MINNEAPOLIS - In his first year as chairman and chief executive of First Bank System, John F. Grundhofer seemed to have sealed his reputation as a ruthless cost-cutter.

He fired 2,000 people, or 20% of the work force, and replaced 19 of the company's top 20 managers. He slashed perks and removed potted plants.

He was called a chain-saw banker, hatchet man, and worse: Jack the Ripper.

But during the past 36 months, Mr. Grundhofer has built an entirely different reputation, both for himself and for a company that just five years ago was ailing.

Mr. Grundhofer is proving he can run a lean, large-scale organization. With a focus on a handful of core businesses and a flurry of acquisitions, he is making First Bank into a model superregional.

"Jack Grundhofer has decided that he doesn't want to go down just as the turnaround artist, the guy who fixed things, but rather as somebody who has built a strong bank," said analyst Ben B. Crabtree, of Dain Bosworth in Minneapolis. "I think he's done that."

When Mr. Grundhofer arrived in January 1990, First Bank had $20 billion of assets and 117 branches in six states. Some of its computer systems were 30 years old. What's more, it was losing millions of dollars after a binge of bad lending.

Mr. Grundhofer, who was schooled by Jesuits in his youth in Los Angeles, immediately applied a strict discipline and set about raising capital, tasks, he said, that were not so difficult in an environment of such urgency.

"It was easier then," he said. "We were in trouble. You had no choice."

Today, First Bank has assets of $34 million and 316 offices in 11 states. Its network of automated teller machines has more than quadrupled, to 2,716 from 604 in 1990.

And the institution's reputation is that of a technological innovator. First Bank has invested hundreds of millions of dollars to upgrade or replace virtually all its systems. It is a deposit-market leader in many of its communities, and its corporate trust business has become the nation's biggest in terms of revenue.

It reported record earnings of nearly $420 million for 1994, a record return on equity of 19.3%, and a sharp reduction in nonperforming loans.

"First Bank is an excellent bank and (Mr. Grundhofer) is probably one of the five most highly respected bank managers around these days," said Elmer L. Meszaros, a bank analyst at Roulston & Co. in Cleveland. "And it's not just for his cost-cutting."

Indeed, Mr. Grundhofer said that the bank's survival and success are due as much to finding the right mix of businesses and identifying the best takeover targets as to simply cutting costs.

But First Bank is still a relentless cost-cutter. It maintains an efficiency ratio of 50% and has shown a startling effectiveness in trimming expenses at acquired banks.

Analysts have praised its string of acquisitions for their strategic fit and low prices.

These include two standout deals either completed or announced this year. The first was the purchase of Metropolitan Financial Corp., a $7.9 billion-asset thrift company with more than 200 offices in eight midwestern states. That deal closed in January.

The second was the recent announcement that First Bank would buy Firstier Financial Inc., Omaha, Neb. With $3.6 billion in assets and 63 offices in Nebraska and Iowa, this deal increased First Bank's heft in the heartland.

"Before Metropolitan, what did you have? You had dominant shares of Minnesota and Colorado - a perfect takeover candidate," said Dain Bosworth's Mr. Crabtree. "The Metropolitan acquisition, to me, is what changed their equation."

An exception, according to analysts, was Boulevard Bancorp in Chicago, one of four acquisitions First Bank completed last year. To analysts, the deal for $1.6 billion-asset Boulevard was a disappointment.

This buying spree was designed to grow the bank and increase shareholder value. At First Bank, shareholder value is a mantra of sorts, a goal that supersedes all others.

"We get invited to a lot of transactions. Unfortunately, the expectations are too high," Mr. Grundhofer said in a recent interview, listing Michigan National Corp. and Fourth Financial Corp. as companies First Bank either bid on or reviewed. (Michigan National ended up with National Australia Bank, Fourth Financial with Boatmen's Bancshares Inc.)

"If we can't find another company that will accept the fact that they have to leave room for the shareholders, Firstier's going to be our last acquisition," Mr. Grundhofer said.

Analysts say First Bank is now very good at planning and execution. But that was not the case when Mr. Grundhofer arrived from Wells Fargo & Co., where he had been since 1978 and where he was in charge of commercial banking.

At that time, First Bank was on the brink. It lost approximately $100 million in 1989's fourth quarter.

"It was real close to being forced to sell," said Richard A. Zona, First Bank's chief financial officer, who arrived five months before Mr. Grundhofer.

Mr. Zona then was unsure of his own future with First Bank. At a dinner with Mr. Grundhofer, he clashed with the new chief executive over the bank's leasing business.

Mr. Grundhofer wanted to sell it; Mr. Zona disagreed.

"Dinner went very, very badly," Mr. Zona recalled. "I left saying, 'This is just not going to work.' I thought, 'This guy is going to want to fire me.' "

Mr. Grundhofer eventually decided Mr. Zona was right about leasing. They then decided on the bank's core businesses: retail banking, trust and investment products, and making loans to small- and middle-market businesses in the Midwest.

There were still some troubled, lean times. In a bizarre twist, Mr. Grundhofer was kidnapped and held for ransom, although he was freed before any money was paid. Police suspect that an angry employee was responsible. The case has never been solved.

Today First Bank faces questions about its future.

Mr. Grundhofer said the bank would "most probably" stay in the Midwest, where he feels he knows the customers and the culture, but he does not rule out heading to the West Coast through acquisitions. He has considered California, for instance, but said it is difficult to find value there. Utah may be more attractive. First Bank is already big in Colorado.

On the other hand, First Bank is a tempting target. Analysts have seen BankAmerica Corp., among other big banks, as a potential suitor, although First Bank's recent purchase of BofA's corporate trust business made that pairing seem improbable.

Moreover, only a handful of other banks could afford to swallow First Bank.

For their part, Mr. Grundhofer and Mr. Zona are unconcerned. They would, in Mr. Grundhofer's words, much prefer to "remain in control of our own destiny."

But they realize they may have little say over that. They foresee 12% to 15% growth in earnings per share, and at least some strategic filling-in through acquisitions. That would seem to make Michigan and Iowa likely target states.

Meantime, Mr. Grundhofer plans to keep First Bank in a "survival mode," he said. "In this environment, with the consolidating industry, you have to manage tough."

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