Ask a nuclear engineer-turned-banker his secrets for delivering consistent, industry-leading profitability, and you'd expect to be swamped with statistics and sophisticated lectures on finance, technology, products and strategy. Right?


George A. Schaefer Jr. says Fifth Bancorp's 6,150 employees are the swing factor in his company's performance.

"If you bring me hard-working people who are selling, talking to each other and watching expenses, you almost can't screw up," the president and chief executive of Fifth Third insists.

Mr. Schaefer has proof. Swarming over the newly-acquired Cumberland Federal Bancorp. in August, for example, his team converted all the back office systems and signs at the 45-branch Kentucky thrift in a single weekend. Scarcely a month later, analysts were declaring the acquisition of the billion-asset unit a success, saying earnings dilution had already been eliminated.

"This is truly an impressive feat," said Thomas McCandless, a banking analyst at Paine Webber Inc.

Under Mr. Schaefer, 49, episodes such as this are the rule rather than the exception at the $14.3 billion-asset Fifth Third, whose name comes from a 1908 merger between Fifth National Bank and Third National Bank.

The derivatives-free 1.77% return on assets posted for the first nine months of 1994 by this powerhouse banking company continues a multi-year trend of superior profitability.

That's why American Banker selected Mr. Schaefer as its 1994 Banker of the Year: In a banking world where top performance is a rare and often fleeting phenomenon, Mr. Schaefer hits the top mark year in and year out.

True, other empire builders have vastly outpaced Mr. Schaefer in growth. Some ensconce themselves in skyscrapers the size of Mount Fuji, criss-cross the country in private jets, and preside over franchises encompassing entire U.S. regions.

But in an interview with American Banker, Mr. Schaefer said avoiding die seduction of rapid expansion, while inspiring the troops to ever more vigorous attacks on the market, are vital in sustaining Fifth Third's performance - and its robust stock trading multiple.

"Size, of itself, isn't of any value", says Mr. Schaefer, thumping on a conference table for emphasis.

Mr. Schaefer says his staff is at work "on a hundred different projects" to further lower Fifth Third's ratio of operating expenses to operating income. At a Spartan 47%, Fifth Third's efficiency ratio is already about 14 percentage points lower than the median for Midwest banks tracked by Keefe, Bruyette & Woods Inc. Given Mr. Schaefer's record, the prospect of even better performance in the future has to be taken seriously.

Q: What are the distinguishing traits that enable Fifth Third to perform as it does?

SCHAEFER: Actually, we are a pretty traditional We've been around for 136 years and provide the same basic services and products as a whole lot of other financial institutions. It is not as though we've got a secret formula for some sort of financial Coca-Cola.

We follow a strategy we call hustle. We try to work a little harder than the average person. We try to sell. We have a lot of teamwork. We keep a close eye on our expenses. And we try to stay focused on what we are about. We're just trying to make each piece of the business a little bit better, a little more efficient than it was the day before.

"Q: Still, there must be some important building blocks.

SCHAEFER: If you want to understand our culture, you have to look at how the bank evolved.

William S. Rowe was a former chairman here. His two chief cultural points were. one, maintain clean credit quality: and two, watch expenses. And if you lived by those two precepts in the traditional banking environment, you would always do better than average.

When my immediate predecessor, Clement L. Buenger, came here in the 1970s, he said we could add two other characteristics.

One was hard work. Clem said "Hey, we are not going to be a traditional bank in terms of working from nine to five. We are going to be in here at seven or seven thirty in the morning, and we are going to be here at six or six thirty at night, and we're all going to work hard, and get that enthusiasm throughout the organization."

And Clem also instilled a sales culture. He had been in the life insurance business, which is almost totally driven by a sales culture. He was ingrained in that culture, and he also brought that to Fifth Third.

That's what drives the organization - a blend of that old style, traditional Midwest conservatism with a sales culture and a work ethic.

Technology also is an important component. Back in the mid-1970s, we were fortunate to get some good people in data processing. We went into it primarily as a way to keep expenses down. But it blossomed into an avenue for fee revenues. Today, Midwest Payment Systems provides electronic funds transfer services to more than 7,000 clients, in addition to supporting the back offices of all our affiliates.

Q: You mentioned a work ethic and a sales culture. While bankers point to these priorities all the time, Fifth Third's results suggest you've got a better than average grasp of how to put them into practice. Can you talk more about this?

SCHAEFER: One of the things we've done, over a period of time, is hire a lot of young college graduates, right out of four-year programs.

