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Westsound Bank reaches agreement with feds

WSB Financial Group recently reported that Westsound Bank, its sole operating subsidiary, has signed an agreement with the Federal Deposit Insurance Corporation and the Washington Department of Finance to enter into a cease and desist order which primarily addresses the bank’s past lending practices and the company is implementing a comprehensive plan to achieve full compliance.

As part of that plan, Mark Freeman was appointed interim CEO, replacing David Johnson, who resigned March 7. Janet Hobson has been appointed vice president and chief accounting officer and Tracy Pelley was named vice president and controller. Freeman will remain as CFO and also serve as interim CEO until a new CEO is named, which is anticipated within 60 days.

Although Westsound Bank has agreed to the order, it has not admitted or denied any allegations of unsafe or unsound banking practices, or any legal or regulatory violations. The order is a formal action by the FDIC and DFI requiring the bank to take corrective measures in a number of areas. No monetary penalties were assessed by the FDIC in connection with the order.

“The order does not in any way restrict Westsound Bank from transacting its normal banking business,” said chairman Louis Weir. “The bank will continue to serve its customers in all areas including making loans, establishing lines of credit, accepting deposits and processing banking transactions. All customer deposits remain fully insured to the highest limits set by the FDIC.”

The order was not unexpected, given the recent issues identified with the bank’s loan portfolio, and the bank is working expeditiously to fully comply with the order as quickly as possible, Weir said.

“When we discovered the problems in our residential construction loan program, our management team began working proactively with both the FDIC and the DFI,” he said. “Consequently, we have already addressed many of the corrective actions outlined in the order and several of these issues have already been resolved.”

The FDIC order directs Westsound Bank to take certain measures in the areas of management evaluation, employee compensation, capital management, loan loss allowance determination, loan portfolio review, lending and collection policies, loan documentation, monitoring of compliance, risk management, internal controls and audit standards, liquidity management and board oversight, and also restricts payment of dividends.

Westsound Bank has been working with these regulatory agencies and has acted promptly on directions it has received from these agencies in the past several months, including the following actions: conducting a comprehensive review of the qualifications of management and existing staff and consideration of potential changes that may be required; engaged a management recruiting firm to conduct a nationwide search for a new CEO, and identified four highly qualified candidates for the position; retained an independent third party consultant to review and evaluate the loan portfolio and began implementing many of his recommendations to improve the bank’s loan approval and loan servicing processes; added $13.9 million to total provisions for loan losses and unfunded commitments in the third quarter of 2007 and plans to boost fourth quarter 2007 reserves by approximately $1.5 million to $2.5 million; strengthened collections and loss recovery teams to accelerate resolution of problem loans; began developing a capital management plan to maintain strong capital ratios; began implementing new procedures to strengthen the monitoring of lending activities with particular emphasis on monitoring individual lender/borrower relationships; initiated a review of loan documentation policy and is correcting documentation deficiencies; developed a liquidity and funds management plan to address anticipated funding needs; increasing internal controls over loan portfolio review; and establishing a communications procedure for reporting progress in all areas to the FDIC and DFI.

A number of these initiatives are complete and a number of policies and procedures have been implemented. As a result, the bank has already acted upon several items addressed by the order.

“We currently have risk-based capital of 16 percent and have been considered a ‘well capitalized’ institution for federal regulatory purposes for many years. As a result of the order, the Federal Reserve Board (FRB) and the FDIC have reclassified the holding company and the bank as ‘adequately capitalized’ for federal regulatory purposes,” Weir said.

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