Sunday, July 18, 1999

5/3 marches on across Tristate


Huge takeover isn't Schaefer's style, even though Wall Street says he has the ammo

BY JEFF McKINNEY
The Cincinnati Enquirer

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George A. Schaefer Jr.
(Gary Landers photo)
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        Unlike many of his peers, George A. Schaefer Jr. does not feel compelled to do a monster bank deal to expand his franchise.

        “You're not going to see us try to buy a Citibank or Bank of America,” the president and chief executive officer of Cincinnati-based Fifth Third Bancorp said. “We don't have to buy a major regional bank to give our investors the returns they've come to expect.”

        It's hard to argue with him.

        Since being named head of Cincinnati's largest bank in 1989, Mr. Schaefer has helped Fifth Third boost its profits from $84 million to $551.7 million in 1998. Assets also have surged: from $5 billion a decade ago to $29 billion.

        Fifth Third also consistently posts some of the industry's best profitability barometers: return on equity and assets, and the knack to grow revenues faster than expenses.

INFOGRAPHIC
Fifth Third's buying spree
        The strong performance has made Fifth Third one of the most highly regarded financial institutions among Wall Street analysts. They contend that Mr. Schaefer — a West Point graduate — has Fifth Third armed and ready for its next acquisition target.

        “If they buy somebody else, it will be under their conditions,” said Timothy Willi of A.G. Edwards in St Louis. “Schaefer won't do a deal because he feels pressured to, make concessions or compromise his operating strategy in any way.”

        much higher multiple to other major regional banks, Though Fifth Third has been one of the nation's busiest banks in terms of acquisitions since 1997 — with two large deals pending in Indiana the past month — industry experts say those mergers are small and safe. Mr. Schaefer is reeling in small fish, certainly not whales, they say.

        Yet, it has been those deals that have helped Fifth Third build a strong-enough stock price to have the option to buy banks, thrifts and nonbanking companies ranging in assets from $1 billion to $15 billion.

        Analysts say Fifth Third's currency could allow it to bag banks like Huntington Bancshares Inc., a Columbus-based bank similar in size to Fifth Third with $28 billion in assets and more than 600 branches in 11 states.

        But they say such a catch is not a high priority for Mr. Schaefer, unless, of course, regional banking powerhouses like Huntington, Michigan's Old Kent Financial Corp. or Wisconsin's Marshall & Illsley Corp. made themselves willing bait.

        “One day, the big fish will come along, and they'll do it,” Mr. Willi said. “But for now, they'll continue to focus on building market share in Indiana like they have in Ohio.”

        Fifth Third did just that last week when it agreed to pay $227 million in stock to buy Peoples Bank Corp. of Indianapolis. That purchase came a month after Fifth Third said it would pay about $2.4 billion in stock to acquire Evansville-based CNB Bancshares Inc.

        Those deals, expected to be completed this year, would catapult Fifth Third from Indiana's 18th-largest bank to No. 3 in deposits and branches. Only Bank One Corp. of Chicago and National City Corp. of Cleveland would be larger in the Hoosier state.

        The deals would boost Fifth Third's portfolio in Indiana significantly:

        • Assets of $6.8 billion.

        • Deposits of $4.4 billion.

        • About 150 branches and more than 300,000 customers.

        It also would give Fifth Third thousands of new business customers, expand its reach in Indiana from Evansville to Gary, and move it up to Indianapolis' fourth-largest bank from sixth-largest before.

Goal: 20% market share
        From an even bigger perspective, the acquisitions would make Fifth Third one of the Midwest's largest banking franchises, with about $36 billion in assets, 631 branches and about 3.5 million customers.

        Analysts do not think Fifth Third is finished in Indiana.

        That's because almost 60 percent of Indiana's deposits are dominated by smaller community banks or thrifts, most of which have deposits ranging from $2 billion to $600 million, according to SNL Securities, a national bank research firm.

