Gerald R. "Jerry" Francis' latest turnaround job has been his fastest yet.
When Hasten Bancshares Inc. of Indianapolis hired Mr. Francis as its chief executive a year ago, the $1.2 billion-asset company was plagued with bad loans and the effects of an ill-advised balance-sheet restructuring.
Though the privately held parent of First National Bank and Trust was not losing money, its returns on equity and assets had been significantly below industry averages for at least three years and its efficiency ratio had ballooned to about 80%.
Its fourth-quarter numbers tell a much different story. Mr. Francis, whose track record includes turnarounds at banks in Indiana, Ohio, and West Virginia, said the company had an ROA of 1.10% an efficiency ratio of 62% in the quarter that ended Dec. 31, as well as a net interest margin of 3.75% - a 74-basis-point improvement from the first quarter.
"He's a miracle worker," Hart N. Hasten, the holding company's chairman, said of Mr. Francis.
But where does Hasten go from here? Mr. Francis is known for fixing up banks and selling them for top dollar. The buzz around Indianapolis is that the Hasten family, which has owned First National Bank since 1976, brought Mr. Francis in to do just that.
"The speculation revolves around Mr. Francis' reputation and the age of the owners, and the lack of the family management in the next generation," said James S. Young, the president and CEO of the $29 million-asset Indiana Business Bank in Indianapolis.
Mr. Francis says the reputation is somewhat exaggerated. He pointed out that his most recent rehabilitation project before Hasten, City Holding Co. in Charleston, W.Va., is still around and even acquired a bank last year.
"City is doing wonderfully," Mr. Francis said. "You don't have to sell them. You can fix them and operate them."
Mr. Hasten, for his part, said that though the family would consider a good offer for the company, its main concern is the bank's performance. "All we know right now is everybody is very happy with the way things are going," he said.
Mr. Hasten and his brother Mark, both in their 70s, came from a Jewish family that fled Poland just before the German invasion in 1939, settling in the Soviet Union. After World War II, they emigrated to the United States, where they got into the nursing home and real restate businesses before buying First National Bank.
The brothers bought controlling interests in four other Indiana banks over the next 12 years and in 1988 founded Hasten Bancshares as the holding company.
Hart Hasten said in an interview that the company hired Mr. Francis after getting in trouble by being too aggressive in making asset-based commercial loans and leveraging its balance sheet in 2000 with Federal Home Loan borrowings on the assumption that interest rates would go up.
This was the sort of challenge Mr. Francis said he likes to tackle. He joined Hasten from the $2.5 billion-asset City Holding, which he rescued from the brink of failure earlier this decade. He brought along two executives, Jon Loeber and William Butcher, who had worked with him on previous turnarounds, including City's.
Mr. Loeber, the chief credit officer, oversaw the loan portfolio cleanup and had most of the problems resolved by June 30. Mr. Butcher took charge of the operational side of Hasten and had it running more efficiently by the end of August. Brian D. Fiscus, the chief financial officer, took care of restructuring the balance sheet.
"All of that work got done in about six months, April through Sept. 30," Mr. Francis said.
Helping the rapid turnaround was that Hasten is a private company - management did not have to file 8-K reports with the Securities and Exchange Commission every time it made a decision.
But the big key is to have the right people and a clear strategy, Mr. Francis said.
"It is a matter of having a simple plan, superior execution, and moving fast on the changes. In that regard, experience is worth a lot," he said.
Mr. Loeber reduced problem loans by selling some, rewriting others with additional collateral, persuading the risky borrowers to seek financing from different banks, and bringing in new lenders to make better loans.
"We do on-the-job mentoring and training to explain what's a good loan and what isn't," Mr. Loeber said.
On the operational front, Mr. Butcher streamlined back-room processes, cut the employee head count from 458 to 300, and, just as he did at City, focused Hasten's marketing on checking accounts, home equity lines of credit, and adjustable-rate mortgages.
For example, Hasten used to bar-code every loan file in its vault so it could keep track of files once they left the vault. When Mr. Butcher arrived, he discovered that only about 5% of the files actually ever left the vault, so he wondered why time was wasted bar-coding them in the first place. He changed the process so that only files that left the vault were given a code.
Mr. Butcher said concentrating advertising on a few specific products helped to boost sales. He noted that home equity loan originations increased from about $100,000 a month in the first quarter to $300,000 a month by the fourth.
"You have to roll up your sleeves, sit and talk with people, and ask them, 'What do you do that doesn't make any sense?' and they tell you," Mr. Butcher said.
As with any turnaround, there is some short-term pain. Hasten took a $9.2 million charge in the third quarter as it prepaid about $130 million of Federal Home Loan bank advances and $35 million in interest rate swaps and took about $6 million out of its loan-loss reserves. The result was a $6 million loss for the quarter.
But the company is profitable again - it earned nearly $5.4 million, pretax, in the fourth quarter - and that means it "has options" in 2006, Mr. Francis said.
He would not elaborate except to say Hasten will not stand pat. Coming off its best quarter in years, it has even loftier expectations for the fourth quarter of 2006, including a net interest margin of 4%, a 1.20% ROA, and a 52% efficiency ratio.
"Our intention is to become the best bank in Indiana," Mr. Francis said. "I think we have come a long way toward that goal."