Each year, we bring in about 125 highly energetic, enthusiastic, type A sales people, who we think can work together as a team.

It seems like that's the basic, raw material. Once you've got that enthusiasm and the ability to work hard, the rest of it is easy. Conversely, we've found it's very difficult to take somebody that might have traits, and skills, and particular qualities, and try to give them the enthusiasm and the energy.

Q: At the same time, the majority of Fifth Third's employees obviously aren't recent college graduates. And enthusiasm has to be nurtured. Are there other things you do to build momentum and cooperation?

SCHAEFER: We work hard on making people feel a part of this team. All of our incentive systems are focused on the team concept, and on the bottom line.

Whether it is the bonus at our senior management levels, which is geared to the overall performance of the organization; or our mid-management bonus structure, which hinges on the performance of individual units; or whether it is at the clerical levels, through our profit sharing program, everyone here is focused on the bottom he for a significant chunk of their compensation and incentive package.

We've paid out about 14% or 15% of salary each year for the past 25 years or so in profit sharing. And we have a strong stock option program, which motivates the officers in the program to behave more like owners than employees.

Q: Are we catching Fifth Third at the peak, or can your team do even better?

SCHAEFER: Everybody here understands you can help the bottom line by either increasing revenues or reducing expenses.

The curtains here [gesturing to the office windows overlooking Cincinatti's Fountain Square! are the same curtains that were here 25 years ago when we moved in. We take a lot of pride in containing the expense side. We don't have corporate aircraft. We don't have company cars. We don't pay for a lot of perks.

Some of our affiliate banks have efficiency ratios in the 34%, 35% percent range, compared with our aggregate ratio of 47%. So there's still lots of room to grow more efficient. We probably have a hundred different projects, encompassing both the revenue and the expense sides.

Q: American Banker research shows Fifth Third has enjoyed one of the banking industry's highest trading multiples for several years running. Despite the advantage this brings in making stock-swap acquisitions, you haven't been nearly as aggressive as certain other regional banking companies in takeovers. Why not?

SCHAEFER: It seems people who have made size the goal have not made their target price-earnings multiples, or have even lost their trading multiples.

You could reach 500 pounds in weight if you ate cheeseburgers all day, probably, but weighing 500 pounds wouldn't make you more valuable. Size, in and of itself, isn't of any value.

We've focused first on consistent, quality shareholder returns, and then growth. We've always said at the end of die day, we want to make sure the bank we have is a Fifth Third bank, not just a big regional bank that performs at the median.

We want to maintain a 1.8% return on assets. We want to shoot for an 18% or 19% return on a 10% equity base. We want to keep a 47% efficiency ratio. We want clean asset quality.

Again, it takes the human element, it takes the team, to be able to play that kind of a game. So it's almost more a function of the human resource than the financial resource - and that's what takes a while to assimilate, and accumulate. So we don't have a big desire to rush.

Q: Still, some other chief executives are rather passionate on the issue of size. They talk about scale economies, and product delivery, and about preserving competitive stance in a rapidly consolidating industry. Don't these issues matter?

SCHAEFER: We've been around 136 years because of the way we operate. I don't know that it's got a lot to do with scale. Our branch is on one corner, and our competitor is on the other corner, and does it really matter if we have $10 billion or $10 trillion of assets?

It doesn't make any difference on that street comer.

It is who is delivering the best service to that customer that determines who is going to win. And if we can work hard, and hustle, and sell on the street corner, and on the next street corner, we can continue to add street corners and grow at our own pace, without rapid consolidation being a factor.

Q: Of course, you did pursue one major acquisition in 1992 and that was the $8.3 billion-asset Star Banc Corp., which sits across the street. Oliver Waddell, Star Banc's former chief executive, made national headlines by turning you down. Is a merger between Fifth Third and Star Banc still possible?

SCHAEFER: Our position remains as we left it two years ago. If they would have an interest in doing something, sure, we would be happy to talk to them. Every Wall Street guy that comes through town says this potential merger still makes sense. We know that. And Star Bank probably knows that.

But it is up to Jerry Grundhofer [Mr. Waddell's successor!, and his board, and his shareholders. In the meantime, Jerry is doing a good job over there. And we, certainly, are getting along okay.

Q: Do you have a take on the direction of the banking industry? A lot of people say branches are rapidly being rendered obsolete by electronic delivery systems, such as telephone banking, home banking via personal computers, and automated teller machines.

SCHAEFER: A lot of people are saying "close your branches, go to technology." I don't think we will get to where we don't need branches. At the same time. each month we are processing 75 or 80 million electronic transactions.

