Overview

WSB 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 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.

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.

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, borrowings and other interest-bearing liabilities, which is referred to as "net interest income". 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. Our principal expense is the interest we pay on deposits and borrowings. 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. Our net income is also affected by the level of our other income, including loan related fees, gain on sale of loans, deposit-based fees, rental income, operations of the Bank's service corporation subsidiary, gains on sales of REO, gains on sales of loans and investment securities as well as operating 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 our loan and investment portfolios. However, given the current state of the residential housing market as well as our previous reliance on residential construction and mortgage loans, we have been diversifying the loan portfolio. Management continues efforts to shift the portfolio from residential lending into commercial real estate and commercial and industrial loans (more commonly referred to as business lending). As part of seeking more diversity in the loan portfolio, we have established commercial business and commercial real estate lending departments staffed with experienced lenders in an effort to significantly expand our nonresidential loan portfolio. This change is particularly important given the current state of the residential housing markets and our 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. Management believes that interest rates and general economic conditions nationally and in our market area are most likely to have a significant impact on our results of operations. We carefully evaluate all loan applications in attempt to minimize our credit risk exposure by obtaining a thorough application with enhanced approval procedures; however, there is no assurance that this process can reduce lending risks. Management reviews models and has established benchmark rates and assures that we remain within the limits. If the limits exceed the established benchmark rate, management develops a plan to bring interest rate risk back within the limits.

Our management considers return on average assets and equity as a measure of our earnings performance. Return on average assets measures the ability to utilize our assets to generate income. However, current economic conditions such as unemployment or declining real estate values, may have a significant impact on our ability to utilize those assets. Return on average assets and equity was .05% and .39%, .65% and 4.61%, during the years ended December 31, 2008 and July 31, 2007, respectively, and .27% and 1.86% during the five month periods ended December 31, 2007 and December 31, 2006, respectively.

We have increased our loan portfolios of commercial business and commercial real estate to commercial borrowers approximately $68 million bringing the total to approximately $117.6 million, or 49.6% of total loans held for investment from $49.2 million, or 24.1% of loans held for investment at July 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.

We are continually seeking to increase our core deposits and advertise our 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.

Both basic and diluted earnings per share amounts are shown on the Consolidated Statements of Earnings. Per-share references in this report are to "basic earnings per share" unless otherwise stated.

Forward Looking Statements

This report contains forward-looking statements within the meaning of and pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. A forward-looking statement encompasses any estimate, prediction, opinion or statement of belief contained in this report and the underlying management assumptions, including those identified by terminology such as "may," "will," "believe," "expect," "estimate," "anticipate," "continue," or similar expressions. The statements presented herein with respect to, among other things, our expectations regarding increasing our commercial loan portfolio, the impact of current and expected economic changes and conditions, the allowance for loan losses, expected increases in investment income, settlement of loans committed to be purchased and the potential for losses in connection therewith, expected impact on expenses of recent staffing reductions, expected terms of loans, prepayments and refinancings, the Bank's continuing to meet its capital requirements and increases in liquidity in the foreseeable future, and the expected outcome of legal proceedings are forward-looking.

Forward-looking statements are based on the Company's current expectations and assessments of potential developments affecting market conditions, interest rates and other economic conditions and assumptions and results may ultimately vary from the statements made in this report. Our future results and prospects may be dependent upon a number of factors that could cause our performance to differ from the performance anticipated or projected in these forward-looking statements or to compare unfavorably to prior periods. Among these factors are:
(a) ongoing review of our business and operations; (b) implementation of changes in lending practices and lending operations; (c) the Board of Directors ongoing review of our capital management plan; (d) changes in accounting principles;
(e) government legislation and regulation; (f) changes in interests rates;
(g) further deterioration of economic conditions; (h) credit or other risks of lending activity, such as changes in real estate values and changes in the quality or composition of our loan portfolio; (i) the impact of any legal or regulatory proceedings; and (j) other expectations, assessments and risks that are specifically mentioned in this report and in such other reports we have filed with the Securities and Exchange Commission. We wish to caution readers not to place undue reliance on any forward-looking statements, which speak only as of the date made, and to advise readers that various factors, including those described above, could affect our financial performance and could cause our actual results or circumstances for future periods to differ materially from those anticipated or projected. Unless required by law, we do not undertake, and specifically disclaim any obligations, to publicly update or revise any forward- looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements.

