Anchor BanCorp Wisconsin Inc. in Madison knows how precious capital can be.

So the $3.8 billion-asset company has created a safeguard to protect $120 million of tax assets that could be used should the company return to profitability, which given its most recent quarterly numbers could be sooner rather than later.

For companies like Anchor that are seeking outside capital, the deferred tax assets are viewed as incredibly important because they allow companies to use past losses to offset taxes on future profits. However, tax laws put the assets in a precarious position — an ownership change that is either unexpected or improperly structured can wipe the tax benefits out.

"For a lot of the companies facing recapitalizations, it is one of the major things that they want to protect," said Jeff Davis, an analyst at Guggenheim Securities LLC. "There can be a lot of value there."

In the past few years, several companies have set up valuation allowances against those deferred tax assets because of sustained losses and an unlikelihood of a return to profitability. However, companies can reclaim some of those losses should they return to profitability and use them to offset further taxable income. Davis said companies and investors are mindful of those benefits and more shareholder rights plans such as Anchor's could be established.

Anchor's shareholder rights plan gives existing shareholders warrants for one preferred share that would only be exercised if there is a change of ownership, meaning more than 50% of the company's stock changes hands. Should that happen, the warrants would be exercised and Anchor's shareholders would be able to dilute down the change.

"At the end of the day, we have very significant deferred tax assets and we want to ensure that nothing inadvertently or unexpectedly causes the elimination of it," said Chris Bauer, Anchor's chief executive, in an interview Monday.

Deferred tax assets are created when a profit for financial accounting is lower than the pretax income reported to the government. When banks are profitable, deferred tax assets accrued in the past offset current income, acting as a tax deduction to ultimately reduce taxes. As a result, such assets could only be used should Anchor return to profitability. Had the company not paid its dividend to the Treasury Department in its second quarter, which ended Sept. 30, it would have made money.

Anchor reported a net loss available to common shareholders of $1.2 million in its second quarter, compared with a net loss of $15.5 million in the previous quarter and $78.4 million a year earlier. Before paying the dividend for the Troubled Asset Relief Program, Anchor reported net income of $1.2 million, marking its first operating profit in two years. The fiscal second-quarter results were largely driven by a $6.8 million securities gain. However, Anchor also had a significant reduction in credit costs, with its provision totaling $10.7 million, roughly a sixfold reduction from a year earlier. Its nonperforming assets were $385.5 million, down 15%.

Anchor also managed to move its thrift's capital ratios from undercapitalized at June 30 to adequately capitalized at Sept. 30 with a total risk-based capital ratio of 8.14%. That was largely accomplished through branch sales, which have cut Anchor's assets.

On Aug. 31, AnchorBank entered into a prompt corrective action directive with the Office of Thrift Supervision that called for the thrift to maintain an adequately capitalized status for the following four quarters.

That gives the company some breathing room to find outside capital, which it is vigorously doing, Bauer said. "That process is going," he said, "But preserving that tax asset is a critical aspect of our recapitalization."

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