| To actually grasp the magnitude of the WSB debacle, a timeline of events is necessary. As near as the Business Journal can piece together based on public documents, what follows should be an accurate assessment of the situation.
August 2006: WSB Financial issues 2.6 million shares of stock in an Initial Public Offering (IPO).
September 21, 2007: The first clue there were problems at WSB came when the bank shut down its mortgage lending operation and laid off 33 people on Sept. 21 of last year. Mortgage operations manager and major WSB stockholder, Brett Green, resigns.
This incident is the first clue there are problems, and is just the tip of the iceberg.
September 24, 2007: CEO Dave Johnson discussed the mortgage shutdown with the Business Journal. When questioned about Green, who was responsible for overseeing the real estate lending operation, Johnson noted that Green would be setting up a competing firm, and alluded to the possibility of the bank steering its future mortgage business to him. However, being directly asked the reasons for Green’s resignation, Johnson became extremely evasive, saying “I just don’t have anything else to say about Brett Green.”
October 24, 2007: WSB reports earnings of $1.3 million for Q3, 2007, compared to $1.1 million for the same period of 2006, with year-to-date net income growing to $3.8 million, compared to $3.1 million a year previous. The year-to-date numbers showed earnings of $0.64 per diluted share, compared to $0.99 per pre-IPO diluted share in the first nine months of 2006.
Third quarter preliminary results also showed a 38 percent growth in loans and 30 percent deposit growth for an overall 24 percent increase in net interest income — before calculating loan losses. The numbers show a 15 percent increase in revenues compared to the same period a year earlier, while year-to-date net interest margin dropped 82 basis points and asset quality declined during the quarter with both non-performing loans and assets increasing.
All numbers released by the bank were both preliminary and unaudited.
However, according to the bank’s preliminary numbers, it had $4.4 million in non-performing assets with another $3.8 million in loans 30 to 89 days past due.
While that didn’t sound like particularly dire news, Security and Exchange Commission (SEC) form 8K detailed some serious problems.
“The FDIC and DFI (Washington State Department of Financial Institutions) recently indicated to the company’s management that in the opinion of the regulators, the bank violated certain banking laws and regulations which are primarily related to the origination, administration, and monitoring of construction and mortgage loans.”
The report added, “The examiners advised that they intend to recommend that the FDIC and DFI take regulatory action against the bank with respect to such lending practices and activities, which may include a Cease and Desist Order, monetary penalties, further increases in allowances for loan losses, reserves and charge offs.”
But there was more in the 8K — much more — and it got worse — much worse for WSB.
“Additionally, the company has been cooperating in an investigation by the regulators pertaining to certain past activities involving former employees and third parties, including possible fraud, misconduct and other violations with respect to the application, processing and approval of certain loans previously made.”
All the while, the bank continued issuing press releases saying that everything was fine, and hinting the problems were minor in nature. That obviously wasn’t the case.
October 26, 2007: On Oct. 26, a conference call for investors took place. While the media was specifically barred from participating in that call, the Business Journal did have the opportunity to listen in. Johnson tried to but the best face on the situation, but it was clear from the questions and comments, that most of the participants on the call were highly skeptical of his answers. After hearing Johnson’s explanations, more than one commented, “Good luck with that.”
During that call, among Johnson’s revelations were that in reviewing its mortgage lending portfolio, the bank had made 146 loans to 130 borrowers for an average of $900,000 each, totaling upwards to $90 million. Of those, although funding had been disbursed, construction was in various stages of completion on some, while it hadn’t commenced on others. He also revealed that Countrywide Funding, to whom Westsound had sold many of its questionable loans, had withdrawn from continuing to do business with the bank, and would be seeking recovery of non-performing loans it had acquired from Westsound. Johnson also stated that the bank looked at 126 other loans and identified serious problems with some of those as well.
October 30, 2007: Big name law firms began scrambling over each other to represent WSB shareholders in class action lawsuits. On Oct. 30, the law firm of Hagens Berman Sobol Shapiro (HBSS), which has offices in Seattle, Los Angeles, San Francisco, Phoenix, Chicago and Boston, was the first to file a proposed class-action lawsuit, which named 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 suit alleges the company misled investors in its registration statement when filing for the company’s IPO in 2006. A number of other large law firms specializing in class-action, several from New York City, and most with offices across the nation, begin actively recruiting WSB stockholders as well.
November 16, 2007: The FDIC and DFI convey numerous concerns to the management of WSB, noting that the bank is in troubled condition. This was formally conveyed to the bank in correspondence dated Feb. 8, 2008, which accompanied the report of examination prepared by the DFI and FDIC.
November, 20, 2007: WSB announces it intends to add between $7 and $9 million additional pretax dollars to cover its anticipated loan losses, and that the company would delay filing its required 10Q form with the SEC for Q3 until an independent, third party review of its loan portfolio is complete and its own registered independent auditors sign off on the results. WSB also said a portion of the reserves will be written off as impairment charges under Generally Accepted Accounting Principles (GAAP), but until the independent audit was complete, exactly how much would continue to remain unknown.
January 24, 2008: WSB commences collection activities on approximately 95 real estate loans by sending notices of default to the borrowers. Some or all of these loans may result in foreclosure actions.
January 30, 2008: The FDIC Call Report revealed that past due loans as of Dec. 30, 2007, amounted to $4.9 million. On Dec. 31, that amount ballooned to $62 million, including $21 million in nonaccrual loans.
February 1, 2008: WSB finally files its 10Q for the period ending Sept. 30. It issues a press release stating WSB, “…remains well-capitalized after reporting preliminary 4Q07 profit of $1.1 million and 3Q07 loss of $7.8 million after adding $13.9 million to loan reserves.”
