    
    $
    320,641
    
    
    $
    335,809
    
    
    $
    306,586Commercial
    
    
    36,268
    
    
    
    37,244
    
    
    
    59,945
    
    
    
    51,827
    
    
    
    46,294Consumer
    
    
    6,055
    
    
    
    7,294
    
    
    
    8,726
    
    
    
    10,708
    
    
    
    12,213Total Loans
    
    $
    354,263
    
    
    $
    374,809
    
    
    $
    389,312
    
    
    $
    398,344
    
    
    $
    365,093
  One year
    
    
    
    
    
    
    
    
    
    
    Loans maturingOne year
    
    
    to five
    
    
    After five
    
    
    
    
    
    
    More than one yearor less
    
    
    years
    
    
    years
    
    
    Total
    
    
    Fixed
    
    
    Variable(in thousands)Mortgages on real estate
    
    $
    85,460
    
    
    $
    152,255
    
    
    $
    74,225
    
    
    $
    311,940
    
    
    $
    171,970
    
    
    $
    54,510Commercial
    
    
    18,709
    
    
    
    15,576
    
    
    
    1,983
    
    
    
    36,268
    
    
    
    11,480
    
    
    
    6,079Consumer
    
    
    1,911
    
    
    
    1,712
    
    
    
    2,432
    
    
    
    6,055
    
    
    
    4,144
    
    
    
    Total Loans
    
    $
    106,080
    
    
    $
    169,543
    
    
    $
    78,640
    
    
    $
    354,263
    
    
    $
    187,594
    
    
    $
    60,589
 43




---



##### Table of Contents



December 31,2009
    
    
    2008
    
    
    2007
    
    
    2006
    
    
    2005(in thousands)Nonaccrual loans
    
    $
    38,026
    
    
    $
    11,955
    
    
    $
    18,245
    
    
    $
    3,069
    
    
    $
    1,651Loans past due 90 or more days
    
    
    8
    
    
    
    575
    
    
    
    1,280
    
    
    
    4,148
    
    
    
    2,044Renegotiated loans
    
    
    25,118
    
    
    
    7,903
    
    
    
    1,347
    
    
    
    486
    
    
    
    515Total non-performing loans
    
    
    63,152
    
    
    
    20,433
    
    
    
    20,872
    
    
    
    7,703
    
    
    
    4,210Other real estate owned
    
    
    6,235
    
    
    
    8,459
    
    
    
    5,996
    
    
    
    325
    
    
    
    306Total non-performing assets
    
    $
    69,387
    
    
    $
    28,892
    
    
    $
    26,868
    
    
    $
    8,028
    
    
    $
    4,516Total non-performing loans to total loans
    
    
    17.83
    %
    
    
    5.45
    %
    
    
    5.36
    %
    
    
    1.93
    %
    
    
    1.15
    %Total non-performing assets to total assets
    
    
    15.02
    %
    
    
    6.27
    %
    
    
    5.46
    %
    
    
    1.61
    %
    
    
    0.91
    %
   44




---



##### Table of Contents



December 31,2009
    
    
    2008
    
    
    2007
    
    
    2006
    
    
    2005(in thousands)Balance  Beginning of year
    
    $
    7,116
    
    
    $
    5,184
    
    
    $
    4,257
    
    
    $
    3,670
    
    
    $
    3,394Loans charged off:Mortgages on real estate
    
    
    (12,213
    )
    
    
    (6,813
    )
    
    
    (5,470
    )
    
    
    (205
    )
    
    
    (536
    )Commercial
    
    
    (1,712
    )
    
    
    (1,261
    )
    
    
    (1,054
    )
    
    
    (1,229
    )
    
    
    (702
    )Consumer
    
    
    (345
    )
    
    
    (313
    )
    
    
    (661
    )
    
    
    (282
    )
    
    
    (642
    )Total Charge offs
    
    
    (14,270
    )
    
    
    (8,387
    )
    
    
    (7,185
    )
    
    
    (1,716
    )
    