Critical Accounting Policies

Our financial statements are prepared in accordance with accounting principles generally accepted in the United States ("GAAP"). The preparation of such financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. The financial information contained within our statements is, to a significant extent, financial information that is based on measures of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value that is obtained either when earning income, recognizing an expense, recovering an asset or relieving a liability. Certain policies inherently have a greater reliance on the use of estimates, assumptions and judgments and as such have a greater possibility of producing results that could be materially different than originally reported. We use historical loss factors as one factor in determining an inherent loss that may be present in our loan portfolio. Actual losses could differ significantly from the historical factors that we use. In addition, GAAP itself may change from one previously acceptable method to another. Although the economics of our transactions would be the same, the timing of events that would impact our transactions could change.

Management views the allowance for loan losses as a critical accounting policy. The allowance for loan losses is an estimate of the losses that may be sustained in our loan portfolio. The allowance is based on two basic principles of accounting: (i) Statement of Financial Accounting Standards ("SFAS") No. 5 "Accounting for Contingencies", which requires that losses be accrued when they are probable of occurring and estimable and (ii) SFAS No. 114 "Accounting by Creditors for Impairment of a Loan", which requires that losses be accrued based on the difference between the value of collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance.

Results of Operations

General. Net earnings for the year ended December 31, 2008 were $236,000, or $0.03 per basic share, compared to $2.9 million, or $0.38 per basic share, for the year ended July 31, 2007.

The decrease in net earnings for the year ended December 31, 2008, as compared to the year ended July 31, 2007, was primarily the result of the Bank allocating $2.2 million to its allowance for loan losses during the year, a $2.0 million decrease in net interest income, and a tax expense of $1.3 million in 2007 versus a tax benefit of $413,000 in 2008. The decrease in net interest income 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 partially mitigated by an overall shift from Federal Home Loan Bank ("FHLB") advances to brokered deposits due to the lower interest rates offered on the FHLB advances compared to the rates on brokered deposits. 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.

Net earnings decreased $805,000 to $493,000 for the five months ending December 31, 2007 compared to net earnings of $1.3 million for the comparable 2006 period. This decrease was primarily the result of a decrease of $909,000, or 15%, in net interest income. The decrease is primarily the result of higher interest rates on deposits offset by lower rates on borrowings.

Our net earnings for the year ending December 31, 2008, included a $584,000 gain from the sale of MBS and investment securities compared to a $183,000 loss for fiscal year ending July 31, 2007. The gain, net of taxes, was approximately $354,000 for the year ending December 31, 2008 compared to, net of taxes, a loss of approximately $121,000 for the year ending July 31, 2007.

Net earnings for the five months ending December 31, 2007, included a $7,900 gain from the sale of investment securities compared to a $47,000 loss for the comparable period of 2006.

Without giving effect to the above-mentioned after tax securities gains and losses, we would have had a net loss of approximately $118,000 and net earnings of approximately $2.9 million for the years ending December 31, 2008 and July 31, 2007, respectively. We received a tax benefit of $413,000 for the year ended December 31, 2008, which contributed to our net earnings for the year.

A significant factor affecting earnings has been in the gain on sale of loans. Gain on sale of loans was $660,000 for the year ended December 31, 2008 compared to $1.0 million for the year ended July 31, 2007, a decrease of $377,000 or 36%. The decrease for 2008 is primarily the result of the decrease in our loan originations sold in the secondary market.

Gain on sale of loans was $353,000 for the five-month period ending December 31, 2007 compared to $480,000 for the comparable 2006 period. This decrease was the result of fewer loan originations sold in the secondary market.

