John R. Cochran, the chairman and chief executive of FirstMerit Corp. of Akron, says this will be its breakout year.
Plagued by bad loans and inefficiencies over the past few years, the $10 billion-asset banking company has revamped its underwriting procedures, its hiring and compensation practices, and the way it serves customers.
"We've been tested," Mr. Cochran said. "We've got a lot of energy right now around a recovery, and we're feeling that in the local market and in our successes.
"We're in the trenches fighting it out with the big guys."
Mr. Cochran, 62, has led FirstMerit for 10 years, and no detail is too small when he is discussing its turnaround. Illustrating tellers' progress in cross-selling, for instance, he points out that referrals jumped 25% in the second half of 2004, to 39,122.
The changes have impressed Bradley Ness, an analyst with Friedman, Billings, Ramsey & Co. Inc. "I think the ball is in motion," he said. "The company has a lot of good things going for it in 2005."
FirstMerit's biggest challenge was poor credit quality, which chief credit officer David G. Lucht blamed on bad decisions by local lenders. Net chargeoffs more than doubled in 2002, to $98.5 million, and climbed to almost $127 million in 2003.
"Our problems were typically on the smaller commercial loans that weren't getting scrutiny on the local level before," Mr. Lucht said. "We didn't want to centralize everything." Regional credit officers now check every loan coming from each of the company's eight regions, and FirstMerit conducts a centralized review once a month. The arrangement preserves local decision-making but provides tighter oversight, Mr. Lucht said.
Net chargeoffs had dropped to $55.4 million at the end of last year. The company is also reviewing all participations centrally and taking part only in loans in its markets. It no longer lends to startups without a Small Business Administration guarantee or a personal guarantee from the owners.
After tackling credit quality, FirstMerit had to take on boosting revenues - a task Mr. Cochran admitted is tough in its competitive Ohio-Pennsylvania market. His strategy is to hire and promote talented bankers and offer great service.
FirstMerit has significantly expanded its lending staff, adding 16 commercial and 10 small-business bankers, for a total of 157. Some were promotions; others were fresh hires from Ohio banks involved in mergers, such as Huntington Bancshares Inc. and Unizan Financial Corp.
The company also wants to build branches in markets like Columbus, Toledo, and Pittsburgh.
A call center, opened in December, handles such routine tasks as getting updated financial statements or executing wire transfers. That frees up bankers to serve borrowers. A separate center opened last fall for retail marketing - pitching investment products to customers with maturing certificates of deposits, for example.
FirstMerit aims to grow its trust business by going after smaller accounts that big banks are not eager to have.
The third piece of FirstMerit's turnaround is the efficiency ratio, currently a lackluster 60.69%. The company is striving to improve to the mid 50s by yearend. The drive is centered on linking teller pay to performance and matching schedules to peak demand.
In August, FirstMerit began paying tellers for working on the busiest days and for referring new business. Pay levels increased as much as $1.57 an hour and teller turnover was reduced by 23%, Mr. Cochran said.
It began using software in mid-2004 to monitor how many transactions were occurring in its 163 branches over 20-minute periods. This helped the bank beef up staffing during peak periods and cut back when business was slow.
The move let FirstMerit trim its work force while improving service, said Mr. Cochran, who forecasts the program will save about $500,000 in salaries this year.
He estimated that the company will save another $1.4 million this year from a new "time-in-attendance" program, which requires that branch employees log in and out on a computer system, to ensure that they are paid only for hours worked.
First Merit's stock has been relatively flat over the past 12 months, hitting a high of $28.85 at yearend. It closed at $26.35 on Wednesday.
