FOR YEARS NOW, bank chief executives across the country have been restructuring their companies -- and laying off thousands.
And while industry observers have seen the bloodletting as a necessary evil, First Bank System Inc.'s chairman and chief executive, John F. "Jack" Grundhofer, has been particularly savaged for his cost-cutting effort by the media -- which gave him the decidely unflattering nickname "Jack the Ripper."
Mr. Grundhofer was hired in 1990 to engineer a massive cost-cutting effort designed to save Minneapolis-based First Bank from oblivion.
The restructuring, which has cut over $100 million in overhead, has been hailed by Wall Street, but Mr. Grundhofer has attracted a flurry of negative press accounts along the way.
"The company was in disarray," Mr. Grundhofer said of his early days at the bank. "The press here was merciless."
Still, he shakes off the bad press: "The bum rap was the one dimension [of the media coverage] - that we were only cutting and not building."
Mr. Grundhofer and a new management team evaluated each line of business to determine where First Bank System could be remain competitive.
They decided to largely abandon lending to major corporations and instead focus on retail banking, small and middle-market businesses, and trust and investments. To boost those lines, First Bank also invested heavily in technology - about $250 million over the last four years.
No one is arguing with the results. In 1988 and 1989, the bank lost more than $400 million due to bad loans and a bond trading operation that took a nosedive.
The numbers have been steadily improving since 1990. Last year, the return on assets was an admirable 1.36%, up from 0.22% in 1990.
The $26.4 billion-asset bank has also cut its efficiency ratio dramatically. In 1990, the ratio of noninterest expense per dollar of revenue was a bloated 75.1%. Last year, the figure was a more respectable 59.8%.
Mr. Grundhofer wants to see further improvements. "We'll be at the mid-50s very shortly. So we've reset the bar," he said. "We want to get to 50%" in the next three to five years.
Those gains have been made possible by technology, said Mr. Grundhofer.
Sandra J. Flannigan, an analyst with Merrill Lynch & Co. in New York, said First Bank has replaced subpar management information systems with superior systems. "They have clearly brought themselves out of the dark ages."
The restructuring resulted from a process in which department heads were asked to appear before Mr. Grundhofer and Richard A. Zona, vice chairman and chief financial officer, to suggest areas to cut.
"That really caused us to focus and emphasize those businesses that were creating the most value and exit the business that were not," said Mr. Zona. "Those were a lot of tough days, [but] we had to get the balance sheet in order."
He noted that the bank was severely undercapitalized, with credit quality problems.
But Mr. Grundhofer was able to attract nearly $200 million in private equity. "Had we not had those friends -- our corporate partners -- people Who I knew who believed in us, believed in what we are trying to accomplish here ... we would be much further behind the curve today," he said.
The bank shrunk its Fortune 500 corporate lending business, basically limiting it to major companies in its markets, such as Minnesota Mining and Manufacturing Co. or Honeywell Inc. it began to write off bad loans, laid off about 2,000 employees, and set out to improve back-office efficiencies through consolidations and new technology.
These rapid-fire steps -- particularly the layoffs -- led to some bad press.
"The perception out there was these guys just took a meatax to ... cut $100 million," said Mr. Zona. "In fact, we took a very surgical approach."
He noted that some areas were spared. With the aid of a new management accounting system, for example, the executives identified retail banking as one area of growth.
Another area targeted for growth was trusts and investment products. About a year and a half after the new management arrived, First Bank was healthy enough to enter the acquisition market.
"The management has done an incredible job of turning around the bank," said Ms. Flannigan.
Among the acquisitions were the corporate trust units of Bankers Trust Co. of California and those of U.S. Bancorp in Oregon and Washington, and, most recently, the domestic corporate trust business of J.P. Morgan & Co. First Bank has $22 billion in assets under management and total trust assets of $194 billion.
In 1991, First Bank also expanded its presence in Colorado with the government assisted purchase of Capital Federal Savings. The bank has made additional acquisitions in the state in 1992 and 1993 and the first quarter of this year.
First Bank, along with its Rocky Mountain BankCard System unit, is also a major player in several parts of the credit card business. It's the nation's third-larges merchant processor and the largest issuer of Visa corporate and procurement cards, officials said.
The company recently won a cobranding arrangement with Northwest Airlines away from Banc One Corp. First Bank also issues a debit card.
Technology was a key factor in First Bank's improved fortunes.
Philip G. Heasley, vice chairman and president of the retail product group, noted that the company had a lot of catching up to do.
"We were this large cartel of largely independent banks whose common denominator was a holding company that provided some data processing [and] equity allocation," said Mr. Heasley.
At the time, First Bank operated 16 loan processing centers, eight consumer loan centers, and 20 item processing shops. The bank lacked a centralized pricing philosophy, and different products were offered at different banks. Systemwide, there were 715 varieties of basic checking accounts, he said.
"Our DDA system was circa 1960. Our installment loan system was circa 1959. Our basic [customer information system] was 1964. We had an on-line savings system that was 20 years old, and we had an archaic lobby system," he said.
