MELROSE PARK, Ill. - As the chief executive of CNB Bancshares Inc. during the 1990s, James J. Giancola developed a reputation as a buyer, engineering 21 acquisitions in one seven-year stretch and building CNB into one of Indiana's largest banking companies before selling it to Fifth Third Bancorp in 1999.
Now he is settling into a new role: turnaround specialist.
After five years as the president of Fifth Third's Indiana operations, Mr. Giancola became the president and CEO of Midwest Banc Holdings Inc. last month, succeeding Brad A. Luecke, who retired. His task is to get what was once one of the better-performing community banks back on track after 18 months of credit and regulatory troubles and declining earnings.
Two weeks ago the $2.5 billion-asset Midwest reported third-quarter results that Mr. Giancola called "unacceptable" - a loss of $31,000, after a $2.3 million profit a year earlier. Its net interest margin fell 28 basis points, its efficiency ratio has soared to near 70%, from 50% a year ago.
In an interview in his office last week, Mr. Giancola, 56, laid out a plan that features strengthening credit procedures, replacing securities with loans, generating more fee income, and hiring more lenders.
"We're not talking nuclear physics here," he said. "It's just getting everyone pointed in the right direction, giving them the resources to be successful, and then holding them accountable."
His first priority is credit quality. He has increased the number of credit analysts, centralized credit oversight, and put loan workouts into their own departments.
"We have had a checkered past, and there are some recoveries out there that could make a difference to us if we can track them down," he said.
Midwest's troubles began in last year's first quarter, when the Federal Reserve Bank of Chicago and the Illinois Office of Banks and Real Estate ordered it to restate its 2002 earnings and raise its loan reserves by $11.5 million. At the time the company had an agreement to buy the $600 million-asset CoVest Bancshares of Des Plaines, Ill., but the deal was terminated in July 2003.
In March, Midwest was slapped with an enforcement order requiring that it tighten corporate governance, risk management, and loan reviews.
Meanwhile, earnings have suffered. Through the first nine months of this year Midwest earned $8 million, down more than 50% from the same period in 2003. It put much of the blame on securities losses, as well as accounting adjustments related to derivates.
Booking more loans and relying less on securities to drive earnings are central to Mr. Giancola's strategy. As of Sept. 30, 40% of Midwest's assets were in securities; and its loan-to-deposit ratio is well below the average of banking companies its size.
Mr. Giancola also wants to diversify the loan portfolio, which he said is too heavily concentrated in commercial and residential real estate, by adding more consumer and commercial and industrial loans. At Sept. 30, 76% of Midwest's loans were in real estate.
Midwest will add two or three new lenders every quarter and base lenders' compensation more on sales, Mr. Giancola said. The calculation of salaries, bonuses, and stock options will be altered to create a package that encourages lenders to bring in more quality loans.
"Ten percent of the work force will get very substantial raises and 10% will get nothing," he said.
Daniel E. Cardenas, an analyst with Howe Barnes Investments Inc. in Chicago, said he does not expect earnings to pick up right away, but that the company is headed in the right direction.
"Jim is well credentialed and a seasoned banking veteran who has a definite game plan to turn this organization around," Mr. Cardenas said. "He's getting the company focused back on core performance and not having to rely on securities gains and other noncore items for performance."
Investors apparently like what they are seeing. Since the Sept. 28 announcement of Mr. Giancola's appointment, Midwest's stock is up 12%; it was trading at $20.94 late Monday.
The CEO promises that investors who stick with Midwest's stock will be rewarded. He acknowledged that Midwest probably will not show much improvement this quarter, but said investors can expect steady progress through 2005 and 2006.
"We're doing the things we need to do to be successful long-term, not necessarily doing the things we need to do to be successful next quarter," he said.
