Chris Bauer, who took the helm last month at Anchor BanCorp Wisconsin, has a plan to shore up the listing Madison company, but acknowledges he may not have enough time to execute it.

"We have a lot that we need to get done, but the question will be how fast can you get some of it done," Bauer, Anchor's president and chief executive, said last week. "It is a race against time for us."

Under a regulatory order, the company must greatly boost the capital levels at its $5.3 billion-asset AnchorBank over the next three months, and again by the end of the year. That will be hard to accomplish with credit problems on the rise.

Assuming it clears those hurdles, Anchor will then have to come up with $116 million by the end of May to pay off a line of credit from U.S. Bancorp. The line was previously due in May of this year, but Anchor, which warned in February that it could not pay the debt, got an extension.

Further complicating matters is the shriveling of the company's tangible common equity ratio, which measures the cushion that can absorb losses before shareholders are wiped out. Analysts generally consider a tangible common equity ratio below 5% to be worrisome. According to Chris McGratty, an analyst at KBW Inc.'s Keefe, Bruyette & Woods Inc., from Dec. 31 to March 31 Anchor's ratio fell 100 basis points, to just under 2%.

"Capital is the No. 1 concern for them. It is razor-thin," said McGratty, who estimates that Anchor needs to raise $200 million. "Their tangible common equity ratio is the lowest of all the banks I cover."

Daniel Cardenas, an analyst at Howe Barnes Hoefer & Arnett who dropped coverage of Anchor this year, said a new captain could help Anchor's chances of attracting new capital from investors, especially if Bauer can make real progress.

"Obviously, there are tremendous challenges for them. It's good to bring in someone with fresh ideas," Cardenas said. "But it will be interesting to see what Bauer can do in a year's time to get the bank moving in the right direction."

On top of everything else, Anchor's actual health might be materially different from what the company stated in its financial results.

Its annual report, filed in late June, said Anchor's independent auditor, McGladrey & Pullen LLP, had found the company did not maintain effective controls over financial reporting relating to its allowance for loan losses and impairment charges on repossessed real estate. McGladrey also said that Anchor did not prepare the statements in accordance with accounting standards.

Anchor received $110 million in government capital through the Troubled Asset Relief Program in January. After the infusion, its thrift had a total risk-based capital ratio of 10.4%, which is above the usual regulatory minimum. But this did nothing to help common equity at the company level, which is shareholders' first line of defense against credit losses.

In addition, the June 26 cease-and-desist order from the Office of Thrift Supervision imposes higher-than-usual capital requirements on AnchorBank. By Sept. 30 it must have a leverage ratio of 7% and total risk-based capital ratio of 11%. And by Dec. 31 both of those ratios must climb an additional percentage point.

Though the order does not spell out what would happen if AnchorBank does not meet those targets, the OTS also told the thrift to draft a contingency plan to sell or liquidate itself.

Bauer said he is exploring options to plug the capital hole.

"I am not going to rule out any avenue," he said. "But it really comes down to three choices: lower the assets, improve your income and look at outside sources."

For now, Bauer said the company — which swung to a loss of $43.3 million for its fiscal fourth quarter, which ended March 31, from a profit of $5.6 million a year earlier — aims to improve its income by reducing expenses.

Since Bauer joined on June 22, the company has found enough cuts to reduce operating expenses 10% by the end of the current fiscal year. Bauer said those cuts would include staff reductions, possibly more branch sales, a companywide hiring freeze and the elimination of bonuses. (In April the company announced a plan to close three of its branches by August, which would leave it with 73 branches.)

The search is on for another 5% in expense cuts.

"I have yet to find where, but I am going to find another 5%," Bauer said. "It is not easy; the last thing you want to do is screw up a line of business that is functioning properly."

McGratty said cutting expenses and reducing assets likely won't be enough. "You can only do so much through that route. This bank needs capital," he said. "They can't cut enough to offset the large credit headwinds."

Anchor should consider converting the government's preferred shares to common ones by participating in the Treasury Department's Capital Assistance Program, McGratty said. That program, introduced in February, lets those that have received Tarp money redeem some of their investments for common equity.

Bauer said participation in CAP would be too dilutive to consider at the moment, but he could consider it later on.

He brought with him to Anchor a team of six consultants to help get his arms around the loan problems and improve the company's risk profile.

"This company is far too concentrated in commercial real estate," he said. "The recession is half to blame for the problems, but the other half is because of the concentration. They were too focused on one area."

Anchor had 25% of its loans in commercial real estate and 11% in construction at March 31. It had $198 million in nonperforming loans at March 31. The nonperformers increased 81.5% from a year earlier.

Bauer said part of his push to improve credit quality was an overhaul of the way the company treats credit administration — from underwriting to review. In addition to working out bad loans, retooling those functions will also be a part of the consultants' work, Bauer said.

From here on out, Anchor will do more commercial and industrial lending, he said. "We will be repositioning ourselves as a traditional business bank that serves small to midsize businesses."

Asset sales are also in the works. Bauer said the company is packaging loans to shop around to potential buyers. Besides helping Anchor improve its loan quality and mix, such sales also would raise its capital ratios.

However, McGratty said that without outside capital and with the lingering debt to U.S. Bancorp (which has the right to foreclose on the thrift if it is not repaid), selling itself might also be the most attractive option for Anchor.

"I think that might be the most likely outcome for them," he said. "We could very well see them merged with another bank."

But Bauer — who has a background with mergers from a previous job — dismissed that idea.

"That is not in our strategy right now. It is not a good market for it," he said. "It is an alternative, but is certainly not at the top of our list."

Bauer, 60, succeeded Douglas J. Timmerman as Anchor's president and CEO. The company had said in March that the board decided to replace Timmerman.

In the 1990s, Bauer headed commercial banking at Firstar Corp., a then $37 billion-asset company in Milwaukee. In that role he oversaw the integration of 20 mergers in three years. Bauer retired from the company in 1999 as the chairman and CEO of its Firstar Bank Milwaukee. Firstar is now a part of U.S. Bancorp.

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