Anchor in Washington Caught Between Activist Investors

Anchor Bancorp (ANCB) in Lacey, Wash., is getting mixed messages from activist investors. One wants to force a sale, while another prefers to give management more time.

Joel Lawson 4th plans to propose that Anchor hire an investment bank to pursue a sale, he said last week in a regulatory filing. But Joseph Stilwell wants to give the company a chance to return to profitability.

Lawson, a Pennsylvania investor who owns about 5.4% of the company's stock, says Anchor's high cost of capital is making it hard to return to the black on its own. Stilwell, whose fund has a 9.9% stake, says he is impressed with the effort exerted by management so far.

"These folks are definitely working hard to right the ship," Stilwell says.

"This is not a case of showing up at 4 p.m. and finding the parking lot empty," Stilwell adds. "The annual meeting isn't until the fall and I think the [financial] numbers will be clear at that point."

A key issue is Anchor's deferred-tax asset. Stilwell says the DTA, if recaptured, would significantly boost Anchor's earnings and should deliver more value to shareholders.

The deferred-tax asset, however, could make Anchor more attractive to a buyer. In early 2012, analysts at Sanford C. Bernstein wrote in a note to clients that, in some instances, acquirers could benefit from a seller's DTA by immediately recognizing it as equity and then marking up book value.

Various activists and institutional investors bought about half the $391 million-asset Anchor's stock when it converted from a mutual thrift three years ago. Investors who bought in at conversion have seen a return of around 70%, based on the stock's closing price Tuesday.

Despite that return, the company has struggled to turn a profit, losing $248,000 in the fourth quarter and about $770,000 in 2013, largely because of pressure on its net interest margin.

The balance sheet has also been shrinking. At Dec. 31, total loans were down 1.4% from a year earlier, to $274 million, and deposits fell 4%, to $316 million.

"Like most former savings and loans, we have more CDs in our portfolio than most community banks," Jerry Shaw, Anchor's president and chief executive, says.

Anchor's margin improved after it paid off Federal Home Loan Bank borrowings. The margin expanded 31 basis points in the fourth quarter compared to a year earlier, to 3.89%.

Lawson has been pessimistic. "I do not believe [Anchor] can earn its cost of capital in any reasonable time frame as a stand-alone entity," he wrote in a letter included in a regulatory filing last year.

Efforts to reach Lawson were unsuccessful.

This is Lawson's second attempt to force Anchor to hire an investment bank. A similar proposal was omitted from last year's meeting for technical reasons. Though not yet widely known as an activist investor, Lawson also has a 5.4% stake in FS Bancorp (FSBW) in Mountlake Terrace, Wash.

Stilwell says, with improved financials, Anchor should get some interest from other banks, especially those that want to reach $1 billion in assets. "They have $310 million or so in deposits, which is a pretty good franchise that is worth something," he says.

Joe Stieven, a Missouri investor who holds about 9.6% of Anchor's stock, would not comment on Lawson's proposal or the DTA issue. Still, he says that independence, for any bank, is "something you earn" rather than a "God-given right."

Anchor's board and management take responsibility to shareholders seriously, Shaw says.

"We have a close relationship with the investment banker who took us public and we have ongoing conversations about market conditions both regional and national," Shaw says. "It's all discussed very frequently and all options are considered."