Dropping Anchor: Bank's stock plummets, but officials optimistic about recovery

Mike Ivey  —  9/11/2008 10:29 am

Madison's largest home-grown bank is smarting.

Stung by a series of problem loans -- including $48 million in a bankrupt downtown Milwaukee condo project -- AnchorBank has seen its stock price plummet and its balance sheet deteriorate.

Shares of AnchorBanCorp Wisconsin (ABCW) have fallen around 60 percent over the past year, making the stock among the state's most battered during the current bear market downturn.

While no one is suggesting the bank is in any danger of failing -- deposits are guaranteed up to $100,000 by the Federal Deposit Insurance Corp. -- analysts are warning that under federal rules, Anchor will need to raise additional money to have adequate cash on hand to offset a high volume of problem loans. That could mean selling some bank branches, issuing more stock or further reducing dividend payments to shareholders.

But it could have wider, harder-to-see effects in Madison, even for people who aren't AnchorBank customers or shareholders. Headquartered on the Capitol Square in downtown Madison, the bank has 73 offices statewide and some 990 employees.

If a bank is short of funds, it hinders its ability to make loans for homes. The same is true for commercial developments like offices or shopping centers. Having a solid local lender competing for business can also help developers negotiate more attractive financing packages.

Anchor is by no means the only area bank that's been forced to tighten its belt in the wake of the subprime mortgage crisis, and it's been noticed.

Madison real estate developer Terrence Wall said he has watched credit markets dry up in light of the higher capital reserves being required by regulators. He recounted trying to secure financing recently for a local office building that was 98 percent leased and showing positive cash flow.

"I was turned down flat by four different lenders," he said. "They're just not making any commercial or development loans."

AnchorBank aside, Wall said state lenders have been caught in the fallout from the subprime mortgage debacle and the collapse of national institutions, including the federal takeover this week of home lending giants Freddie Mac and Fannie Mae.

"What is happening in New York is hurting us in the Midwest," he said.

Anchor executive vice president Mark Timmerman, son of bank CEO Doug Timmerman, said the entire industry has been "infected by the virus of subprime lending," which he said Anchor did not engage in.

"We operate in Wisconsin in a relatively stable environment but our stock price is affected by both the perception and the reality out there," said Timmerman. "What I think is important to remember is that we are profitable with respectable earnings."

It is true that Anchor produced earnings of 26 cents per share last quarter, beating expectations, but Jason Werner, a regional bank analyst with Howe Barnes Hoefer & Arnett of Chicago, said there are problems on the horizon, with more delinquent loans coming to the surface. He described the earnings figure as a "surprise," attributed in part to higher-than-expected fee income. "Despite the earnings beat, we remain concerned about credit quality, which continued to deteriorate during the quarter."

Werner said Anchor's problems cover the entire spectrum of its portfolio -- from construction and development loans to single-family home mortgages.

The most pressing problem is a $120 million credit agreement that comes due on Sept. 30. Werner said the choices are to negotiate an extension, refinance with other lenders or raise capital, with the last one being most likely.

"It's a question of whether they are just delaying the inevitable," he said. "They're sitting on $140 million in bad loans and that's a pretty big number."

That's a tremendous turn of events from July 2007 when Anchor acquired S&C Bank of New Richmond, adding another 17 banking locations in northwestern Wisconsin and the greater Twin Cities area.

Back then, Anchor shares were trading near $29 and were still holding above $25 in February. But it's been a rough ride since then, with shares plunging to a 52-week low of $5.50 in July.

Twice this summer, AnchorBank earned national mention in the Wall Street Journal -- for having the largest single-day price drop of any financial stock.

"The market has not been kind," said Russell Weyers, chief operating officer at Johnson Bank of Racine and current chairman of the Wisconsin Bankers Association.

Certainly AnchorBank isn't the only Wisconsin bank facing headwinds amid the national housing market meltdown and the ongoing economic slowdown.

More than 2 percent of all bank loans and leases in the state are now in default, according to June 30 figures from the Federal Deposit Insurance Corporation. That's double over last year and nearly triple the number of problem loans in 2006.

By all indications, things are going to get worse before they get any better. The latest figures show more than 4 million American homeowners with a mortgage, a record 9 percent, were either behind on their payments or in foreclosure.

