Where The Money Is Bank of America's Ken Lewis has a chance to create more wealth than any other freshman CEO. Okay, no one says it'll be easy.
By Thomas A. Stewart

(FORTUNE Magazine) – On a September day in 1969, Ken Lewis, fresh out of Georgia State University, came to his orientation session at North Carolina National Bank. He'd been hired as a credit analyst, but he had big thoughts. "I just wanted to be president of that thing," he says, "because that's what my mother told me to be."

Brydine Lewis, a nurse, raised Ken by herself. He was born in Meridian, Miss., where country singer Jimmie Rodgers grew up; when he was 6, they moved to Columbus, Ga., home of Fort Benning. Momma was nothing if not tenacious, her son nothing if not devoted: In 1971, when he became an officer of the bank, his mother asked, "How far is that from president?" And when he called in 1999 to say he had indeed become president, she said, "You know, back then I didn't know there was a CEO position."

The mother can relax now, but not the son. In April, Kenneth D. Lewis became chairman and CEO of the company now known as Bank of America, the third-biggest bank in the land. It's a gargantuan bank, a Herculean challenge. A quiet Mr. Inside, Lewis has been so low-profile he doesn't even make his hometown's list of famous Meridianites. Bankers know him better, of course, but even in the industry he's a largely unknown quantity.

In a curious sense, so is Bank of America. It's a collection of assets whose potential is so far unproven. The 13th-biggest U.S. corporation and the nation's No. 1 consumer bank, serving 27 million households and two million businesses, processing 3.8 million transactions a day (including more checks than the Federal Reserve System), today's Bank of America is the product of a 30-year binge of nearly 100 acquisitions done mostly by Lewis' controversial predecessor, Hugh McColl.

Simply put, no other freshman CEO has a chance to create as much wealth as Lewis. Says Amy Brinkley, Bank of America's deputy head of risk management: "It's arguably the greatest opportunity in American business." Last year, a lousy one, B of A made more profit, in sheer dollars, than all but nine U.S. corporations--some $7.5 billion, $4.52 a diluted share. Next year analysts expect about $5.50 a share. The stock, at around $60, is up nearly 70% from its low last November but still trades at only 14 times earnings, vs. 17 for J.P. Morgan Chase and 19 for Citigroup and Wells Fargo. If Lewis just gets it to those levels--18, say--he'll have a $77 stock and the bank will have created over $60 billion in new wealth. To Lewis, that sounds like a plan. "Bank of America must be nothing short of one of the world's great companies," he insists.

But first he must overcome a few big obstacles, starting with the mess McColl left. McColl's NCNB/NationsBank was ravenous, swallowing bank after bank on its way to leviathan status. There was vanity in this quest--the bank's 60-story headquarters, the tallest edifice in Charlotte, N.C., has been called "the Taj McColl"--but realism too. For the past two decades or so, overcapacity and economies of scale have forced consolidation in every part of the industry. A CEO had three choices: eat, be eaten, or dig a defensible niche.

For much of his career, McColl ate well. Even his most vociferous critic, former Donaldson Lufkin & Jenrette analyst Tom Brown, now CEO of hedge fund Second Curve Capital, credits him with "the best bank acquisition in history"--Texas' First Republic Bank, plucked for a song from the savings and loan crisis in 1989.

By 1996, however, McColl was giving the bank indigestion, buying too fast and paying too much. That year he acquired Boatman's Bancshares, with $41 billion of assets in the Midwest. Within 18 months he bought Florida's $44 billion Barnett Banks for $15.5 billion, in what was then the biggest bank buy ever. Four months after that deal closed, he announced the BankAmerica deal--$265 billion in assets--which would close in September.

Barnett became a disaster. Regulators forced the sale of 127 branches; far worse, McColl had to close 200 others to cut costs. The big day--closing branches, changing signs--came in October 1998, and the bank botched it. An upgrade in back-office and teller software confused veteran NationsBank tellers nearly as much as it did Barnett's. Virtually all of NationsBank's merger-integration experts had decamped to work on the bigger BankAmerica deal. Service collapsed, customers left. Between 1997 and 2000, the bank's share of FDIC-insured deposits in Florida dropped from around 29% to 22%.

Management bored McColl. Says Lewis: "We'd talk about customer satisfaction, then go out and buy that next bank." B of A itself was a patchwork. Michael Hammer, the reengineering expert, calls it "the loopiest organizational structure I'd ever seen," with parts organized by product, parts by geography, parts by customer. Add credit problems on top of that. Bad loans to Sunbeam, Finova, and others caused the bank to add $850 million to its $350 million reserves in the fourth quarter last year.

McColl retired in April; ever the predator, he left the annual meeting wearing cowboy boots, jeans, and a black shirt, bound for a turkey shoot in Texas. He had dreamed of a coast-to-coast bank. Now the boys from Charlotte had one--with huge problems but also with quite possibly the best consumer brand in banking. It was, says CFO James Hance, "a case where the dog actually caught the bus." What do you do with it?

