Chris Bauer was done with banking and was ready for adventure.
As the industry boomed, and then busted, he was gallivanting and globetrotting, splitting his time between places in Wisconsin, Florida and Colorado, mixed in with jaunts to exotic and far-reaching places.
But in March 2009, an old buddy stopped by to have a beer with Bauer on his boat docked off Marco Island in Florida and talk to him about an opportunity in Wisconsin. That chat sent Bauer on a new kind of journey.
"I had no intention to be back in the banking business," Bauer said. "I said yes, because I thought this could be interesting. It is going to be challenging, but I have the skill set to do it. I have the drive and the determination."
Three months later, Bauer was the president and chief executive of Anchor Bancorp Wisconsin in Madison, one of the Midwest's biggest and most badly damaged community banks. After several years of fighting for survival, Anchor began to breakthrough in 2013. The banking company last fall resorted to bankruptcy to make a recapitalization happen. Anchor went public last October, and analysts now see the once-doomed company as solidly built and poised for growth.
Bauer's tireless efforts and Anchor's improbable turnaround explain why the veteran executive is one of American Banker's three community bankers of the year. (The first honoree, Trevor Burgess of C1 Financial, was announced Monday; the third will be revealed Friday.)
Bauer came up in a generation of bankers who benefited from timing, he said. They hit their career stride when there were still so many banks that young go-getters could move up quickly. And the deregulation of the 1980s made a stodgy industry exciting.
"Up to that point, banking was pretty sedate and boring," he said. "All that lifted and banks became more interesting, but there was an age gap and so all my friends and I were pulled up through the organizations to run community banks."
Bauer spent nearly his entire career at the company that evolved into Firstar Corp., a $37 billion-asset company that is now part of U.S. Bancorp.
Bauer was involved in merging multi-state banks into branches as interstate banking laws changed. He also ran Firstar's retail and small business segment while simultaneously serving as the president of the company's Milwaukee bank from about 1989 until his retirement in 1999. The Milwaukee bank was the largest source of assets at Firstar, and wholesale businesses like credit cards, mortgage banking and investments were run out of Bauer's division.
Bauer's generation learned every aspect of the business. That could explain why, as the 2008 banking crisis hit, veteran bankers like Bauer reemerged. Many of those bankers, in their late 50s and early 60s, had cashed out during the consolidation of the early 2000s, or had retired.
"Our understanding of banking was rooted in the '80s and '90s," Bauer said. "When you think of the private investment firms, how many brought back retired senior bankers?"
A Long Hiatus
By the end of the 1990s, Bauer was ready for a scaled-back role. He organized a community business-focused bank in Milwaukee in 2000, but stepped down as chairman in 2003.
Bauer and his longtime partner, Dee Dee Pellegrin, decided they would occupy their time by seeing the world, moving with the seasons between Milwaukee, Bachelor Gulch in the Rocky Mountains and the Gulf Coast. Bauer describes himself as adventurous, but submits that the travel, specifically the unusual stuff, is usually Pellegrin's doing.
"She always says we can take a trip down the Rhine River when we're 80 years old," Bauer said. "Machu Picchu is the type of thing that a lot of people will go to, but for example, she said we have to go to Bhutan. And I said, 'Where is Bhutan?'"
Bhutan is nestled between Tibet and India. The couple flew into Nepal and spent a few days in Kathmandu because communist rebels were holding up the highway they needed to use to get to their hike to Paro Taktsang, a Buddhist temple more than 10,000 feet up in the Himalayas.
"There was never really a dull moment," he said.
Suffice to say, Bauer wasn't paying much attention to banking during his hiatus. He calls it the lost decade because the industry changed so dramatically.
"I wasn't reading banking trade journals, I can promise you that," he said.
Bauer recalls Marshall & Ilsley, the Midwest regional that, after a few years of losses, sold itself to Bank of Montreal in 2011 at a deep discount. The M&I he knew was highly profitable, strongly capitalized and generated good returns.
"We were good, strong competitors of each other, but that was a very credit-disciplined bank back then," he recalled. "A lot of my peers and friends ran similar types of banks across the country, but something changed while I was gone. Why? I don't know. The search for growth? More profits? Acquisitions? The pace of things with improper diligence?"
He takes a long pause.
"Greed? Maybe greed."
A Perfect Fit
Dick Bergstrom, an Anchor director, goes to Marco Island every year, and he usually calls up Bauer and Pellegrin. In March 2009, he was looking for more than just a catch-up with Bauer, whom he met in 1971 through the management training program at First Wisconsin National Bank.
Anchor was facing a cease-and-desist order, and the board had decided to replace Douglas Timmerman as its chief executive.
"In my mind, the best possible candidate was Chris," Bergstrom said. "We needed a commercial banker and he has 40 years of that. He is one of the most recognized and proven bank leaders in Wisconsin."
That's not all.
"He hates to lose," Bergstrom said. "He's a fierce competitor."
Still, Bauer's experience at Firstar may have left him feeling a little cocky as he sized up the task of righting Anchor.
