In his first two and a half months as the chief executive of First Federal Bankshares Inc. in Sioux City, Iowa, Levon Mathews has cut expenses by trimming jobs and selling a branch.

Now he needs to improve the capital position of his company's Vantus Bank. Unrealized losses on trust-preferred securities and problems with construction loans have led to an agreement with regulators to fortify the thrift's balance sheet. Mathews is considering shrinking the thrift to help it comply.

In the longer term, he wants to make the $525 million-asset First Federal more like a commercial banking company by refocusing it on lending to small businesses in its markets.

"We are nowhere near that at the moment, but that is what we want to be," Mathews said in an interview Wednesday. For now it is preoccupied with "making sure we have the right people in place for where we want to go."

In December, Vantus signed an agreement with the Office of Thrift Supervision to achieve higher capital ratios than normally required to be considered well capitalized. Mathews said he is looking at all options, including the Treasury's Troubled Asset Relief Program. First Federal is eligible for an infusion of up to $13 million. (He would not say whether it has applied for the money or received any word from the government about its prospects.)

"We are considering everything," he said. "There are no sacred cows here."

Mathews also said First Federal has received interest from private investors. He would not say how much money it would seek from that source, but he did say it would need about $5.1 million to reach the prescribed capital levels.

Despite a tough environment, analysts said First Federal has a good shot of raising the money it needs, as long as asset quality does not deteriorate much further.

Theodore Kovaleff, the president of Informed Sources Service Group in New York, said it helps that First Federal has new leadership.

"It will help if they have a good business model and new management," Kovaleff said. "New management doesn't have to justify the previous team's mistakes to potential investors, and they can focus on talking about how they plan to run a conservative shop."

Mathews, 49, spent most of the last decade as the president of northern Indiana and Memphis operations for Union Planters Corp., remaining with the company after it sold itself to Regions Financial Corp. in 2005. Most recently he was executive vice president of Regions' private banking unit, Morgan Keegan & Co., until April.

Though he officially took the reins at First Federal in January, Mathews began implementing changes when he was hired in December. He persuaded the board to consider selling branches and eliminate redundant back-office positions.

"One of the first things that struck me about it was its high efficiency ratio. I feel if you can cure the efficiency ratio, other things fall into place," Mathews said. "I want us to be the most efficient and effective franchise in northwest Iowa … even if that means shrinking."

The company sold a branch in Grinnell on Dec. 15 to Lincoln Savings Bank, which paid a $5.6 million premium for the deposits. The sale helped First Federal return to the black in its fiscal second quarter, which ended Dec. 31. It made $2.9 million, after losing $1.8 million a year earlier. It also trimmed its staff by more than a fifth during the quarter, to 157 full-time employees.

(First Federal has 13 remaining branches; Mathews said more sales are possible.)

These efforts reduced the efficiency ratio 15 percentage points in three months, to 75% on Dec. 31.

"All of the things they did that quarter works in their favor," said Karen Dorway, the president of BauerFinancial Inc., a bank rating agency in Coral Gables, Fla. "Credit seems to have stabilized, and they could possibly be at a point where they are poised for a turnaround."

Mathews said that eventually he would like to get the efficiency ratio down to 55%, but he does not expect more job cuts. Now his company will now focus on streamlining processes.

Like other banking companies, First Federal stumbled in recent years by making construction and development loans and buying participations in loans outside its markets. Nonperforming assets made up 3.79% of its total on Dec. 31, versus 1.05% a year earlier.

Mathews said the problems are concentrated in nine credits. "We feel we've identified the major problem loans in the portfolio, and we are working them aggressively," though "my assumption is that credit quality across the industry is not going to get better quicker."

From now on, Mathews said, First Federal will focus on making business and real estate loans to companies in its markets with less than $20 million of annual revenue. Commercial lending currently makes up about 15% of the portfolio; he said he wants the figure to grow to 60%.

Though many economists have speculated that this sort of lending could be the next one to falter, Mathews said First Federal's markets are dominated by agriculture, a sector that has not shown much weakness in this recession. The bulk of its commercial lending will be in sectors ancillary to agriculture, but he said the company could also lend to farmers and ranchers.

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