Some of the matters discussed below include forward-looking statements within the meaning of the federal securities laws. Forward-looking statements often use words such as "may," "will," "believe," "expect," "estimate," "anticipate", "continue" or other words of similar meaning. You can also identify them by the fact that they do not relate strictly to historical or current facts. Our actual results and the actual outcome of our expectations and strategies could be materially different from those anticipated or estimated for the reasons discussed below and the reasons under the heading "Information Regarding Forward Looking Statements."

Overview

WSB Holdings became the holding company of the Bank as of January 3, 2008, and reports financial results on a calendar year basis (unlike the Bank's previous fiscal year). Accordingly, results of operations and other financial data for periods prior to January 3, 2008 are for the Bank, and thereafter are for WSB Holdings on a consolidated basis. The Bank has changed its fiscal year end from July 31 to December 31 to be consistent with the year-end of WSB Holdings.

Upon completion of the holding company reorganization, all shares of the Bank were converted into an equal number of newly issued shares of WSB Holdings, as a result of which shareholders of the Bank became shareholders of WSB Holdings in the identical proportion as they were shareholders of the Bank immediately before the reorganization. The Bank continued to exist as a federally chartered savings bank and be managed by its then current board of directors and officers.

We operate a general commercial banking business, attracting deposit customers from the general public and using such funds, together with other borrowed funds, to make loans, with an emphasis on residential mortgage, commercial and construction lending. Our results of operations are primarily determined by the difference between the interest income and fees earned on loans, investments and other interest-earning assets and the interest expense paid on deposits and other interest-bearing liabilities. The difference between the average yield earned on interest-earning assets and the average cost of interest-bearing liabilities is known as net interest-rate spread. The principal expense to WSB is the interest it pays on deposits and other borrowings. The difference between interest income on interest-earning assets and interest expense on interest-bearing liabilities is referred to as net interest income. Net interest income is significantly affected by general economic conditions and by policies of state and federal regulatory authorities and the monetary policies of the Federal Reserve Board. WSB's net income is also affected by the level of its non-interest income, including loan-related fees, deposit-based fees, rental income, operations of its service corporation subsidiary, gain on sale of real estate acquired in settlement of loans, and gain on sale of loans, as well as its non-interest and tax expenses.

During this period of economic slowdown, the effects of which, including declining real estate values resulting in asset impairment and tightening liquidity, has particularly impacted the banking industry in general, management continues to stress credit quality within both its loan and investment portfolios. Management continues with its diversification of WSB's loan portfolio from residential lending into commercial real estate and commercial and industrial (more commonly referred to as business lending). Management continues to seek more diversity in its loan portfolio and has established commercial business and commercial real estate lending departments staffed with experienced lenders in an effort to significantly expand its nonresidential loan portfolio. This change is particularly important given the current state of the residential housing markets and WSB's prior reliance on residential construction and mortgage origination. To expand its commercial customer deposit base, the Bank has implemented remote deposit capture services for commercial customers. This service compliments the Bank's PC Banking platform and provides us a commercially viable means to serve the depository needs of businesses beyond our branch network. We believe that the expansion of our commercial base is significant to the profitability of the Bank in that commercial customers provide lower cost deposit funding, with commercial loan borrowings structures that reprice to interest rate changes under terms that are favorable to the Bank.

Both basic and diluted EPS amounts are shown on the Consolidated Statements of Operations. However, "basic" earnings per share is utilized in this report's narrative when per share amounts are listed, unless otherwise stated

Critical Accounting Policies

The preparation of consolidated financial statements requires management to make judgments in the application of certain of its accounting policies that involve significant estimates and assumptions about the effect of matters that are inherently uncertain. These estimates and assumptions are based on information available as of the date of the financial statements, and may materially impact the reported amounts of certain assets, liabilities, revenues and expenses as the information changes over time. Accordingly, different amounts could be reported as a result of the use of revised estimates and assumptions in the application of these accounting policies.

Accounting policies considered relatively more critical due to either the subjectivity involved in the estimate and/or the potential impact that changes in the estimates can have on the reported financial results include the accounting for the allowance for loan losses. Information concerning this policy is included in the "Critical Accounting Policies" section of Management's Discussion and Analysis in the 2007 Form 10-K. There were no significant changes in this accounting policy during the nine months ending September 30, 2008.

