First Chicago Corp. said on Thursday that it will slash 600 positions in its retail banking unit and take a $7 million charge to third-quarter earnings.

The cost-cutting measures imposed on the Community Banking Group are intended to save $20 million pretax annually, starting in 1995.

First Chicago said the economizing is the first step toward its goal of boosting annual net income of it s community banking group by $100 million in three years.

Bad Performance Obscured

Analysts praised the move, saying First Chicago's community banking group represents the last of the major problems within the $64.1 billion-asset bank.

Woeful returns in First Chicago's retail business have been obscured by the bank's accounting procedures, which blend stellar credit card returns with lackluster results in community banking.

"This is an organization which a few years ago was not a well-run machine," said David Berry, senior analyst at Keefe, Bruyette & Woods Inc.

First Chicago has seen some success after unloading nonperforming assets last year and restructuring its corporate banking unit. Its return on average assets hit 1.42% at the end of 1993, the only time in the last five years the bank has seen its ROA top 0.74%.

Flat in Second Quarter

The bank's profits in this year's second quarter remained flat with those of the year-earlier quarter.

Analysts and the bank say the retail unit's poor performance comes from badly managing the integration of acquisitions made over the last decade.

"First Chicago's branch network has been expensive to operate because it was formed through the acquisition of disparate banks and thrifts, each with its own way of doing things," said W.G. Jurgensen, First Chicago Corp.'s executive vice president and head of the community banking group.

String of Acquisitions

Mr. Jurgensen said he could not disclose how poorly the retail group had performed overall, because the bank does not break those numbers out.

First Chicago recently completed the $304 million stock-swap acquisition of Lake Shore Bancorp. Prior to that, the bank acquired two failed thrifts, in 1990 and 1991. And in 1988 the bank acquired a community bank operating in Chicago's western suburbs.

Consolidating all those banks is a "significant management challenge," said Keefe's Mr. Berry. "A management effort to restructure an underperforming part of the business is good news," he added.

Merrill Lynch analyst Judah Kraushaar, who described himself as "fairly cynical" about First Chicago's performance for the last few years, says he is changing his view now that the bank is paying attention to community banking.

"I think they've recognized they've undermanaged the business historically," he said.

Part of a Trend

First Chicago's move is hardly unique in the industry, analysts say. It is merely a way to get the least profitable customers, who need only basic banking services, to use technology-based delivery systems, they point out.

The bank also plans to tailor its products to match the more complicated needs of individuals. Mr. Jurgensen said that most banks today have designed "one size fits all" products.

"The big bang for the buck here comes by understanding customers by segment and building product delivery to match that," he said.

The restructuring calls for reducing staff levels during slow hours and increasing staff during more active periods with part-time employees. As a carrot to get employees to switch, the bank is Offering full benefits.

Affected in the reorganization will be four main customer segments: consumer banking, private banking and trust, small-business customers, and the customers who generally only use ATM machines and other technology-based distribution channels.

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