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WSB Financial Continues to Build Reserves in First

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thekrup   Thursday, 05/01/08 11:52:40 AM
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WSB Financial Continues to Build Reserves in First Quarter 2008
8:31p ET April 30, 2008 (PrimeNewswire)
WSB Financial Group (Nasdaq:WSFG), the parent company of Westsound Bank, today reported a loss in the first quarter of 2008 after significant additions to loan reserves. Based on the maturing of its construction loans and continued uncertainty in the local housing market, the company added $7.7 million, or $0.91 per share after tax, to total provisions for loan losses and unfunded commitments in the first quarter. The company posted a net loss of $5.8 million, or $1.04 per share, for the first quarter of 2008. In the first quarter of 2007, WSB generated a net profit of $1.1 million, or $0.18 per share. Book value per share was $9.14 at March 31, 2008, and the ratio of Tier 1 equity capital to average assets was 11.76% at quarter end. All results for the first quarter are unaudited.

"Obviously, the past few months have been challenging for us, as we continue to work through the issues with the construction loans in our portfolio," said Terry A. Peterson, President and CEO. "We have scaled back our construction loan originations in the past few months and are concentrating on working with our borrowers to complete existing projects in a timely manner and to bring past-due loans current." Peterson was hired as WSB's President and CEO on April 15, 2008.

"During the first quarter, however, several factors contributed to higher levels of non-accrual loans. We have maturing construction and land development loans that we are choosing not to renew in order to keep all of our legal remedy options available to us. Many of these loans originated in 2006 or 2007, and as a result are reaching their contractual maturities. At 90 days past due, these loans are placed into a non-accrual status while we work with our borrowers to maximize our recovery. The majority of our remaining construction and land development loans mature in the next two quarters. Therefore, the contraction or expansion of our non-accrual loan portfolio in future periods will depend upon our ongoing collection efforts. In the first quarter we had $37 million in total loan payoffs.

"The real estate collateral valuations supporting our construction and land development loan portfolios have clearly suffered along with the recent decline in the local housing market. We are rapidly updating our real estate appraisals to help us better understand our total exposure to this loan segment. The good news is that real estate cannot disappear like other types of collateral. However, a loan made in 2006 that was within our policy guidelines may have a loan to value today that exceeds our guidelines. While we watch our real estate markets soften, it is prudent to add to our reserves for potential loan loss," Peterson said.

"In addition, we have brought in two very seasoned loan administration and workout specialists, whom I have known for ten years. One is an attorney and banker and the other has prior chief credit officer experience. Both specialize in loan collection and loan administration in Bank turnaround situations," Peterson added.

The following table reflects the make up of the company's overall loan portfolio by location:

Loan Category March 31, 2008 Total ($ in thousands) Loans --------- Spec Construction $ 68,735 Custom Construction 116,271 --------- Total Construction 185,006 Vacant Land & Land Development 55,720 1-4 Family Mortgage 34,636 Multifamily Mortgage 13,144 Commercial RE 66,239 Commercial Loans 29,338 Consumer 2,235 --------- Total Gross Loans $ 386,318 Loan Category March 31, 2008 Kitsap % of King % of ($ in thousands) County Loans County Loans -------- -------- -------- -------- Spec Construction $ 31,089 8% $ 10,649 3% Custom Construction 28,085 7% 54,739 14% -------- -------- -------- -------- Total Construction 59,174 15% 65,388 17% Vacant Land & Land Development 30,733 8% 5,215 1% 1-4 Family Mortgage 15,258 4% 3,469 1% Multifamily Mortgage 6,057 2% -- 0% Commercial RE 43,764 11% 4,194 1% Commercial Loans 24,296 6% 79 0% Consumer 1,981 1% 25 0% -------- -------- -------- -------- Total Gross Loans $181,264 47% $ 78,370 20% Loan Category March 31, 2008 Pierce % of Other % of ($ in thousands) County Loans Counties Loans -------- -------- -------- -------- Spec Construction $ 15,906 4% $ 11,091 3% Custom Construction 21,505 6% 11,943 3% -------- -------- -------- -------- Total Construction 37,410 10% 23,033 6% Vacant Land & Land Development 6,001 2% 13,771 4% 1-4 Family Mortgage 6,771 2% 9,138 2% Multifamily Mortgage 3,271 1% 3,816 1% Commercial RE 3,919 1% 14,362 4% Commercial Loans 3,071 1% 1,892 0% Consumer 17 0% 212 0% -------- -------- -------- -------- Total Gross Loans $ 60,460 16% $ 66,225 17%

