First Active chief executive Cormac McCarthy has overseen an impressiveperformance by the bank following a painful overhaul of the business, writesSiobhán Creaton, Finance Correspondent

Three years ago, Mr Cormac McCarthy was handed a daunting task. The then 37-year-old Dubliner was appointed chief executive of First Active, a newly converted building society that was in bad shape.

Investors and the media were regularly berating its board of directors and senior management team for presiding over a disaster. There were some management changes to try to placate the critics but this was viewed as no more than a rearrangement of the deckchairs on the Titanic.

Mr McCarthy had joined what was then the First National building society a month before it floated on the Dublin and London stock markets as First Active plc in October 1998.

At that time he was the only member of the management team who had any experience of working in a public company, having joined from Woodchester which is part of the international conglomerate GE.

His initial function was as head of finance and in the immediate aftermath of the flotation his job was largely to liaise with the investment community who had bought the shares.

"I wouldn't have joined the company if it hadn't floated. I think the value of going public has been well demonstrated. It is a fundamentally better business now than it was then," he says.

The bank began to get into trouble in 1999, reporting a drop in profits and the performance of its share price had delivered nothing but disappointment primarily for the thousands of customers who were given free shares when it came to the stock markets.

Anglo Irish Bank made an opportunistic swoop on the ailing financial institution in 2000 but this deal quickly unravelled amidst a dispute about boardroom positions. The stock markets didn't like the deal much either seeing it as a bad move particularly for Anglo.

Mr McCarthy seems to have found himself in the right place at the right time and took over as chief executive in July 2000.

"If you told me when I joined First Active that I would be chief executive within what turned out to be two years I would have been shocked. Sometimes I have to pinch myself and say has this thing really happened? Like most people, you keep waiting to be found out."

This week the bank reported a 26 per cent rise in profits to €66 million, well ahead of market expectations. It also had some very good news for its shareholders, announcing a proposal to share €160 million of its surplus cash amongst them. For those who received free shares on a qualifying mortgage and savings account in 1998 this payment, if approved in March, could be worth €550.

It's an impressive result that has been achieved through a complete overhaul of its business achieved through much pain for many of its employees.

"I always believed that people never gave the company credit for what a sound business it had. At the edges there were a lot of issues and it would be fair to say that the company had not addressed a lot of substantive issues, but its mortgage and savings business was in fact very sound and a low-risk business."

He acknowledges that morale amongst its staff of almost 1,000 was extremely low and worsened following the swingeing job cuts that were sought. Today First Active's staff headcount is 695.

"In times of difficulty, taking cost out is the first thing you must do. It is very painful but it is in fact the easiest thing to do. Growing revenues is a much tougher game. You reposition the business and buy yourself time.

"We immediately shut down 25 branches and let 200 people go within a very short period of time. Over the course of time we then focused on re-building the revenue base," he explains.

Mr McCarthy says he asked staff to be patient and attempted to reassure them that things would come right in time.

"They went through a really hard time having been brought into the flotation environment and been shown the promised land, to then be taken through a very significant restructuring and a lot of trauma. They have shown tremendous resilience."

A new management team was recruited, the most senior being finance director Mr Michael Torpey who moved from Irish Permanent.

Mr McCarthy says since then it has concentrated on making money in its core mortgage and savings business.

It focused on selling these products directly to the public and now largely by-passes brokers who would earn commissions.

It sold its head office in Booterstown in south Dublin and centralised its operations at a new facility in Leopardstown and it managed to foster a more sales-focused culture throughout the organisation by introducing a high performance-related component to staff earnings.

"It was basic stuff. We set out a very clear agenda, starting with cost. We continue to be very religious about cost and that is something that won't go away."

It is no coincidence that the bank has been knocked into shape just before it loses the takeover protection afforded under the Building Societies Act. In October it could become a takeover target and shareholders could be asked to consider a bid from one of its domestic rivals

Mr McCarthy will not comment on what may happen but insists the bank can remain independent.

"Because we are different at the moment that question arises but we are building this business for the long term and we think we can stand on that record."

With the business on track, the 40 year-old chief executive is confident about its future, but is annoyed and disappointed with the decision by the Minister for Finance, Mr McCreevy, to penalise all Irish financial institutions for being profitable and successful.

Under the new bank levy proposed in the Budget, First Active is expected to have to pay proportionately more money to the Exchequer than its rivals because of its business mix.

"We will get on with it and pay it but it is sending out a very bad message about this country to the international investment community.

"I will be on the road in the next few days meeting investors and this thing will come up. What they see is the thin end of the wedge," he says.

"They have bought into a low tax rate in Ireland and they do not understand why, on an arbitrary basis, the banks are singled out. I am very annoyed about it."

He says he has made his strong views known to the Minister but does not expect him to relent.