A hundred days later, Lewis' answer is clear: The hunter will become a farmer. "Organic growth" is the strategy, reduced earnings volatility and greater profitability the goals. The plan is to make more money from essentially the same customers by selling more services for a fee and relying less on interest-rate spreads. In the huge Consumer & Commercial bank, which generates 65% of earnings, that means getting a bigger "share of wallet" by encouraging consumers to consolidate their banking and--the Holy Grail--bring their portfolios over from Fidelity and Merrill Lynch. For small and midsized B of A business clients, it means getting relatively less income from loans and more from services like cash management, trading, estate planning, and M&A.

It's the same deal in Global Corporate & Investment Banking, run out of San Francisco: less use of the capital on the balance sheet to back loans, more use of intellectual capital to collect fees for investment banking and other services. Today half of GCIB's profits are net interest income; the goal is to lower that to 30% by dropping corporations that insist on loan-only relationships and building up fees from treasury management, debt and equity securities, and the like. Also, the bank is keeping fewer loans on its balance sheet, instead selling them into the market--indeed, becoming a market maker for debt. Overall, GCIB's share of profits will fall from 25% to 18%.

If this works, the big winner will be Manhattan-based Asset Management, which Lewis expects to kick in 15% of profits, more than double its share now. (The last 2% to 3% of profits comes from investing for the bank's own account.) B of A manages some $290 billion for individuals, companies, and governments, including $119 billion in some pretty good mutual funds.

Of course, every retail bank wants wealthy customers and every corporate bank wants to do investment banking. Says Lenny Mendonca, head of McKinsey's San Francisco office: "What distinguishes a great bank from a mediocre one is execution, not the blinding brilliance of its strategy."

There B of A has neatly counterpoised strengths and weaknesses. Maybe the biggest plus is its network of 4,300 branches. A school of thought--still prevalent at some banks--held that brick and mortar was a ball and chain in the Internet Age. B of A now realizes branches are an opportunity to sell more from the same store--"like McDonald's realizing they could sell breakfast as well as lunch," says Scott Kisting, a B of A alumnus who runs retail banking at CalFed in San Francisco.

A typical customer enters a branch every nine days and uses an ATM nearly three times a week--an extraordinary opportunity. A prototype in the Buckhead section of Atlanta shows how B of A hopes to grasp it. There's a greeter by the door--an idea taken from retailers like the Gap. A stock ticker runs along one wall, near an "investment bar" with computers where you can bank online, check your portfolio, or surf the Web. At freestanding kiosks, personnel, none of whom have private offices, stand waiting to open an account, get a copy of a check, or write a loan; at least one is a financial planner qualified to sell stocks and mutual funds.

The coolest stuff is invisible. Every month a computer tracks 40 variables to spit out names of people at risk of leaving (perhaps they have moved or their balance has fallen significantly) and passes them to a sales force. When salespeople phone, retention rates rise 2.5%. Another program finds customers who might qualify for "premier" or "private bank" status. According to consumer products chief Barbara Desoer, "household identifiers" now allow the bank to calculate "relationship net income"--the profits to be made from a mogul, her mate, and their moppets. Over at the teller windows and ATMs is another change. It used to be that every deposit over $25,000 was flagged and checked for risk; now it'll likely prompt a call from a private banker inviting you to stop by. The goal is to increase the number of upscale customers by at least 50%. The math's mouthwatering: Entry-Level Plus customers are nine times more profitable than the entry-level group; Premier customers are twice as profitable as Plus; and Private customers are worth four times as much again.

Fawning over high-income customers could alienate the rest, and plays into the hands of at least two formidable rivals: Washington Mutual, California's No. 3 consumer bank, which models itself on Nordstrom's and Starbucks and makes a big point of not distinguishing levels of service; and Wells Fargo, whose CEO Richard Kovacevich, one of the nation's most innovative consumer bankers, calls branches stores. At the same time, Bank of America can't compete with Merrill Lynch on Merrill's ground. The bank's business model depends on lots of branches to collect lots of stable deposits from lots of customers, some of whom trickle up.

Then there's the wholesale side. What's a carrot for consumers--can we entice you to do more than checking?--is a stick for corporations: If you want us as a lender, you must give us other business. Edward Brown, head of the corporate bank, intends to drop clients--up to 400 of them, or about 20% of the total--with which he can't leverage the lending relationship. Says he: "We drive a hard bargain, but our investors do too."

That leverage is trouble for investment banks like Goldman Sachs, Morgan Stanley, and Merrill Lynch. Their balance sheets are too small to underwrite big loans themselves. Surveys by Greenwich Associates show 11% of big U.S. corporations listed Bank of America among their lead investment banks in 2000, a huge jump from 5% in 1998 and 3% in 1999. As of August 6, according to Thomson Financial, B of A ranked seventh in investment-grade debt underwriting, fifth in high-yield debt placements, and eighth in investment banking overall.

