Bremerton bank's stock dives on news of fraud probe

By Drew DeSilver

Seattle Times business reporter

Investors dumped shares of WSB Financial on Wednesday, after the Bremerton-based parent of Westsound Bank said state and federal regulators are looking into possible fraud and misconduct in its real-estate lending.

The shares plunged 42.9 percent, making WSB the day's worst-performing Nasdaq stock.

In a filing with the Securities and Exchange Commission, WSB said examiners from the Federal Deposit Insurance Corp. and the Washington Department of Financial Institutions recently told management they believed the bank "violated certain banking laws and regulations which are primarily related to the origination, administration and monitoring of construction and mortgage loans."

Though the filing gave few details, it did say the investigation concerned "certain past activities involving former employees and third parties, including possible fraud, misconduct and other violations with respect to the application, processing and approval of certain loans."

The company also said its chief financial officer, Mark Freeman, had asked for and received a leave of absence to deal with unspecified "health concerns." He will be on paid leave for the rest of the year.

David Johnson, WSB's chief executive, declined to discuss either the investigation or Freeman's leave, other than to say, "I'm not aware of any connection" between them.

Shares of WSB, which went public last December, dropped $4.96 Wednesday to close at $6.60. More than 379,000 shares changed hands, almost 18 times the average daily volume for the past three months.

According to the filing, the examiners plan to recommend that the two agencies "take regulatory action" against the bank. Such action could include fines, a cease-and-desist order or required increases in the money the company sets aside for bad loans.

Other potential impacts, it said, could include "restriction of our business and lending activities [and] removal or resignation of one or more members of our senior management and board of directors."

The company said it plans to hire an independent auditor to look at its portfolio of construction and real-estate loans, with an eye to possibly increasing its loan-loss reserves or charge-offs.

The company also announced its third-quarter financial results Wednesday — ahead of schedule, after they were filed with the FDIC and became public.

WSB earned $1.26 million, or 21 cents a share, compared with $1.16 million in the third quarter of 2006, before the company's initial public offering. Non-performing assets rose to $4.47 million, from $1.8 million in the second quarter; they represent 0.94 percent of WSB's total assets of $476.2 million.