WSB Financial Reports Strong Liquidity and Capital Ratios While Continuing to Build Loan Reserves and Makes Adjustment to Deferred Tax Asset in Second Quarter 2008


BREMERTON, Wash., July 30, 2008 (PRIME NEWSWIRE) -- WSB Financial Group (Nasdaq:WSFG), the parent company of Westsound Bank, today reported a loss in the second quarter of 2008 after a accounting charge to the deferred tax asset and further additions to loan reserves.

The company posted a net loss of $11.0 million, or $1.97 per share, for the second quarter of 2008, following the non-cash $6.5 million accounting adjustment, compared to a net loss of $5.8 million, or $1.04 per share in the first quarter of 2008. In the second quarter of 2007, WSB generated a net profit of $1.4 million, or $0.24 per share. Excluding the valuation allowance of $6.5 million related to its deferred tax asset, WSB Financial's operating loss was $0.80 per share in the second quarter of 2008. With the ongoing uncertainty in the local housing market and the large number of construction projects in progress, the company added $3.5 million, or $0.63 per share, to its provision for loan losses in the second quarter.

Book value per share was $7.16 at June 30, 2008, and the ratio of Tier 1 equity capital to average assets was 10.0% at quarter end. All results for the second quarter and six month periods are unaudited.

"At day 80 of the first 100 days of my tenure, we have completed a three-year plan in which we anticipate returning this bank to healthy operations within two years. I commend our management team and staff for accomplishing this task 20 business days ahead of schedule. The process will take a great deal of time and effort by the team of professionals we are assembling, and we believe our efforts will be successful in the long run," said Terry A. Peterson, President and CEO. Peterson was hired as WSB's President and CEO on April 15, 2008.

"As a result of our continuing assessment of our balance sheet, we elected to take a accounting charge of $6.5 million to establish a valuation allowance for our deferred tax asset. This charge created a tax expense of $4.3 million in the second quarter of 2008 and further reduced net income," said Mark Freeman, Chief Financial Officer. "While this charge along with the additional allocation to our reserve for anticipated loan loss has a negative impact to earnings, we believe it provides transparency to all constituents. In addition, the valuation allowance may be used as a benefit against future earnings."

Strong Liquidity and Capital Ratios

"We are maintaining a high level of liquidity as we continue to deleverage our balance sheet from loan collections," Peterson noted. "Westsound Bank has one of the highest liquidity ratios of banks in the region, and we continue to have a very strong capital base. Both of these factors provide great comfort to our deposit clients, and they deserve nothing less."

Demonstrating the Bank's ability to meet its clients' cash needs, the liquidity ratio, measured by total cash and investments divided by deposits, is 25.2% at June 30, 2008, compared to 11.2% a year ago. "In addition, we believe Westsound Bank's capital ratios are solid with Tier 1 risk based capital of 13.5% and total risk based capital of 14.8%. Similarly, WSB Financial capital ratios are strong with Tier 1 risk based capital of 13.9% and total risk based capital of 15.2%," Peterson said. According to the FDIC, commercial banks nationally average Tier 1 risk based capital of 9.4% and total risk based capital of 12.3%, at March 31, 2008.

Balance Sheet and Credit Quality Review

In the last quarter, the loan portfolio shrank by $47 million to $339 million with $56.5 million in total net principal payments, $3.5 million in real estate foreclosures, and $13 million in additional construction funding disbursements. "We are not counting on a real estate recovery to help us with loan recoveries, and, according to the June edition of the Puget Sound Economic Forecaster, the Pacific Northwest is not expected to slip into a recession in 2009. We believe that collection for the portfolio will accelerate as our team executes on our plans," said Peterson.

The following table reflects the makeup of the company's overall loan portfolio by loan type.



