First Bank System Inc.
First Bank System Inc.
Incorporated: 1929 as First Bank Stock Investment Company
Total Assets: $26.4 billion
Stock Exchanges: New York
SICs: 6712 Bank Holding Companies; 6021 National
Commercial Banks; 6022 State Commercial Banks
First Bank System Inc. is one of the largest and most successful regional bank holding companies in the United States. Headquartered in Minneapolis, Minnesota, First Bank System is made up of nine banks, four trust companies, and numerous other non-bank subsidiaries spread across a multi-state area, including Colorado, Illinois, Minnesota, Montana, North Dakota, South Dakota, and Wisconsin. The company operates almost 225 offices, of which 181 are banking locations and the remainder non-banking facilities. First Bank System’s three core businesses involve retail and community banking (small businesses and consumers), commercial banking (middle market), and trust and financial investment services. First Bank System’s non-banking activities are comprised of data processing, brokerage services, mortgage banking, and agricultural finance. The bank is also one of America’s largest suppliers of Visa corporate cards, and ranks as the fifth largest merchant processor of Visa/Mastercards in the country.
In April of 1929, just one-half year before the great stock market crash, 85 banks located in the Ninth Federal Reserve district joined together in a loose confederation called First Bank Stock Investment Corporation. Since the Federal Deposit Insurance Company (FDIC) had not yet been created, the purpose of the confederation was to provide mutual financial support during difficult economic times. Although there was a great deal of speculation going on during this time in Wall Street brokerage houses, most banks throughout the country remained financially conservative and extremely cautious about using their assets for anything except the most stable investments.
Despite their fiscal conservatism, a number of banks were forced to close their doors during the 1920s. With the stock market crash of October 1929, and the onset of the Great Depression, conditions for the banking industry grew harsher and harsher. Many banks were forced to close during the years between 1929 and 1932. As the depression grew worse during the first few months of Franklin Roosevelt’s presidency, he decided in early 1933 to close all the nation’s banks for 10 days. The purpose of this dramatic decision was to make certain that only those banks with stable financial ledgers would be permitted to reopen their doors to the public. When the 10-day period was over, all First Bank Stock Investment Corporation subsidiaries were allowed by the federal government to reopen without any mandated reorganization. The conservative policies adhered to by First Bank management were so sound, in fact, that the holding company was able to start an acquisitions campaign that lasted through much of the 1930s.
During the 1940s, banks that belonged to the First Bank confederation largely operated independently of one another. Management at the individual banks were fiercely loyal to their own self-interests, and never hesitated to engage in extensive price cuts if they thought it might take a profitable customer away from another bank within the confederation. In fact, the competition among confederation banks was most intense in the Twin Cities of Minneapolis and St. Paul, Minnesota, where the largest individual banks in the First Bank system fought one another for customers. One cause of this counterproductive competition among the banks was the restrictive and antiquated branching legislation in Minnesota and other states in the region.
In 1954, the Bank Holding Company Act was passed by the U.S. Congress. This legislation gave the First Bank confederation and other bank holding companies throughout the nation the approval for already existing multi-state banking operations. Banks within the First Bank confederation were spread across a four-state area during this time, including Montana, South Dakota, North Dakota, and Minnesota. For the remainder of the 1950s, and throughout the decade of the 1960s, the banks of the confederation expanded their presence in these states by engaging in an aggressive acquisitions policy. By the 1970s, however, member banks of the confederation were operating so independently of one another that there was not only a lack of uniformity in services, but an overall lack of direction and centralized decision making.
During the late 1970s and early 1980s, the economy in the United States went into a tailspin, and the First Bank confederation was faced with the challenges of high inflation, uncertain interest rates, and growing competition from nonbank financial service companies. Confederation management recognized the need for more centralized control, and in 1982 began to prepare a comprehensive strategy for this purpose. In 1985, First Bank management made its first significant decision by selling 28 smaller, rural banks with little prospect for future growth. This decision resulted in the sale of 45 offices over a four-state region. Another major decision involved the 1988 merger of the large Minneapolis and St. Paul banks, and additional suburban banks in the Twin Cities area, into First Bank National Association. The increase in operational efficiency and reduction in service costs provided the bank with a greater opportunity to compete effectively in the entire Twin Cities metropolitan area. Management at First Bank also purchased banks in the states of Washington and Colorado during this time, taking advantage of recent federal legislation that weakened many barriers to national banking.
More than the recession of the early 1980s led First Bank to reassess the adequacy and effectiveness of a loose confederation and hands-off management style. The farm crisis of the early to mid-1980s created credit quality problems for the regional banks affiliated with First Bank which were outside of the greater Twin Cities metropolitan area. Under the bank’s own credit examination, its credit losses amounted to $424 million by 1986. This loss was compensated for by the $397 million in realized gains when the investment securities were sold. Yet when rising interest rates led to a substantial unrealized loss estimated at $640 million in the long-term bonds which had been bought to replace the securities recently sold, the company decided upon a hedging strategy to minimize the loss. Unfortunately, the hedging strategy failed, and the bonds were finally sold at a pre-tax loss of $506 million in 1988.
First Bank’s emphasis on merchant banking, capital markets, and lending specializations had proved disastrous during the mid-1980s. With decreasing capital levels resulting from the securities and bond losses, rising noninterest costs, an increasing amount of nonperforming assets, and weakening profitability, the company announced a comprehensive reorganization strategy in late 1989. The strategy included a withdrawal from merchant banking and lending specializations, and a concentration on more basic banking services, such as merchant processing, credit cards, automated teller machines, and cash management. The company also began to capitalize upon and extend its geographic franchise. In 1989, First Bank recorded a restructuring expense of $37.5 million, while also reporting a $175 million provision for credit losses.
