After spending much of 2002 and 2003 consolidating its 14 charters into five and reorganizing back-office operations, First Financial Bancorp in Hamilton, Ohio, learned that cost-cutting alone does not improve performance.
By the end of 2003, in fact, its returns on equity and assets were lower than they had been two years earlier, its efficiency ratio was 952 basis points higher - and its longtime chief executive officer was out of a job.
Now the $3.9 billion-asset company is starting another restructuring program, and the current president and CEO says this time will be different, because the changes will free up managers to focus on selling.
Claude E. Davis, the former head of the $5.2 billion-asset Irwin Financial Corp. of Columbus, Ind., who joined First Financial in October, unveiled its plans for improving earnings in a conference call with investors last week.
First Financial will once again consolidate charters - from five to one - reorganize its business lines, and change its management structure, he said.
Though he would not give any specifics on its goals, the costs it expected to incur, or anticipated savings, Mr. Davis said the changes would let the managers in its markets drum up new business instead of handling administrative work.
"We are going to free the market presidents and the line-of-business CEOs from having the responsibility of the nonclient support functions," he said.
First Financial will take charges throughout the year to pay for the restructuring, Mr. Davis said. Still, investors seem to like what they are hearing. The stock hit a 52-week high of $19.26 a share Monday, though it slipped a bit Tuesday, closing at $19.03.
John Rodis, an analyst with Stifel Nicolaus & Co. Inc. in St. Louis, said that 2005 would be a "year of transition" for First Financial, but he is cautiously optimistic that it is turning the corner.
"I think they are making the necessary steps, and time will tell," Mr. Rodis said. "It's going to take a couple years to really see what they can do."
Though it plans to consolidate to a single charter, its 107 branches in Ohio, Michigan, Kentucky, and Indiana, will operate under three brand names: First Financial Bank, Community First Bank, and Sand Ridge Bank.
A chief component of the restructuring will be redefining market areas. First Financial has more than 30 separate ones, some of which have their own presidents. That will change June 1, when First Financial will reduce its number of regions to 14 and give each its own president and loan committee.
C. Douglas Lefferson, who will be promoted from chief financial officer to chief operating officer April 1, will oversee the back-office support functions for the regions, and sales and marketing, risk management, and credit risk management will now all report directly to Mr. Davis, rather than regional heads.
These changes will help First Financial develop a more aggressive sales culture and, in turn, expand revenue, he said. "The staff, I think, are ready to become more aggressive."
Also, First Financial will rename its Flagstone insurance unit to First Financial Insurance and combine its investment management, trust, brokerage, and private banking operations in a newly created unit, Financial Wealth Management, by June 1.
Mark W. Immelt, the president and CEO of First Financial Bank, will run the new unit.
First Financial had not been losing money, but its performance has weakened in recent years. Its return on equity dropped from 18.57% at the end of 2000 to 15.51% at the end of last year. Over the same period its efficiency ratio climbed from 50.84% to 61.52%, and loans increased by roughly 1%.
And though its net income last year rose 3.1% from 2003, to $47.9 million, the total was still well below the $60.5 million it earned in 2000.
First Financial attributed its lackluster earnings to credit quality problems brought on, in part, by a downturn in the Ohio economy. Also, many of its branches are in rural areas, where opportunities for loan growth are limited.
It tried to address the problems with cost cuts when Stanley N. Pontius was the president and CEO, but those efforts failed to pay off, and Mr. Pontius resigned in October 2003.
Mr. Davis said he believes First Financial is well positioned to execute his strategy. It has unloaded its manufactured housing portfolio - which had contributed to the problems with asset quality - and sold off some branches in slower-growing markets. This month it announced it was selling the assets of a $110 million-asset subsidiary, First Fidelity Financial in Marion, Ind., to the $838 million-asset MutualFirst Financial Inc. of Muncie. That deal is expected to close in the third quarter.
"We are in a good financial position and good markets," he said. "We just needed to define our direction."
Fred A. Cummings, an analyst with KeyBanc Capital Markets, said First Financial is moving in the right direction, and he is recommending the stock, because Mr. Davis has outlined a strategy that is not risky and has worked well for other banking companies.
"This is basic blocking/tackling. They're refocusing on community banking," Mr. Cummings said.