 Loan Category        30-Jun-08   % of   31-Mar-08   % of    Quarter
                        Loans     Loans    Loans     Loans   Change
                      ----------------------------------------------
 ($ in thousands)
 Spec Construction    $ 53,961     16%   $ 68,735     18%     -21%
 Custom Construction    94,567     28%    116,271     30%     -19%
                      --------    ----   --------    ----
 Total Construction    148,528     44%    185,006     48%     -20%
 Vacant Land & Land
  Development           47,622     14%     55,720     14%     -15%
 1-4 Family Mortgage    34,462     10%     34,636      9%      -1%
 Multifamily Mortgage   11,815      3%     13,144      3%     -10%
 Commercial RE          66,293     20%     66,239     17%       0%
 Commercial Loans       27,658      8%     29,338      8%      -6%
 Consumer                3,311      1%      2,235      1%      48%
                      --------    ----   --------    ----
 Total Gross Loans    $339,689    100%   $386,318    100%     -12%

"Balance sheet risk continues to be centered in spec/custom home construction loans and land development," said Charles Turner, Chief Credit Officer. "We are not renewing loans in these categories, which is resulting in high past due loan percentages, because we believe this provides the best form of transparency to our clients and shareholders, as well as the most advantageous legal position for loan collection.

"The growth in NPA's was anticipated and the next quarter represents the last one-third of our contractual maturities for construction and development loans," Turner continued. "We expect NPA's will peak by year end and then gradually decline as we execute on our collection efforts."

Nonperforming assets (NPAs) at June 30, 2008, totaled $105.8 million, which includes $101.4 million of loans on non-accrual status and $4.4 million in other real estate owned (OREO). The allowance for loan losses was $28.1 million, or 8.30% of gross loans at June 30, 2008. "We believe that we have properly reserved for our anticipated loan losses, although we are in the early phase of the collection cycle," said Turner. During the second quarter of 2008, net charge-offs totaled $1.7 million, or 0.48% of average loans at June 30, 2008. Year to date, net charge-offs were $2.6 million compared to $284,000 a year ago.

The following table reflects the makeup of the company's total nonperforming loan portfolio:



                     30-Jun-08   % of    31-Mar-08   % of   Quarter
 Loan Category         NPLs      NPLs      NPLs      NPLs   Change
                     -------------------------------------- -------
 ($ in thousands)
 Spec Construction   $ 23,318    23.0%   $ 15,724    22.4%    48%
 Custom Construction   45,773    45.1%     37,000    52.6%    24%
                     --------   ------    -------   ------
 Total Construction    69,091    68.1%     52,724    75.0%    31%
 Vacant Land & Land
  Development          14,542    14.3%     10,949    15.6%    33%
 1-4 Family Mortgage    8,425     8.3%      4,781     6.8%    76%
 Multifamily
  Mortgage              3,111     3.1%         --     0.0%
 Commercial RE          2,762     2.7%      1,125     1.6%   145%
 Commercial Loans       3,399     3.4%        710     1.0%   379%
 Consumer                  82     0.1%         24     0.0%   242%
                     --------   ------    -------   ------
 Total Nonperforming
  Loans              $101,412   100.0%    $70,313     100%    44%

Of the nonperforming loans, 39% were in Kitsap County, 32% were in King County, 19% were in Pierce County and the remaining 10% were in other parts of Western Washington. OREO consists of 12 properties with 2 homes in King County's eastside, 3 homes and 2 lots in Kitsap County, 2 homes and 1 lot in Mason County, and 1 home and 1 lot in Pierce County.

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



 Loan Category 
  6/30/2008           Total   % of    Kitsap   % of    King   % of         
 ($ in thousands)     Loans   Total   County   Total  County  Total 
 -------------------------------------------------------------------
 Spec Construction   $ 53,961   16%  $ 23,061    7%  $  9,430    3%
 Custom Construction   94,567   28%    18,485    5%    45,998   14%
                     ----------------------------------------------
 Total Construction   148,528   44%    41,546   12%    55,428   16%
 Vacant Land & Land
  Development          47,622   14%    25,793    8%     4,313    1%
 1-4 Family            34,462   10%    16,605    5%     3,926    1%
 Multifamily           11,815    3%     5,085    1%        --    0%
 Commercial RE         66,293   20%    48,210   14%     2,918    1%
 Commercial            27,658    8%    22,926    7%        80    0%
 Consumer               3,311    1%     3,084    1%        18    0%
                     -----------------------------------------------
 Totals              $339,689  100%  $163,249   48%  $ 66,683   20%

