Firstar Corp.'s Roger L. Fitzsimonds says he has been doing a lot of homework lately - on a plan to reduce expenses significantly at the Milwaukee-based banking company.
In April, the Firstar chairman and chief executive offcer began telling analysts that the goal is to slash the eficiency ratio from about 61% in 1995 to 55% by the end of 1997.
We have committed ourselves to an intensive process in the months ahead that will, in fact, lead to major expense reductions, he said. Everything is on the table.
While few details of the reengineering have been announced, Mr. Fitzsimonds did offer a clue to its scope. He noted that a one-point reduction in the eficiency measure - the ratio of noninterest expenses to revenue - translates to $6 million in after-tax income.
If you accept that we're at 61% and we're going to 55%, that's a $36 million reduction in overhead, he said. We're in that world.
Mr. Fitzsimonds added that reaching 55% will primarily involve cutting costs, not increasing revenue.
This is a big statement for us to make, said Mr. Fitzsimonds. We're doing a lot of homework to get us there.
The first announced step is a consolidation of $18.1 billion-asset Firstar's four subsidiary banks in Iowa. After a $2 million pretax charge to pay for the move, it will result in $4 million of ongoing expense savings.
With its plan to undertake a broad-based reengineering, the bank is following a path well-travelled by banks seeking to rein in costs.
But Firstar, which operates in Wisconsin, Illinois, Minnesota, and Iowa, has also been gaining a reputation as a leader in efforts to boost profitability in retail banking. Firstar has been piloting, and will deploy throughout its branch network, a market segmentation system that tracks profitability by customer and product. The approach is being supported by a new platform automation system that will, executives say, make sales efforts in the branch more effective.
Thomas K. Brown, an analyst with Donaldson, Lufkin & Jenrette in New York, said, You start out with the basic premise - which is true for everybody - that half of the customers that we deal with on the retail side of our bank are unprofitable.
Mr. Brown said he knows of no other bank that is doing as much as Firstar to maximize profitability across the customer base.
Firstar is hardly alone in wanting to reduce overhead and boost profitability. The bank is, however, undertaking these efforts from a position of relative strength.
When you look at them over the last 10 years, they have gone from a one-state, mediocre Midwest bank to a premier-performing, very well diversified four-state franchise, said Steven R. Schroll, an analyst with Piper Jaffray Inc. in Minneapolis. It's hard to argue with the results.
Last year, Firstar posted a return on average assets of 1.51%, down slightly from 1.59% a year earlier. Earnings per share last year was $3.22, up from $3.15 in 1993.
Mr. Fitzsimonds cautioned, however, that 1995 results will not compare as favorably with those of Firstar's regional bank peers, largely because four acquisitions in the last year boosted the company's asset base by $3 billion.
We've got a lot of integration to do here in 1995, he said. We did in fact take some special charges and some first-year dilution. We call this the year of investment at Firstar.
The bank is taking restructuring charges related to its acquisitions of First Colonial Bankshares, a $1.8 billion-asset Chicago bank, and Investors Bank Corp., a $1.1 billion-asset thrift that doubled Firstar's presence in the Twin Cities of Minneapolis and St. Paul.
Analysts have been particularly pleased with the expansion in Minnesota. They get two things that they needed, said Mr. Schroll. They needed more good, high-traYc locations in the Twin Cities, and they needed more critical mass and more origination capability on the mortgage banking side.
Firstar also bought a $423 million-asset bank in southeastern Wisconsin and an $80 million-asset bank in Moline, Ill.
To provide some breathing room after an active year of buying, Mr. Fitzsimonds said the bank will probably not make any big deals this year.
Firstar's year of investment also includes plans for spending more heavily on information technology. According to Ronald E. Roder, president of the data processing subsidiary, systems investments, which have typically grown at 6% to 7% a year, will increase by nearly 10% in 1995. Among other initiatives, Firstar is planning to install a new consumer loan system, buy image technology for its mutual fund processing business, and enhance its centralized telephone service center.
But a key focus of Firstar's technology strategy is supporting the goal of boosting customer profitability. The company is in the early stages of rolling out an approach known as managing local markets, which involves segmenting its customer base.
It really identifies by market segment who's profitable, who isn't but could be if you got a bigger share of their wallet, and who can't be, said Mr. Fitzsimonds.
Firstar is dividing its customer base into four segments based on annual income: aZuent (income above $125,000), investor ($60,000 to $125,000), broad ($25,000 to $60,000), and economy (less than $25,000).
Households are then ranked by profitability on a scale from A plus to D. Finally, the information on household profitability is compared with each segment.
The bank has found that both profitable and unprofitable customers can be found in all segments.
Local managers are expected to use the information to retain the most profitable households, which contribute a disproportionate share of income. We have actually identi fied by household who these people are, said John T. Franey, senior vice president. (The information) shows just how vulnerable you are with that small group. And our sales management tools are geared around the acquisition and retention of those customers.
Firstar's strategy, he said, also means turning a profit on marginal and unprofitable customers.
But can the bank really make money on all segments?
The answer is yes, said Mr. Fitzsimonds. But not the way we currently serve them.
