George A. Schaefer Jr., who studied nuclear engineering at West Point, says banking is a cinch by comparison.
"Most of our business isn't rocket science," the 52-year-old chief executive officer of Fifth Third Bancorp said recently. "We're buying money at 4% and we're selling it at 8%."
And by paying close attention to costs as revenues grow, Fifth Third posts some of the best performance numbers in the industry. The big question is whether the company can keep up the pace for the next five years. Suddenly, the megamerger wave is creating competitors so large that analysts wonder if Fifth Third can survive without bulking up in a hurry.
"Just because banking is easy to understand doesn't mean it's easy to execute," Mr. Schaefer said.
Fifth Third, with $21.4 billion of assets, had the highest total return to shareholders last year among the top 50 banks tracked by Keefe, Bruyette & Woods. The Cincinnati company's 97.9% was more than double the group average of 46.2%.
Most securities analysts who cover Fifth Third rate it as a good long- term investment. "They've proved they can grow faster than the industry as a whole," said Keefe analyst Joseph Duwan.
The stock trades at a peer-group high of 28 times estimated earnings, and its expense base is one of the lowest as a percentage of income.
Fifth Third's middling size has probably worked to its advantage in terms of profitability, but it has not been standing still. Three Ohio acquisitions are pending: $2.8 billion-asset State Savings Co. of Columbus, $3.3 billion-asset CitFed Bancorp of Dayton, and the Columbus-based investment firm Ohio Co.
With those deals all closing in the second quarter, and with Fifth Third expected to have its computer systems prepared for year-2000 by third, company officials said they could easily handle another acquisition this year.
Mr. Schaefer said he would be interested in any sizable banking organization in the tri-state area of Ohio, Indiana, and Kentucky. Two home-state favorites, Charter One Financial of Cleveland and FirstMerit Corp. of Akron, would be particularly attractive, he added. Either would give Fifth Third greater heft in Cleveland, where it is relatively small.
Though Mr. Schaefer has not had to manage the integration of a large acquisition at Fifth Third, he is indicating an appetite for such a deal.
In 1992, two years after he was named CEO, Mr. Schaefer made an unsolicited and ultimately unsuccessful bid for his local archrival, Star Banc Corp. The maneuver forced Star, which has its headquarters across the street from Fifth Third's, to turn itself around. With new management it became a much stronger and better competitor.
"The acquisition of Star would have marked a major turning point for Fifth Third," said Fred Cummings, an analyst with McDonald & Co. Securities in Cleveland. Instead, it woke Star Banc up, and allowed it to get back on its feet to become Fifth Third's toughest competition."
P. Michael Brumm, executive vice president of corporate development, said Fifth Third would have liked to have gotten a chance to look at two holding companies that National City Corp. of Cleveland won: $22 billion- asset First of America Bank Corp. of Kalamazoo, Mich., and $3.3 billion- asset Fort Wayne (Ind.) National Corp.
Those who follow the company would applaud Fifth Third for doing a big deal, but such a merger could put its strong performance ratios at risk.
"Their biggest challenge," Mr. Cummings said, "is doing bigger deals down the road and making sure their corporate culture is transferred to a larger company."
Mr. Schaefer is adamant about preserving that culture. It dates back to 1979, when then-chairman William Rowe, a fourth-generation Cincinnati banker, put strict expense controls and conservative underwriting standards into effect.
After Mr. Rowe, Clement Buenger, Mr. Schaefer's predecessor, prevailed upon employees to "work a little harder" and "sell a little harder."
Mr. Schaefer said he would like to be remembered for pushing the cross- selling of bank products and for encouraging companywide cooperation.
Fifth Third is still well known for its penny-pinching ways. It boasts about its purchase of second-hand mainframe computers. The decor of the executive offices has changed little since 1968, when the headquarters were built.
Lunch at the company's annual meeting is cold cuts and potato salad.
These and other steps have pushed the company's ratio of expenses to profits down to 39%, the best efficiency measure in banking. Expense controls enable Fifth Third to price its loans and other products lower than competitors can.
Fifth Third's profits come from four business lines-retail banking, commercial banking, trust, and investment services-and a technology and transaction-processing subsidiary, Midwest Payment Systems.
But basic lending to people and businesses drives most of the company's earnings. Even as many bankers bemoan that they can't make money the old- fashioned way because loan spreads are too narrow, Mr. Schaefer said he is satisfied with Fifth Third's profit stream. The banking business still has better margins than the grocery business or insurance, he added.
Retail and commercial banking provided 80% of the 1997 net income, though investment services and data processing are fast-growing.
Midwest Payment's biggest customer is Fifth Third, which further helps create efficiencies.
"In banking, boring is the best," Mr. Cummings said. "Coca-Cola's strategy isn't that complicated: Sell as many cans of Coke across the globe as you can."
Mr. Schaefer said he has considered buying into some more exotic businesses. He recently ran the numbers on subprime automobile finance but said he couldn't figure out how taking the attendant risks could be depended on to produce steady income.
It is ingrained that Fifth Third won't get burned on loans. Mr. Schaefer said he remembers former chairman Rowe's advice to never make a loan that might lose money.
"It's a conservative approach, but we've been very consistent," Mr. Schaefer said.