    
    (1,880
    )Recoveries on loans previously charged off:Mortgages on real estate
    
    
    240
    
    
    
    109
    
    
    
    36
    
    
    
    
    
    
    
    80Commercial
    
    
    81
    
    
    
    55
    
    
    
    209
    
    
    
    241
    
    
    
    225Consumer
    
    
    133
    
    
    
    199
    
    
    
    204
    
    
    
    223
    
    
    
    297Total Recoveries
    
    
    454
    
    
    
    363
    
    
    
    449
    
    
    
    464
    
    
    
    602Provision for loan losses
    
    
    16,169
    
    
    
    9,956
    
    
    
    7,663
    
    
    
    1,839
    
    
    
    1,554Balance  End of year
    
    $
    9,469
    
    
    $
    7,116
    
    
    $
    5,184
    
    
    $
    4,257
    
    
    $
    3,670
  45




---



##### Table of Contents



December 31,2009
    
    
    2008
    
    
    2007
    
    
    2006
    
    
    2005(in thousands)Percent of
    
    
    
    
    
    
    Percent of
    
    
    
    
    
    
    Percent of
    
    
    
    
    
    
    Percent of
    
    
    
    
    
    
    Percent ofLoans in
    
    
    
    
    
    
    Loans in
    
    
    
    
    
    
    Loans in
    
    
    
    
    
    
    Loans in
    
    
    
    
    
    
    Loans inEach
    
    
    
    
    
    
    Each
    
    
    
    
    
    
    Each
    
    
    
    
    
    
    Each
    
    
    
    
    
    
    EachCategory
    
    
    
    
    
    
    Category
    
    
    
    
    
    
    Category
    
    
    
    
    
    
    Category
    
    
    
    
    
    
    CategoryAllocated
    
    
    to Total
    
    
    Allocated
    
    
    to Total
    
    
    Allocated
    
    
    to Total
    
    
    Allocated
    
    
    to Total
    
    
    Allocated
    
    
    to TotalAmount
    
    
    Loans
    
    
    Amount
    
    
    Loans
    
    
    Amount
    
    
    Loans
    
    
    Amount
    
    
    Loans
    
    
    Amount
    
    
    LoansMortgages
    
    $
    8,247
    
    
    
    88.05
    %
    
    $
    6,418
    
    
    
    88.11
    %
    
    $
    4,239
    
    
    
    82.36
    %
    
    $
    716
    
    
    
    84.30
    %
    
    $
    609
    
    
    
    84.09
    %Commercial
    
    
    1,025
    
    
    
    10.24
    %
    
    
    539
    
    
    
    9.94
    %
    
    
    675
    
    
    
    15.40
    %
    
    
    2,895
    
    
    
    13.01
    %
    
    
    2,221
    
    
    
    12.56
    %Consumer
    
    
    196
    
    
    
    1.71
    %
    
    
    158
    
    
    
    1.95
    %
    
    
    266
    
    
    
    2.24
    %
    
    
    528
    
    
    
    2.69
    %
    
    
    690
    
    
    
    3.35
    %Unallocated
    
    
    1
    
    
    
    n/a
    
    
    
    1
    
    
    
    n/a
    
    
    
    4
    
    
    
    n/a
    
    
    
    118
    
    
    
    n/a
    
    
    
    150
    
    
    
    n/aTotal
    
    $
    9,469
    
    
    
    100.00
    %
    
    $
    7,116
    
    
    
    100.00
    %
    
    $
    5,184
    
    
    
    100.00
    %
    
    $
    4,257
    
    
    
    100.00
    %
    
    $
    3,670
    
    
    
    100.00
    %
 Investment securities
  December 31,2009
    
    
    2008Amortized
    
    
    Fair
    
    
    Amortized
    
    
    FairCost
    
    
    Value
    
    
    Cost
    
    
    Value(in thousands)Available-for-sale securities:U. S. treasury securities and
obligations of other U.S.
government agencies
    
    $
    39,946
    
    
    $
    40,155
    
    
    $
    43,834
    
    
    $
    45,146Obligations of states and
political subdivisions
    
    
    17,919
    
    
    
