Alaska Pacific: Business as usual despite cease-and-desist order

Posted: Sunday, October 10, 2010

Alaska Pacific Bancshares, the holding company for Alaska Pacific Bank, has consented to a cease and desist order issued by the Office of Thrift Supervision.

The order, issued Sept. 28, stipulates a list of rules that the company must comply with to cease any actions that result in "deteriorating asset quality, ineffective risk management practices, inadequate internal controls, and inadequate oversight supervision at its wholly owned subsidiary, Alaska Pacific Bank."

Alaska Pacific President and Chief Executive Officer Craig Dahl said the order is really a formal requirement that the bank demonstrate good earnings. He said the order was the result of the bank's report of first quarter losses and an increase in classified assets.

He said these losses were the result of a number of large participation loans for large-scale projects in the lower 48 states. The majority of these loans went bad. As a result, the bank sought relief from the Capital Purchase Program.

The order originated from an OTS inspection March 15. Dahl said the timing of the inspection was the major factor in getting the enforcement order.

"They simply moved it up. We chose to reserve some funds on one of those loans and that was the correct thing to do but it sent the earnings in the wrong direction," he said.

He said the order revolved mostly around the losses of these participation loans that are outside the company's normal market.

"I would say basically they monitor our progress quarter to quarter and as we got to end of year they wanted to show profitability in first quarter," he said. "Even though things have changed to positive since then, it just became a matter of timing in the first quarter."

Dahl said the order will not affect Alaska Pacific customers, and it mostly relates to business practices that don't involve standard transactions.

He said the bank deals mostly with small loans that have to be worked on a timely basis and those are profitable. He said the OTS requires the rest of the bank's operations to show better earnings.

He said there will be no changes to lending programs and new deposit insurance helps ensure "this has no effect on customers at all."

There are several stipulations in the order. One states "Effective immediately, the Holding Company shall not incur, issue, renew, repurchase, or rollover any debt, increase any current lines of credit, or guarantee the debt of any entity without receiving the prior written notice of non-objection of the Regional Director." Alaska Pacific also cannot make payments on existing debts without approval of the OTS regional director, which for the OTS western region is Philip Gerbick.

Dahl said these rules are only relative to debt structures or credit at holding company levels. He said this will not affect such issues for customers.

"We don't have any borrowing lines of credit that fall into that category," he said, adding that Alaska Pacific is a small bank that doesn't issue debt.

Dahl said the term "entity" refers to other organizations or subsidiaries but the company doesn't have any.

"From our view it doesn't apply to anything we're doing," he said.

The order also demands the company maintain a Tier 1 capital core ratio equal to or greater than 8 percent after the funding of an adequate allowance for loan and lease losses. The total risk-based capital ratio must be equal to or greater than 12 percent.

Dahl said this is no problem as the bank's Tier 1 capital core ratio is more than 10 percent now and its total risk-based capital ratio is more than 14 percent.

Another limitation prohibits new or revised contractual arrangements for compensations for senior executives or directors plus restrictions on golden parachute or indemnification payments.

Dahl said there were no existing plans for these concerning any of the employees.

Alaska Pacific must submit a consolidated capital plan to the OTS by Oct. 29, outlining how it will preserve and enhance capital, thus improving earnings.

Dahl said the day-to-day of operations of the bank have been profitable so there are no major operations changes planned for the report. He said the company is past the problems it encountered with the participation loans and so the next inspection should reveal that everything is up to code without making many changes.

He said he is hopeful the order will be dropped after that inspection, which is not yet scheduled.

"We can only hope we're in full compliance by then," Dahl said.

Dahl said the requirements don't apply to most of the bank's regular practices, so there will be little change to their regular business plans. He said with the matter of the participation loans behind them, the regular businesses of the bank will show a rise in earnings.

"The plan is really business as usual because there isn't a lot of work we can do," said Dahl. "As far as we're concerned, the order is a compliance to make sure they're satisfied with the business plans and those plans have been worked on since we've moved forward."

APB's Chief Financial Officer Julie Pierce said a lot of the limitations set in the order were already in place as part of the Capital Purchase Program.

OTS communications director William Ruberry said it's standard policy not to comment on these enforcement orders.

He did say these orders mean different things to different companies. They are orders requiring institutions to follow the directions given in the order itself. He said there aren't set standards that must be included in every order, but rather that each one is tailored to the demands of the specific company it applies to.

He also said the number of such orders typically increases during times of financial downturn. Being the case, he said the number has risen significantly since 2007.

Alaska Pacific Bancshares is traded on the NASDAQ as AKPB. It was listed at $6.15 at the closing Friday, which was unchanged from the previous closing date.

The U.S. Securities and Exchange Commission did not comment.

• Contact reporter Jonathan Grass at 523-2276 or at

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