A prompt corrective action directive is often a sign of grim times, but for AnchorBank in Madison, Wis., the order is serving as a guide as it fights to survive.
The $4 billion-asset thrift unit of Anchor BanCorp Wisconsin Inc. announced last week that it had agreed to a PCA with the Office of Thrift Supervision on Aug. 31.
That order followed the regulator's conditional approval of Anchor's capital restoration plan, as it had returned to adequately capitalized status.
The directive calls for the thrift to remain adequately capitalized for the next four quarters. Though that will be a tough feat, AnchorBank has bought some badly needed time.
"In a funny way, this is good news for them," said Kip Weissman, a partner with Luse Gorman. "They are fighting for survival, and getting the regulators to approve their plan has cleared a big hurdle. Now they have to execute on that plan, but if it wasn't accepted they'd be in line" to be taken over by the Federal Deposit Insurance Corp.
In the past few years, a PCA often has been issued upon rejection of a capital plan, and serves as a final public warning by the regulator to the institution. In AnchorBank's case, however, the PCA appears to have dual purposes: fulfilling the regulator's obligation to acknowledge that the thrift's capital is low and indicating that the company is making some progress.
In the past year the company has cut expenses by 30% and has significantly reduced assets through branch sales.
In an interview Wednesday Chris Bauer, Anchor's chief executive, said those actions allowed the thrift to become adequately capitalized as of July 31.
"We've been right-sizing our bank to our capital," he said. "We recognize that our capital is tight, but not many banks in our condition have seen their capital go in a positive direction."
As of July 31, the thrift had a total risk-based capital ratio of 8.05%, up 42 basis points from the end of the second quarter and up 73 basis points from the first quarter.
That doesn't give the thrift much wiggle room to address the $422 million in nonperforming assets it had on its books on June 30. Though that is a sizable number, the NPAs are flat compared with what it held on March 31, the end of its fiscal year.
"Our sense is that it has stabilized across the board," Bauer said. "That number has been relatively stable for six months."
Still, any increase in nonperforming assets or any losses could quickly send the thrift back under the 8% threshold required to be considered adequately capitalized.
Ken Thomas, an independent bank consultant, said Anchor's coverage ratio is thin, at 42% of problem assets. Thomas said that ratio should be closer to 50% given the amount of problem assets the company holds. Because of the perceived shortfall, the thrift's adequately capitalized status is dubious, he said.
"Some of that growth in capital is artificial," Thomas said. "They are not as well reserved as they should be."
Bauer said the company, its auditors and the OTS all have found the reserve levels to be acceptable. Still, he acknowledged that Anchor's internal capital building must be accompanied by external capital raising.
Anchor has been down that road before.
Late last year, Badger Holdings, an entity created by the veteran investment banker Steve Hovde, agreed to infuse $400 million into Anchor.
That was expected to be enough to address the problem assets and place the thrift in compliance with a cease-and-desist order that calls for it to have a leverage ratio of 8% and a total risk-based capital ratio of 12%. (Even with the PCA, the order remains in effect.)
Hovde, however, was unable to negotiate a settlement with U.S. Bancorp over a $116 million line of credit to Anchor. Consequently, the deal was called off in April.
The company then turned to internal housekeeping. In June it sold 11 branches to Royal Credit Union in Eau Claire, Wis., and in July sold four branches to Nicolet National Bank in Green Bay. Collectively the deals brought in $7.5 million in capital. Bauer said the company is considering more sales of noncore branches, but no deals are in the works.
And there is optimism on the capital front. Since Anchor's deal fell apart in April, a handful of large community banks have pulled off recapitalization deals despite other stakeholders' unwillingness to budge.
For instance, the private-equity group Ford Financial Fund LP has proceeded with a $500 million investment in Pacific Capital Bancorp in Santa Barbara, Calif., despite its inability to get trust-preferred holders to accept a discount for their debt. That compromise could be a positive signal for companies like Anchor.
"Today there is more clarity around how to deal with creditors in recapitalization deals," said Christopher Zinski, a partner at Schiff Hardin LLP in Chicago. "Once you have a few successful recapitalizations, the pathway to success becomes better defined and the smart money figures out how to replicate it."
Observers said there is also just a lot more capital around than there was six months ago.
That gives Bauer hope. He said he thinks the company has a shot at raising capital externally as long as AnchorBank can stay above adequately capitalized long enough to make a deal. He said the goal is still to raise $400 million.
"Every quarter will be a key benchmark," Bauer said. "We have to stay adequately capitalized to buy enough time to raise the external capital we need."
Jeffrey C. Gerrish, a partner in the Gerrish McCreary Smith PC law firm in Memphis, said although Anchor faces challenges as it seeks outside capital, it is noteworthy that the company was able to secure regulatory approval based on its internal tinkering.
"It is pretty good to see a capital plan accepted without a check attached to it," Gerrish said.