Westsound Bank in Bremerton, Wash., is searching for a new chief executive officer after its former CEO was forced out by regulators amid an investigation into possible mortgage fraud.
Its parent, the $490 million-asset WSB Financial Group, said Wednesday that David K. Johnson resigned as the bank’s CEO on March 7 in accordance with a cease-and-desist order from the Federal Deposit Insurance Corp. and the Washington Department of Financial Institutions. Mr. Johnson, 43, had been president and CEO since 2001.
The agencies issued the order after reviewing problems in Westsound’s residential construction loan portfolio that examiners first detected last spring.
Chief financial officer Mark D. Freeman has been appointed interim CEO.
Calls to WSB were not returned. But in a news release Wednesday, WSB chairman Louis J. Weir said the order was expected, given that the company had been working with regulators over the last six months to determine the extent of the problems within a $90 million portfolio originated by “one or two” Westsound lenders.
“When we discovered the problems in our residential construction loan program, our management team began working proactively with both the FDIC and the DFI,” Mr. Weir said. “Consequently, we have already addressed many of the corrective actions outlined in the order and several of these issues have already been resolved.”
In October, WSB had said that the lenders, who have been fired, were under investigation for possible fraud. The lenders had originated construction loans for upscale homes, whose borrowers subsequently took out mortgages with Countrywide Financial Corp., using stated-income documentation only. The borrowers had said they intended to live in the homes, but WSB said in October that the FDIC was investigating allegations that some of them immediately sold the homes or were intending to sell.
Westsound’s problems were compounded by Countrywide’s decision last spring to stop making mortgages on the homes on which Westsound made the construction loans.
James Bradshaw, an analyst at D.A. Davidson & Co. in Portland, Ore., said WSB has not released the results of that investigation. But it was clear regulators were concerned that neither top management nor WSB’s board had adequately supervised Westsound’s lending, he said.
Under the cease-and-desist order, Westsound has been told to immediately bolster its provisions to cover anticipated losses in that loan portfolio. For the third quarter the holding company recorded a $13.9 million loan-loss provision that resulted in a $7.8 million loss, compared with earnings of $1.1 million a year earlier.
WSB said Wednesday that it would boost its fourth-quarter provision by $2.5 million, from $200,000 that it had reported in its preliminary results on Feb. 1. At the time the company said it estimated that its fourth-quarter earnings rose 41%, to $1.1 million, or 19 cents a share.
Mr. Bradshaw said that with the added provision, fourth-quarter earnings likely fell by as much as 30 cents a share, resulting in a loss of 11 cents a share. WSB said Feb. 1 that it lost $4.2 million, or 75 cents a share, in 2007, but Mr. Bradshaw said he expects the loss will now be closer to $1.32 a share.
In addition to replacing its CEO and beefing up reserves, Westsound was ordered to retain an outside consultant to review its loan portfolio, strengthen collection and recovery efforts, and monitor individual lender relationships with borrowers within its residential construction loan program.
The bank also was ordered to develop a capital management plan to maintain strong ratios. WSB said its bank has completed or started taking many of the actions under the order.
Mr. Bradshaw said, “They’ve got their work cut out for them during the next six months, as they hire a new management team, build a better loan policy, and really concentrate on getting this basket of problem loans beaten down.”
He estimates WSB’s 2008 per-share earnings will be 26 cents, but he said things should improve in 2009, with an estimated EPS of 52 cents.
“I assume by then that they’ll have lower credit costs, a little bit of loan growth, and a slight improvement in margins, as they try to rebuild deposits and get away from high-cost borrowings,” Mr. Bradshaw said.
Regulators have also prohibited Westsound from accepting brokered deposits, but Mr. Bradshaw said the bank should not have to worry too much about funding loans, since its loan portfolio should drop from $427 million to $400 million in 2008.
WSB’s stock was trading at $4.80 a share late Friday. The stock has fallen 58% since WSB disclosed the loan troubles in October.