        Mr. Schaefer has said Fifth Third wants deposit market share of at least 20 percent each in Ohio, Kentucky and Indiana. It will have about 7 percent of Indiana's deposits after its mergers. Fifth Third ranks fifth in deposit market share in Kentucky with 5.4 percent and second in Ohio with 10.8 percent in Ohio, after its Emerald deal.

        Most of the Indiana institutions also would fit Mr. Schaefer's strategy of buying more Tristate banks or thrifts with assets of $500 million to $1 billion or more.

        “If they're of that size, we're probably talking to them,” Mr. Schaefer said. “You could see us doing more deals similar in size to the one we did in Strongsville.”

Strongsville deal
        Strongsville, Ohio, that is — and that deal involves Fifth Third's pending buy of Emerald Financial Corp., a thrift with assets of $670 million, 16 branches and 25,000 customers primarily in the Cleveland area.

        Fifth Third agreed to pay $204 million in stock to buy Emerald, making it Ohio's second-largest bank behind National City Corp.

        Daniel Cardenas, an analyst at Howe Barnes Investment in Chicago, which tracks most of Indiana's publicly traded community banks and thrifts, said there are plenty of opportunities. He pointed to South Bend-based 1st Source Corp., Indiana's sixth-largest financial institution with deposits of $2 billion and 48 branches, as a possible target.

        Mr. Cardenas said such a deal would give Fifth Third a major presence in the growing Indiana cities of South Bend and Fort Wayne, places where it now has only one branch. “They'll be looking to grow in markets where they have little presence but the potential for a lot of growth,” he said.

        He and other analysts said Fifth Third will use its strong stock price, the best expense-control operations among the nation's banks, and bread-and-butter community banking strategy to attract sellers.

        Mr. Cardenas noted that Fifth Third offered more than four times book value for CNB and Peoples Bank. He said similar-sized Indiana banks and thrifts might fetch purchase prices of 2.5 times to three times book value.

        “Their currency is attractive to a lot of companies because if you can't provide those kinds of return independently, you certainly will would examine your options with that type of offer,” Mr. Cardenas said.

        Moreover, Fifth Third could do more deals in Indiana because it's one of the nation's best banks at integrating small banks and thrifts into its system, quickly increasing their profits and share earnings without disrupting their cultures.

Developed a niche
        Chris Bamman of Advest Inc. of New York said Fifth Third has developed a niche of buying little banks, cross-selling their products to banks' customers and consolidating duplicate operations.

        “I expect them to do more deals like Peoples because they know how to make them work,” Mr. Bamman said. “They might pay a little bit more, but they can make it up with competitive pricing, increasing the products they offer and getting cost savings from the mergers.”

        He said Fifth Third prefers smaller deals because it often can go into cities and quickly get name recognition, cater its services to individuals and small businesses, and go after customers of both larger regional banks and small community banks efficiently.

        For example, Fifth Third might be more aggressive in serving a small business with annual sales of $10 million than a Bank One because Fifth Third's size might provide it a higher profit margin.

        Would Wall Street like to see Fifth Third buy a super-regional bank? Perhaps, analysts say, but no one is losing sleeping over it. They argue that Fifth Third's culture and Mr. Schaefer's conservative management style complement each other.

Not broke? Don't fix it
        Mr. Schaefer, 54, has a simple philosophy: There's nothing wrong with doing old stuff to make a lot of new money.

        He figures that if each of the more than 600 branches Fifth Third picks up after its completion of deals does at least $4 million annually in loans, that will generate $2.4 billion in loans and another $60 million in earnings. He said that alone would nearly match CNB's 1998 profits of about $61.6 million.

        He added that potential gain in loan volume does not include $40 million on a pre-tax basis Fifth Third expects to get from cutting CNB's annual expenses. Mr. Schaefer said the bank expects to benefit from new business it will pick up from CNB, including 2,800 merchants Fifth Third will be able to provide data-processing servives.

        Mr. Schaefer, a Delhi Township native and Elder High School graduate, uses a hearty smile and disarming disposition to get his point across to employees, peers, investors and merger partners. “What we do might not sound sexy, but it works and has helped us consistently put up some of the best numbers in the industry, ” he said.

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