1st Bank Says Deal Won't Hurt Customer Relations

First Bank System Inc.'s chairman, John F. Grundhofer, said Friday he is confident that doubling its size through the acquisition of U.S. Bancorp would not disrupt existing customer relationships.

That's because the company has invested in technology that can accurately track customer satisfaction in addition to profitability, he told a Federal Reserve Bank of Chicago conference on bank structure and competition.

First Bank would increase to $70 billion of assets and would have a sizable presence in the Northwest through the acquisition of Portland, Ore.-based U.S. Bancorp. Mr. Grundhofer declined to speak specifically about the pending merger, which is expected in the third quarter, citing the blackout period of silence required before such acquisitions.

But couching his answer in his presentation about the importance of technology, Mr. Grundhofer said his company has been much more responsive to customers since it moved to a centralized operation, a process that began in 1990 when he joined the bank.

"Customer satisfaction has been higher since we've been centralized than it ever was when we were decentralized," Mr. Grundhofer said.

Although the company is legally organized as seven banks, it has from a technological standpoint been operating as a one-bank company for several years, he told the audience of about 300 bankers, economists, and regulators.

"We had a single bank before most banks were thinking about it," Mr. Grundhofer said.

Technology played a major role in U.S. Bancorp's decision to merge with First Bank, according to Salomon Brothers analyst Michael Plodwick. Mr. Plodwick said U.S. Bancorp would have had to spend $200 million over the next several years to provide customer and product profitability data.

First Bank, on the other hand, has been investing steadily in technology, and Mr. Grundhofer said that made it easier to integrate 23 acquisitions over the past five years. Using a single-bank model to quickly integrate a merged bank, Mr. Grundhofer said, First Bank smoothly and swiftly converted computer systems.

The last big bank acquisition, Firstier Financial Inc. of Omaha was converted to First Bank's computer systems two days following the close of the deal, he said.

Investing "heavily and wisely" in technology is one of the key components for banks to survive, he said, in addition to "quality" earnings growth, efficiency, and brand identity.

The strong bank of the future will also have fee income that accounts for more than 50% of earnings, an efficiency ratio below 40%, and return on equity "considerably above" 20%, Mr. Grundhofer said.

He said even his bank, which has an efficiency ratio of 48.5% - one of the best in the industry - has room to improve. Some 65% of the costs of his current branches could be performed through other channels, he said.

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