Nonperforming assets (NPAs) at March 31, 2008 totaled $72.2 million, which includes $70.3 million of loans on non-accrual status and $1.9 million in other real estate owned. The allowance for loan losses was $26.3 million, or 6.82% of gross loans at March 31, 2008. During the first quarter of 2008, net charge-off's totaled $912,000, or 0.23% of average loans at March 31, 2008. Of the non-accrual loans, 37% were in Kitsap County, 31% were in King County, 17% were in Pierce County and the remaining 15% were in other parts of Western Washington.

The following table reflects the make up of the company's total loan portfolio by non-accrual status:

Loan Category % of March 31, 2008 % of Non- Non- -------------- Loans Loans Accruals Accruals ---------------------------------------- ($ in thousands) Spec Construction $ 68,735 18% $ 15,724 22% Custom Construction 116,271 30% 37,000 53% -------- -------- -------- -------- Total Construction 185,006 48% 52,724 75% Vacant Land & Land Development 55,720 14% 10,949 16% 1-4 Family Mortgage 34,636 9% 4,781 7% Multifamily Mortgage 13,144 3% -- 0% Commercial RE 66,239 17% 1,125 2% Commercial Loans 29,338 8% 710 1% Consumer 2,235 1% 24 0% -------- -------- -------- -------- Total Gross Loans $386,318 100% $ 70,313 100%* *rounding brings it to 101%

"The increase in non-accrual loans also impacted net interest income, as $1.6 million in interest income was reversed in the first quarter," said Peterson. "In addition, we are maintaining a high level of liquidity using higher cost wholesale funding sources and have more than half of our deposits in time certificates. As we collect our construction loans and development loans we should be able to deleverage the balance sheet over the next few quarters. As we do this our yields and cost of funds should return to more normal levels, although I anticipate this will be a gradual process."

These factors, combined with the significant reduction in fee income from new loan originations, contributed to significant margin compression in the quarter. Net interest margin in the first quarter dropped to 1.65% from 3.62% in the fourth quarter of 2007 and 5.06% in the first quarter a year ago. Net interest income, before the loan loss provision, was $2.0 million in the first quarter, compared to $4.3 million in the same quarter last year. Following the provision, the first quarter net interest income was negative $5.6 million compared to $4.3 million a year ago.

Primarily because of closing its wholesale mortgage operation last fall, WSB Financial's noninterest income declined to $236,000 in the first quarter, compared to $1.3 million in the first quarter a year ago. The decline was offset somewhat by the drop in noninterest expense, which fell to $3.9 million in the quarter from $4.1 million in the first quarter of 2007.

At March 31, 2008, gross loans grew 3% year-over year to $386 million from $376 million at March 31, 2007, and fell 7% from $413 million at December 31, 2007. Deposits grew 22% to $441 million at March 31, 2008, from $362 million a year ago, with growth in time deposits accounting for most of the increase.

ABOUT WSB FINANCIAL GROUP, INC.

WSB Financial Group, Inc., based out of Bremerton, Washington, is the holding company for Westsound Bank. The company was founded in 1999, and currently operates nine full service offices located within 5 contiguous counties within Western Washington. Our website is http://www.westsoundbank.com.





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