    17,894
    
    
    
    5,380
    
    
    
    5,126Mortgage-backed securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Corporate debt securities
    
    
    500
    
    
    
    450
    
    
    
    500
    
    
    
    450Equities
    
    
    1,532
    
    
    
    1,532
    
    
    
    1,532
    
    
    
    1,532Total available-for-sale
securities
    
    $
    59,897
    
    
    $
    60,031
    
    
    $
    51,246
    
    
    $
    52,254
  46




---



##### Table of Contents



From one to
    
    
    From five to
    
    
    After tenOne year or less
    
    
    five years
    
    
    ten years
    
    
    years
    
    
    Equity
    
    
    TotalDollar
    
    
    Yield
    
    
    Dollar
    
    
    Yield
    
    
    Dollar
    
    
    Yield
    
    
    Dollar
    
    
    Yield
    
    
    Dollar
    
    
    Yield
    
    
    Dollar
    
    
    Yield(in thousands)Obligations of U.S.
government agencies
    
    $
    17,351
    
    
    
    2.70
    %
    
    $
    15,402
    
    
    
    3.55
    %
    
    $
    6,350
    
    
    
    3.68
    %
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    39,103
    
    
    
    3.19
    %Obligations of states and
political subdivisions
    
    
    4,405
    
    
    
    5.30
    %
    
    
    3,775
    
    
    
    5.11
    %
    
    
    2,415
    
    
    
    5.57
    %
    
    
    7,020
    
    
    
    6.17
    %
    
    
    
    
    
    
    
    
    
    
    17,615
    
    
    
    5.64
    %Mortgage-backed securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Corporate debt securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    500
    
    
    
    3.77
    %
    
    
    
    
    
    
    
    
    
    
    500
    
    
    
    3.77
    %Equity securities & others
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,532
    
    
    
    2.04
    %
    
    
    1,532
    
    
    
    2.04
    %Total
    
    $
    21,756
    
    
    
    3.23
    %
    
    $
    19,177
    
    
    
    3.86
    %
    
    $
    8,765
    
    
    
    4.20
    %
    
    $
    7,520
    
    
    
    6.01
    %
    
    $
    1,532
    
    
    
    2.04
    %
    
    $
    58,750
    
    
    
    3.90
    %
 Deposits
   December 31,2009
    
    
    2008
    
    
    2007(in thousands)Noninterest bearing
demand deposits
    
    $
    54,647
    
    
    $
    49,661
    
    
    $
    59,028NOW accounts
    
    
    34,105
    
    
    
    29,128
    
    
    
    33,750Savings
    
    
    33,108
    
    
    
    110,707
    
    
    
    132,588Money market demand
    
    
    132,226
    
    
    
    15,898
    
    
    
    18,030Time under $100,000
    
    
    95,303
    
    
    
    104,213
    
    
    
    81,446Time over $100,000
    
    
    93,356
    
    
    
    102,835
    
    
    
    113,668Total deposits
    
    $
    442,745
    
    
    $
    412,442
    
    
    $
    438,510
 47




---



##### Table of Contents



December 31, 2009(in thousands)Time Deposits Over $100,000 Maturing in:Less than three months
    
    $
    31,333Three through six months
    
    
    9,635Six months through one year
    
    
    32,119Over one year
    
    
    20,269Total deposits
    
    $
    93,356
 Borrowings
  Outstanding as of12/31/2009
    
    
    12/31/2008(dollars in thousands)Type
    
    Matures
    
    
    Dollar
    
    
    Rate
    
    
    Dollar
    
    
    RateFHLB Advance
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    5,000
    
    
    2.97%  FixedFHLB Advance
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    10,000
    
    
    2.66%  FixedESOP Note Payable
    
    
    2011
    
    
    $
    282
    
    
    2.03% Variable
    
    $
    436
    
    
    5.81%  VariableTotal
    
    
    
    
    
    $
    282
    
    
    
    
    
    
    $
    15,436
 Contractual Obligations
 Payments due - as of December 31, 2009(in thousands)0-12 Months
    