Average Balances, Interest and Yields. The following table sets forth, for the periods indicated, information regarding: (i) the total dollar amounts of interest income from interest-earning assets and the resulting average yields;
(ii) the total dollar amounts of interest expense on interest-bearing liabilities and the resulting average costs; (iii) net interest income;
(v) interest rate spread; (v) average interest-earning assets and the total yield earned on average interest-earning assets; (vi) average interest-bearing liabilities, the amount of interest paid on such liabilities and the average interest rate paid on interest-bearing liabilities; and (vii) the ratio of total interest-earning assets to total interest-bearing liabilities. Average balances, yields, and costs are calculated on the basis of month-end averages (except deposits, which are on the basis of daily averages) for all periods through December 31, 2008.

Weighted average yields and costs at December 31, 2008 are also indicated. Non-accrual loans are included in total loan balances, lowering the effective yield for the loan portfolio in the aggregate.

                                 Year Ended December 31,                  Year Ended July 31,
                                          2008                                   2007
                            Average                     Yield/     Average                    Yield/
                            Balance     Interest(1)      Cost      Balance     Interest(1)     Cost
Interest-earning assets:
Loans                      $ 234,066   $      16,383      7.00 %  $ 216,569   $      17,602      8.13 %
Mortgage-backed
securities                   123,793           6,877      5.56       50,278           2,815      5.60

Investment securities
(excluding MBS)               65,449           3,664      5.60      140,392           7,509      5.35
Other interest-earning
assets                         7,113             139      1.96        4,907             256      5.21
Total interest-earning
assets (2)                 $ 430,421          27,063      6.29 %  $ 412,146          28,182      6.84 %
Interest-bearing
liabilities:
Deposits                     257,510           9,756      3.79      297,242          10,802      3.63
Other borrowings             130,625           5,782      4.43       72,423           3,818      5.27

Total interest-bearing
Liabilities (2)            $ 388,135          15,538      4.00 %  $ 369,665          14,620      3.95 %

Net interest
income/interest rate
spread (3)                             $      11,525      2.29 %              $      13,562      2.89 %
Net yield on
interest-earning assets
(4)                                                       2.68 %                                 3.29 %
Ratio of
interest-earning assets
to interest-bearing
liabilities                                              110.9 %                               111.49 %

(2) This is a weighted average yield.

(3) Interest-rate spread is the arithmetic difference between the average yield on interest-earning assets (expressed as a percentage) and the average cost of interest-bearing liabilities (expressed as a percentage).

(4) Net yield on interest-earning assets is the ratio of net interest income to average interest-earning assets.

Rate/Volume Analysis. The following table shows, for the periods indicated, the changes in interest income and interest expense attributable to: (i) changes in volume (change in volume multiplied by prior period rate); and (ii) changes in rate (change in rate multiplied by current period volume).

                                        Years Ended                        Year Ended July 31,
                            December 31, 2008 v. July 31, 2007                2007 v. 2006
                                    Increase (Decrease)                    Increase (Decrease)
                           Due to          Due to          Rate/      Due to     Due to      Rate/
                           Volume           Rate          Volume      Volume      Rate       Volume
                                                   (dollars in thousands)
Interest Income:
Loans(1)                 $     1,423    $      (2,642 )  $  (1,219 ) $ (8,791 ) $     (37 ) $ (8,828 )
Mortgage-backed
securities                     4,117              (55 )      4,062      1,395          35      1,430
Investment securities         (4,109 )            264       (3,845 )    2,342         825      3,167
Other interest-earning
assets                           115             (232 )       (117 )   (1,301 )        55     (1,246 )
Total interest income          1,546           (2,665 )     (1,119 )   (6,355 )       878     (5,477 )

Interest Expense:
Deposits                      (1,442 )            396       (1,046 )   (2,685 )     1,126     (1,559 )
Other                          3,067           (1,103 )      1,964        908         (93 )      815
Total interest                 1,625             (707 )        918     (1,777 )     1,033       (744 )
Decrease in net
interest income          $       (79 )  $      (1,958 )  $  (2,037 ) $ (4,578 ) $    (155 ) $ (4,733 )

Net Interest Income. During 2008, net interest income before the provision for loan losses decreased $2.0 million, or 15.0%, to $11.5 million from $13.5 million for 2007. The decrease is due to a $1.1 million decrease in interest income and a $900,000 increase in interest expense.

