DESPITE ITS NAME, Star Banc Corp. has spent most of its 120-year history building a reputation as a buttoned-down institution that avoided the spotlight whenever possible.
But recent events, particularly an unsolicited acquisition offer in 1992 from its Cincinnati rival Fifth Third Bancorp, has Wall Street and other industry observers paying closer attention to the $7.4 billion-asset company.
Now Star's mission is to make those suddenly interested investors forget about Fifth Third's hefty $42-a-share offer by accelerating its efforts to increase revenue and capture greater back-office efficiencies.
"One of the things I have found annoying is that Fifth Third is getting credit for all the economies we're putting in," said Oliver W. Waddell, Star's chairman. But the Fifth Third offer "added more importance to what we were doing and probably stepped up our time schedule a little bit," he acknowledged.
"Any organization in a competitive marketplace has to take steps to operate more efficiently. Star has been doing that," said Stephen Mead Jr., a research analyst at the money management firm Anchor Capital Advisors Inc., Boston.
But he added that recent events also "heightened management's awareness that it has to actively sell the stock" to be able to better fend off unfriendly advances and maintain the confidence of its board of directors.
Once it decided that good performance was no longer good enough, the bank stepped up its housecleaning in 1992. Star executives say this restructuring, dubbed Project Excel, will contribute $30 million to the company's annual pretax earnings after it is fully implemented in 1994.
Investors appear to agree, because Star's stock was trading in the mid-30s earlier this month, rebounding from $29 after the Fifth Third rebuff last year.
"You're seeing companies doing this all over the place," said Mr. Waddell. "But most of them are doing it as they're getting ready to fail, because they've got major problems. We did it, and we had no major problems. We're taking what is a good bank and making it an exceptional bank."
Star defines exceptional as consistent returns of more than 1.25% on assets and 15% on equity. That represents a significant jump over Star's traditional performance, typically in the neighborhood of 1% ROA and 12% to 13% ROE.
Mr. Waddell, 62, and Star have also begun preparing for a change of command. In May, Mr Waddell stepped down as CEO, a position he had held for a decade. The bank then reached outside its management ranks and named Jerry A. Grundhofer president and chief executive officer of the holding company. Mr. Grundhofer is a former top-level executive at BankAmerica Corp., Security Pacific Corp., and Wells Fargo & Co.
"I didn't come to Star Bank to babysit it," said Mr. Grundhofer, 47, adding that he was just beginning to familiarize himself with the bank's day-to-day operations.
"This is a great franchise with a first-rate management team. There are lots of opportunities to use this as a springboard to continuing improvement. Our mandate is to increase shareholder value. I know how to do that," Mr. Grundhofer said.
Still, implementing the many changes that Star made in its effort to become a superior performer was neither quick nor easy, Mr. Waddell noted.
Star had been trimming fat from its systems and operations as far back as 1987. At the time, the company, known as First National Bank of Cincinnati, consisted of the lead bank and 22 acquired affiliate banks in two states. This loosely knit aggregation produced steady if unspectacular results.
Star spent several years closing redundant item processing centers in the affiliates, standardizing products, and taking other steps to streamline operations. The company also added substantial acquisitions in Cleveland and a third state, Kentucky.
The Excel project, management thought, would take Star's efforts to another level. Star's management committee hired an outside firm, Aston Limited Partners, New York, which specializes in bank restructurings.
"What I liked about it was that this program was administered by Paul [Allen, A chairman] and maybe four other people on his staff, which meant the majority of the work had to be done by us," Mr. Waddell said. "It wasn't like having a consultant who does everything for you and then goes away."
Nor was Aston afraid to shake things up. During Mr. Allen's initial presentation to the management committee, he asked that Star's top 17 managers be assigned to the project exclusively for the three months.
"I said, |We can't do that. This whole organization is going to come to a screeching halt.' Then he started packing up," Mr. Waddell remembered.
"I said, |What are you doing?' He said, |I'm leaving. It's obvious you're not sincere about what you want to do here.' That kind of shook us up a bit."
The management committee was further rattled when it tried to identify the Star employees who would temporarily replace the 17 managers.
"We didn't make it halfway through the list. Paul said the only way we were going to know what sort of backup we had was to let him have the people. That I found very intriguing," Mr. Waddell said.
The demands made of the managers involved in the project were no less stringent. Members of the team examined an area of the bank removed from their normal field of expertise.
