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Fed auditors fault Westsound Bank management

Westsound Bank’s management allowed the failed financial institution to expand dangerously into commercial real estate loans and permitted one bank executive to profit handsomely in the process, eventually forcing regulators to intervene, according to a federal audit released Wednesday on the Bremerton bank’s closure.

Westsound Bank, a subsidiary of Westsound Financial Corp., grew its commercial real estate and construction lending portfolio rapidly, increasing those types of risky loans to $144.5 million in September of 2007 from $128,000 in only two years, representing a large chunk of the bank’s loan book, according to the analysis of the bank’s May failure. Eventually, those lending practices caused state and federal regulators to seize Westsound in early May and sell its assets to Kitsap Bank.

The report, written by the Federal Deposit Insurance Corp.’s Office of Inspector General, was completed because the Westsound failure cost the FDIC’s insurance fund $106.4 million. The IG’s office investigates all bank failures that tax the fund.

Westsound also allowed one executive — not named in the report — to receive $1.2 million in compensation for generating construction loans, the majority of which ended up going bad, according to the report.

In addition, the bank, with eight branches and $324 million in assets, had a large amount of brokered deposits, a type of deposit that regulators consider “hot money” because customers don’t have a long-term relationship with the institution and can leave at any time. At the time of its closure, Westsound had about $46.8 million in brokered deposits, according to the report.

Westsound’s regulators, primarily the Washington Department of Financial Institutions and the FDIC, conducted examinations of the bank in the several years before its closure, pointing out its worrisome concentration of construction loans and eventually forcing the bank to come up with a turnaround plan by issuing a cease-and-desist order in the spring of 2008.

 
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