 Loan Category 6/30/2008           Pierce   % of    Other    % of
 ($ in thousands)                  County   Total  Counties  Total
 ------------------------------------------------------------------
 Spec Construction                $11,964    4%    $ 9,506     3%
 Custom Construction               19,942    6%     10,142     3%
                                ---------------------------------
 Total Construction                31,906    9%     19,648     6%
 Vacant Land & Land Development     6,529    2%     10,987     3%
 1-4 Family                         6,499    2%      7,432     2%
 Multifamily                        2,910    1%      3,820     1%
 Commercial RE                      3,809    1%     11,356     3%
 Commercial                         2,888    1%      1,764     1%
 Consumer                              16    0%        193     0%
                                ---------------------------------
 Totals                           $54,557   16%   $ 55,220    16%

"The next 100 business days will be equally critical for the evolution of our bank," Peterson continued. "Our loan collection efforts will accelerate as we move from formulating to executing our action plans. As we continue to generate loan payoffs from collection, our balance sheet will deleverage. The need to grow earning assets and diversify our deposit base is now becoming increasingly important. As we execute on our three year plan, we believe our staff, deposit clients and shareholders can expect an acceleration of positive announcements and accomplishments."

Review of Operations

Net interest income before provision for loan losses was $948,000 in the second quarter of 2008 compared to $5.4 million in the second quarter of 2007, reflecting lower earning assets and an increase in low yielding securities on the balance sheet. Year-to-date, net interest income before provision for loan losses totaled $3.0 million compared to $10.2 million in the first half of 2007. The increase in non-accrual loans also impacted net interest income, as $2.2 million in interest income was reversed in the second quarter and $4.5 million was reversed in the first six months of 2008.

Lower interest rates during the year, combined with the significant reduction in fee income from new loan originations, contributed to significant margin compression in the quarter. Net interest margin in the second quarter dropped to 0.80% from 1.65% in the first quarter of 2008 and 5.06% in the second quarter a year ago. For the first six months of 2008, net interest margin was 1.24% compared to 5.06% in the first half of 2007.

The provision for loan losses was $3.5 million in the second quarter of 2008 compared to $7.7 million in the first quarter of 2008 and $326,000 in the second quarter a year ago. For the first six months of 2008, the provision for loan losses was $11.2 million compared to $817,000 a year ago. Net interest income after the loan loss provision was a loss of $2.6 million in the second quarter and a loss of $5.7 million in the first quarter of 2008, compared to net interest income of $5.1 million in the second quarter of 2007. In the first half of 2008, the net interest income after loan loss provision was a loss of $8.3 million compared to income of $9.4 million in the first half of 2007.

Noninterest expense in the second quarter was $4.3 million compared to $3.4 million in the first quarter of 2008 and $4.2 million in the second quarter of 2007, reflecting increased consulting, accounting, legal, loan collection and appraisal expenses. Year-to-date, noninterest expense totaled $7.7 million, down from $8.2 million in the first six months of 2007.

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

This news release may contain "forward-looking statements" that are subject to risks and uncertainties. These forward-looking statements describe management's expectations regarding future events and developments such as future operating results, growth in loans and deposits, net interest margin, credit quality loan losses and efficiency ratio, and success of the Company's business plan. Readers should not place undue reliance on forward-looking statements, which reflect management's views only as of the date hereof. The words "should," "anticipate," "expect," "will," "believe," and words of similar meaning are intended, in part, to help identify forward-looking statements. Future events are difficult to predict, and the expectations described above are subject to risks and uncertainties that may cause actual results to differ materially. In addition to discussions about risks and uncertainties set forth from time to time in the Company's filings with the Securities and Exchange Commission, factors that may cause actual results to differ materially from those contemplated in these forward-looking statements include, among others: (1) local and national general and economic conditions; (2) changes in interest rates and their impact on net interest margin; (3) competition among financial institutions; (4) legislative or regulatory requirements; (5) pending litigation; (6) reductions in loan demand or deposit levels; and (7) changes in loan collectibility, defaults and charge-off rates. WSB Financial Group, Inc. does not undertake to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements were made. Any such statements are made in reliance on the safe harbor protections provided under the Securities Exchange Act of 1934, as amended.



