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. The Bank continues to exist as a federally chartered savings bank and to be managed by its board of directors and officers in place prior to the holding company reorganization.

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. Our principal expense is the interest we pay 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. Our net income is also affected by the level of our non-interest income, including loan-related fees, deposit-based fees, rental income, operation of our service corporation subsidiary, gain on sale of real estate acquired in settlement of loans, and gain on sale of loans, as well as our 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 our loan and investment portfolios. Management continues efforts to diversify our loan portfolio from residential lending into commercial real estate and commercial and industrial (more commonly referred to as business lending). Management believes that such diversification will be appropriate and beneficial in dealing with interest rate spread compression and portfolio risk management, although such diversification continues to be significantly hampered by the current economic slowdown. As part of seeking more diversity in our 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 re-price 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.

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

Our financial statements are prepared in accordance with accounting principles generally accepted in the United States ("GAAP"). 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 our Form 10-K for the year ended December 31, 2008 ("2008 Form 10-K"). There were no significant changes in this accounting policy during the six months ending June 30, 2009.

Consolidated Results of Operations

Net loss for the three and six months ended June 30, 2009 was ($41,000), or ($0.01) per basic and diluted share, and ($1.6) million, or ($0.20) per basic and diluted share, respectively, compared to net income of $514,000 or $0.07 per basic share and $0.06 per diluted share and $982,000 or $0.13 per basic share and $0.12 per diluted share, respectively, for the corresponding 2008 periods. Net loss for the three and six month periods ended June 30, 2009, represents decreases of $555,000, or 108% and $2.6 million, or 260%, over the same periods last year.

The decrease in net income for the three month period is primarily the result of a $246,000 increase in Federal Deposit Insurance Corporation ("FDIC") insurance premiums including a $202,000 special assessment, the Bank's addition of $250,000 to the allowance for loan losses, a $210,000 decrease in net interest income and a $196,000 decrease in non-interest income. The FDIC special assessment was imposed on each insured institution's assets minus its Tier 1 capital as reported on June 30, 2009. Without the special assessment, WSB's net income would have been approximately $92,000 for the quarter ending June 30, 2009. The premiums also increased compared to the 2008 period because we had a FDIC insurance credit that decreased the amount of our insurance premium in the 2008 period but which was fully utilized during the fourth quarter of 2008. Additionally, WSB recognized an expense on our real estate owned properties of approximately $82,000 during the quarter ending June 30, 2009.

The decrease in net income for the six month period is primarily the result of the Bank allocating an additional $2.75 million to its allowance for loan losses.

Net interest income during the three and six month periods decreased as a result of a decrease in yield on our interest-earning assets. Non-interest income decreased during the three months ended June 30, 2009 primarily because we had no gain on the sale of investment securities during the period compared to $259,000 pretax, $171,000 net of tax for the same period last year. This decrease offset increases in loan related fees and gain on sale of loans. During the six months ended June 30, 2009 non-interest income decreased primarily as the result of a decrease in gains on the sale of investment securities, as well as a loss on sale of real estate acquired in settlement of loans and a decrease in loan related fees, all of which offset an increase in gain on sale of loans in the secondary market.

While the investment portfolio continues to be in an unrealized loss position as of June 30, 2009, the securities are either agency securities or highly rated. As of June 30, 2009, there has been approximately

35% downgraded with five securities that have been rated less than investment grade by one agency. We continue to aggressively monitor the performance of these securities and the underlying collateral, and at the present time have not designated any investment as other than temporary impaired.

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 $6 million and $16.5 million during the three and six month periods ended June 30, 2009 bringing the total to approximately $134.0 million, or 53.0% of total loans held for investment from $117.5 million, or 48.6% of loans held for investment at December 31, 2008.

We continually seek to increase our core deposits and advertise our lower-cost NOW accounts, no fee checking incentives, overdraft protection program, variable money fund savings account priced to current interest rates, and the advantages of customer access to ATM networks.