After a four month search, in January of 1990 the First Bank Board of Directors hired John F. (Jack) Grundhofer to act as chairman, president, and chief executive officer. Grundhofer, a former vice-chairman and senior executive officer at Wells Fargo, immediately initiated a massive cost-cutting strategy designed to bring the bank back to profitability. Grundhofer and his hand-chosen management team examined each line of the bank’s business to determine whether or not it could remain competitive in the market. Grundhofer’s first move was to stop lending to large corporations and concentrate more on retail banking, trusts and investments, and small and middle-range businesses. As a result, First Bank’s portfolio of loans was drastically reduced. All the bank’s national lending programs and its indirect auto loan programs were entirely eliminated, thus allowing the company to concentrate on expanding its regional commercial lending program and its direct consumer loan program. In general, First Bank’s loan portfolio was gradually restructured to emphasize a larger number and more diverse mix of consumer loans.
The most important move that Grundhofer made, however, was to commit $150 million in First Bank funds to a cost-cutting technology program. When he arrived on the scene in the beginning of 1990, Grundhofer discovered that First Bank was mired in 1950s and 1960s technology. Over 45 banks under First Bank’s umbrella had 47 different data processing centers, 715 different kinds of basic consumer deposit accounts, 16 loan processing centers, eight consumer loan centers, and 20 item processing centers. The bank also was without any centralized pricing structure for its products or services, and each bank within the system offered various kinds of products and services. The company’s installment loan system was initially brought in during 1959 and was still in use. First Bank’s customer information system dated back to 1964, without the benefit of any update since that time. The firm’s DDA system dated from 1960, and its on-line savings system was more than 20 years old.
Within two years Grundhofer consolidated the bank’s 47 data processing centers into one, and drastically reduced or eliminated all the other loan and processing centers. He implemented a fixed price structure for the bank’s products and services, and standardized the products and services each of the banks offered within the First Bank system. As First Bank’s efficiency ratio improved, more customers were attracted to the services provided by the bank. By 1992, a customer could walk into any of First Bank’s affiliates in the Twin Cities area and get a cashier’s check or automobile loan within 10 minutes. The bank also developed an extremely useful and very popular 48-hour turnaround on small business loans; for a $250,000 loan, the customer was asked to fill out a brief two-page application. Other processing capabilities that were improved by the bank’s emphasis on technological development included a customer’s ability to access information on their account in Colorado Springs, Colorado, even though their account is with a bank in Duluth, Minnesota. Finally, all of the bank’s numerous customer service phone centers were consolidated into two locations.
When the cost-cutting technology program began to show financial rewards, Grundhofer decided to increase First Bank’s asset base through an aggressive acquisitions program. First Bank purchased U.S. Bancorp’s Oregon and Washington corporate trust operations in early 1993. Prior to this, it had purchased the California corporate trust subsidiary of Bankers Trust New York Corporation in 1992. The company acquired Colorado National Bank with over $3 billion in assets, and Boulevard Bancorp in Chicago with over $1.5 billion in assets. Perhaps the most important acquisition involved the purchase of the domestic corporate trust of J. P. Morgan & Company, one of the largest and most prestigious banks in the United States. In May of 1994, the company confirmed its acquisition of Metropolitan Financial Corporation for approximately $800 million. Metropolitan Financial, a Minneapolis, Minnesota-based bank with $5.7 billion in assets, operated a multi-state banking office network located in North Dakota, Iowa, Nebraska, Kansas, and Wyoming. The purchase of Metropolitan helped push First Bank’s assets to $34.5 billion, ahead of the assets at First Fidelity Bancorp, the nation’s 25th largest bank holding company.
In 1990 and 1991, the bank’s capital restoration program involved a private placement of new common stock, which raised some $145 million from an investment partnership headed by Lazard Freres, and $30 million from the State Board of Administration of Florida. The bank also initiated a public offering of $114.5 million of preferred stock. These moves placed First Bank’s capital ratio in the top percentile of regional banks in the United States.
Under Grundhofer’s leadership, by the beginning of 1995 First Bank had grown into one of the largest and most successful of the regional banks. With its financial condition clearly improved, First Bank began to develop a community initiatives program that became a model for regional banks. First Bank’s extensive community outreach program involved volunteerism, youth-employment projects, event sponsorships, and grants to nonprofit organizations. The company offered a comprehensive line of mortgage products and services to help low and moderate income families purchase their own homes. The bank also tailored loans for people with disabilities, provided customer assistance for non-English speaking peoples, and offered free accounts and services to individuals with low-income jobs. First Bank also extended credit to small businesses that fostered community development and rehabilitation by working closely with the Small Business Administration. First Bank was growing by leaps and bounds in the 1990s as it positioned itself to become the largest regional bank in the upper Midwest. With an ever-increasing asset base, an aggressive acquisitions policy, high-tech banking equipment, and intelligent management, First Bank looked certain to reach its goal.
Kapiloff, Howard, “Fourth-of-July Merger Fireworks,” American Banker, July 5, 1994, p. 1.
Klinkerman, Steve, and Karen Gullo, “First Bank System to Purchase Morgan’s Corporate Trust Unit,” American Banker, January 5, 1993, p. 5.
Zack, Jeffrey, “Technology Gives First Bank’s Grundhofer a Cost-Cutting Edge,” American Banker, May 9, 1994, p. 1.