Consolidated Results of Operations

Net loss for the three and nine months ended September 30, 2008 was ($1.1) million, or ($0.14) per basic and diluted share, and ($92,000) or ($0.01) per basic and diluted share, respectively, compared to net earnings of $386,000 or $0.05 per basic and diluted share, and $1,796,000 or $0.24 per basic share and $0.22 per diluted share, respectively, for the corresponding 2007 periods. Net earnings for the three and nine month periods ended September 30, 2008, represent decreases of $1.5 million, or 378%, and $1.9 million, or 105% over the same periods last year.

The decrease in net income for the three and nine month period is primarily the result of the Bank allocating an additional $2.1 million to its Allowance for Loan Losses during the third quarter. The decrease for the nine month period also reflects an interest rate compression as the interest rate on our interest-earning assets decreased while the interest rate on our interest-bearing liabilities increased during the period. This interest rate compression was mitigated in part by an overall shift from brokered deposit funding to Federal Home Loan Bank ("FHLB") advances and reverse repurchase agreements (see page 16 - Interest Income/Expense for more detail). In general, the decrease in net-interest income is primarily the result of a decrease in yield on earning assets and an increase in the volume on interest-bearing liabilities. Non-interest income increased primarily as the result of an increase in the gain on sale of investment securities which offset the decrease in gain on sale of loans in secondary market and loan related fees.

WSB continually seeks to increase its core deposits and advertises it's lower-cost NOW accounts, no fee checking incentives, an overdraft protection program, variable money fund savings account priced to current interest rates, and the advantages of customer access to ATM networks.

Due to the increase to our loan portfolios of commercial business and commercial real estate to commercial borrowers, the total commercial loan portfolio increased approximately $27 million during the nine month period ended September 30, 2008 bringing the total to approximately $111.0 million, or 47.9% of total loans held for investment from $83.5 million, or 36.2% of loans held for investment at December 31, 2007. We believe that the expansion of our commercial customer base is significant to the profitability of the Bank in that commercial customers provide lower cost deposit funding, with commercial loan borrowings structures that reprice to interest rate changes under terms that are favorable to the Bank

Net earnings for the three and nine month periods ending September 30, 2008 included gains on the sale of investment securities of approximately $10,000 pretax, $6,000 net of tax and $460,000 pretax, and $279,000 net of tax, respectively, compared to a loss on sale of investment securities of $0 and $135,000 pretax and $82,000 net of tax

for the same periods last year. The gain on the sale of investments was from restructuring short term investments within the Bank's portfolio to highly-rated mortgage-backed securities in an effort to minimize reinvestment risk while improving portfolio yield. While there has been a decline in fair value for the investment portfolio, the securities are either agency securities or highly rated. As of September 30, 2008, all non-agency mortgage-backed securities, the sector of the portfolio which has experienced the predominate decline in market value, remain AAA rated.

Interest Income/Expense

Total interest income decreased $377,000, or 5.3%, and $247,000, or 1.2% for the three and nine month periods ending September 30, 2008, respectively, compared to the corresponding periods last year. The decrease is due to the decreases in the rates paid on our interest-earning assets as compared to the comparable 2007 periods, which decreased the total interest earned during the 2008 periods despite increases in the amount of our interest-earning assets during the periods.

The average nine-month balance of interest-earning assets increased to $427.2 million for the nine months ended September 30, 2008 from $406.6 million as of September 30, 2007, due primarily to an increase in the loans held-for-investment portfolio and mortgage-backed securities, offsetting the decrease in investment securities. The average yield on interest-earning assets as of September 30, 2008 decreased to 6.38% from 6.85% at September 30, 2007. Short-term investment securities that were called or matured were reinvested in mortgage-backed securities resulting in an increase in interest income on mortgage-backed securities that offset most of the decrease in interest income on investment securities, for a slight aggregate decrease of 1.20%. The investment in short- term securities is being used to maintain liquidity for future loan growth as we restructured the existing loan portfolio under the business plan with a transition into a more diversified loan portfolio with lower credit risk.