The bank was significantly smaller than Firstar and he had set up a workout division at Firstar, too. Even with $146 million in nonperforming assets identified by previous management before his arrival, the task "seemed very manageable," he said.
It turned out not to be, of course.
The challenge could be described simply enough: To stay in business, he needed to keep Anchor's capital above the level that regulators deem "adequate."
But adequately capitalized is a bit of a cruel misnomer. Well-capitalized status, required for banks to be in good standing with regulators, is about 200 basis points higher than adequately capitalized. Adequate capital is enough to keep regulators from making life really difficult or worse.
Bauer got a crash course in those ratios when the bank's Tier 1 risk-based capital ratio fell below adequately capitalized and into the dangerous undercapitalized bucket in the fall of 2009.
"Every move we made was made to preserve capital," Bauer said.
Bauer boiled the situation down to digestible figures for Anchor's employees: Cutting $250,000 of expenses was equal to 1 basis point of capital; reducing $2 million of assets was equal to 1 basis point of capital, too.
He called for 500 ideas from the employees and got about 300. "But they were fantastic," he said.
Asking Tough Questions
The employees' suggestions gave Bauer insight it would have otherwise taken years to gain.
Why do we have Wall Street Journals in every branch? He cancelled the subscriptions and saved $12,000 a year. Did Anchor need to have music playing? He cancelled the Muzak service and saved $100,000 a year. An employee mentioned the staffer whose sole job was to water the plants. He called personnel.
"She said, 'If we want to have plants, we'll water them and if we don't, we'll let them die. Why are we paying her?" Bauer said. "The employee was right we are doing everything we can to save the company. Water your own plants."
On a larger scale, Anchor quickly sold branches and closed underperforming ones, taking the network from 77 to 53. He shrunk the loan book dramatically by securitizing mortgages, selling the indirect paper business and selling educational loans.
Bauer is particularly proud of building up and selling the investment portfolio three times, each time for a profit.
The mortgage division, aided by low interest rates, was producing $1 billion in mortgages a year; the fees helped offset credit losses and preserved capital. "Thank you, Ben Bernanke," he said.
Bauer's father was an accountant and, as he entered the University of Wisconsin in Madison, he thought he would be an accountant, too. But one of his dad's nuggets of advice as his eldest child went off to school was to take as many speech classes as he could.
"No matter what you do in life, you need to be able to speak and to listen," Bauer said, recalling his father's advice.
It shows. He speaks in fluid and full thoughts, rarely repeating himself with the exception of saying "How did this all happen?" several times and he chooses his words carefully.
With employees, he rallied them behind collectively saving the company.
With regulators, he aimed to make the relationship collaborative. When Anchor was about to receive a prompt corrective action an order that often is the last step before failure Bauer pleaded with regulators to accept the bank's capital restoration plan and not to burden it with restrictions. Anchor agreed to remain adequately capitalized for at least four quarters and the regulators only put one restriction in the plan; it addressed how the bank disposed of repossessed assets.
"We fell below [adequately capitalized] but I told the regulators we'd be back above it and we were by the time the order was signed," Bauer said. "I told them, 'Don't tie my hands behind my back. I'm working for you. We're partners in this deal.'"
Bauer admits he was probably afforded a certain amount of deference by the regulators. He wasn't the one who oversaw the company during the run-up to the problems and he was a respected industry veteran who hadn't been around for a few years.
"A fresh set of eyes absolutely helped us," Bauer said. "It changed the dynamic."
Anchor's problems were indicative of a lot of community banks and thrifts during the downturn. It made big bets on the housing market and got burned. But Anchor had a few things going for it that many others didn't.
It received $110 million from the Troubled Asset Relief Program in January 2009. Around that time, community banks had to prove that they didn't need the capital to survive before getting it.
Other Midwest bankers specifically those at other struggling community banks viewed Anchor's infusion scornfully, dismissing it as lax oversight by the Office of Thrift Supervision. If Anchor was a national bank or regulated by the Federal Deposit Insurance Corp., there would be no chance, they murmured.
Without Tarp, Bauer's turnaround doesn't exist. By Sept. 30, 2009, just a quarter after his arrival, Anchor was in a negative tangible common equity position, meaning that it would have failed had there been no government investment.
"They were thrown a big life raft by the Treasury," Bauer said.
Anchor's problems also were contained to Wisconsin, unlike other Midwest banks that had pursued growth in states such as Florida and Arizona.
Anchor was more flabby than far-flung. There was some good, but it needed a lot of work.
"I took a bank that, when I arrived, was $4.5 billion and shrunk it down to $2.1 billion," Bauer said. "What did we do? We wiped out the excesses of the past decade basically."
Racing Against Time
I covered many troubled banks during the 2008 crisis and lot of banks failed. Bankers got cagey real fast. From 2008 to 2011, I left probably hundreds of messages for presidents and CEOs of banks, both legacy leaders and new blood brought in to save the day. Many of those calls went unreturned.
Bauer always returned the call, though. I asked him in November why he did when so many others didn't.
