Westsound Bank seized by regulators

Westsound Bank of Bremerton, which for more than a year has been staggering under the weight of millions of dollars in soured real-estate loans, was seized late Friday by state and federal regulators.

The state Department of Financial Institutions (DFI) cited the bank's "severe asset problems, significant losses and inadequate capital" as reasons for taking it over.

DFI immediately turned the bank over to the Federal Deposit Insurance Corp. (FDIC), which in a prearranged deal sold most of the bank's deposits and $49.3 million in assets to Port Orchard-based Kitsap Bank. Westsound's corporate office and eight branches will reopen Monday as Kitsap Bank branches.

The FDIC is holding onto the remaining $285.5 million in Westsound assets for later disposal. It also will pay off $9.4 million in brokered deposits not being assumed by Kitsap Bank; customers who placed money with brokers should contact them directly about the status of their funds.

"This unfortunate event is the result of very poor lending practices during the past several years," Brad Williamson, director of the DFI's Division of Banks, said in a written statement.

As of March 31, 46 percent of Westsound's loan portfolio was in construction and development loans, which has been hammered by the real-estate slump. That's actually an improvement over a year earlier, when 61.4 percent of Westsound's loans were in construction and development.

Westsound is the second Washington-based bank to fail so far this year, after the Bank of Clark County in January, and the 33rd nationally. By contrast, 25 U.S. banks failed in all of 2008.

Westsound has been operating under tight state and federal supervision since March 2008, when it agreed to bolster its capital levels, tighten its lending practices, clean up its balance sheet and strengthen management and board oversight.

However, the bank's position continued to deteriorate over the past year, as the deflating economy outpaced management's turnaround efforts.

Total assets fell from $502.8 million on March 31, 2008, to $334.6 million a year later, while nonperforming assets — mainly foreclosed real estate and delinquent loans — rose from $72.2 million to $127.8 million over the same period.

The bank's coverage ratio, which measures its loan-loss reserves as a percentage of nonperforming loans, dwindled from 37.4 percent on March 31, 2008, to 14.3 percent a year later.

"While the current management team worked diligently to overcome problems with the bank's loan portfolio, a combination of the downturn in the local real-estate market and the overall economic situation combined to make it impossible for the institution to continue," DFI's Williamson said.

As the bank has struggled, so has Westsound's parent company, WSB Financial. In its annual report filed with the Securities and Exchange Commission last month, WSB's auditors expressed doubt as to whether the company could continue as a going concern.

WSB's shares — which traded at $16.50 when WSB went public in December 2006 and at $5.86 at the start of 2008 — closed at 29 cents on Friday, down a penny, before Westsound was seized.

Over the weekend, Westsound customers should still be able to withdraw money from ATMs and make debit-card purchases; checks drawn on accounts at the bank will continue to be processed. Online services, however, may not be available until Monday.

Drew DeSilver: 206-464-3145 or ddesilver@seattletimes.com