The new management recognized that things would have to change. "I'm the spoiled brat of the company because I spend all the money," said Mr. Heasley. In the last four years, First Bank has invested $250 million in technology to upgrade or replace virtually every system.
All of First Bank's 181 branches now use Hogan Systems Inc.'s software for deposit accounting. The bank has gone from a handful of personal computers at banking offices -- personnel previously used "dumb" terminals connected to a mainframe -- to more than 8,000 PCs bankwide.
First Bank's automatic teller machine network has expanded rapidly, from about 100 to more than 1,000. The bank is installing a new customer information file system that officials say will be up and running by early 1995. And imaging technology has been installed at the mortgage company.
To house the new technology, the bank opened an operations center and consolidated its customer service phone centers into two locations.
"At the same time, we built a mailing capability" linked to a customer data base that runs profitability models, said Mr. Heasley. First Bank now generates about 2.2 million pieces of direct mail each month.
"The technology allows us to do a lot of stratifying of the customer base," Mr. Grundhofer said, adding that the bank is segmenting its customers into demographic categories.
"We're not there. We're just starting," he said. "We know what products are profitable in whole, but we don't know what products are profitable in each strata. But look at the numbers without us being there."
Technology spending has been geared to support what First Bank calls its product distribution paradigm, which uses customer information to cross-sell products. "Data has to become the primary intellectual property," said Mr. Heasley. "Over time it will be our great advantage over the brokerage industry."
He offered an example. The bank has been running a promotion for home equity loans this spring, using direct mail and mass media advertising. When a potential customer calls, the representative takes the application over the phone and lets the customer know if he qualifies. Then the information is sent to a branch near the applicant's home or business.
If everything goes according to plan, a loan officer will call the potential customer the next day to request tax forms and other necessary information. When the applicant arrives at the branch, the loan officer can then offer other First Bank products to the customer.
"We sell on average 3.75 accounts per sale to our noncustomers when we sell a home equity loan," said Mr. Heasley.
This approach, he noted, involves direct mail, telemarketing, and the branch in the same transaction, a product-delivery combination that is still fairly rare in banking.
William F. Farley, vice chairman, said, "We can use our data and our marketing file to more closely identify who we should be mailing. We are getting more efficient at it."
When the new customer information file is fully operational, the bank will be able to track customers' account activity and segment them into different demographic categories. That data, along with supplemental information such as credit reports, which the bank looks at four times a year, can yield tremendous selling opportunities, said Mr. Heasley.
In addition to technology, the bank is looking to increase sales through other avenues.
The bank is in a pilot program with IDS Financial Services Inc., in which the financial planning company has put its representatives in two Minnesota branches to sell customers mutual funds, annuities, and other products.
David Hubers, CEO of Minneapolis-based IDS, has told the American Banker that the companies expect to expand the program throughout First Bank's branch network.
Bank officials were more cautious, saying that while negotiations with IDS continue, no plans have been made.
With the gains in efficiency largely achieved through consolidations and cost-cutting, Mr. Grundhofer is looking for further improvements in the efficiency ratio on the revenue side of the equation.
"The opportunity is revenue enhancement," he said. "It's just implementation and education. In Colorado we had four banks -- major banks -- with four different cultures. Now we have them using new systems. The learning curve of the people we have is going like this" -- he made an upward gesture with his hand -- "in terms of productivity."
That's not to say Mr. Grundhofer is relaxing his vigilance in keeping costs down.
"There is a sense of urgency in this company," he said. 'You've got to let people know continually that as much progress as we have made, it is still not enough to assure survivorship in this industry."
Officials noted, for example, that employees must use First Bank's corporate card fro travel and entertainment expenses -- and not the bank's cobranded credit card, which would give them frequent flier miles on Northwest Airlines.
Using the cobranded card, Mr. Zona said, would result in larger interchange fees.
In another step to rein in costs, the holding company offered branch managers a one-time opportunity to give up a portion of their floor space, which in turn, would be divided up and sublet.
Mr. Farley said that due to the program there has been a 16% reduction in occupancy space although the number of branches has increased.
"Cost control kind of overrides everything that we do," said Mr. Grundhofer.
Mr. Grundhofer said the bank will bring that kind of discipline to its acquisition strategy. "I'm not worried about the opportunities but I'm worried a lot about the price," he said.
When evaluating acquisitions, First Bank looks at earnings per share dilution -- but officials say that is secondary to looking at the return a purchase would generate. "We make sure the price that we pay is a price less than the discounted cash flows," said Mr. Zona.
"Their approach to acquisition pricing makes more sense for the shareholder than some other approaches," said Ms. Flannigan of Merrill Lynch.
Mr. Grundhofer said he is keeping his eyes out for targets that would expand the bank's presence in its existing markets in Minnesota, Colorado, the Dakotas, Montana, and Wisconsin. He's also watching the greater Chicago area for opportunities. The bank is expected to complete its acquisition of Boulevard Bancorp this spring.
"We're going to be very disciplined," said Mr. Grundhofer. "We know how to make acquisitions. We know how to take costs out. We know how to leverage technology. We know how to grow revenues."
