Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
WSB > SEC Filings for WSB > Form 10-Q on 14-Nov-2012All Recent SEC Filings

Show all filings for WSB HOLDINGS INC

Form 10-Q for WSB HOLDINGS INC


14-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

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

The consolidated financial statements include WSB Holdings, Inc. ("WSB") and its wholly owned subsidiaries, The Washington Savings Bank FSB (the "Bank"), WSB, Inc. and WSB Realty, Inc. (collectively referred to herein, as the "Company").

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 currently on residential mortgage 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 generally 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 Board of Governors of the Federal Reserve (the "Federal Reserve"). Our net income is also affected by the level of our non-interest income, including loan-related fees, deposit-based fees, rental income, operations of our service corporation subsidiary, gain on sale of real estate acquired in settlement of loans, gain on the sale of investment securities and gain on sale of loans, as well as our non-interest and tax expenses.

Pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the "Dodd-Frank Act") banks have been permitted to pay interest on demand deposit accounts, including those from businesses, since July 21, 2011. While we have not yet experienced any impact from this provision on our operations, if our competitors were to start paying interest on these accounts it is possible that our interest expense associated with deposits could increase, or that there could be additional impacts on the Bank's allocation of deposits, deposit pricing, loan pricing, net interest margin, ability to compete, ability to establish and maintain customer relationships, and profitability.

During this continuing 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. The Bank originates residential loans for its portfolio and for sale in the secondary market. We had previously focused on diversifying our loan portfolio by broadening our lending emphasis to include commercial real estate and commercial and industrial loans. Recently, however, as demand for these and other areas of lending have slowed, we again are focusing on increasing our mortgage activity in order to reduce balance sheet risk as well as to realize gains on the sale of loans in the secondary market. As a result, our portfolios of commercial business, commercial real estate, and residential land development loans to commercial borrowers have decreased. We also use available funds to retain certain higher-yielding fixed rate residential mortgage loans in our portfolio in order to improve interest income. Although we intend to again focus on diversifying our loan portfolio when demand for these other areas of loans picks up, we believe that our continued efforts to expand our residential mortgage lending department are important to ensure future profitability based on the current slow demand for commercial


Table of Contents

lending. 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 an 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.

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.

Recent Developments

Entry into a Material Definitive Agreement

On September 10, 2012, WSB and Old Line Bancshares, Inc., the parent company of Old Line Bank, entered into an Agreement and Plan of Merger (the "Merger Agreement"), pursuant to which Old Line Bancshares will acquire WSB for consideration of approximately $48.7 million in stock and cash, or $6.09 per share, subject to possible adjustment. The Merger Agreement, which has been approved by the Boards of Directors of both companies, provides that WSB will be merged with and into Old Line Bancshares (the "Merger"). The Bank will be merged with and into Old Line Bank immediately following consummation of the Merger.

Consummation of the Merger is subject to certain conditions, including, among others, the approval of the Merger Agreement by the stockholders of Old Line Bancshares and WSB and the receipt of required regulatory approvals. In addition, a lawsuit has been filed against WSB and its directors and against Old Line Bancshares that seeks to enjoin the Merger. Please see "Part I. Legal Proceedings" in Part II of this report.

Please refer to our Current Report on Form 8-K filed September 11, 2012 for further information and details relating to the Merger Agreement. Please refer to our Current Report on Form 8-K filed October 26, 2012 for further information relating to the lawsuit.

Regulatory Developments

On June 3, 2011, WSB and the Bank each entered into separate Supervisory Agreements (the "Agreements") with the Office of Thrift Supervision (the "OTS"), their primary banking regulator on such date. Pursuant to regulatory changes instituted by the Dodd-Frank Act, WSB is now regulated by the Federal Reserve and the Bank is now regulated by the Office of the Comptroller of the Currency (the "OCC").

The Agreements, which are formal enforcement actions initiated by the OTS, require WSB and the Bank to take certain measures to improve their safety and soundness and maintain ongoing compliance with applicable laws. During the course of a routine review at the Bank by the OTS, examiners identified certain supervisory issues, primarily related to our classified assets. The Agreements formalized the current understandings of both the Company and the OTS and the Federal Reserve of the actions that WSB, the Bank and their Boards of Directors must undertake to address the issues identified therein. Each Agreement will remain in effect until terminated, modified or suspended by the Federal Reserve or OCC, as applicable.

We have adopted many of the requirements required by the Supervisory Agreements and have submitted the information to the appropriate regulators for their approval.


Table of Contents

For additional information regarding the Agreements, please see WSB's Current Report on Form 8-K filed with the Securities and Exchange Commission on June 6, 2011. The Agreements are filed as Exhibits 10.12 and 10.13 to our quarterly report for the period ending June 30, 2011.

Critical Accounting Policies

Our financial statements are prepared in accordance with accounting principles generally accepted in the United States of America ("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, 2011 ("2011 Form 10-K"). There were no significant changes in this accounting policy during the nine months ending September 30, 2012.