Lewis is betting that big companies will let bankers coordinate financing activities on both sides of the balance sheet, not just debt. The question is whether B of A's investment bank, under highly regarded Carter McClelland, can attract enough top-notch talent to compete with Merrill and Goldman. Wall Street stars won't fit a culture where four levels of hierarchy separate them from the chairman, in a chain of command that runs from New York via San Francisco to Charlotte. On the other hand, the sheer size of the bank gives dealmakers clout and the chance to do lots of different kinds of work. It's a classic match of scale and scope vs. focus and agility.

Charles Wendel, head of Financial Institutions Consulting in Manhattan, gives a great description of banking when he says, "Banks are very good at being mediocre at a lot of different things." Against that tradition, Lewis is readying a new weapon--new for B of A, certainly. In a move that has impressed analysts, he has gone outside banking for several high-profile executives to bring best-practice management to the bank. "Process and competence will win," Lewis insists. To run online banking--B of A has more online clients than any other bank--he hired John Rosenfeld, who set up e-commerce at GE Aircraft Engines. From Kodak came Charles Goslee, a top process-management expert. He's unveiling a Six Sigma quality program to reduce errors, streamline processes, and make cross-platform selling possible. Mike Mayo, an analyst at Prudential Securities, figures Goslee for $1 billion in savings starting in 2002. Lewis confirms it: "A billion is what he's promised me, and I bet he's sandbagged some extra." That's over 5% of the bank's noninterest expenses.

When Lewis' colleagues talk about him, they all praise his focus, clarity, and straight-line thinking. He's not rigid, but he is methodical. Every Friday night he drives to his weekend place in the Blue Ridge Mountains. On his way, he stops at an Outback steak house and orders a drover's platter--ribs, chicken, fries, and cinnamon apples. On Saturdays he's learning to play golf. His predecessor was an opportunist; Lewis is a planner. And for once Bank of America is quiet, while rivals like Wachovia and J.P. Morgan Chase struggle with acquisitions and integration.

There are two other big tests where planning can go only so far. The first is the economy. So far Lewis has been lucky. The economic rains have actually helped. Falling interest rates increase the spread between what banks get for old loans and what they pay out for new money; thanks to the Fed and some nifty balance-sheet moves by CFO Hance, B of A's net interest income jumped 9% from the first to the second quarters of this year. The stony soil of the stock market has helped Edward Brown and McClelland win bond business and recruit people who wouldn't return phone calls two years ago. B of A's $6.9 billion reserve against bad loans is a nail-biting 118% of the value of past-due loans. (The industry average is 146%.) Meanwhile, consumers have exploited cheap money by refinancing mortgages--the volume's up nearly 50% year to date--which generates fee income. They have bought money market funds instead of stocks and are paying debt more slowly, meaning more interest for the bank. All this helped Bank of America trounce the Street's second-quarter earnings estimate, $1.24 to $1.18.

Says McClelland: "If the consumer stays fairly solid, this bank's going to have a great ride." But every farmer knows that luck can run dry. The net interest gains and the bump in mortgage fees are one-time-only. If consumer credit unexpectedly cracks or the bank takes hits in its loan portfolio, its fragile credibility with Wall Street will wither, and Lewis will be no better off than McColl.

The long-term test is whether Lewis can build a team equal to his ambitions. Says McColl's scourge, Tom Brown: "By no measure is this a great financial institution. This is just a large financial institution. If he's serious about making it great, he'll have to make hard decisions about people." The problem, says a man once high up in old BankAmerica: "The same small cadre of NCNB people is in power in this company." Lewis, Hance, Brown, chief risk officer William Vandiver, and Gene Taylor, head of the consumer bank, have worked for the company for a total of 141 years. The board of directors, improved by a couple of Lewis' additions, still carries McColl cronies whose shenanigans twice caused FORTUNE to list it among corporate America's worst boards.

Just beneath, though, is some impressive talent, including Liam McGee in California, where B of A was the only bank whose deposits grew faster than the market last year. Most interesting is a group of strong, smart women. Barbara Desoer, who runs consumer products like mortgages and credit and debit cards, and Amy Brinkley, Vandiver's deputy, are Goslee's (and hence Lewis') strongest allies in process management. Cathy Bessant, who twice spurned Bill Clinton's invitation to join the Federal Reserve Board, has taken over the troubled Florida bank and is tipping its numbers upward. Bessant, who believes in past lives, has a future.

An amateur psychologist might read too much into the way Lewis--whose mother so steeled his ambition--has brought this trio to the highest levels of the bank. Certainly, maybe shrewdly, they and Lewis' hires from outside represent a culture that's different from the good old boys' but doesn't threaten it head on.

In banking, good decisions matter more than assets; bad decisions bring the assets down on your head. With $12 billion in cash flow to put to work each year, Lewis gets to make lots of decisions. He says, "I want to be the kind of executive who isn't the most charismatic, isn't the best salesman, isn't even the best manager--but all of a sudden you see he has the best sales force, the best team, the best combination of all these things." That's a matter of good farming, day in and day out. Says Vandiver: "We've got to go execute. If we fail, shame on us. We all ought to be fired, shot, and thrown in the gutter."

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