Total interest expense decreased $74,000, or 1.9%, but increased $603,000, or 5.4%, respectively, for the three and nine month periods ended September 30, 2008 compared to the same periods in the prior year. The increase in the nine month period was attributable to an increase in the average volume on WSB's interest-bearing liabilities, slightly offset by a slight decrease in the rate paid on those liabilities. For the nine month period ended September 30, 2008, WSB's average interest-bearing liabilities were $388.4 million with an average interest rate of 4.05%, compared to $364.8 million with an average interest rate of 4.08%, for the corresponding period last fiscal year. Total interest expenses decreased in the three-month period, however, due to the reduction of interest-bearing deposits partially offset by a slight decrease in the average rate paid on such deposits.

Net interest income decreased $303,000, or 9.5%, and $850,000, or 8.8%, respectively, for the three and nine month periods ended September 30, 2008, compared to the same period in the prior fiscal year. Due to a lower average return on WSB's interest-earning assets, and a higher volume of WSB's interest-bearing liabilities, WSB's net interest rate spread decreased to 2.33% for the nine month period ended September 30, 2008 from 2.77% for the same period in the prior fiscal year. The ratio of WSB's interest-earning assets to interest-bearing liabilities as of September 30, 2008 decreased to 110.00% compared to 111.44% as of September 30, 2007.

Management continues with its diversification of WSB's loan portfolio from residential lending into commercial real estate and business lending. However, these changes continue to be significantly hampered by the current economic slowdown.

With the current state of the residential housing markets, including reduced property values, reduced sales and increased foreclosures, as well as WSB's prior reliance on residential construction and mortgage origination, WSB has significantly expanded its commercial loans and commercial real estate loans based on both management's determination that it is prudent to reduce our reliance on a sector that is currently unstable and also on decreased opportunities to originate construction and mortgage loans. Commercial loans and commercial real estate loans have increased to $111.0 million as of September 30, 2008, compared to $60.4 million as of September 30, 2007. We believe that the expansion of our commercial base is significant to the profitability of the Bank in that commercial

customers provide lower cost deposit funding, with commercial loan borrowings structures that reprice to interest rate changes under terms that are favorable to the Bank.

WSB is currently experiencing a compression of its interest rate margins due to a slowing demand for loans and lower yields on loan originations and investment security offerings. This lower interest rate environment for loans and investment securities compresses the interest rate spread which decreased interest income. We believe that WSB will be able to take advantage of the continued decline of prevailing rates on fixed rate deposits and Federal Home Loan Bank advance funding structures which will be favorable to WSB thereby reducing our interest expense.

Interest rate margins should improve when economic conditions begin to become more favorable to lending and funds currently held in investment securities can be redirected back into the loan portfolio, as loans generally pay a higher rate of interest than investments securities. We cannot, however, estimate when economic conditions may begin to improve. In the meantime, our ability to enhance our interest income will be limited by the decreased opportunities to make loans and thus redirect funds from investment securities to loans, which pay higher interest rates than investment securities.

Allowance for Loan Losses

WSB's loan portfolio is subject to varying degrees of credit risk. Credit risk is mitigated through portfolio diversification and limiting exposure to any single customer or industry. WSB maintains an allowance for loan losses (the "allowance") to absorb losses inherent in the loan portfolio. The allowance is based on careful, continuous review and evaluation of the loan portfolio, along with ongoing, quarterly assessments of the probable losses inherent in that portfolio. The methodology for assessing the appropriateness of the allowance includes: (1) a formula allowance reflecting historical losses by credit category; (2) the specific allowance for risk rated credits on an individual or portfolio basis; and (3) a nonspecific allowance which accounts for risks not reflected by the other two components of the methodology. The amount of the allowance is reviewed monthly by WSB's Loan Committee, and reviewed and approved monthly by the Board of Directors.

The allowance is increased by provisions for loan losses. Charge-offs of loan amounts determined by management to be uncollectible or impaired decrease the allowance, while recoveries of loans previously charged-off are added back to the allowance. WSB makes provisions for loan losses in amounts necessary to maintain the allowance at an appropriate level, as established by use of the allowance methodology.