The conventional wisdom is that Wisconsin banks, due to their conservative nature, would avoid the problems that have befallen other lenders. Ten banks have already failed nationwide in 2008. Another 117 are now on the FDIC's "watch list," the largest number since 2003.

But as more borrowers fall behind on their payments -- or in some cases simply walk away -- more state banks have been scrambling.

Marshall & Ilsley, the largest Wisconsin-based bank, has already put aside $900 million to help cover problem loans in Arizona and Florida. That contributed to a $388 million loss for M&I in the last quarter.

Green Bay-based Associated Bank has just increased its provision for loan losses to $59 million. Associated has been stung by the faltering condo market and is on the hook for $26 million in the bankrupt Metropolitan Place Phase II development in downtown Madison.

Anchor has also been forced into a defensive posture. In June, it upped its reserves to $11.3 million. Then in July, the bank cut its quarterly dividend by 44 percent to 10 cents a share, down from 18 cents.

"Any time you start to cut the dividend, shareholders get jittery," said Ray Unger, chairman of Forward Investment Advisors in Madison, noting that many investors hold bank stocks for their income-producing potential.

Still, Weyers is confident that things will eventually straighten out for the industry.

"We've been through these things before," he said, noting that nearly 400 U.S. financial institutions failed during the unraveling of the 1990s savings and loan debacle.

Rising along the banks of the Milwaukee River in the city's historic Third Ward, the 151-unit First Place on the River is the poster project for AnchorBank's troubles.

Unfinished and now in receivership after the developers defaulted on their commitments, the ambitious housing project remains less than half sold. AnchorBank is the largest creditor, holding a $48 million mortgage and is still funding construction costs.

The project remains about $60 million in debt, said Michael Polsky, the court-appointed receiver.

A court recently approved post-petition financing for the project, which allows AnchorBank to continue funding ongoing construction. The project's lobby, docks and boat slips are still under construction. The lobby is to be completed in February, while the boat slips and docks will be finished later in the spring.

Polsky told the Milwaukee Business Journal recently that while continuing financing for a project in receivership might look foolhardy, it is the bank's best chance for recovering its costs.

"The best way to maximize (the project's value) is to complete it as intended in a first-class way and to market the units through professionals that market this type of unit," he said.

Timmerman defended the project, saying no one realized at the time it would have been so risky.

"The current situationis simply a result of the deterioration of certain parts of the downtown Milwaukee condominium market, which occurred much faster than anyone anticipated," he said. "First Place continues to be a desirable address and despite all of the press it has received recently, there continues to be interest and sales activity."

Set to celebrate its 90th birthday next year, Anchor is a major Madison institution, and its leaders are confident it will continue to be one.

Local real estate legend Paul Stark was a founder of Anchor Savings & Loan in 1919, and its list of major shareholders is a who's who of prominent business people in the area: former Oscar Mayer executive and UW athletic director Pat Richter; Holly Cremer, former owner of Wisconsin Cheeseman in Sun Prairie; auto dealer Richard Bergstrom and local biotech investor Greg Larson.

AnchorBank is also perhaps Madison's most visible lender, backing a wide variety of unique projects, from the Arboretum Cohousing condominium complex near the Henry Vilas Zoo to the conversion of worn Allied Drive apartments into condominiums. That's in addition to the literally tens of thousands of home mortgages and refinancings the bank has written over the years.

"They're a tremendous asset to the community and the downtown," said Susan Schmitz, executive director of Downtown Madison Inc.

In addition, AnchorBank has been a generous corporate contributor, backing events such as DMI's upcoming Downtown Living Tour on Sept. 28. It has long helped sponsor the Parade of Homes.

Last year, AnchorBank donated tens of thousands of dollars to organizations that promoted affordable housing, including nearly $30,000 to Habitat for Humanity chapters throughout Wisconsin. Another $40,000 was donated to organizations that help low-to-moderate-income families achieve home ownership and financially maintain their homes.

Timmerman said those efforts won't end even with the tough economy.

"Our corporate giving program is focused on promoting affordable housing, fostering financial literacy and bolstering economic development opportunities," he said. "It's definitely tough to give more during these challenging times, but we'll certainly continue to offer our support."

Mike Ivey  —  9/11/2008 10:29 am