In Jerry Grundhofer's world view, bigger is not necessarily better.

To the 51-year-old chairman and chief executive of Cincinnati-based Star Banc Corp., innovation, expense control, and avoiding mistakes beat doing a merger any day.

Compared with its rivals, Star is small - at $9.6 billion in assets - and thinly spread across Ohio, Indiana, and Kentucky. But in a recent interview, Mr. Grundhofer insisted Star can do virtually anything banks 10 times its size can do.

"I think you can generate outstanding returns and above-market returns and not be the biggest bank in the country," Mr. Grundhofer said. "I guess there's something about size that makes you feel better."

Mr. Grundhofer's contrarian views about achieving growth and profits stand out in an industry obsessed with acquisitions.

Star's goals are to boost earnings per share 12% to 15% a year and maintain a return on equity of 17% to 18%. If the bank can't do that, Mr. Grundhofer conceded, it should be sold.

Despite his past experience working for large and acquisitive California banks - BankAmerica Corp. and Wells Fargo & Co. - Mr. Grundhofer said he is trying a different strategy with Star.

Star grew significantly through acquisitions from the late 1970s to early 1990s, but Mr. Grundhofer now preaches profitability over growth. Getting bigger for the sake of getting bigger is a waste of time, he said.

In the three years since Mr. Grundhofer arrived, Star has ventured into new technology, foreign markets, and some areas atypical for a bank of its size.

Mr. Grundhofer prides himself on the fact that so many of his major initiatives have been accomplished through partnerships with other companies, and without significantly expanding Star's assets.

Through partnerships Star has been able to forge ahead with a fairly sophisticated retail banking system, offer international banking services, and enter new businesses, such as a recently announced venture to lease railroad cars.

When he arrived in Cincinnati, Star was already a well-established business bank. Mr. Grundhofer looked to retail banking as a way to increase revenues through greater market share in key Ohio markets - Cincinnati, Cleveland, Columbus, and Dayton - and in northern Kentucky.

Fees on retail accounts have helped the company generate noninterest income. In 1995, noninterest income rose to $138 million, an 18% increase over yearend 1994. The increase was largely due to fees on such things as deposit accounts, credit cards, and ATMs.

Star also is looking for cost-savings opportunities. Last week, for example, it merged its Ohio, Kentucky, and Indiana banks into one bank after receiving approval from the Comptroller of the Currency.

David Moffett, Star Banc's chief financial officer, said the move will bring the bank more than $1 million in savings this year alone.

Innovation is a key part of Star's strategy, Mr. Grundhofer said. The bank now provides up-to-the-minute technology to its retail customers, including home banking, video banking, and enhanced teller machines. At its size, Star has to be creative to be able to deliver this kind of service, inking outsourcing agreements with several companies.

The cost of launching its "remote banking" option last November was $10 million, but because of partners such as Visa Interactive and Fujitsu-ICL, Star's cost was only $1.2 million, about what it would cost to build a new branch.

Even though the expense was modest, the technology push showed a contrast with Star's previous management, which dismissed investing heavily into automated teller machines in the 1980s because it didn't believe "people wanted to bank in a box."

Last week, Star announced two new partnerships: the formation of a limited liability firm with the David J. Joseph Co. to lease rail cars to railroad companies; and a pact with the Hongkong and Shanghai Banking Corp. to provide trade-finance services for companies doing business in Asia.

Analysts said Star Banc's ability to keep pace with its larger rivals will hold true as long as the bank maintains its profitability. The practice of seeking partners is paying off, said one analyst.

"They're using others' expertise," said Smith Barney analyst Henry "Chip" Dickson. "For a minimal cost, they're able to deliver remote banking."

Mr. Grundhofer also has relied on the help of longtime colleagues. He recruited two former colleagues from BankAmerica to serve as his top managers - one is Mr. Moffett, and the other is Richard K. Davis, executive vice president of consumer banking. Together the three Californians have transformed the once sleepy Midwest bank into a more energetic retail bank, said Fred Cummings, an analyst with McDonald & Co. in Cleveland.

"When Grundhofer took over he had a sound bank with average profit and just average growth," said Mr. Cummings, who now rates Star as the best- performing bank of the 20 he follows.

But Mr. Grundhofer's arrival at Star Banc was met with some skepticism.

Cincinnati is a conservative, midsize, Midwestern city rich with German heritage. Folks in Cincinnati didn't know what to make of the boyish- looking Mr. Grundhofer at first, said Joseph Campanella, executive vice president of community banking and an eight-year veteran of Star Banc. After all, it was clear this transplanted Californian was going to shake things up a bit.

"The question was, 'This is a strong and staid and true bank, so are we going to get in trouble like the California banks?'" said Mr. Campanella. "The West Coast had a reputation as more of a fast-track and risky environment."

The thing that warmed Mr. Campanella to the new management was Mr. Grundhofer's promotional skills. A relentless salesman, Mr. Grundhofer is said to continually sell his bank to people on the street. Once when standing in line at a supermarket checkout line, he noticed the woman in front of him writing a check from another bank, Mr. Campanella said. He proceeded to ask her why she didn't bank at Star. Another time Mr. Grundhofer convinced a worker replacing the roof on his house to switch his checking account.

That salesmanship has even rubbed off on analysts, a group usually adept at finding fault. So far, Mr. Dickson said, he has no complaints with Star's management.

"The old Star was conservative," he said. "These guys are conservative, but they're bringing in a new view of the world. Maybe it's the West Coast experience."

And if the acquisition strategy isn't in Star's cards, that's fine with Mr. Dickson.

Star has a very strict formula for doing acquisitions, Mr. Grundhofer explained.

Each deal has to fit three criteria:

*The takeover has to be accretive to earnings on day one;

*The earnings of the target must be growing at least as fast as Star's earnings; and,

*The acquired bank must provide a rate of return that exceeds Star's 14% cost of capital.

"An acquisition for the sake of an acquisition is really not in the best interest of the shareholders," said Mr. Moffett, the CFO. "And we will absolutely not do an acquisition if it will be dilutive."

Even if the cost appears steep, Star has figured how it will affect shareholders.

Take last year's acquisition: The company paid $66.3 million for $680 million in deposits from Household International Inc. A big price, but it met the criteria, Star officials said.

Indeed, Star, which dubs itself a "bank without boundaries," is one of the best-performing banking companies in the nation. Its ratio of expense to revenue is 52%. In the Midwest, only Fifth Third Bancorp and First Bank System, which is headed by Mr. Grundhofer's brother John, are more efficient.

However, Star's Mr. Grundhofer insisted the bank is not nearly where he wants it to be.

"There's a lot of coal in the fire," he said, "now we have to make those embers burn hot."

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