Under the methodology, WSB considers trends in credit risk against broad categories of homogenous loans, as well as a loan by loan review of loans criticized or classified by management. Classified loans exceeding $300,000 are individually evaluated quarterly as part of the calculation of the adequacy of the allowance.

While management has seen favorable developments in many of its previously internally criticized loans, the current economic environment has led to an increased volume in loan delinquencies, an increase of internally criticized loans, and the devaluation of real estate collateral used to secure some of these loans. Additionally, WSB continues to experience an increase in its commercial real estate and commercial lending portfolio, for which management uses a higher reserve factor than traditional mortgages, due to a historical loss history from both the Bank and industry. The allowance for loans losses is very subjective in nature, relying significantly on historical loss experience, collateral valuations available to management on specific loans, and economic factors deemed to exist at quarter end affecting the inherent loss within the portfolio. Management believes that given the continued problems within the economy and the inherent risk within the portfolio that a $2.1 million provision was appropriate to increase the existing allowance level, during the period ending September 30, 2008.

During the nine months ended September 30, 2008, the allowance increased in net by $835,000 or 20%, to $5.1 million from $4.2 million at December 31, 2007. This increase is the result of a $2.1 million provision and net charge-offs of $1.3 million. At September 30, 2008, the allowance was 2.13% of total loans held-for-investment, compared to 1.85% of total loans held-for-investment, at December 31, 2007.

During the nine months ended September 30, 2008, WSB has experienced a noticeable increase in the charge-offs experienced in its loan portfolio, which impacted,management's analysis of the adequacy of the allowance for loan loss during the period, and at period end. WSB has experienced significant deterioration in several loans in the loan portfolio which has resulted in an increased level of inherent loss.

Assets subject to WSB's Loan Committee criticism include loans which meet the sub-standard criteria due to collateral deficiencies that may reflect inherent losses. Based on the review of the individual loans involved, management estimates inherent losses. Management continues to assess the allowance for loan losses as new and relevant data is obtained.

Management believes that the allowance reflects its best estimate of the losses existing in the $236.8 million loans-held for investment portfolio as of September 30, 2008. The $2.5 million loan held-for-sale portfolio has been committed to be purchased by investors at September 30, 2008 and will be settled subsequent to that date.

WSB's determination of the adequacy of the allowance requires significant judgment, and estimates of probable losses inherent in the loans held-for-investment portfolio can vary significantly from the amounts actually observed. See Critical Accounting Policies in the 2007 Form 10-K. While management uses available information to recognize probable inherent losses, future additions to the allowance may be necessary based on changes in the credits comprising the portfolios, changes in the financial condition of borrowers, such as may result from changes in economic conditions, or other considerations determined by management to be appropriate.

In addition, various regulatory agencies, as an integral part of their examination process, periodically review the loan portfolio and the allowance. Such review may result in additional provisions based upon their judgments of information available at the time of each examination.

Management has developed a comprehensive review process to monitor the adequacy of the allowance for loan losses. The review process and guidelines were developed utilizing guidance from federal banking regulatory agencies and relies on relevant observable data. The observable data considered in the determination of the allowance is modified as more relevant data becomes available. The results of this review process support management's view that the allowance reflects probable losses within the loan portfolio as of September 30, 2008.

Changes in the estimation valuations may take place based on the status of the economy and the estimate of the value of the property securing loans, and as a result, the allowance may increase or decrease. Future adjustments could substantially affect the amount of the allowance.

In WSB's determination of the adequacy of the allowance, the following defaults and reserve levels impacted the allowance for loan losses during the nine months ending September 30, 2008:

† WSB experienced defaults in 1-4 family residential loans of approximately $662,000.

†          WSB experienced defaults in lot loans of approximately $475,000.

†          WSB experienced defaults in consumer loans of approximately $8,000.

†          Traditional reserve levels in commercial and commercial real estate

† As a result of an analysis of its current portfolio, WSB has recognized an increase of the loss allocation percentages to internally classified loans. This increase is due to an increase that has been experienced in internally classified loans.