The decrease in interest income during 2008 is due to decreases in the rates paid on our interest-earning assets in 2008 as compared to the 2007 period, which decreased total interest earned during 2008 despite an increase in the amount of our interest-earning assets during 2008. For the year ended December 31, 2008, the average balance of our total interest-earning assets increased to $430.4 million from $412.1 million for the year ended July 31, 2007. This increase is primarily the result of an increase in the loan held-for-investment portfolio and MBS, offsetting a decrease in investment securities. The increase in the loan held-for-investment portfolio is primarily due to increased originations in commercial and commercial real estate loans. The increase in MBS is due to the reinvestment of available-for-sale securities that were called or matured during 2008. The average yield on our interest-earning assets for the year ended December 31, 2007 decreased to 6.29% from 6.84% for the year ended July 31, 2007. The decrease in the average yield is the result of lower interest rates on the loan held-for-investment portfolio.

Interest expense increased during 2008 primarily as a result of an increase in interest-bearing liabilities. The average balance of interest-bearing liabilities increased to $388.1 million for the year ended December 31, 2008 as compared to $369.7 million for the year ended July 31, 2007, due to an increase in borrowings partially offset by a decrease in deposits. The average cost of interest-bearing liabilities increased slightly to 4.00% as of December 31, 2008 from 3.95% as of July 31, 2007. The increase of $58.1 million in borrowings is the result of $28.1 million in FHLB advances and $30.0 million in reverse repurchases. For the year ending December 31, 2008, as compared to the year ending July 31, 2007, deposits decreased $31.7 million due to a in runoff of time deposits , partially offset by an increase in savings and NOW accounts. The runoff in time deposits was a result of our offering lower interest rates on time deposits during 2008, which caused these deposits to not be renewed when they came due. However, management directed its focus to increase its core savings and NOW accounts by increasing the rates offered on these products compared to our competitors. As a result, some of the funds that were in time deposits were directed to savings and NOW accounts when they came due. At December 31, 2008 and July 31, 2007, our time deposits were $189.3 million and $232.3 million, respectively, and the corresponding interest expense on these deposits during 2008 and 2007 was approximately $8.7 million and $10.2 million, respectively. This total at December 31, 2008, included 18 accounts totaling approximately $68.9 million of deposits received through brokers. These funds were primarily used to fund loan originations and purchase investments. These brokered accounts consists of individual accounts issued under master certificates in the broker's name. These types of accounts are covered by FDIC insurance. The interest rates on these brokered deposits are similar to our posted rates or less than the borrowed fund rates for similar terms.

During the five-month period ending December 31, 2007, net interest income decreased $909,000, or 15.2%, to $5.1 million from $6.0 million for the comparable 2006 period. The decrease is primarily the result of higher interest rates on deposits offset by lower rates on borrowings. The average cost of interest-bearing liabilities increased to 4.17% for the period ending December 31, 2007, compared to 3.76% for the comparable period ending December 31, 2006.

Allowance for Loan and REO Losses. Our loan portfolio is subject to varying degrees of credit risk. We seek to mitigate this risk through portfolio diversification and limiting exposure to any single customer or industry. We maintain an allowance for loan losses (the "allowance") to absorb losses inherent in the loan portfolio. The amount of the allowance is based on careful, continuous review and evaluation of the loan portfolio, along with monthly and quarterly assessments of the probable losses inherent in that portfolio. The amount of the allowance is reviewed monthly by the Loan Committee and reviewed and approved monthly by the Bank's Board of Directors. The methodology for determining the appropriate amount 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 non-specific allowance which considers risk factors not evaluated by the other two components of the methodology. Additions to the allowance are made through periodic charges to income (provision for loan losses), and actual loan losses are charged against the allowance, while recoveries are added to the allowance.

Each of the components of the allowance for loan losses is determined based upon estimates that can and do change when the actual events occur. The specific allowance is used to individually allocate an allowance for loans identified for impairment testing. Impairment testing includes consideration of the borrower's overall financial condition, resources and payment record, support available from financial guarantors and the fair market value of collateral. These factors are combined to estimate the probability and severity of inherent losses. When an impairment is identified, a specific reserve is established based on our calculation of the loss embedded in the individual loan. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, we do not separately identify individual consumer and residential loans for impairment. The formula allowance is used for estimating . . .