Interest Income/Expense

Total interest income decreased $552,000, or 8.0%, and $1.3 million, or 9.0% for the three and six month periods ending June 30, 2009, compared to the corresponding periods last year, due primarily to a decrease in the average volume and average yield on interest-earning assets.

The average six month balance of interest-earning assets decreased to $431.0 million for the six months ending June 30, 2009 from $434.3 million for the six months ending June 30, 2008, due primarily to a decrease in investment securities, offsetting an increase in loans held-for-investment portfolio and mortgage-backed securities. The average yield on interest-earning assets decreased to 5.89% from 6.42%. Short-term investment securities that were called were reinvested in mortgage-backed securities, consistent with a savings and loan association charter. The investment in short-term securities was 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. Additionally, we experienced an increase in non-accrual loans during the period which also negatively impacted the yield on interest-earning assets for the period ending June 30, 2009.

Total interest expense decreased $342,000, or 8.7%, and $741,000, or 9.3%, respectively, for the three and six month periods ended June 30, 2009, compared to the same periods in the prior year. The decrease was primarily attributable to a decrease in the average interest rate on our interest-bearing liabilities. For the six month period ended June 30, 2009, our average interest-bearing liabilities were $392.9 million with an average rate of 3.70%, compared to $390.7 million with an average rate of 4.08%, for the corresponding periods last fiscal year.

Net interest income decreased $210,000, or 7.2%, and $518,000, or 8.7%, respectively, for the three and six month period ended June 30, 2009, compared to the same periods in the prior fiscal year. Due to a lower average return on our interest-earning assets, our net interest rate spread decreased to 2.19% for the six month period ended June 30, 2009 from 2.76% for the same period in the prior fiscal year. The ratio of our interest-earning assets to interest-bearing liabilities decreased to 109.69% from 111.17%.

With the current state of the residential housing markets, including reduced property values, reduced sales and increased foreclosures, as well as our prior reliance on residential construction and mortgage origination, we have continued to expand our 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 on decreased opportunities to originate construction and mortgage loans. Commercial loans and commercial real estate loans have increased to $134.0 million as of June 30, 2009, compared to $100.6 million as of June 30, 2008.

We are currently experiencing a compression of our interest rate margins due to 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 by reducing interest income. We believe that the continued decline of prevailing rates on fixed rate deposits and Federal Home Loan Bank advance funding structures will be favorable to us as existing fixed rate instruments re-price to lower market rates reducing interest expense. Interest rate margins will be further enhanced 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.

Allowance for Loan Losses

Our 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. We maintain 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 our Loan Committee, and reviewed and approved monthly by the Board of Directors.

The allowance is increased by provisions for loan losses, which are an expense. 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. We make 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, we consider 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.

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, we continue to experience an increase in our commercial real estate and commercial lending portfolio, for which management uses a higher reserve factor than traditional mortgages due to a historical loss history of both the Bank and industry indicating a higher risk of default for commercial loans. 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 conditions. Management believes that given the continued problems within the economy and its impact on our loan portfolio as well as the inherent risk within the portfolio that a $2.75 million provision was appropriate to increase the existing allowance level during the period ending June 30, 2009.

During the six months ended June 30, 2009, the allowance decreased in net by $394,000 or 7.9%, to $4.6 million at June 30, 2009 from $5.0 million at December 31, 2008, as a result of net charge-offs of approximately $3.1 million and the $2.75 million addition to the allowance. At June 30, 2009, the allowance was 1.81% of total loans held-for-investment, compared to 2.06% of total loans held-for-investment, at December 31, 2008.

