Even before Robert H. Warrington became First Indiana Corp.'s president in June, the struggling Indianapolis company was showing signs of a recovery.
It earned 32 cents a share in the second quarter, versus an 11-cent loss a year earlier, and its returns on assets and equity had inched closer to industry averages.
Nevertheless, Mr. Warrington saw room for improvement and wasted little time making major changes. First, he announced Sept. 15 that the $2.1 billion-asset First Indiana was selling its out-of-state construction loan offices, some of which it had operated for nearly two decades. It expects to post a $1 million gain on the sale, which it expects to close by the end of October.
Two days after that deal was announced, First Indiana said it was eliminating 70 jobs, consolidating back-room operations, and subletting leases on office space. Though it will take a $1.1 million charge this quarter, it expects to save $4 million a year, before taxes, on the changes.
Mr. Warrington did not blame First Indiana's credit troubles on the loan production offices in North Carolina, Florida, and Arizona, but he said selling them would help his company manage overall loan risk. They do not provide cross-selling opportunities, nor do they bring in deposits, and they distract the management team from First Indiana's home market of Indianapolis, where it has the No. 5 deposit share, he said.
"There is more than enough opportunity to fuel growth here for years and years. I don't think we've focused enough on our own backyard, and that is what we're going to do," Mr. Warrington said in an interview last week.
Stephen L. Covington, an analyst with Stifel, Nicolaus & Co. Inc. in St. Louis, applauded the changes and said he expects Mr. Warrington to make more changes this year to improve efficiency.
The changes will produce "a much simpler franchise and a much more focused strategy" and show that Mr. Warrington is trying to put his personal stamp on First Indiana, Mr. Covington said.
Before joining First Indiana, Mr. Warrington spent much of his career at Old Kent Financial Corp. of Grand Rapids, Mich. His positions there included the chief financial officer of Old Kent and the chairman and chief executive officer of Old Kent Mortgage Co. When Fifth Third Bancorp bought Old Kent in 2001, he was Old Kent's vice chairman in charge of corporate banking, enterprise risk management, and investment and insurance services.
He left a few months after the purchase. A noncompete agreement he signed with Fifth Third expired June 1.
At First Indiana, Mr. Warrington has adopted a back-to-basics strategy that many banks have used in recent years.
"This is very much a low-frills approach to banking that has worked for hundreds of years, and we want to execute it with ruthless intensity," he said.
Reaching out to local businesses is the primary way Mr. Warrington plans to boost First Indiana's earnings, which sagged after problems developed in its commercial loan portfolio.
Its return on assets at the end of last year was 0.24%, down from 1.05% a year earlier and well below the average of 1.41% for commercial banks with between $1 billion and $10 billion of assets, according to Federal Deposit Insurance Corp. statistics.
Fred A. Cummings, an analyst with Keybanc Capital Markets in Cleveland, said First Indiana's biggest challenge is "carving out a competitive lending niche." He noted that companies like the $134 billion-asset National City Corp. of Cleveland, the $8.9 billion-asset Old National Bancorp of Evansville, Ind., and Fifth Third are also targeting small businesses in Indianapolis.
National City has been particularly aggressive in courting small businesses; it has deployed armies of commercial bankers to knock on companies' doors.
However, Mr. Warrington said First Indiana has a built-in advantage. "All the other large banks are headquartered somewhere else. The businesses know who all the senior executives are here, and we answer the phone."
First Indiana, which charged off $31.5 million last year, blamed its credit quality troubles largely on a single borrower, an Indianapolis contractor, that had cash-flow problems. Loans to a home construction company that did not have enough collateral were also charged off. In a July 2003 news release, First Indiana said one of the out-of-state loan offices originated those loans.
Though the company had been working to resolve its credit problems before he arrived, Mr. Warrington said, its board decided last year that it needed new leadership. Owen B. Melton Jr., who had been its president for 20 years, took an early retirement at the end of last year. Mr. Warrington was hired in April to become the president of the parent company and the president and CEO of its First Indiana Bank.
Brad Milsaps, an analyst with First Horizon National Corp.'s FTN Midwest Research Securities Corp. of Nashville, said First Indiana is on the right track. Like Mr. Covington, he expects more changes to be announced this year as it works to improve its efficiency next year.
At the end of the second quarter its efficiency ratio was 61.52%, compared with the 55.5% average for banks with $1 billion to $10 billion of assets.
"With operational efficiencies, 2005 should be a [more] profitable year for them. Profitability seems to be on the upswing and shows no sign of coming down," Mr. Milsaps said.
Mr. Warrington acknowledged that more changes are in the works, but he would not reveal specific targets for First Indiana's earnings or efficiency ratio. He said he would reveal more about his company's plans in its third-quarter conference call, scheduled for Oct. 28.
