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Westsound Bank settles class action suit

WSB Financial Group, the parent company of Westsound Bank , has announced a settlement agreement with the lead plaintiff in its pending securities class action lawsuit. The settlement, which is subject to approval by the United States District Court for the Western District of Washington, provides for the certification of a class consisting of all persons who purchased WSB’s common stock pursuant or traceable to its initial public offering completed on Dec. 21, 2006.

The total amount of the settlement is $4.85 million. The bank’s directors’ and officers’ liability insurance policy will contribute approximately $4.45 million towards the settlement amount, previously contributing approximately $350,000 towards the bank’s legal fees.

“This settlement is a significant accomplishment and allows our management team to focus on our future,” said Terry A. Peterson, President and CEO. “It further demonstrates our focus on identifying and executing strategies to eliminate risk. While we still believe we have strong defenses, we felt it was important to get it behind us and eliminate the burden and expense of protracted litigation. We continue to maintain adequate levels of capital and liquidity, which are important measures of the Bank’s safety and soundness for both shareholders and depositors.”

The original complaint against WSB was filed in U.S. District Court in Tacoma, in October of last year by Robert McClain. McClain was an investor who purchased shares of WSB Financial Inc, alleging in court documents that the registration statement “failed to disclose” that WSB Financial Group had been violating certain banking laws and regulations related to the “origination, administration and monitoring of construction and mortgage loans.”

In the complaint, McClain alleged that WSB misled investors in the IPO registration statement and prospectus with “positive but misleading untrue statements,” noting that WSB stock traded as high as $21 per share during the initial public offering.

The original suit named President and CEO, Dave Johnson and CFO Mark Freeman, as well as directors Dick Christopherson, Lou Weir, Pat Tucker, Jim Lamb, Brian McLellan, Dean Reynolds, Larry Westfall and Brett Green.

The mortgage lending practices of the bank were at the root of its problems, and had prompted investigations from both the Federal Deposit Insurance Corp. and the Washington State Department of Financial Institutions , with regulators looking specifically into possible fraud and misconduct.

The problems came to light after WSB laid off 33 people in its mortgage division, and announced the leave of absence for Green, the company’s vice president of sales and lending.

After an investigation spanning almost six months, regulators found the bank had a documentable history of unsafe and/or unsound banking practices, had engaged in unsatisfactory lending and collection practices; operated with inadequate management and board supervision; had less than satisfactory capital in relation to its large volume of poor quality loans with an inadequate loan valuation reserve; had inadequate provisions for liquidity, inadequate internal routine and control policies, and was in violation of various banking laws and regulations relating to internal audits and controls, real estate appraisal and lending guidelines, and responsibilities of bank directors and officers.

Johnson stepped down in early March when WSB entered into a cease-and-desist agreement with the FDIC. Chief Financial Officer Mark Freeman served as interim bank president between Johnson’s resignation and the hiring of Peterson in April. Peterson also agreed to invest up to $1 million of his own money in WSB.

The FDIC announced in March that it would issue no fines against WSB Financial Group, but the Federal Reserve Bank of San Francisco listed the bank in “troubled condition.” In June, the Securities and Exchange Commission announced it would take no action against WSB.

The bank’s lending practices — and in particular 146 high-end construction loans — came under heavy scrutiny by federal and state regulators last year, and began as the focus of the investigation, which uncovered more irregularities in its real estate lending practices.

WSB Financial Group said in the press release that the settlement agreement contains no admission of fault or wrongdoing by the company.

WSB Financial Group’s stock closed at $1.16 per share Tuesday afternoon on a volume of 23,479 shares.

 
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