The press release explained that based on the findings of an independent assessment of the loan portfolio, the company was forced to add the $13.9 million, or $1.65 per share after tax dollars, to cover loan losses and unfunded commitments in Q3, generating the $7.8 million loss, or $1.39 per share. In the fourth quarter, WSB generated a preliminary profit of $1.1 million, or $0.19 per share.
But for the full year of 2007, WSB Financial lost $4.2 million, or $0.75 per share.
It also added the caveat that all 2007 results for Q3, Q4 and full year were unaudited, but tried to calm investor fears by saying WSB remained well capitalized, with total equity of $58 million and total risk-based capital of 16 percent, substantially above the 10 percent minimum regulatory standard for well capitalized institutions.
The press release also began preparing investors for the upcoming firestorm of bad news and the specter of even more losses, by saying, “When we did our initial internal review in November, we focused primarily on certain residential construction loans, and initially projected a lower addition to reserves. With the more comprehensive review across the entire loan portfolio and the build up of inventory in homes in our markets, we decided it was necessary to further increase our reserve position in the third quarter. The loan review also considered updated estimated fair market and resale values of the collateral for our residential loans. All these factors contributed to higher levels of specific and general reserves.”
SEC form 10Q also noted that WSB had 95 loans for which collection notices had been sent out for possible foreclosure action.
February 8, 2008: The Federal Reserve bank of San Francisco (FRB), notifies WSB that it had designated the Company and Westsound bank to be in a “troubled condition” for purposes of Section 914 of the Financial Institutions Reform, Recovery and Enforcement Act of 1989.
As a result of that designation neither the Company nor the bank may appoint any new director or senior executive officer or change the responsibilities of any current senior executive officers without notifying the FRB. In addition, neither the Company nor the bank may make indemnification and severance payments without complying with certain statutory restrictions including prior written approval of the FRB and concurrence from the FDIC. Further, the Company is generally prohibited from making any payments to any entity, including dividends and interest payments (including dividends on its trust preferred securities, and interest at the holding company level), director fees, consulting expenses and other operating expenses, without notifying the FRB for prior approval of such payments.
Although WSB was classified as “well capitalized” for federal regulatory purposes on Sept. 30, 2007, based on its financial statements prepared in accordance with Generally Accepted Accounting Principles (GAAP) and the general percentages in the rules, the FRB and the FDIC advised WSB it will no longer be regarded as “well capitalized” for federal regulatory purposes, and had been reclassified to “adequately capitalized.”
As a result, the bank’s borrowing costs and terms from the FRB, the Federal Home Loan bank (FHLB) and other financial institutions, as well as the bank’s premiums to the Deposit Insurance Fund administered by the FDIC to insure bank and savings association deposits (generally up to $100,000 per customer), are all expected to increase.
March 7, 2008: David K. Johnson resigns as President and CEO of WSB under the terms of a previously unreleased Separation Agreement and Release dated Jan. 31, 2008. Former CFO Mark D. Freeman assumes the role of interim CEO.
WSB stated it expected to complete its search and select a permanent replacement CEO within 60 days, and that it had not entered into any additional employment agreements with, and is not paying any additional compensation and benefits to Freeman with respect to his interim position as CEO.
Janet M. Hobson, 51, is promoted to serve as WSB’s vice president and chief accounting officer. Hobson, who had been serving as staff accountant for WSB, joined the company in September of 2006, bringing more than 25 years of experience in accounting, including four years of public company reporting to the bank. Previously she had served as an accountant at Rainier Pacific Bank in Tacoma, since 2002. WSB had not entered into any employment agreement with Hobson and no significant change to her compensation and benefits was agreed upon.
Tracy Pelley was also named Vice President and Controller.
March 10, 2008: WSB enters into a Stipulation and Consent to the Issuance of an Order to Cease and Desist with the FDIC, and the DFI, outlining what steps WSB must take to remain operational.
March 12, 2008: WSB was advised that based on management’s review, the bank expected to add between $1.5 million and $2.5 million additional pretax dollars to its reserve for loan losses in Q4, 2007. A portion of that reserve would be written-off as impairment charges under GAAP. However, the exact amount of such charges can’t determined until WSB’s registered independent auditors sign off on their final review.
In one bright spot, on that same day, WSB also announced that it had been advised by the NASDAQ Hearings Panel in a written decision that it had regained compliance with the listing standards of the NASDAQ exchange and the Panel had decided to continue the listing of the Company’s shares on the NASDAQ Global Market. Previous to that, because of its financial problems, WSB stock was in danger of being delisted from the global stock market exchange.
March 15, 2008: WSB begins to start deferring payments of quarterly interest on its trust preferred securities, as permitted by the indenture agreement.
March 20, 2008: WSB stock, which had traded at a high of $21 at one point, plummets to $5.03 — after trading at $18.21 exactly a year earlier.
April 9, 2008: The deadline for meeting the mandatory 30-day requirements outlined in the Cease and Desist Order dated March 10, 2008.
April 24, 2008: The deadline for meeting the mandatory 45-day requirements outlined in the Cease and Desist Order dated March 10, 2008.
May 9, 2008: The deadline for meeting the mandatory 60-day requirements outlined in the Cease and Desist Order dated March 10, 2008.
June 8, 2008: The deadline for meeting the mandatory 90-day requirements outlined in the Cease and Desist Order dated March 10, 2008.
(Editor’s Note: The complete list of timelines and requirements WSB must comply with to remain operational, along with a detailed explanation of each, can be found in this KPBJ Article.)
|
