SANTA BARBARA, Calif. - Despite the economic downturn and its effect on companies' ability to pay back loans, U.S. banks are in a better position to handle the volatility than they were 10 years ago, says Firstar Corp. president Jerry A. Grundhofer.
Mr. Grundhofer is to become president of the new U.S. Bancorp this quarter after the merger of Firstar with U.S. Bancorp, the Minneapolis-based banking giant headed by his brother, John F. "Jack" Grundhofer.
Addressing a group of California's top banking officers here at a conference of the California Bankers Association, Mr. Grundhofer said problem loans are down industrywide: Loan-loss reserves are hovering at 0.8%, versus the 1.45% average in 1991. Moreover, U.S. banks' returns on assets and efficiency ratios are much better, he said.
"We all know that we're looking at the economy slowing down instead of expanding, and the big question is how soft the landing will be for the economy. But banks are in a far better position to handle a downturn than we were 10 years ago."
However, it is important that banks adjust their expectations to a slowing economy, Mr. Grundhofer added. "Banks will do well if they don't count on 2001 being another 1999," he said.
That banner year for the industry was certainly memorable for Mr. Grundhofer. After his old company, the former $15 billion-asset Star Banc Corp. of Cincinnati, completed its merger with $20 billion-asset Firstar of Milwaukee at the end of 1998, Mr. Grundhofer and the team at Firstar Corp. went on to buy $35.5 billion-asset Mercantile Bancorp of St. Louis in April 1999.
Firstar continued its march westward in 2000, announcing in October that it would merge with U.S. Bancorp. When the deal closes next month, the combined $160 billion-asset company, operating under the name U.S. Bancorp, will be the eighth-largest banking company in the country, with 2,200 branches in 24 states from the Midwest to the Pacific Ocean.
Though Firstar has been able to control costs during its recent mergers, the company's success, Mr. Grundhofer told California bankers, has really been based on increasing revenues. It has posted double-digit revenue growth figures for years, he said, and revenue growth has been centered around employee incentives.
Observers expect Mr. Grundhofer's model of rewarding employees for boosting revenues will prevail at the merged company - rather than the cost-cutting measures used by his older brother Jack, who is to stay on as chairman until his retirement in 2002.
"Incentivizing our branch managers really drives our company," Mr. Grundhofer said. "And all employee incentives are tied to EPS growth." U.S. Bancorp has posted earnings-per-share growth of more than 19% each year since 1993.
Nevertheless, employees are always reminded that controlling costs is part of the equation. As a result, Firstar's efficiency ratio was 46.51% as of Sept. 31, 2000; the industry average is 58.21%, according to the Federal Deposit Insurance Corp.
"Our efficiency ratio is enviable, but we don't manage our day-to-day operations on cost-cutting," Mr. Grundhofer said. "At Firstar, the efficiency ratio does not have people quaking in the their boots. Because they know that as long we grow revenues faster than expenses, the efficiency ratio will go down."