Management believes its evaluation as to the adequacy of the allowance as of September 30, 2008 is appropriate, and cautions the reader that the provisioning for the nine month period is not necessarily indicative of future provisioning. Subjective judgment is significant in the determination of the provision and allowance for loan losses, manifested in the valuation of collateral, a borrower's prospects of repayment, and in establishing allowance factors

and components for the formula allowance for homogeneous loans. The establishment of allowance factors is a continuing exercise, based on management's assessment of the factors and their impact on the portfolio, and that allowance factors may change from period to period, resulting in an increase or decrease in the amount of the provision or allowance, based upon the same volume and classification of loans. A time lag between the recognition of loss exposure in the evaluation of the adequacy of the allowance and a loan's ultimate resolution and or charge-off is normal and to be expected. See above for discussion of some of the factors that have had a significant impact in the evaluation of the adequacy of WSB's allowance for loan losses.

Management reviews the adequacy of the allowance for loan losses monthly, and provisions accordingly to meet the deemed losses within the portfolio. For a better understanding and a more complete description of the allowance and the evaluation process, refer to the 2007 Form 10-K.

WSB, as shown below in tabular format, has seen an increase of charge-offs compared to the comparable period last year. While there has been a increase in loan charge-offs, we believe there are additional, unidentified, probable losses within the portfolio, which may be reflected as charge-offs against the allowance in future quarters, as these losses manifest themselves and loan collection efforts continue.

                                            2008                                            2007
                          3rd Qtr         2nd Qtr         1st Qtr         3rd Qtr         2nd Qtr         1st Qtr

Provision for loan
losses                  $  2,100,000    $          0    $          0    $          0    $          0    $          0

Loan charge-offs        $    744,060    $     39,447    $    517,882    $    554,531    $     34,000    $     67,823
Loan recoveries               31,019           5,669             100           5,779           7,457          27,717
Net Charge-offs         $    713,041    $     33,778    $    517,782    $    548,752    $     26,543    $     40,106

Allowance for loan
losses at period end    $  5,052,102    $  3,665,143    $  3,698,921    $  3,888,459    $  4,437,211    $  4,463,754
Total loans held for
investment at at
period end               236,760,847     230,251,591     228,164,709     210,479,020     208,764,146     211,255,631
Allowance to total
loans held for
investment at period
end                             2.13 %          1.59 %          1.62 %          1.85 %          2.13 %          2.11 %

At September 30, 2008, total non-performing loans were $11.8 million, or 5.05%,of total loans held-for-investment compared to $11.6 million, or 5.07% of total loans held-for-investment, at December 31, 2007. Included in non-performing loans are non-accrual loans of $11.7 million and $77,000 in accruing loans, which were contractually past due more than four months, but with current positions deemed to fully support recovery of principal and interest. The allowance is approximately 42.9% of non-accrual loans, versus 36.5% at December 31, 2007. Significant variation in this ratio may occur from period to period because the amount of non-performing loans depends largely on the condition of a small number of individual credits and borrowers relative to the total loan and lease portfolio.

Increased court caseloads have already resulted in delays in ratification of foreclosure sale actions by the courts affecting mortgage lenders, including WSB. This has resulted in both a lengthening of the curing time for delinquent loans and an increase in non-performing asset levels. Recent Maryland legislation intended to provide extended notice periods and other protections to defaulting mortgagors will further delay the resolution of defaulting loans secured by residential properties, both owner and non-owner occupied. Management continues its previous practice of working with borrowers to resolve delinquencies, with foreclosure action being the remedy of last resort when reasonable means to cure deficiencies in the best interest of both the Bank and borrower, consistent with sound banking considerations, are exhausted.

While there has been a slight increase in non-accruals since December 31, 2007, there is not a direct relationship between the discontinuation of interest accrual and the level of inherent risk of loss associated with those loans or the portfolio. This is primarily due to the identification of the inherent risk of loss of some loans being recognized before the loan is placed on non-accrual and because some loans being placed on non-accrual are believed to be collectable

through collateral or other sources. While there has been an increase in non-performing assets, and charge-offs, management believes this is a normal . . .