 CONSOLIDATED STATEMENTS OF INCOME
 ---------------------------------                    
 (Unaudited)                                                         
 (in   
  thousands          Quarter Ended                 Year to Date
  except             -------------                 ------------    
  share     Jun. 30,    Mar. 31,    Jun. 30,   Jun. 30,    Jun. 30,
  data)       2008        2008        2007       2008        2007
 -------------------------------------------- ----------------------
 Interest
  Income
  Interest 
   and
   fees on
   loans   $    4,710  $    6,336  $    9,324 $   11,046  $   17,667
  Taxable
   investment
   securities     105          79          71        184         144
  Tax exempt
   securities      (1)         19          19         18          38
  Federal
   funds sold     468         555         257      1,023         413
  Other
   interest
   income          36          25          44         61          94
 -------------------------------------------- ----------------------
   Total
    interest
    income      5,318       7,014       9,715     12,332      18,356

 Interest
  Expense
  Deposits      4,244       4,835       4,182      9,079       7,844
  Other
   borrowings      --          --          --         --           1
  Junior
   subordi-
   nated
   debentures     126         144         150        270         296
 -------------------------------------------- ----------------------
   Total
    interest
    expense     4,370       4,979       4,332      9,349       8,141

 Net Interest
  Income          948       2,035       5,383      2,983      10,215
  Provision
   for loan
   losses       3,545       7,690         326     11,235         817
 -------------------------------------------- ----------------------
   Net
    interest
    income
    (loss)
    after
    provision
    for loan
    losses     (2,597)     (5,655)      5,057     (8,252)      9,398

 Noninterest
  Income
  Service
   charges on
   deposit
   accounts        73          78          96        151         180
  Other
   customer
   fees           141          93         233        234         479
  Net gain on
   sale of
   loans           --          --         886         --       1,865
  Other 
   income         (53)         65          16         12          52
 -------------------------------------------- ----------------------
   Total
    non-
    interest
    income        161         236       1,231        397       2,576

 Noninterest
  Expense
  Salaries 
   and
   employee
    benefits    1,711       1,526       2,576      3,237       5,243
  Premises
   lease           83          77          82        160         172
  Depreciation
   expense        212         202         204        414         397
  Occupancy
   and
   equipment      149         159         141        308         309
  Data and
   item
   processing     186         184         172        370         323
  Advertising
   expense         38          42          42         80          96
  Printing,
   stationary
   and
   supplies        45          42          45         87         105
  Telephone
   expense         20          23          28         43          57
  Postage 
   and
   courier         36          35          43         71          82
  Professional
   services       880         709         211      1,589         368
  Business 
   and
   occupation
   taxes           52          57          84        109         157
  OREO loses
   and
   expense,
   net            145          26          29        171          37
  Provision
   for
   unfunded
   credit
   losses         (66)       (320)         13       (386)         13
  Other
   expenses       779         631         480      1,410         850
 -------------------------------------------- ----------------------
   Total
   non-
   interest
   expense      4,270       3,393       4,150      7,663       8,209

 Income 
  (loss)
  before
  provision
  for income
  taxes        (6,706)     (8,812)      2,138    (15,518)      3,765

 Provision
  (benefit)
  for 
  income
  taxes (1)     4,255      (2,994)        708      1,261       1,253
 -------------------------------------------- ----------------------
 Net 
  Income
  (Loss)   $  (10,961) $   (5,818) $    1,430 $  (16,779) $    2,512
 ============================================ ======================

