Since Westsound Bank in Bremerton, Wash., was founded in 1999, its growth has mirrored that of the state's Kitsap Peninsula; as more people have fled the pricey Seattle market for the more affordable west side of Puget Sound, Westsound's assets have grown an average of 61% a year.
Now, flush with $40.5 million of capital raised in a public offering last month, the $338 million-asset Westsound is aiming to accelerate its growth by building more branches in its fast-growing market, and perhaps buying a bank, said David K. Johnson, the president and chief executive of the bank and its parent, WSB Financial Group Inc.
"We have a tremendous market, with some very strong drivers: affordability, the military, and the vibrant resurgence of Bremerton," Mr. Johnson said.
Westsound has eight branches and wants to add as many as eight more in the next two years. Most of them will be on the Kitsap Peninsula, but some will be in adjoining counties.
The bank is also aiming to make more commercial and industrial loans to diversify its portfolio, which is heavily concentrated in real estate and construction. Still, Westsound has no intentions of backing away from its bread-and-butter business of lending to developers and builders of affordable homes. It maintains that it has the right strategy to mitigate the risks of such a heavy concentration.
With Seattle's median home price now above $450,000, more people are moving to the Kitsap Peninsula, where the median price is $258,000, Mr. Johnson said. Commuters to Seattle have a new ferry terminal in Bremerton, and a second bridge being constructed across the Tacoma Narrows should make moving to the peninsula even more attractive.
Moreover, Bremerton's naval bases are expanding, including the Puget Sound Naval Shipyard, which has been building and repairing more ships and nuclear submarines since Sept. 11, 2001, Mr. Johnson said. Bremerton's downtown is also being revitalized, with a new conference center and private commercial development.
Westsound has never made an acquisition, but that's now a possibility with the additional capital raised from its IPO, he said.
"We are more than willing to look at an opportunity that makes sense, to expand our presence just outside our market," Mr. Johnson said, but he would not say where.
Also, Westsound is not confining its growth plan to the Kitsap Peninsula. This month it opened a branch in Federal Way, on the east side of Puget Sound between Tacoma and Seattle.
James Bradshaw, an analyst at D.A. Davidson & Co. in Portland, Ore., said that Westsound's goal to roughly double its assets in two years seems doable, as demand for construction loans is strong in its market - the most affordable in the Puget Sound area.
"Plus, the average age of management is 43, so I like the energy and vibrancy they bring to the marketplace," he said. "And as more people move there, they could end up with a younger audience, to whom the bankers could relate really well."
However, a heightened focus on construction lending also opens the bank up to greater risk, Mr. Bradshaw said. Real estate loans make up 93.1% of its loan portfolio, with 52.3% in construction loans, and such a concentration could be risky if and when the market slows, he said.
Still, Westsound's loans are underwritten well, and the outlook for continued growth in its main market remains steady, Mr. Bradshaw said. He also expects the bank to diversify its loan portfolio with more commercial and industrial loans, particularly as it expands into other markets.
Mr. Johnson said the bank mitigates the risk of a heavy construction portfolio by focusing on making all three types of loans on projects - development, construction, and a longer-term "takeout" loan to pay off the construction one. "Because of that, we understand the markets much more intimately, and we can stay on top of each project until they are done."
Moreover, Westsound lends on projects that tend to be for 10 to 20 homes, he said, so each loan is very manageable.
Mr. Johnson said that he welcomes the extra scrutiny that regulators have already given the bank because of its real estate and construction loan concentrations. "It's our dollars, so I want it to be scrutinized."
Last month the Federal Reserve Board, Federal Deposit Insurance Corp., and the Office of the Comptroller of the Currency issued final guidelines regarding commercial real estate concentrations. Banks that have increased their concentrations by more than 50% in the past three years and now have huge concentrations may be required to monitor their holdings more closely - and may have to either reduce their concentrations or hold more capital against them. A bank's exposure is considered high if its commercial real estate portfolio equals 300% or more of total capital, or if its loans for land, land development, and construction equal 100% or more of capital.
After Westbound raised more capital in its recent IPO, it lowered its concentration ratios, Mr. Bradshaw said. The ratio of construction loans to total risk-based capital is now 270%, and the overall CRE ratio is 108%. Before the IPO the construction ratio was 840%, and the overall CRE ratio was 325%.
Robert J. Rogowski, the managing director of corporate finance at McAdams Wright Ragen Inc. in Seattle, said that the Pacific Northwest is home to a number of banks, most notably Frontier Bank in Everett, Wash., and Bank of the Cascades in Bend, Ore., that historically have had heavy concentrations of real estate and construction loans - and have maintained good credit quality.
"These banks show that you can live with huge CRE concentrations and still do very well by underwriting properly," Mr. Rogowski said.
