by Christopher Menkin
(This is a synopsis of a complicated story and supportive articles and documents with details are available at the end for those seeking more definitive information.)
Competitors of Puget Sound Leasing (NASDAQ:PSL), Bellevue, Washington have been questioning why the company is not on the "no longer doing business with brokers/discounters" list and why haven't other news concerning the company appeared in Leasing News. The leasing company has been struggling, but the problems do not come from the staff, but from its parent: First Sound Bank.
It started the end of 2008 as other leasing companies from Balboa to Pentech and others were exciting the brokers’ marketplace and the financial market had hit leasing companies. Leasing News reported from deep inside that Louis Secord, Jr. was escorted from a bank board of directors meeting of First Sound Bank, Seattle, Washington.
What happened next was January 14, 2009 First Sound filed suit in federal court for fraud and breach of contract in connection with its "...March 1, 2008 purchase of certain assets from Puget Sound Leasing Co., Inc. The defendants to the suit are the sellers of the assets: Larasco, Inc. (the business formerly known as Puget Sound Leasing Co., Inc.) and its owners, Richard Secord and Louis Secord."
Secord was one of the founding directors along with his former accountant, who also was on the board, and insiders told Leasing News this was a divorce where the bank would not win. Legal experts from John Deane, The Alta Group, Bob Teichman, CLP, Leasing News Advisory Chairman, Rob Yohe (who had represented the Secords in discounting portfolio's), and many others, as well as a host of up to 25 attorneys and 14 banks got involved regarding what Louis Secord described in his defending statement " Between 2001 and 2008, PSL received anywhere from 2500 to over 6,500 lease applications each year. Of these applications, only approximately 50-60% were approved by PSL and approximately 40% were actually carried through to funding by the lessee and lease agreement executed ...through March, 2008." First Sound involved Wells Fargo and other banks, afraid or representations and warrants.
The major complaint was that the loss ratio as stated by the sellers was not "accurate." The Secords said any change was due to the economy and the bank was taking this position due to its other problems, primarily in real estate loans. The bank accused the Secords of hiding assets, money, planning to flee the country, and insiders said for years Secord had been buying vintage Corvettes and storing them away as well as other property and they would never get him. The bank came back with 12 employees talking about Evergreen Clauses (extending leasing payments to lessees without their knowledge, legal in Washington), using security deposits for the extra payments (legal as part of an Evergreen clause), changing residuals (perhaps legal as part of a Winter Green or Evergreen clause) and applying these payments to the leases instead of reporting them as delinquent. Both sides had experts on this practice. Ethics was not the discussion, but business practices in the entire leasing industry and what is legal and what is not legal. Much of the testimony in the depositions would be quite eye opening to lessees, but common knowledge to those with experience in the small ticket marketplace (perhaps practiced by many more lessors than the industry would like to make public.)
Dates for a settlement or a trial were extended, with the last date scheduled for May 17th, the postponed to June 1st, but on April 27th Larasco, the corporation who owned Pugent Sound Leasing and sold it to the bank declared bankruptcy and asked for an extension, but the court said, “All the remaining claims by and against Defendant Larasco, Inc. and the individual defendants are STAYED only as to Larasco, Inc. The remaining claims will proceed as set forth in the pretrial order, docket no. 424, commencing on June 1, 2010, at 9:00am. The individual defendant’s bankruptcy attorney Gayle Bush notified the Court that the individual defendants may file for bankrtupcy protection prior to the start of the trial. The Court directs the individual defendants to provide notice to the Court and to the other parties in the event they file for bankruptcy protection."
Add to this the FDIC on April 13, 2010 informed First Sound Bank "... that the Bank's Capital Restoration Plan was unacceptable; WHEREAS, the condition of the Bank continues to deteriorate;
WHEREAS, the management of the Bank has not demonstrated the ability to return the Bank to a safe and sound condition;
WHEREAS, the deteriorating condition of the Bank and the inability of the management of the Bank to return it to a safe and sound condition require that prompt corrective action be taken immediately..."
"IT IS HEREBY DIRECTED, that within 30 days of the effective date of this Directive, the Bank shall take one or both of the following actions to recapitalize the Bank:
1. The Bank shall sell enough voting shares or obligations of the Bank so that the Bank will be adequately capitalized after the sale; and/or
2. The Bank shall accept an offer to be acquired by a depository institution holding company or to combine with another insured depository institution;
FURTHER DIRECTED, that during the period this Directive is in effect, the Bank shall not accept, renew or rollover any brokered deposits as defined in Section 337.6(a)(2) of the FDIC Rules and Regulations, 12 C.F.R. § 337.6(a)(2);
FURTHER DIRECTED, that during the period this Directive is effective, the Bank shall restrict the interest rates that the Bank pays on deposits to comply with the interest rate restrictions in Section 337.6 of the FDIC Rules and Regulations, 12 C.F.R. § 337.6;
FURTHER DIRECTED, that during the period this Directive is in effect, the Bank shall not permit its average total assets during any calendar quarter to exceed it average total assets during the preceding calendar quarter."
There were other conditions applied and a copy of the FDIC Directive follows the article.
From the FDIC Institution Directory filings:
First Sound Bank went from 76 full time employees March 31, 2009 to 50 full time employees, March 31, 2010. Equity in the bank dropped from $27.7 million to $5.1 million. The bank March 31, 2009 lost $37,000 and March 31, 2010 $1.16 million, with non-current loans going from $16.5 million to $30.7 million. Net charges offs were $3,789,000. There appears to be $548,000 in "lease finance receivables" which would make $632,000 in lease finance receivable charge offs, but the highest charge offs in "commercial and industrial loans" $3 million, with $97,000 loss in construction and land development. Tier 1 risk-based capital ratio: 2.96%.
This bank will more than likely appear in a Bank Beat column in June. Whether the Secords file bankruptcy and postpone the trial for an assuming bank and FDIC to resolve or the FDIC to resolve or settle or how many appeals may be made by any of those in the suit is not known at this time. In the meantime, what happens to Puget Sound Leasing depends on what happens to First Sound Bank. In this case, no news is good news.
LARSASCO BK Filing:
FDIC First Sound Bank Directive:
Articles and supportive footnotes/documentation:
Disclosure: No position