 Diluted
  Earnings
  (loss) 
  per
  Common 
  Share
  from
  Operations
  (1)      $    (0.80) $    (1.04) $     0.24 $    (1.84) $     0.42
 Basic
  Earnings
  (loss) 
  per
  Common 
  Share    $    (1.97) $    (1.04) $     0.26 $    (3.01) $     0.45
 Diluted
  Earnings
  (loss) 
  per
  Common 
  Share    $    (1.97) $    (1.04) $     0.24 $    (3.01) $     0.42
 ============================================ ======================

 Average
  Number of
  Common
  Shares
  Outstand-
   ing      5,574,853   5,574,853   5,563,887  5,574,853   5,556,128
 Fully 
  Diluted
  Average
  Common
  Shares
  Outstand-
    ing     5,574,853   5,574,853   5,926,369  5,574,853   5,952,216


 (1) See discussion on deferred tax asset one-time accounting 
     charge.

 CONSOLIDATED BALANCE SHEETS
 -----------------------------------------------------------------
 (Unaudited)                                                         
 (in thousands except 
  share                     June 30,   Mar 31,   Dec 31,  June 30,
  data)                       2008      2008      2007      2007
 -----------------------------------------------------------------
 ASSETS
 Cash and due from banks   $  12,557 $  10,390 $  10,026 $   9,709
 Fed funds sold               66,000   102,500    56,900    18,200
 -----------------------------------------------------------------
  Total cash and cash
   equivalents                78,557   112,890    66,926    27,909
 Investment securities
  available for sale, at
  fair value                  17,593     7,691     8,832     8,357
 Federal Home Loan Bank
  stock, at cost                 319       319       319       319
 Loans held for sale              --        --        --    10,482
 Loans receivable            339,233   385,679   412,950   397,212
  Less: allowance for loan
  losses                     (28,140)  (26,292)  (19,514)   (4,492)
 -----------------------------------------------------------------
 Loans, net                  311,093   359,387   393,436   392,720
 Premises and equipment,
  net                          8,485     8,689     8,760     9,275
 Accrued interest
  receivable                   1,505     2,176     2,541     2,265
 Other real estate owned       4,394     1,883       983     1,605
 Deferred tax asset            6,536     9,074     6,496       849
  Less: valuation
   allowance deferred taxes   (6,532)       --        --        --
 -----------------------------------------------------------------
 Deferred tax asset, net           4     9,074     6,496       849
 Other assets                  7,052     1,425     1,040     1,471
 -----------------------------------------------------------------
 TOTAL ASSETS              $ 429,002 $ 503,534 $ 489,333 $ 455,252
 =================================================================

 LIABILITIES
 Deposits:
  Noninterest-bearing      $  21,503 $  23,043 $  24,711 $  30,123
  Interest-bearing           356,858   418,504   396,734   349,891
 -----------------------------------------------------------------
   Total deposits            378,361   441,547   421,445   380,014
 Accrued interest payable      2,044     2,232     1,955     1,795
 Allowance for unfunded
  credit losses                   79       145       465       117
 Other liabilities               381       382       500       826
 Junior subordinated
  debentures                   8,248     8,248     8,248     8,248
 -----------------------------------------------------------------
  TOTAL LIABILITIES          389,113   452,554   432,613   391,000
 STOCKHOLDERS' EQUITY

  Common Stock, $ 1 par
   value; 15,357,250 shares
   authorized; 5,574,853
   shares issued and
   outstanding June 30 and
   March 31, 2008,
   5,574,853 and 5,567,478
   shares issued and
   outstanding at
   December 31, 2007 and
   June 30, 2007
   respectively                5,575     5,575     5,575     5,567
 Additional paid-in capital   48,247    48,230    48,223    48,192
 Retained earnings           (13,926)   (2,965)    2,854    10,566
 Accumulated other
  comprehensive loss              (7)      140        68       (73)
 -----------------------------------------------------------------
  TOTAL STOCKHOLDERS'
   EQUITY                     39,889    50,980    56,720    64,252
 -----------------------------------------------------------------
 TOTAL LIABILITIES AND
  STOCKHOLDERS' EQUITY     $ 429,002 $ 503,534 $ 489,333 $ 455,252
 =================================================================

