Star Banc shines, but it may have to do a lot more to stay independent.

CINCINNATI -- After a year at the helm of Star Bane Corp., Jerry A. Grundhofer is winning Wall Street's support. But he says more must be done if the company is to remain independent.

Chairman and chief executive of the $8 billion-asset Star Bane, Mr. Grundhofer has Seen his banking company elicit a number of "buy" recommendations recently and for good reason Demonstrating robust loan growth, tight efficiency, and clean credit quality, Star Bane delivered a hefty 1.46% annualized return on average assets in 1994's first half.

Buoyed by strong results and analysts' endorsements, Star Banc's stock on Monday jumped to a 52-week high of $40.625, or 176.6% of book value.

But Mr. Grundhofer is not resting easy. Operating in the shadow of some of the nation's most profitable and most acquisitive banking companies, Star Banc's 200-branch franchise remains eminently edible.

Profits and Growth

To reach a takeover-resistant stock trading range, Mr. Grundhofer must not only deliver high profitability, he must also convince the market that Star can grow at a front-running pace. That's a tough proposition, considering the excellent competition he faces.

Between 1989 and 1993, Star's revenues grew at a 9.35% compound annual rate, according to Sheshunoff Information Services, while a group of Midwest peers grew at a 16.45% compound rate.

"We hope we have the time to produce what we think We can produce," says Mr. Grundhofer.

Independence is an especially sensitive issue at Star Bane.

The institution's former helmsman, Oliver Waddell, endured scathing criticism in 1992 after rejecting a $42-per-share buyout offer from rival Fifth Third Bancorp. Fighting back, Mr. Waddell delved into an efficiency campaign that sharply improved Star Banc's profitability. In anticipation of Mr. Waddell's 1993 retirement, Star Banc's directors recruited Mr. Grundhofer, a former vice chairman of BankAmerica Corp., San Francisco.

Team Assembled

In turn, Mr. Grundhofer recruited former BankAmerica colleagues David M. Moffett, who became chief financial officer, and Richard K. Davis, to be head of consumer banking.

The high-visibility trio is gaining support from analysts such as Mark Alpert of Alex., Brown & Sons, who says they are "committed to realizing all the potential" at Star Bane. Implicit in that support, however, is a stipulation that Mr. Grundhofer won't scurry into a bunker in the event of a lucrative buyout offer.

"I don't think Jerry has Star Bane up for sale, but I also don't expect a circle-the-wagons, fight-it-out-to-the-end reaction if an offer lands on the table," said Chicago Corp. analyst Gregory P. Anderson.

Mr. Grundhofer is refreshingly candid about the challenges ahead, and he seems to relish this test of his banking mettle. The animated executive, 49, radiates a blend of infectious enthusiasm and financial ferocity.

He is passionate about Star Banc's strengths and growth potential, for example, and he holds out a recent $11,500 incentive award to a top branch manager as evidence that "we are going to pay for performance."

Cut or Be Cut

At the same time, Mr. Grundhofer warns that Star Bane managers portraying bleak growth prospects in their locales risk having branches closed beneath them. And as for employees who don't buy into rigorous expense controls: "We don't need them I will make the changes."

Mr. Grundhofer, whose older brother John is chairman and chief executive of Minneapolis-based First Bank System, rose to prominence in banking as a retail marketing and branch specialist at Wells Fargo & Co. He later became top officer of Security Pacific Corp.'s lead bank.

Following BankAmerica's 1992 buyout of Security Pacific, Mr. Grundhofer, a Los Angeles native, remained with BankAmerica long enough to get the merger transition under way and activate a golden parachute worth several million dollars. He joined Star in May 1993, a month after leaving BankAmerica, receiving a salary and bonus totaling $495,358 for his first year.

Mr. Grundhofer and the analysts who follow Star Bane believe the Midwest institution he inherited is in fit condition. With a long-standing reputation for superior underwriting and robust capitalization, Star Bane "didn't need any fixing," Mr. Grundhofer says.

In the same breath, however, Mr. Grundhofer, who sits on the board of Visa International, insists Star Bane can do better on the retail side.

More Autonomy Given

Deciding that recent consolidations went a bit too far in centralizing the bank, Mr. Grundhofer created a community banking division and is returning some authority to managers in nonmetropolitan markets.

"I was looking at every $200 invoice, and I just don't know the outlying markets," he says.

Now, he is tweaking Star Banc's branches. Aside from introducing incentive pay and beefing up marketing, Mr. Grundhofer is extending and upgrading the network of automated teller machines, installing a new computerized information system, and opening branch sites in grocery stores.

While variations of this banking strategy are widespread in the industry, Mr. Grundhofer is attracting attention because he is delivering results.

Average total loans grew a hefty 4.16% in the second quarter alone, for example, fueled by a nearly 8% rise in consumer installment and credit card outstandings.

Still, this progress is not the complete answer to growth. Mr. Grundhofer acknowledges.

At about 25.7% of revenues, Star Banc's fee income fell short of an average 30% contribution among certain Midwest peers in 1993, Sheshunoff reports, and is growing only gradually. "We really are dying for more fee business," says Mr. Grundhofer.

Acquisitions of service companies would speed this process, he says. But price tags are high.

And given the thunderous reverberations on Wall Street following Star Banc's rejection of Fifth Third's offer, "this company in particular can't be overly aggressive" in bidding, says Mr. Grundhofer. Ditto for bank acquisitions.

'Doing It the Hard Way'

That leaves efficiency gains and loan growth as Mr. Grundhofer's two main avenues for near-term achievement. "We are doing it the hard way," he says.

The news is good on the efficiency front, with Star Banc's ratio of operating expenses to revenues coming in at a crisp 56.41% in the second quarter. And loans are growing. Star Banc's second-quarter net interest margin of 4.74%, however, did not match front-running regional banks.

For cures, Mr. Grundhofer is looking to Mr. Moffett, his CFO, to boost the sophistication of Star Banc's balance sheet management, and for an expansion in higher-yielding consumer credits.

A larger challenge is growing in outlying metropolitan markets. In contrast to the nearly 15% deposit market share Star Bane commands in Cincinnati, the banking company has a 3.2% stake in Cleveland, 2.3% in Columbus, and 3.4% in Dayton. "If there is a weakness, it is that market share is terribly low in several regions," says Mr. Alpert of Alex Brown.

Going up against the likes of Bane One Corp., Keycorp, National City Corp., and Huntington Bancshares, "it will be difficult to build critical mass, especially since there is not a lot left to buy in those markets," says Mr. Alpert. Mr. Grundhofer is looking to his head of consumer banking, Mr. Davis, to perform on this front.

Although Mr. Grundhofer conveys urgency and intensity in his discussions about independence, he appears to have room to maneuver.

Not only is Star Bane gaining recognition for improved performance, but "many well-known acquirers have suffered trading setbacks, casting doubt on their ability to make a near-term run at Star Bane," said Henry C. Dickson, a Smith Barney bank analyst.

That provides all the more inducement for Mr. Grundhofer, Who says he Prefers expanding Star Bane to selling it.

"I've got to grow revenues faster than the peer group, and be better than the next guy." he says.

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