We overdeliver to those people who will never migrate up, said Mr. Franey. So we have to force them, we have to migrate them, to a lower delivery cost. When you know that 78% of your market is earning $60,000 or less as a household, how you invest your money is critical. Because you can't afford high-touch service.
That means promoting nonbranch delivery channels like the telephone and ATMs.
In the future, it may also mean reconfiguring the network of 248 branches. Mr. Fitzsimonds said Firstar has too many full-service branches today. While there are no concrete plans to scale back on brick and mortar, he said the bank will have fewer branches in five years.
But, Mr. Fitzsimonds added, As far out as I can see, we will continue to have physical facilities. We are not going to go to the virtual bank quite yet.
To support this approach, Firstar is rolling out a platform automation system, Customer Transaction, from International Business Machines Corp., and is customizing the core software.
We've broken out the project into many phases, said Lizette Lewis, assistant vice president.
The first stage - the opening of checking and savings accounts on-line o is complete.
A second phase is now being tested in a branch in Madison, Wis. The system allows platform personnel to guide customers through a series of computer screens that show product features and benefits, pricing, comparisons, and what-if calculations not unlike those offered on personal Wnance software packages like Intuit's Quicken.
It is really meant as a referral tool, said Ms. Lewis. It will automatically generate referral forms to our investment area, trust area, mortgage, and insurance.
And by the end of this year, Firstar expects all branches to have expanded demographic data and financial profiling information to support the managing local markets approach. A later stage will involve tracking profitability by account.
Mr. Brown, the Donaldson Lufkin analyst, said, a key to the system's strength is its ability to provide valuable and easy-to-use profitability information at the point of customer contact, whether that be the teller window, the platform, or the telephone.
Executives and analysts credit Jay Williams, now the president of Firstar's Illinois aYliate, and Stephen J. Steiner, first vice president of marketing, for championing the approach.
But it was bought into, importantly, by (president) John Becker and Roger Fitzsimonds, added Mr. Brown. The second reason is they used a consulting firm, called Action Systems, that knows how to help a banking company translate the strategy into actual change in performance.
But Mr. Schroll of Piper Jaffray said, I think it's too early to tell at this point how successful they are going to be in that program. But he added, They are certainly doing what they need to - and what a lot other banks need to - and that is rationalizing how they go about serving their consumer customer base.
For his part, Mr. Fitzsimonds said the time was right for such a system. Bankers historically didn't run their companies using the basic thesis and the basic concepts of market segmentation, he said. Why are we doing it today? It was really the availability of the products and the availability of the technology.
The platform system and management information also supports Firstar's overall consumer strategy, a version of the certi fied financial planning approach.
What we are trying to do is have all of those products on the shelf behind us, said Mr. Fitzsimonds. They reach behind them with the technology and have stocks, bonds, annuities, life insurance, credit cards, and, importantly, the traditional products of banks.
Five years ago, Firstar launched a family of mutual funds. It was one of the original 10 banks in what was to become MasterCard and now issues cards for 700 correspondent banks in the Midwest.
And on the insurance side of it, we are one of 16 bank holding companies in the United States that were grandfathered in by the Garn-St Germain 1982 legislation, he said. So we have been developing our approach to insurance since the early 1980s. It represents more than $10 million in fee revenue in this company, which is a nice adjunct to what we do.
The acquisition of Investors Bank also demonstrates Firstar's commitment to the mortgage banking business. We've always been pretty good at generating mortgages in our branches. We have not been particularly good at originating mortgages through brokers and builders, said Mr. Fitzsimonds. Investors is superb at generating that 'outside production. '
Firstar also wants to boost noninterest income from Firmco, its investment counseling unit, which now has $12.8 billion of assets under management. The goal is revenue growth of 10% per year. That's an increase over last year's 7% growth, but lower than numbers posted in previous years.
And Firstar has plans to expand its mutual funds processing business, an area many regional banks have exited as dominant players like State Street Boston Corp. have built market share.
We are probably going to end up investing $5 million to $6 million in technological enhancements for the business, said Michael J. Bills, executive vice president. If you are not willing to invest in the technology to be a player in this business, you are going to get squeezed and squeezed hard.
Firstar is focusing on providing services for registered investment companies with fewer than 100,000 shareholders, which the larger companies like State Street have avoided.
But Mr. Bills concedes the competition will be Werce. First Data and State Street are coming down to our marketing segment.
Analysts are also taking a wait-and-see attitude. It's confusing to me that Firstar and Star Banc (an Ohio regional bank) can find that business as attractive as they apparently find it, said Mr. Brown.
Still, the bank gets high marks for its mix of businesses, financial health, strong asset quality, and plans for the future. Indeed, those factors, according to Mr. Schroll, make it an attractive takeover candidate.
Our current position is we are striving to remain independent, said Mr. Fitzsimonds. 'If you listen to all the things we are doing, we are certainly not posturing this company for sale.
In his view, a key factor other than shareholder value in consolidation decisions is whether a bank can afford to invest in technology.
We don't see anywhere we are going to be at a technological disadvantage compared to our competitors, he said.
