Cincinnati Bank's CEO Has Tough Act to Follow

There are few enviable challenges in the troubled banking industry these days, but George A. Schaefer Jr. is facing one of them.

Earlier this year Mr. Schaefer took the reins of Fifth Third Bancorp, an $8 billion-asset company based in Cincinnati that has the distinction of being one of the nation's most profitable banks.

His challenge is to fill the big shoes of Clement Buenger, who 10 years ago took over a profitable, penny-pinching, conservative bank and turned it into a very profitable, penny-pinching, conservative bank.

Mr. Buenger's legacy is instilling the notion that selling is critical to success. The aggressive sales force he nurtured has made Fifth Third a regional powerhouse in consumer and wholesale lending and trust services, as well as a national player in the processing of electronic payments.

His successor as chief executive won't stray from that path.

"Clem put in a hard-driving marketing and sales culture," Mr. Schaefer, who is 46, said in a recent interview. "The bank I have inherited is the bank I will run." About the only thing Mr. Schaefer plans to do differently is ride the staff even harder to sell, sell, sell.

Emerging from Mr. Buenger's shadow will not be easy. For one thing, the 65-year-old executive remains Fifth Third's chairman and is still a visible presence in the bank, often making sales calls. He is largely responsible for the bank's impressive performance over the past decade: a virtually spotless lending record, 14% growth in income a year, and an average return on assets of about 1.6%, far higher than most of its peers.

Indeed, it's hard to find anyone with a bad word about Fifth Third's record.

"They do a pretty darn good job," said Thomas D. McCandless, an analyst with Goldman, Sachs. "It is hard to suggest they do anything wrong - and it is easy to criticize management in this industry."

In a recent report, First Boston called the Fifth Third one of the best banking companies in the country.

And the company has scored high grades with a chief executive's toughest critics - investors. The bank's stock has appreciated an average of 25% every year since 1980.

Profit-Driven Strategy

Mr. Schaefer, who joined the bank in 1970, is just the fifth chief executive the 133-year-old Fifth Third has had since the Depression. Only Wachovia Corp. has had fewer chiefs over the same period.

He appears every inch as driven as his predecessor, and just as capable of making a joke at his own expense. He plans to continue Mr. Buenger's cost-conscious ways - the headquarters have 20-year-old green carpeting - but sees plenty of room to improve earnings. And profits, not asset size, is what has always driven Fifth Third.

"If I could make twice the money and be half the size, I would," said Mr. Schaefer, who rose through data processing and commercial lending departments. Fifth Third - the odd name stems from a turn-of-the-century merger of Fifth National Bank and Third National Bank - earned $120 million last year, up 11% from 1989.

Early Morning Sales Calls

Mr. Schaefer's focus on sales is already apparent. At 7:30 a.m., the bank's commercial lenders are on their phones, their desks stretched out across the open executive floor. Lenders receive no commissions for loan sales, a reason the bank has only 5% of its portfolio in commercial real estate loans - about a fourth of a typical big regional bank. Highly leveraged transactions, which are caving in on banks, are less than 1% of its loans. Fifth Third did one loan to a developing country, which it sold in 1989.

Nevertheless, the bank is not immune to the economy. Credit quality has deteriorated slightly over the past year. The percentage of bad loans in the first quarter of this year increased to 1.87%, up from 1.37% a year ago, due to a slow real estate market in the Midwest.

Incentive: $200 Shoes

When a new branch opened recently, Mr. Schaefer led 20 bankers on a door-to-door sales campaign, trying to drum up business. Whoever knocked on the most doors won a $200 pair of Allan Edmond shoes.

Everyone sells. Tellers get $10 when they convince a customer to get a Fifth Third credit card. The various departments of the bank - from cash management to payroll - may make as many as 15 calls a client to attract business.

The company's approach is geared to compete against some of the country's most aggressive marketers. "Our toughest competitors are not banks," he said, pointing to rival financial companies such as American Express, Merrill Lynch, and GE Capital.

Earnings to Rise 12% to 15%

Given Fifth Third's go-get-'em attitude, Mr. Schaefer favors trawling waters close to home, rather than growing through acquisitions in other states.