    
    2-3 Years
    
    
    4-5 Years
    
    
    After 5 Years
    
    
    TotalOperating Leases
    
    $
    350
    
    
    $
    430
    
    
    $
    276
    
    
    $
    115
    
    
    $
    1,171Federal Funds
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    ESOP Note Payable
    
    $
    154
    
    
    $
    128
    
    
    $
    
    
    
    $
    
    
    
    $
    282FHLB Advances
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Total
    
    $
    504
    
    
    $
    558
    
    
    $
    276
    
    
    $
    115
    
    
    $
    1,453
 Off Balance Sheet Obligations
 Results of Operations
 48




---



##### Table of Contents



Year ended December 31,2009
    
    
    2008
    
    
    2007Average
    
    
    
    
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    
    
    
    
    AverageBalance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    Rate(dollars in thousands)Federal funds sold
    
    $
    19,247
    
    
    $
    53
    
    
    
    0.28
    %
    
    $
    306
    
    
    $
    7
    
    
    
    2.29
    %
    
    $
    598
    
    
    $
    28
    
    
    
    4.68
    %Investment securities  taxable
    
    $
    59,589
    
    
    $
    2,265
    
    
    
    3.80
    %
    
    $
    49,062
    
    
    $
    2,418
    
    
    
    4.93
    %
    
    $
    36,091
    
    
    $
    1,649
    
    
    
    4.57
    %Investment securities  tax-exempt
    
    $
    5,752
    
    
    $
    212
    
    
    
    3.69
    %
    
    $
    6,818
    
    
    $
    282
    
    
    
    4.14
    %
    
    $
    24,073
    
    
    $
    945
    
    
    
    3.93
    %Loans, net of unearned income
    
    $
    368,826
    
    
    $
    21,492
    
    
    
    5.83
    %
    
    $
    385,174
    
    
    $
    25,730
    
    
    
    6.68
    %
    
    $
    412,274
    
    
    $
    29,960
    
    
    
    7.27
    %Total earning assets
    
    $
    453,414
    
    
    $
    24,022
    
    
    
    5.30
    %
    
    $
    441,360
    
    
    $
    28,437
    
    
    
    6.44
    %
    
    $
    473,036
    
    
    $
    32,582
    
    
    
    6.89
    %Interest bearing deposits
    
    $
    384,233
    
    
    $
    8,423
    
    
    
    2.19
    %
    
    $
    358,920
    
    
    $
    9,799
    
    
    
    2.73
    %
    
    $
    385,758
    
    
    $
    14,205
    
    
    
    3.68
    %Funds borrowed
    
    $
    11,986
    
    
    $
    296
    
    
    
    2.47
    %
    
    $
    22,695
    
    
    $
    635
    
    
    
    2.80
    %
    
    $
    12,334
    
    
    $
    614
    
    
    
    4.98
    %Total interest bearing liabilities
    
    $
    396,219
    
    
    $
    8,719
    
    
    
    2.20
    %
    
    $
    381,615
    
    
    $
    10,434
    
    
    
    2.73
    %
    
    $
    398,092
    
    
    $
    14,819
    
    
    
    3.72
    %Net interest income
    
    
    
    
    
    $
    15,303
    
    
    
    
    
    
    
    
    
    
    $
    18,003
    
    
    
    
    
    
    
    
    
    
    $
    17,763Net interest spread
    
    
    
    
    
    
    
    
    
    
    3.10
    %
    
    
    
    
    
    
    
    
    
    
    3.71
    %
    
    
    
    
    
    
    
    
    
    
    3.17
    %Net interest margin
    
    
    
    
    
    
    
    
    
    
    3.38
    %
    
    
    
    
    
    
    
    
    
    
    4.08
    %
    
    
    
    
    
    
    
    
    
    
    3.76
    %
  49




---



##### Table of Contents



2009 compared to 2008
    
    
    2008 compared to 2007Change
    
    
    Change
    
    
    Change
    
    
    
    
    
