When Chris Bauer arrived at Anchor BanCorp Wisconsin (ABCW) in June 2009, he described his task as a race against time to save the thrift. Today, he is still racing.
Anchor is a lesson in austerity. Since becoming president and chief executive, Bauer has shed assets, cut annual noninterest expenses in half, and reduced nonperforming assets. Last week, Anchor said it would close two more branches.
The result: a company that has managed to dodge failure but still needs capital.
"When I started, there were so many unknowns and everything was moving toward the negative. The question was how fast could we tackle and resolve the problems given the speed they were coming at us," Bauer says. "We've created a longer time line because of our relentless focus on not only getting on top of the loan portfolio, but also our focus on the costs and the operating platform."
With cost cutting and "right sizing," its AnchorBank unit became adequately capitalized in the third quarter of 2010. It had been undercapitalized.
On average, the Madison thrift's total risk-based capital ratio improves a bit each quarter. At March 31, it was 8.42%, up 35 basis points from the end of 2011. Though that is below the 12% required by a 2009 consent order, it is comfortably above thresholds where regulators are compelled by law to seize an institution.
In late 2009, Anchor announced a $400 million recapitalization led by Steven Hovde, but the deal unraveled a few months later. Since then, Anchor has focused on closing and selling branches. The company will have 54 branches after its latest closures, compared to 73 when Bauer arrived. Anchor has laid off roughly a third of its employees since his arrival; it had 738 employees at March 31.
Survival remains uncertain, but Bauer says he is more optimistic about the long term compared to when he joined the company.
"Early on, we were very concerned, particularly after we found what we found in the loan portfolio," he says. In the two quarters after his arrival, nonperforming assets nearly doubled, to $339 million, as management combed the portfolio.
Bauer says he sees the cost cutting and asset reduction as upgrades to Anchor's appeal, but temporary fixes. Anchor needs $250 million in capital, he says.
The thrift could return to well capitalized status slowly over time, but the company had $29.5 million of negative equity at March 31 and it is overwhelmed with debt. It has a $116 million line of credit led by U.S. Bancorp's U.S. Bank (USB), with $41 million in unpaid interest and fees. The lenders have been lenient, giving Anchor several extensions, pushing the due date to this November.
Anchor also has $110 million of preferred stock from the Troubled Asset Relief Program with $18.8 million of deferred interest payments. Without Tarp, which Anchor received prior to Bauer's arrival, the thrift likely would have failed since it has burned through all of its common equity.
"Tarp gave them a buffer," says Justin A. Barr, the president of Loan Workout Advisers.
Any recapitalization would likely include provisions that would call for repaying the Treasury Department and debtholders at a discount, says Michael Iannaccone, the president of MDI Investments. He pegs Anchor's capital needs at roughly $280 million, accounting for those discounts and the sale of about $500 million of nonperforming and substandard assets at a 50% discount.
"That is being optimistic," Iannaccone says. "I don't think the conditions have improved for them to get capital. I don't really see anybody being big enough or interested enough."
Bauer says Iannaccone's assessment of a likely deal structure is accurate, though he thinks that Anchor's $90 million of repossessed assets would fetch a higher liquidation amount. He disagrees about the prospects of a deal.
"I think there is some renewed interest. We've talked to everybody at the dance, but there are some new ones, too," Bauer says. "Those that passed on us early on now have a lot more clarity. … We no longer have amorphous problems."
Barr says two things may help Anchor. It lost $7.4 million loss for the quarter ending March 31, an improvement from the $21.7 million it lost a year earlier. The thrift lost just $143,000 in the quarter.
"The return to near break-even [at the thrift] is certainly very positive," he says. "New capital wants to know they have found the bottom for chargeoffs and provision. Even in this late stage in the cycle, there are still surprises where banks try to push losses into the future. On its face, Anchor doesn't appear to be one of them."
Barr says the other stoke of confidence was the recently announced recapitalization of the $2.9 billion-asset Metropolitan Bank Group in Chicago. Bauer says that deal was a beacon of hope, even if Chicago and Madison are different markets.
"A lot of recaps have happened on the coasts," Bauer says. "I'd like to think that some of the investors are perhaps reconsidering that and looking to the traditionally solid upper Midwest."