"Why not?" he said in our November interview. "What do I have to be afraid of?"
Bauer didn't sugarcoat Anchor's condition, either. In our first interview in mid-2009, he called the task in front of him a "race against time," and he has brought that up every time we've talked since then.
"I remember saying to you, 'This is a race against time.' You said, 'What do you mean?'" he said in our recent discussion. "What I meant was that I have to move so fast, so quickly, right, to address issues before the bank runs out of capital."
Preserving capital would only buy Anchor time. It still had to worry about repaying a $183 million loan from U.S. Bank, Bank of America and Associated Banc-Corp. Eventually it would need to redeem Tarp. If it ever wanted to deal with those lingering issues and have a shot at thriving again it would need new capital.
In late 2009, investment banker Steve Hovde agreed to recapitalize Anchor, but that deal sputtered early the next year. Bauer said another deal began to gel in 2011, but it also fell apart.
The main hiccup was negotiating with the Treasury Department and debtholders. Most recapitalizations were pinned to new capital coming in with nothing senior ahead of it. Holders of preferred shares and debt were often asked to take common equity at a discount to allow the recapitalization deal to go through and preserve some valuable tax instruments.
By late 2012, Anchor's credit issues were still elevated, but were stable. The bank was in compliance with every point of its consent order, except for capital. But a $175 million recapitalization was taking shape. In fact, it was oversubscribed. Negotiating with the banks and the Treasury about the value of the company remained the key hurdle.
Bauer calls that period his darkest days at Anchor.
"It was the most frustrating period of my whole life," he said of the spring of 2013. "We'd succeeded with everything we wanted to do. We were on the verge of being a good institution and I was doing what I was hired to do, only to find out that we couldn't get an agreement on it."
Investment bank Sandler O'Neill had represented Anchor throughout its drawn-out capital pursuit and, by 2013, had also helped several struggling banking companies find their exit through bankruptcy court. The bankruptcy most often resulted with an auction of the bank being the solution.
Anchor's situation was a bit different, because Bauer had lined up financial backing and support from the Treasury, U.S. Bank and B of A. According to court documents, Associated was the only stakeholder not on board. In bankruptcy, majority rules.
In August 2013, Anchor filed for Chapter 11 in the U.S. Bankruptcy Court for the Western District of Wisconsin. The next month, the bankruptcy was complete. AnchorBank was, for the first time in more than four years, well capitalized.
Bankruptcy is a drastic step. It wipes out common shareholders. But the truth is the common shareholders had lost their investment when the company's capital dwindled to only the Tarp money in September 2009.
Still, it weighs on Bauer.
"This was a bank whose stock was very heavily owned by customers and local people. It was tough. I was straight with them I'd do my best to save the company and get some value back for them," Bauer said. "The structure of our plan had initially called for them to get a little something. It wasn't much, but it was something."
As he was making repairs and searching for capital, Bauer looked to improve the bank's long-term profile. His team built a new risk monitoring system and credit discipline. It realigned the deposit make up, running off high-cost CDs. Core deposits now make up 74% of Anchor's deposits, and its cost of funds is well below its peers.
Bauer also focused on "happy things." Strategic plans, guiding principles and focus groups might not sound so happy, but they gave the employees hope.
"Why is he doing all of these things? He must believe we are going to make it," Bauer said, voicing how he thought the employees interpreted the strategy.
Joseph Fenech, an analyst at Hovde Group, said the company's attention to what would happen after it survived is paying off. Fenech, who began covering Anchor last month, has the stock rated as "outperform." It is one of Hovde's "top ideas" for next year.
"It seems like he never allowed the company to be consumed or overwhelmed by the crisis," Fenech said. "They were always positioning the company for the next step. That's a big issue for a lot of struggling banks if you waited until you passed the crisis to worry about the future you tended to hit a wall."
Anchor is also focusing more on commercial credits. Bauer's ultimate goal is to get such loans to be a quarter of its portfolio. Commercial-and-industrial loans make up a very small percentage of the portfolio, but Bauer said he is spending his time the time he used to spend looking for capital looking for talent.
During his hiatus from banking, Bauer and Pellegrin visited Positano, a village built on the edge of Italy's Amalfi Coast. He rented a small, multicolored wooden boat with a 15-horse-power engine, the type intended to tool around the harbor, but certainly not meant to be taken too far into the choppy waters of the Mediterranean Sea.
He kept pushing it and pushing it, telling Pellegrin they'd turn around once they got to that point over there. That point turned out to be Capri, the famous island playground of the rich and famous.
"I'm the kind of person who has to get to that next point before I can turn around," Bauer said. "Let's just go a little farther."
Given that Bauer has retired once before, it's easy to ask him if he is eyeing it again. No, he said. He looked his new investors in the eye and told them he was going to be there. But his role might change, Bauer said, though right now he is enjoying the turnaround.
"At this point in time, every goal I've wanted to achieve has been achieved. And more than I even anticipated," Bauer said. "But it doesn't mean that there aren't some more goals going forward. I clearly have a lot of pride in what we've done, in our team and in Anchor."