During the six months ended June 30, 2009, we have experienced a noticeable increase in charge-offs in our loan portfolio as well as an increase in our loans held-for-investment portfolio, which was considered in management's analysis of the adequacy of the allowance during the period, and at period end.
The fair value of impaired loans is estimated using one of several methods, including the collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows. Those impaired loans not requiring a specific allowance represent loans for which the fair value of expected repayments or collateral exceed the recorded investment in such loans. At June 30, 2009, substantially all of the totally impaired loans were evaluated based upon the fair value of the collateral. Management's analysis of our impaired loans represents a level of reserves of approximately $2.6 million for the period ending June 30, 2009 compared to approximately $2.8 million at December 31, 2008. Despite the increase in charge-offs and our loans-held-for-investment during the period, offsetting factors, including with respect to the value of the collateral securing such impaired loans, resulted in an overall effect of a slight decrease in the allowance as a percentage of total loans held-for-investments.

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

We believe that the allowance reflects our best estimate of the probable inherent losses existing in our $252.9 million loans-held for investment portfolio as of June 30, 2009. The $7.2 million loan held-for-sale portfolio has been committed to be purchased by investors at June 30, 2009 and will be settled subsequent to that date.

Our 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 2008 Form 10-K. While we use available information to recognize probable 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.

We have developed a comprehensive review process to monitor the adequacy of the allowance. 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 June 30, 2009.

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.

The following occurred during the six months ending June 30, 2009, which impacted the allowance analysis:

† We experienced defaults in 1-4 family residential loans of approximately $325,000.

†              We experienced defaults in lot loans of approximately $308,000.

†              We experienced defaults in construction residential loans of
approximately $1.4 million.

†               Due to the increase in the commercial and commercial real estate

All of the above-referenced loan defaults were charged off to the allowance during the six months ended June 30, 2009. Also, during the three months ending June 30, 2009, additional loans were partially charged off to the allowance and as a result, we took a provision for the allowance of $250,000 during the period to ensure that the amount of the allowance was adequate to account for identified and additional unidentified probable losses in our loan portfolio.

We believe our evaluation as to the adequacy of the allowance as of June 30, 2009 is appropriate, and caution the reader that the provisioning for the six month period is not necessarily indicative of future provisioning. Subjective judgment is significant in the determination of the provision and allowance, 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 our allowance.

We review on a monthly basis the adequacy of the allowance, and make 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 2008 Form 10-K.

As shown below in tabular format, there has been an increase in charge-offs compared to the comparable period last year. While there has been an 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.

                                                2009                               2008
                                      2nd Qtr           1st Qtr          2nd Qtr          1st Qtr
Provision for loan losses          $      250,000    $   2,500,000    $           0    $           0

Loan charge-offs                   $      673,138    $   2,509,962    $      39,447    $     517,882
Loan recoveries                            12,048           27,268            5,669              100
Net Charge-offs                    $      661,090    $   2,482,694    $      33,778    $     517,782

Allowance for loan losses at
period end                         $    4,579,656    $   4,990,746    $   3,665,143    $   3,698,921
Total loans held for investment
at at period end                   $  252,853,842    $ 248,240,555    $ 230,251,591    $ 228,164,709
Allowance to total loans held
for investment at period end                 1.81 %           2.01 %           1.59 %           1.62 %

At June 30, 2009, total non-performing loans were $28.9 million, or 11.44% of total loans held for investment, compared to $18.3 million, or 7.58% of total loans held-for-investment, at December 31, 2008. Non-performing loans consisted of $25.3 million that were non-accrual loans and $3.6 million 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 as of June 30, 2009. For the six month period ending June 30, 2009, we recorded charge-offs of $2.0 million on $4.3 million of non-accrual loans. This reduced the balances on these loans to $2.3 million which is a level we believe to be collectable through the liquidation of collateral or collection methods. The allowance is approximately 18.1% of non-accrual loans, versus 27.1% at December 31, 2008. 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.

As previously reported, there has been an increase in court caseloads resulting in delays in ratification of foreclosure sale actions by the courts affecting mortgage lenders, including us. 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. We are continuing our 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 the borrower, consistent with sound banking considerations, are exhausted.

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