In just this one week, Anchor BanCorp entered bankruptcy, had its former CFO accused of financial-reporting fraud by the Securities and Exchange Commission and disclosed weak second-quarter earnings. It wasn’t a banner week for the Wisconsin-based company, but it’s hoping to once and for all clean up the mess it made underwriting questionable commercial real estate loans prior to the financial crisis.
The bankruptcy filing is fairly unusual. In most cases during and after the financial crisis, only after a U.S. financial institution failed and was taken over by the FDIC did its bank holding company declare bankruptcy. In this case, AnchorBank, a $2.3 billion (in assets) banking subsidiary, will continue to operate as normal.
A bank holding company Chapter 11 case can also be tricky to navigate. In a handful of other instances, federal banking regulators stepped in and put a banking subsidiary into receivership while the bank holding company was still under bankruptcy protection.
But Anchor BanCorp management had almost no other options left. The company’s management has been trying to recapitalize the company for almost four years. In June, the Federal Reserve refused to let Anchor’s lenders grant it another extension on its debt, essentially forcing the bank into a prepackaged bankruptcy. “In bank holding company reorganizations you are fighting against time,” says Chip MacDonald, a partner at Jones Day. “The longer it takes you, the more regulators get concerned about their enforcement actions.”
As part of Anchor’s bankruptcy plan, investors will kick in $175 million toward the bank holding company’s restructuring. The filing will wipe out equity holders, and the bank’s group of secured lenders will receive a cash payment of $49 million in settlement of the $183 million owed to them, if the plan is approved by the bankruptcy court.
The U.S. Treasury Department will exchange $139 million in preferred securities and deferred dividends related to the capital injection Anchor received from the Troubled Asset Relief Program (TARP). In return, Treasury will receive a 3.3 percent common equity stake. (Anchor stock was trading at $0.025 a share on Friday.)
“All the lenders and Treasury are [probably] saying that if the company can’t get this done there is likely to be nothing, and that’s why they are willing to take 26 or 27 cents on the dollar,” MacDonald says.
On Thursday, two days after the Chapter 11 filing, Anchor reported a $9 million second-quarter net loss, up from $3.4 million a year earlier. The banking subsidiary is adequately capitalized but not well-capitalized. AnchorBank’s tier 1 leverage ratio at the end of the second quarter was 4.6 percent, according to the company’s earnings release Thursday, and its total risk-based capital ratio was 9.21 percent.
“This bank has too much capital to fail; I don’t think the bank is in danger of failing,” says MacDonald.
A fraud suit filed by the SEC this week seemingly closed one chapter in the bank’s stressed half-decade. The SEC settled civil charges against Anchor and Dale C. Ringgenberg, a former chief financial officer who retired from the company in 2010. The SEC accused Ringgenberg of “intentionally or recklessly” misstating the company’s financials in an August 2009 earnings report.
The SEC complaint says Ringgenberg, among other things, understated the bank’s provision for loan losses for the June 2009 quarter, even after auditors detected a discrepancy in the company’s calculations. The $4 million rise in provision for loan losses that Anchor should have reported would have increased its net loss for that June quarter to $15.8 million from $11.8 million, the SEC says.
In addition, when Anchor finally restated its June results in October 2009, the numbers turned out even worse. After taking additional charge-offs of “collateral-dependent mortgages and commercial loans” and re-evaluating “other collateral-dependent lending relationships” for the quarter, Anchor said its provision for loan losses had been understated by $51 million and its net charge-offs by $53.9 million.
Although the fraud case and Anchor’s bankruptcy are not directly related, the misstatements occurred at a time when Anchor’s financials were deteriorating and the company was negotiating the terms of a line of credit with U.S. Bank. In addition, just after it filed its 10-Q with the manipulated numbers, AnchorBank entered into a consent order with the FDIC. The bank says it was put under heightened regulatory scrutiny at the time because of an increased level of nonperforming assets, a reduced capital position and pre-tax operating losses in 2009 and 2010.
Under the SEC settlement announced Thursday, Ringgenberg agreed to pay $75,000 and be barred from serving as an officer or director of a public company for five years. Anchor was not fined.
A special inspector general for the Troubled Asset Relief Program participated in the investigation of Anchor, the SEC says.
Anchor said the timing of the announcement of the SEC charges — two days after the Chapter 11 filing — was coincidental. The SEC declined to comment.