    
    Change
    
    
    Change
    
    
    Changedue to
    
    
    due to
    
    
    due to
    
    
    Total
    
    
    due to
    
    
    due to
    
    
    due to
    
    
    TotalRate
    
    
    Volume
    
    
    Mix
    
    
    Change
    
    
    Rate
    
    
    Volume
    
    
    Mix
    
    
    Change(in thousands)Federal funds sold
    
    $
    (6
    )
    
    $
    433
    
    
    $
    (381
    )
    
    $
    46
    
    
    $
    (14
    )
    
    $
    (14
    )
    
    $
    7
    
    
    $
    (21
    )Investment securities  taxable
    
    $
    (553
    )
    
    $
    519
    
    
    $
    (119
    )
    
    $
    (153
    )
    
    $
    129
    
    
    $
    593
    
    
    $
    47
    
    
    $
    769Investment securities  tax-exempt
    
    $
    (31
    )
    
    $
    (44
    )
    
    $
    5
    
    
    $
    (70
    )
    
    $
    49
    
    
    $
    (678
    )
    
    $
    (34
    )
    
    $
    (663
    )Loans, net of unearned income
    
    $
    (3,285
    )
    
    $
    (1,092
    )
    
    $
    139
    
    
    $
    (4,238
    )
    
    $
    (2,432
    )
    
    $
    (1,970
    )
    
    $
    172
    
    
    $
    (4,230
    )Total interest income
    
    $
    (3,875
    )
    
    $
    (184
    )
    
    $
    (356
    )
    
    $
    (4,415
    )
    
    $
    (2,268
    )
    
    $
    (2,069
    )
    
    $
    192
    
    
    $
    (4,145
    )Interest bearing deposits
    
    $
    (1,931
    )
    
    $
    691
    
    
    $
    (136
    )
    
    $
    (1,376
    )
    
    $
    (3,664
    )
    
    $
    (988
    )
    
    $
    246
    
    
    $
    (4,406
    )Funds borrowed
    
    $
    (74
    )
    
    $
    (299
    )
    
    $
    35
    
    
    $
    (339
    )
    
    $
    (270
    )
    
    $
    516
    
    
    $
    (226
    )
    
    $
    20Total interest expense
    
    $
    (2,005
    )
    
    $
    392
    
    
    $
    (101
    )
    
    $
    (1,715
    )
    
    $
    (3,934
    )
    
    $
    (472
    )
    
    $
    20
    
    
    $
    (4,386
    )Net interest income
    
    $
    (1,870
    )
    
    $
    (576
    )
    
    $
    (254
    )
    
    $
    (2,700
    )
    
    $
    1,666
    
    
    $
    (1,597
    )
    
    $
    172
    
    
    $
    241
   th th
    50




---



##### Table of Contents



Recovery Plan.
  
    
    Aggressively manage the banks existing loan portfolios to minimize further credit
losses and to maximize recoveries,
    
    Shrink the banks balance sheet,
    
    Reduce the banks loan portfolio through pay-downs, restructuring and significantly
reducing lending activity, and
    
    Significantly lower operating costs to align with the restructured business model.
   Liquidity and Capital Resources.
  51




---



##### Table of Contents



Regulatory Orders
   
    
    The Bank must have and retain qualified management.
    
    The board of directors was required to assume full responsibility for the approval of
sound policies and objectives and for the supervision of all of the Banks activities.
    
    Increase the Banks level of Tier 1 capital as a percentage of total assets to at least
8 percent.
    
    Charge off any loans classified as loss.
    
    Prohibit the extension of credit to borrowers that have had loans with the Bank that
were classified substandard, doubtful or special mention without prior Board
approval.
    
    Prohibit the extension of credit to borrowers that have had loans charged off or
classified as loss in exam reports.
    
    The Bank may not declare or pay any cash dividend without prior written consent of the
FDIC and OFIR.
 52




---



##### Table of Contents




    
    Prior to submission or publication of all Reports of Condition, the board shall review
the adequacy of the Banks Allowance for Loan and Lease Losses, (ALLL).
    
