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%