Consolidated Results of Operations

Net loss for the three months ended September 30, 2012 was $4,000, or $0.00 per basic and diluted share, compared to net income of $410,000 or $0.05 per basic share and diluted share for the same three month period last year. Net earnings for the nine months ended September 30, 2012 was $448,000, or $0.06 per basic and diluted share, compared to net earnings of $966,000, or $0.12 per basic and diluted share for the corresponding 2011 period. Net income for the three and nine month periods ended September 30, 2012, represent decreases $414,000, or 101%, and $518,000, or 54%, respectively, over the same periods last year.

The decrease in net earnings for the three month period is primarily the result of a $462,000 decrease in net interest income, a $232,000 decrease in non-interest income and an increase of $211,000 in non-interest expenses as compared to the same three month period last year. The decrease in net interest income is primarily the result of the reduction of our loan portfolio classified as held for investment due to loan payoffs. The primary reason for the decrease in non-interest income during the three month period is a decrease in the gain on sale of investment securities available for sale. The increase in non-interest expense for the three month period is primarily the result of increases of $97,000 in the provision for losses on real estate acquired in settlement of loans, $86,000 in salaries and benefits and $61,000 in professional fees. The decrease in net earnings for the nine month period is primarily the result of a $901,000 decrease in net interest income and a $288,000 decrease in non-interest income, partially offset by a decrease of $107,000 in non-interest expenses. The decrease in net interest income is primarily the result of the reduction of our loan portfolio classified as held for investment due to loan payoffs that occurred during the nine month period ending September 30, 2012 as well as a decrease in the yield on the portfolio. The decrease in non-interest income is the result of a loss on the sale of investment securities for the period ending September 30, 2012 as compared to a gain on the sale of investments for the same nine month period last year, partially offset by increases in most other components of non-interest income. The decrease in non-interest expenses is primarily the result of decreases in FDIC premiums and salaries and benefits. As we continue to experience low loan demand there has been a decrease in our total loans held-for-investments portfolio which has contributed to our interest income decreasing by 15% and 10%, respectively, for the three and nine months ended September 30, 2012. Also, during the nine month period ending September 30, 2012, interest


Table of Contents

income decreased as a result of a decrease in both the balance and yield in our loan portfolio classified as held for sale, offsetting the decrease in interest expense, primarily as a result of the continued efforts to reduce our higher cost liabilities, offsetting the decrease in interest expense.

Interest Income/Expense

Total interest income decreased $753,000, or 16.4%, and $1.8 million, or 13.3%, respectively, for the three and nine month periods ending September 30, 2012, compared to the corresponding periods last year, due primarily to a decrease in both the average volume and average yield on interest-earning assets.

The nine month average balance of interest-earning assets decreased to $338.5 million for the nine months ending September 30, 2012 from $361.6 million for the nine months ending September 30, 2011, due primarily to a decrease in loans held for investment and investment securities, offsetting an increase in MBS. The decrease in loans held-for-investment is primarily the result principal paydowns. The decrease in investment securities is the result of approximately $33.5 million called agency securities, the sale of a $2.5 million agency security and the sale of $5.0 million of corporate bonds offset by $10.0 million in purchases of callable agencies. The increase in MBS is the result of purchases of MBS, partially offset by the sale of other MBS. The short-term investment securities that were called and sold during the nine month period were reinvested in mortgage-backed securities to increase the yield spread. In accordance with the Merger Agreement, WSB is repositioning a portion of its investment portfolio by selling existing securities that may result in an adjustment to the total consideration to be paid in the Merger, based on adjustments relating to the value of our investment portfolio as set forth in the Merger Agreement, if such securities remain in our portfolio, as well as purchasing new securities with Old Line Bancshares' consent. We expect to continue to reposition the investment portfolio in order to attempt to minimize any potential adjustment to the total consideration paid to WSB's stockholders upon closing of the Merger.

The average yield on our interest-earning assets decreased to 4.74% during the nine months ended September 30, 2012 from 5.12% during the same period in 2011. The decrease is primarily the result of lower interest rates on interest earnings assets including our loans held for investment, MBS and investment securities compared to the same period last year due to a lower interest rate environment. In addition, our troubled debt restructured loans increased by approximately $6.9 million from September 30, 2011 to September 30 2012, and such loans had significantly lower interest rates after such restructuring, which also negatively impacted the yield on our interest-earning assets in the 2012 period.

Total interest expense decreased $291,000, or 20.2%, and $938,000, or 20.4%, respectively, for the three and nine month periods ended September 30, 2012, compared to the same periods in the prior year. The decrease was attributable to a decrease in both the average balance, resulting primarily from the maturities of approximately $5.0 million in our brokered certificate of deposits since September 30, 2011, and the average interest rate on our interest-bearing liabilities. For the nine month period ended September 30, 2012, our average interest-bearing liabilities were $307.6 million with an average rate of 1.59%, compared to $333.6 million with an average rate of 1.85% for the corresponding period last year.