    Within 30 days of the effective date of the Order, the Bank was required to eliminate
and/or correct all violations of law, rule, and regulations.
    
    Within 60 days from the effective date of the Order, the Bank was required to correct
all deficiencies in the loans listed for Special Mention.
    
    Prepare and submit progress reports the FDIC and OFIR.
  Quantitative and Qualitative Disclosures About Market Risk
    53




---



##### Table of Contents



Estimated Maturity or Re-pricing at December 31, 2009Less than three
    
    
    Three months to
    
    
    One to five
    
    
    Due after fivemonths
    
    
    less than one year
    
    
    years
    
    
    years
    
    
    TotalInterest earning assets:Securities (1) (2)
    
    $
    2,100
    
    
    $
    8,541
    
    
    $
    16,933
    
    
    $
    32,457
    
    
    $
    60,031Loans
    
    
    112,284
    
    
    
    29,269
    
    
    
    167,755
    
    
    
    44,955
    
    
    
    354,263Total interest earning assets
    
    $
    114,384
    
    
    $
    37,810
    
    
    $
    184,688
    
    
    $
    77,412
    
    
    $
    414,294Interest bearing liabilities:Savings and interest bearing
demand deposits
    
    $
    199,439
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    199,439Time deposits
    
    
    57,215
    
    
    
    89,097
    
    
    
    42,347
    
    
    
    
    
    
    
    188,659Short term borrowings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Long term borrowings
    
    
    154
    
    
    
    
    
    
    
    128
    
    
    
    
    
    
    
    282Total interest bearing liabilites
    
    $
    256,808
    
    
    $
    89,097
    
    
    $
    42,475
    
    
    $
    
    
    
    $
    388,380Interest rate sensitivity gap  current
    
    $
    (142,424
    )
    
    $
    (51,287
    )
    
    $
    142,213
    
    
    $
    77,412
    
    
    $
    25,914Interest rate sensitivity gap  cumulative
    
    $
    (142,424
    )
    
    $
    (193,711
    )
    
    $
    (51,498
    )
    
    $
    25,914Cumulative interest rate sensitivity
gap as a percent of total assets
    
    
    -30.83
    %
    
    
    -41.93
    %
    
    
    -11.15
    %
    
    
    5.61
    %
 
 (1)
    
    Equity investments have been placed in the 0-3 month category.(2)
    
    Re-pricing is based on anticipated call dates, and may vary from contractual maturities.    54




---



##### Table of Contents



Application of Critical Accounting Policies
 Allowance for Loan Losses 
  Accounting for Goodwill th
 55




---



##### Table of Contents



Market Information
  2009
    
    High
    
    Low
    
    Dividend DeclaredFirst Quarter
    
    $
    2.60
    
    
    $
    0.56
    
    
    $
    0.00Second Quarter
    
    $
    2.90
    
    
    $
    0.75
    
    
    $
    0.00Third Quarter
    
    $
    1.95
    
    
    $
    1.08
    
    
    $
    0.00Fourth Quarter
    
    $
    1.95
    
    
    $
    0.25
    
    
    $
    0.00
 2008
    
    High
    
    Low
    
    Dividend DeclaredFirst Quarter
    
    $
    9.75
    
    
    $
    6.05
    
    
    $
    0.04Second Quarter
    
    $
    8.90
    
    
    $
    3.85
    
    
    $
    0.00Third Quarter
    
    $
    7.50
    
    
    $
    3.00
    
    
    $
    0.00Fourth Quarter
    
    $
    5.15
    
    
    $
    1.15
    
    
    $
    0.00
  Contact Information
 Todd Raclaw
    
    Steven SchroederHowe, Barnes, Hoefer & Arnett, Inc.
    
    Monroe Securities, Inc.222 Riverside Plaza  7th Floor
    
    100 North Riverside Plaza, Suite 1620Chicago, IL 60606
    
    Chicago, IL 60606(800) 800-4693
    
    (800) 766-5560www.howebarnes.com
    
    www.monroesecurities.com
 56