So we are hedging our bet.

When a customer comes in, we say "Hey, what do you like? Do you want to do everything electronically? You want to use a PC? Or do you want to bank the old fashioned way, and deal face to face with a responsive banker at one of our branches? You tell us the way you want it, and we will deliver it that way."

We try to be ready, both with electronic banking, and with bricks and mortar.

Q. Are there issues or concerns that especially bother you?

SCHAEFER: We are a regulated industry; we've got the government out there. If we were in a really free market, I'd feel a lot better. Governmental regulation is probably the biggest dampener of what we are about.

At Fifth Third, we deal with the states of Ohio, Indiana, Kentucky, and the Office of Thrift Supervision, and the Federal Deposit Insurance Corp., and the Office of the Comptroller of the Currency, and the Federal Reserve System, and the Securities and Exchange Commission, and a plethora of other agencies, and 200,000 pages of regulation. It takes a lot of time and costs a lot of money,

Is that going to allow us to compete in our commercial lending business with General Electric Capital Corp., which isn't similarly burdened? Is that going to allow us to compete in our credit card business against American Express, and General Motors, and Discover? And why do we need 42 documents and a room full of regulators in order to originate a mortgage?

We can't continue to have regulations generated at the recent pace and still have the banks stay in business.

Q: Some bankers are outspoken about scaling back deposit insurance. Do you share the view that curtailing insurance, and by extension the govenment's backing of the banking industry, would set the stage for regulatory streamlining and charter liberalization?

SCHAEFER: Obviously, in the banking industry, we firmly believe we need regulation. We are in no way saying we should not be regulated.

But look at deposit insurance. All of a sudden, we hiked the coverage to $100,00 per account from $400,00. Well, what would be wrong with going back to $40,000 from $100,000? Insurance was designed for the widows and orphans, but sophisticated investors are the ones taking maximum advantage of it.

If you were to offer me 40% of the insurance coverage and 40% of the regulation, I'd sign up right here.

Q: What's your top priority?

SCHAEFER: It is being a consistent, quality performer. We are in our twenty-first year of record earnings, and each time it is a little more difficult.

Q: Out of all we've discussed, what's the most important factor in making that happen?

SCHAEFER: If we can continue to attract quality people, and to keep them motivated, fired up about what they are doing, and playing as a team, we are going to do very well - no matter what die guy in this office does. If you bring me hard working people, who are energetic, and selling, and talking to each other, and watching expenses, you almost can't screw it up.

Engineering His Way to the Top

George A. Schaefer Jr. might never have risen to prominence at Fifth Third Bancorp had it not been for the inability of a nuclear power plant to get licensed.

A former U.S. Army captain, Mr. Schaefer came home from Vietnam in 1970. With an undergraduate degree in nuclear engineering from the U.S. Military Academy, West Point, the young Mr. Schaefer found what seemed the ideal job at the newly-constructed Zimmer Nuclear Power Plant in Moscow, Ohio.

But the nuclear plant failed to win its operating license, leaving Mr. Schaefer in the lurch. In a surprising turn of events, the Cincinnati native in 1971 signed on as a computer operations management trainee at predecessor Fifth Third Bank, which back then had roughly $750 million of assets.

Wasting no time in re-channeling his ambition, Mr. Schaefer by 1974 had earned an MBA in finance from Xavier University, Cincinnati.

His career momentum started building in earnest in 1979, when he transferred jobs within the bank to metropolitan commercial lending. Risinng to a senior vice president and head of that department by 1982, Mr. Schaefer in 1984 was named an executive vice president and the corporation's head of commercial lending.

Five years later, in 1989, Mr. Shaefer rose to second in command, gaining the posts of president and chief operating officer. On New Year's Day, 1991, Mr. Schaefer inherited the chief executive's slot from Clement L. Buenger, who remained chairman until March 1993.

The heart of an engineer still beats in the chest of Mr. Schaefer, who says the practicality of that discipline has served him well in banking. "On the engineering side, you stick with what works," says the executive, whose 1993 salary and bonus totaled $799,000.

Of course, engineers also like to build things, and Mr. Schaefer can be counted among the architects of Fifth Third's growth and high performance. Since he took the helm, Mr. Schaefer has improved on Fifth Third's already robust profitability while boosting total assets by nearly 80%, to $14.3 billion.

"It is nice to see the results of your efforts and be on a good team," says Mr. Schaefer. "I enjoy what I'm doing."

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