Net interest income decreased $462,000, or 14.6%, and $901,000, or 9.7%, respectively, for the three and nine month periods ended September 30, 2012, compared to the same periods in the prior year. Due to a lower average yield on our interest earning assets and a lower average yield on our cost of interest-bearing liabilities, our net interest rate spread decreased to 3.15% for the nine month period ended September 30, 2012 from 3.27% for the same period in the prior year. The ratio of our interest-earning assets to interest-bearing liabilities increased to 110.04% at September 30, 2012 from 108.41% at September 30, 2011.

We continue to experience pressure on the compression of our interest rate margins due to slowing demand for loans and lower yields on loan originations and investment security offerings, however, the effects of this have


Table of Contents

been minimized by our ability to decrease interest rate expense through lower deposit costs. This lower interest rate environment for loans and investment securities compresses the interest rate spread by reducing interest income. Interest rate margins may be further enhanced when and if 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 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. The challenges caused by the recent recession and continuing high unemployment levels and uncertain real estate valuations have resulted in the Bank currently applying a loss history look back period for the allowance for loan losses of 12 months, which is shorter than the period the Bank had used historically. We continue to be mindful of the continued problems within the economy and its impact on our loan portfolio as well as the inherent risk within the portfolio, and management will make adjustments to the allowance and loan loss provision as necessary. Based on our review, no provision was necessary for either the three or nine month periods ending September 30, 2012.

During the nine months ended September 30, 2012, the allowance decreased by $2.8 million or 45.3%, to $3.4 million at September 30, 2012 from $6.1 million at December 31, 2011, as a result of net charge-offs of approximately $2.8 million during the nine months ending September 30, 2012. At September 30, 2012, the allowance was 1.79% of total loans held-for-investment, compared to 2.90% of total loans held-for-investment at December 31, 2011.

The change in the allowance was primarily due to the fact that the risk profile of our loan portfolio has improved as well as the reduction of our loan portfolio balance classified as held-for-investment, particularly our commercial secured by real estate loans. However, $2.6 million in charge-offs were related to eliminating the specific reserve on our collateral dependent loans in 2012 based on OCC guidance newly applicable to us compared to the specific reserve balances that existed at December 31, 2011.

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 2011 Form 10-K. While we use available information to


Table of Contents

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 experienced an increase in charge-offs in our loan portfolio during the nine month period ending September 30, 2012 compared to the same period last year. During the nine months ending September 30, 2012 we recorded loan charge-offs of $2.8 million and recoveries of previous charged-off loans of approximately $61,000 compared to net charge-offs of $2.7 million for the corresponding nine month period last year.

Assets subject to our Loan Committee review 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.

We believe that the allowance reflects our best estimate of the probable inherent losses existing in our $186.8 million (net of deferred loan fees) loans-held for investment portfolio as of September 30, 2012. The $10.7 million loan held-for-sale portfolio has been committed to be purchased by investors at September 30, 2012 and will be settled subsequent to that date.

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 September 30, 2012.

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.

We believe our evaluation as to the adequacy of the allowance as of September 30, 2012 is appropriate, and caution 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, 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.

We review on a monthly basis the adequacy of the allowance, and make provisions accordingly to meet the deemed losses within the portfolio. Based on this review, as noted above, no provision was deemed necessary for the three and nine month periods ending September 30, 2012. For a better understanding and a more complete description of the allowance and the evaluation process, refer to the 2011 Form 10-K.

The following table shows charge-offs and recoveries in the allowance during the three and nine month periods ending September 30, 2012 and 2011. In addition, we believe there are additional, unidentified, probable


Table of Contents

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.

                                         2012                                           2011
                        3rd Qtr        2nd Qtr         1st Qtr         3rd Qtr         2nd Qtr         1st Qtr
Provision for loan
losses                           0   $          0   $           0   $     100,000   $     100,000   $           0

Loan charge-offs
single family        $      66,072   $    158,692   $     610,954   $     299,555   $           -   $     426,710
construction                     -              -               -               -               -               -
commercial, land
and other                  170,575         92,466       1,735,782         199,433       1,741,128          39,395
                           236,647        251,158       2,346,736         498,988       1,741,128         466,105
Loan recoveries
single family                2,810          9,562           1,195           4,327           5,071           7,755
construction                     -              -               -           5,021               -               -
commercial, land
and other                   34,896          1,650          10,942           3,242             941               0
Net Charge-offs      $     198,941   $    239,946   $   2,334,599   $     486,398   $   1,735,116   $     458,350

Allowance for loan
losses at period
end                  $   3,350,630   $  3,549,571   $   3,789,517   $   7,739,928   $   8,126,326   $   9,761,442
Total loans held
for investment at
at period end (1)    $ 186,764,390    189,817,953   $ 199,270,866   $ 219,663,498   $ 226,637,073   $ 235,551,909
Allowance to total
loans held for
investment at
period end                    1.79 %         1.87 %          1.90 %          3.52 %          3.59 %          4.14 %

. . .

  Add WSB to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for WSB - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.