CANTON, Ohio -- When the thrift reform law was passed in 1989, First American Bancorp was among 838 institutions that faced the risk of federal takeover because of capital deficiencies.
But by unmercifully slashing costs, chief executive Mark Grossi lifted the thrift into compliance - and into the hands of wealthy suitor.
He did it by shedding six of the thrift's 19 branches. He halved operating expenses and slashed employment by one-third. He even began charging officers 15 cents for a cup of coffee.
Thrift Lawyer's Assessment
"Mark is the cheapest guy I have ever known in my life," quips Barbara Mathews, an Arnold & Porter lawyer who represented First American in its September buyout by Charter One Financial Corp., Cleveland.
Mr. Grossi's penurious ways were no joke.
Pretax income at the $720 million-asset First American would have been 85% - or $26 million - lower in the past four years had the thrift's ratio of operating expenses to average assets held constant at 1987 levels.
In this sluggish economy, experts say, cost-cutting on the order of Mr. Grossi's may prove the best avenue to earnings growth for many institutions. Even healthy thrifts may want to start rethinking expenses.
"The guys with low expense ratios seem to be the ones who survive," says Larry Muldoon, a former chief regulator in the Cincinnati branch of the Office of Thrift Supervision.
Indeed, First American is among roughly four dozen capital-deficient thrifts that earned their way back into compliance primarily through efficiency gains, says Joseph Blalock, economist at Savings and Community Bankers of America, a thrift trade group.
Of course, Mr. Grossi had a big advantage.
Few Bad Assets
First American did not suffer from the asset-quality problems afflicting most of the 722 thrifts seized by the government since the 1989 law was passed. Nonperforming assets comprised a slim 0.88% of its gross loans that year.
But Mr. Grossi, 39, had little room to maneuver under the Financial Institutions Reform, Recovery, and Enforcement Act.
He was barred from entering new lines of business, making acquisitions, or boosting assets. His thrift was obliged to submit to regulators a business plan from which it was given little room to diverge.
Rather than amputate valuable lines of business and shed capital-intensive assets, Mr. Grossi decided to pare the flab First American had gained in the previous decade. That extra weight was considerable, be-speaking an institution that had fallen out of touch with economic reality.
First American's $6.5 million headquarters - replete with underground parking garage, glass-encased elevator shafts and panoramic views of the William McKinley monument - seemed lush, given the thrift's deficit in tangible common equity. It also was becalmed in a city whose unemployment rate in the year Mr. Grossi took over was above 8.2%.
To Mr. Muldoon's examining eye, it was clear Mr. Grossi's predecessors had gotten caught up in the boom mentality of the 1980s, "just like everybody else."
Recruited in 1987 after a stint at the now-defunct TransOhio Savings, Mr. Grossi tore into expenses, redoubling efforts when the thrift reform law was enacted. "Anything that didn't stand on its own was reduced or cut," he says.
* Coaxed 15 officers off the payroll through an early retirement plan.
* Replaced First American's in-house legal counsel with contract help.
* Canceled orders for more than $1 million worth of computer equipment. He also let contractors assume supply functions once handled on-site.
* Assigned additional responsibilities to employees throughout the bank, often rolling the duties of several workers into one job. For example, the paralegal remaining on the payroll took on double duty by replacing an executive secretary.
"I like telling people we saved $5 million [of annual expenses], $25,000 at a time,' says Mr. Grossi.
Space Rented Out
Today, a Canton law firm occupies the second floor of First American's headquarters, space originally envisioned as a training facility. Tellers occupy only three of the 10 service windows in the spacious lobby.
When the thrift reform took place, executive vice president Gary Vaccaro, 44, and chief financial officer David Huffman, 40, quickly canceled their memberships in the Canton Club, the city's exclusive wood-paneled executive dining club, where annual dues are $765. (Mr. Grossi retained his membership.)
As for the 15-cent cups of coffee, "that doesn't mean a darned thing to the bottom line," says Mr. Vaccaro, "but it does mean a lot toward consistency of management."
In the midst of the slimming, Mr. Grossi's team was careful to leave some elements of corporate ambience intact. After all, Mr. Grossi reasoned, cost-cutting can become destructive when it comes down to "using cheap-o pens and having a run-down building" that turns off customers.
A Few Grace Notes
The company still published handsome annual reports, and "we didn't do away with the Muzak," say Mr. Vaccaro, who will head up the Canton franchise for Charter One.
Operating expenses dwindled from 2.56% of average assets in 1987 to 1.75% in 1991.
It was this performance that proved a key to establishing credibility with regulators and investors, some of whom were bottom fishers betting on the thrift's turnaround.
"I saw they were really reducing expenses," says William Belden Jr., president of the local Belden Brick Co. So great was Mr. Belden's confidence in Mr. Grossi that he had his company buy 6% of the thrift's stock - even after the 1989 reform put it on the endangered-species list.
Likewise, regulators took notice of Mr. Grossi's extensive cost reductions and allowed him to earn his way into compliance. "We knew what their core earnings were, what their goodwill was, and that they could rebuild capital and come out of this thing," says Mr. Muldoon of the OTS.
Efficiency notwithstanding, Mr. Grossi and the regulators did not see eye to eye on all matters.
"Regulators pushed them to sell stock and dilute shareholders," says Ms. Mathews of Arnold & Porter. "Mark managed to keep them at bay and continue earning his way out of the problem."
Compounding the stress were longtime shareholders, who had been paid no dividends since the former mutual association went public in 1987.
Cries for a Dividend
"If there were half a dozen questions after the shareholders' meetings, four of them were: |When are we going to get a dividend?'" recalls Mr. Grossi. Stockholders even thwarted his attempts to offer bonuses as an incentive for management during the capital crisis.
Moreover, the tight restrictions imposed on the company by the 1989 law left few opportunities to improve earnings. Barred from growth, Mr. Grossi instead reconfigured the loan portfolio. He increased highyield consumer loans by 40% from 1989 to 1991; home equity loans grew 50%.
But one crucial element was beyond Mr. Grossi's control. "We suffered from a credibility problem," concedes the executive.
When an article in the Canton paper listed First American as one of three area thrifts with capital deficits, depositors staged a brief run. The other two thrifts have since folded.
"If we were in a bigger urban environment, we would have gotten creamed," says Mr. Grossi.
The veil was finally lifted for First American last March. Even before it announced it had exceeded all required capital ratios, Charter One agreed to buy the institution for about $45 million, or 1.25 times book value.
Investors like Mr. Belden were rewarded with a tripling in the trading value of their shares.
Today, First American's 13 branches in Canton and surrounding towns bear the name of their acquisitive parent's flagship, Charter One Bank.
And as for the tight-fisted Mr. Grossi: His payoff was a post heading up retail banking at Charter One, the Buckeye State's largest thrift, and almost $2 million worth of its stock.
Now, he is up to his old tricks.
Based in his native Cleveland, Mr. Grossi oversees all of Charter One's branches and is implementing the findings of an efficiency study that will reduce branch payrolls by 100 workers.
"Mark was quite aggressive in Canton at making branches profitable," says Charter One chief executive Charles John Koch. "So I would expect him to bring some of that efficiency culture over to Charter One."