"All of us had a lot of confidence to do what we had been trained to do," said Thomas J. Lakin, an executive vice president who was one of the senior people involved with the project. "We were suddenly disconnected from that and put in a room where all 17 of us worked together for three months, with a lot of pressure, trying to get things done. It was an unbelievable experience."
For example, Mr. Lakin, who had spent his entire 27-year career in Star's trust department, was assigned to review some retail banking and administrative functions.
"The logic behind that is, we don't want people coming in with a bias or vested political interest in seeing business conducted as usual," said Aston's Mr. Allen. "These people start asking questions and find that products, processes, and systems are derived from something that made sense 10 years ago."
The Excel team worked with department heads in what Mr. Lakin called a "a reengineering exercise." Each department had to develop a list of suggestions to reduce expenses by 40% and increase revenue by the same percentage.
"The 40% was an unreal number. We knew that going in," said Mr. Lakin. "But it forces you to think of ways to come up with the 40% without blowing the place up."
The exercise generated a stack of volumes, containing 2,500 suggestions and filling several feet of shelf space in Mr. Lakin's office. These ideas were rated according to risk, and then presented to the management committee over a two-week period at the end of 1992.
Most of the suggestions, and the subsequent changes, were related to staffing and organizational issues.
"The efficiencies, the economies are really in the structure - trying to get decision-making closer to the customer and taking the administrative burden out of the affiliate banks," said Joseph A. Campanella, an executive vice president and management committee member who supervised the Excel project. He added that Star's technology area, which had already been upgraded and centralized, remained relatively unscathed.
Mr. Campanella also noted that most of the changes within the bank over the past year related to a number of broad themes.
* One bank, one state. Under the new arrangement, the network of affiliate banks is being dissolved in favor of a single bank charter in each of the three states where Star operates.
* Line-of-business management. Rather than maintaining separate profit-and-loss statements for each affiliate, Star reorganized its accounting to match its eight lines of business, which are managed from its headquarters.
* Centralized administrative functions. In addition to accounting, other administrative functions were brought into Star's Cincinnati headquarters.
* Selective price hikes. The revenue-generation portion of the Excel project, this involves raising fees on various bank products and services, based on what Mr. Allen called the "perceived value" of the products to the customers. Although increased fees are often met with complaints from aggravated customers and negative publicity, Mr. Allen says the runoff caused by such increases is less than 1%.
Implementing these changes was not a painless process. The Excel program will eventually reduce the job count at the bank by 450.
"The greatest areas we hit were out in the field. The affiliates had a rougher time of it," said Mr. Lakin.
Employees whose jobs were being eliminated were informed as soon as the decision was made, even though some of those jobs would not be eliminated for up to a year after the announcement. That decision was based on fairness to the employee, said Mr. Lakin. If the bank was going to cut the work force, it was wining to risk low morale or early departures.
Displaced workers are also being given first shot at positions that open up in the bank through normal attrition. Nevertheless, Mr. Lakin said the layoff was tough.
"It still is," he said. "It will take a while, if ever, for the organization to get over that."
A number of affiliate presidents also resigned shortly after the reorganization, reportedly upset over their loss of autonomy.
Star bankers argue that the "de-layering" of management, as they term it, will improve customer service.
"We've cut out layers, and we've gotten it down," said Mr. Waddell. He said that lending decisions will typically involve one or two officers at the most. "Hopefully, we can give much faster and much better service."
"There are three things that came out of this: the expertise of our people, the ability to make acquisitions work faster, and the skill level that's been built for continuous improvement," said Mr. Lakin, who was recently named to the management committee. He will continue to co-manage the Excel project through the end of the year.
"The easy way, which some banks take, would have been to say, |Gentlemen, we're going to cut 20% right across the board,"' said Mr. Waddell. "There you're throwing the baby out with the bathwater."
So far, the bank is performing as expected. In the first quarter, Star reached its self-determined milestones, posting a 1.35% ROA and 16.48% ROE.
Analysts are guardedly optimistic. "I was skeptical of Excel when the numbers first appeared. It seemed like an overly ambitious view," said Joseph Duwan, an analyst with Keefe, Bruyette & Woods Inc., New York. "But they had a great first quarter on the cost side. It will be interesting to see how things develop on the revenue side."
The spate of recent moves seem to indicate Star's desire to remain independent, even in a market that is fired with healthy, aggressive competitors.
"You all keep trying to sell us," said Mr. Waddell, referring to rumor mongering by analysts and the media. "I hope you aren't successful, but you may be."
Whether Star goes it alone or not, its recent experience demonstrates that in banking, as in boxing, staying in fighting shape can be a rigorous business.