 Book Value per Share      $    7.16 $    9.14 $   10.17 $   11.54

 Financial Statistics     
 --------------------        
 (Unaudited)              Quarter Ended             Year to Date  
 (in thousands            -------------             ------------
  except share     Jun. 30,  Mar. 31,  Jun. 30,  Jun. 30,  Jun. 30,
  data)              2008      2008      2007      2008      2007
 ----------------------------------------------- -------------------
 Revenues
  (Net interest
   income plus
   non-interest
   income)         $  1,109  $  2,271  $  6,614  $  3,380  $ 12,791

 Averages
  Total Assets     $482,528  $502,694  $441,352  $492,611  $420,839
  Loans and Loans
   Held for Sale   $356,417  $404,498  $395,639  $380,457  $379,607
  Interest Earning
   Assets          $473,911  $496,006  $427,049  $484,959  $407,379
  Deposits         $421,456  $434,596  $366,568  $428,026  $347,256
  Stockholders'
   Equity          $ 49,923  $ 56,704  $ 63,779  $ 53,314  $ 63,037

 Financial Ratios
 ----------------------------------------------- -------------------
  Return on
   Average Assets     -9.14%    -4.66%     1.30%    -6.85%     1.20%
  Return on
   Average Equity    -88.31%   -41.27%     8.99%   -63.29%     8.04%
  Net Interest
   Margin              0.80%     1.65%     5.06%     1.24%     5.06%
  Efficiency Ratio    384.9%    149.4%     62.7%    226.7%     64.2%
  Non-performing
   Assets to Total
   Assets             24.66%    14.34%     0.40%    24.66%     0.40%

 Asset Quality             Quarter Ended            Year to Date
 ------------------        -------------            -------------
 (Unaudited)                                                          
 (dollars in        Jun. 30,  Mar. 31,  Jun. 30,  Jun. 30,  Jun. 30,
  thousands)          2008      2008      2007      2008      2007
 ------------------------------------------------------------------

 Allowance for 
  Loan Losses 
  Activity:

  Balance of
   Beginning of
   Period          $ 26,292  $ 19,514  $  4,407  $ 19,514  $  3,972
   Charge-offs       (1,697)     (916)     (234)   (2,613)     (284)
   Recoveries            --         4        --         4        --
 ----------------------------------------------  ------------------
   Net Loan
    Charge-offs      (1,697)     (912)     (234)   (2,609)     (284)

   Reclassification
    of unfunded
    credit
    commitments          --        --        (7)       --       (13)
   Provision for
    Loan Losses       3,545     7,690       326    11,235       817
 ----------------------------------------------  ------------------
   Balance at End
    of Period      $ 28,140  $ 26,292  $  4,492  $ 28,140  $  4,492
 ==============================================  ==================

  Selected Ratios:
   Net Charge-offs
    to average
    loans              0.48%     0.23%     0.06%     0.69%     0.07%
   Provision for
    loan losses to
    average loans      0.99%     1.90%     0.08%     2.95%     0.22%
   Allowance for
    loan losses to
    total loans        8.30%     6.82%     1.10%     8.30%     1.10%

 Nonperforming
  Assets:

  Non-Accrual 
   loans           $101,412  $ 70,313  $    201
  Accruing Loans
   past due 90 
   days or more          --        --        --
  ----------------------------------------------
  Total non-
   performing 
   loans (NPLs)    $101,412  $ 70,313  $    201
  Other real 
   estate owned       4,394     1,883     1,605
  ----------------------------------------------
  Total non-
   performing
   assets (NPAs)   $105,806  $ 72,196  $  1,806

  Selected Ratios:
    NPLs to total
     loans            29.85%    18.20%     0.05%
    NPAs to total
     assets           24.66%    14.34%     0.40%

            

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