For example, the bank calculates it has only 2.7% of deposits in its primary market of Ohio, Kentucky, and Indiana. It is only now moving into Cleveland and Indianapolis, two of the Midwest's biggest markets. The bank has doubled its number of branches over the past five years, primarily through openings, not acquisitions. Goldman Sachs projects the bank's earnings per share will jump 12% to 15% this year and next.

Years of rising earnings have already paid off. The market value of tight-fisted Fifth Third's outstanding stock is among the highest in the industry - about the same as The Bank of New York Co., which is five times larger.

"There is still plenty of work for us here," said Mr. Schaefer, a Cincinnati native, who came to the bank almost accidentally. After a stint in the army, he took a job with the local gas and electric company. The job fell through, and he was hired by Fifth Third in data processing.

"I couldn't do anything else - I had never even taken an accounting course," laughed Mr. Schaefer. He remedied that by getting a master's in finance at night at nearby Xavier University.

Selling is only one part of the bank's culture. Mr. Buenger was known to send female employees home to change if he thought their dress inappropriate. Women are noticeably absent from the ranks of senior managers.

When it comes to financial security, the bank treats employees well. They receive an annual bonus of either stock options or cash under a compensation plan established in 1954. A lock-box clerk recently retired with $200,000 in stock. About 15% of an employee's salary comes from profit sharing. The top 10% of managers are shareholders. Vice presidents and above receive cash bonuses based on the company's profits.

"We can tell a 22-year-old college graduate that if he comes to work for us, he can retire with $1 million," said Mr. Buenger.

In turn, that ownership contributes to the bank's penny-pinching ways. Fifth Third loses only 50 cents of every dollar of revenue to expenses - the best ratio in the country. The average big bank loses about 65 cents.

Cost-Curbing Measures

Unlike other banks, Fifth Third finds plenty of ways to not spend money. The Midwest Payment System, the bank's fast-growing data processing and electronic services unit, runs on two second-hand mainframes from International Business Machines Corp. Mr. Schaefer is doing away with the few companies cars that exist. Business lunches appear nonexistent.

"People here would rather have a dividend increase than a big lunch," said Mr. Schaefer.

The bank has found ways to grow at low cost. Five years ago, Fifth Third was one of the first banks in the country to open branches in supermarkets. These locations cost about a tenth of the amount to run a traditional branch, and provide longer banking hours for customers. So far, 29 of these supermarket branches are open, with as many as 10 to be added this year.

Trust Business Prodded

Nonetheless, Mr. Schaefer sees plenty of work ahead. He is lighting a fire under his trust business, which reported $34 million in income last year. In the past, trust didn't sell aggressively enough for Mr. Schaefer, even though the unit's earnings grew 9% in 1990 and 20% in 1989.

"Maybe if they do what we want, we'll buy them new carpet," Mr. Buenger said.

Midwest Payment System is another underperformer, in Mr. Schaefer's view. He is a harsh judge. In addition to handling all the bank's data processing, MPS runs three of the largest ATM networks - Money Station (Ohio), Quest (Kentucky), and Cash Station (Chicago), and handles the credit card authorization for Bloomingdale's and Caldor's, among others. MPS contributes about 16% of the bank's earnings. Goldman Sachs estimates that the unit, if a separate company, would be worth $242 million.

Areas of Contention

So where is MPS falling short? For starters, the unit has developed a sophisticated phone banking system, called Jeanie Audio System, that enables customers to get account information and pay all their bills, via telephone. MPS has sold this technology to other banks, but not enough to please the chief executive. Mr. Schaefer wants a more aggressive sales campaign.

Nor is Mr. Schaefer satisfied with the bank's overall performance. The return on assets of just the Cincinnati bank is 2%, among the highest in the industry. Other affiliates are still high performers at 1.1%. Mr. Schaefer wants to bring the affiliates up to the main bank's level.

PHOTO : STEPPING UP: George Schaefer, took over as chief executive of Fifth Third in January, replacing Clem Buenger, who is still chairman.

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