Banker of America
By ignoring his critics, Ken Lewis built the country's biggest retail bank. Look out, Citigroup.

(FORTUNE Magazine) – EXUDING A SELF-CONSCIOUSLY WESTERN CHIC IN his pressed jeans and polished boots, Ken Lewis tours his striking new home near Aspen. The chalet is built of local stone and timber. It is filled with rare Persian carpets. And it sits on a parcel of spruce-carpeted mountainside with a view so beautiful that Lewis just had to buy it.

What really excites Lewis, though, is his collection of art from the American West. His favorite piece is a bronze depicting four elongated, scraggly cowboys sporting six-guns and ten-gallon hats: "I had to have this one," he purrs. The band's leader, he explains, is Black Jack Ketchum, a notorious bank robber of the 1890s, who was lynched and, in the process, decapitated. "The lawmen put his own head in his [Ketchum's] hands!" says Lewis. "I have the newspaper photo." Dramatic pause. "Of course, in banking I've met some desperadoes of the modern kind." And Lewis has left them holding their heads in their hands.

For three decades Lewis, 58, has relished playing the outsider who isn't welcome in polite banking society. He helped build Bank of America into the largest consumer bank in the country through a series of shootouts with older, often aristocratic, institutions that deeply resented him. "We never had a lot of conflict inside the bank, because we always focused our aggression outward," says Hugh McColl, the architect of BofA's expansion. "To do that, I always kept an enemies list. Ken keeps the enemies list alive."

So who heads the list now? Citigroup, says a top BofA executive. "The hunt is on."

Lewis dreams of posting bigger earnings than Citi, a goal he's on track to reach next year. He's targeting Citi's dominance in investment banking, a field where BofA is an also-ran. The ultimate goal is to become known as the world's leading bank--a title Citi now holds by acclamation.

Lantern-jawed and relentless, Lewis is used to thinking big, an attitude that helped him build something totally new in banking: the first coast-to-coast-franchise. BofA has 5,880 branches--half as many as McDonald's and almost seven times as many as Citi. The beauty of the franchise is that it is strongest in America's fastest-growing markets, specifically California, Florida, and the rest of the Southeast. Those areas are also rich in banking's most dynamic demographic: Hispanics. BofA holds $635 billion in deposits, one-fifth more than No. 2, J.P. Morgan Chase; in its footprint, it has one-seventh of the total. "In consumer banking Bank of America is the franchise to beat," says Charles Rauch, an analyst with S&P.

Bank of America is a breed apart. Citigroup and J.P. Morgan rely more on corporate and investment banking, and have strong operations in Asia and Europe. By contrast, BofA derives 95% of its revenues from the U.S. and does two-thirds of its business with consumers and small companies. It harvests revenues through millions of tiny transactions each day, from garnering fees on credit cards and mortgages to making car and home- equity loans. Nor does BofA have much in common with its two biggest rivals specializing in consumer banking. Wells Fargo and Wachovia are powerhouses mainly on the West and East coasts, respectively. The recent deal to purchase credit card giant MBNA for $35 billion sets BofA further apart. When the deal closes, it will be the country's biggest credit card provider.

For Lewis, the challenge is to prove that bigger also means better. So far his record is strong. Since 2001, the year he became CEO, BofA has posted average annual returns of almost 18%, waxing Citi, J.P. Morgan, Wachovia, and Wells. BofA is also increasing both sales and profits much faster than Citi. Net earnings have risen about 89%--three times as much as Citi's--over the past four years.

For all that, BofA is still a work in progress. It's fair to say that it has made its biggest strides by skillfully buying and integrating other banks. But for Lewis, the era of big deals in U.S. retail banking is over. Federal law prohibits any acquisition that would give a bank 10% or more of total U.S. deposits. BofA is at the limit. The new mission: Grow fast anyway.

To make that happen, Lewis wants to build the most efficient bank in the U.S. To do so, he has poached 100 Six Sigma--trained GE people, even though he regards CEO Jeff Immelt as both a friend and a business hero. Refined at GE during the Jack Welch era, Six Sigma is a method of improving operating efficiencies. Six Sigma--trained "black belts" help rank-and-file employees improve every step of their work processes--in BofA's case, from collecting bad loans to writing mortgages. The payoff is more production and fewer errors--all tracked by sophisticated statistical measures. This regimen is light years ahead of the traditional coffee-and-cookies approach to getting new business.

Lewis deployed Six Sigma to derive a metric that BofA had never before considered: the number of products each banker sells each day. He found that 20% of the employees in a branch were selling 80% of the mortgages, loans, and credit cards, and that many employees sold almost nothing. Now he imposes minimum daily sales quotas--typically, around a half-dozen products a day--for every banker. There's a carrot to match the stick: New incentives mean star producers can earn half their base pay in bonuses.

Can BofA prosper without serial deals? It's true that, with short-term rates rising, BofA risks losing some easy money; it can't just borrow at low rates and buy securities at higher ones. "We're worried that the flatter yield curve could hit earnings in the short term," says Ed Najarian of Merrill Lynch. The flat yield curve has not escaped the bank's notice. It's one of the reasons Lewis is buying MBNA: Credit cards are a lucrative way to put deposits to work.

Right now, the smart money isn't betting against BofA. The main reason to think it can keep growing goes to Lewis himself. What he knows--and Black Jack Ketchum didn't--is how to take money out of banks without robbing them.

MCCOLL TAUGHT HIM THE ROPES OF banking, but Lewis got his drive from another iron-willed boss--his mother. Lewis's parents, an Army sergeant and a nurse, divorced when he was 12. He grew up in a tiny tract house in dusty Columbus, Ga. Byrdine Lewis, who often worked 16-hour days, expected epic feats from her son. When he showed her his fifth-grade report card--one B, the rest A's--Mrs. Lewis said only, "You'll do better next time."

In classic bootstrap style, Lewis honed his work ethic by tackling the humblest of jobs. At age 11, he sold Christmas cards door-to-door in a nearby trailer park. As a salesclerk at a shoe store in high school, he recognized that the key to success was "not to waste two to three minutes running back and forth to the stockroom." So he memorized the inventory, then steered customers to styles that were in stock. He cleaned up.

After graduating from Georgia State in 1969 with a finance degree, Lewis shunned job offers from the Atlanta banks because they were stuffed with old-money attitudes and empty of the entrepreneurial buzz he relished. Instead, he joined the small but energetic bank in Charlotte that became NCNB. "It was an ambitious underdog, like me," says Lewis. "I viewed it as a meritocracy, where results would be everything."

Lewis also liked NCNB because it was one of the few growth machines in banking. North Carolina was far ahead of other states in allowing branch banking, and NCNB rampaged through the state, buying up local rivals. The head rampager was Hugh McColl. "I have an imperialistic mind," says McColl, who relished being photographed with his troops, sporting his old Marine helmet. In the early 1970s, McColl sent Lewis to rural Texas and upstate New York to sell loans to companies that did business in North Carolina. Recalls Lewis, wearing his bitterness like a medal: "We were looked down upon by the New York banks, the California banks, and even the Texas banks."

Lewis's cool restraint impressed McColl. "He always had good credit judgment," says McColl. "He never fell in love with a company." But Lewis always liked the consumer business far better than corporate lending--and still does----for a simple reason: The loan losses in retail tend to be small and predictable, while one big, failed business can blot a balance sheet for years. Lewis's conservatism about credit is a major reason that, until recently, BofA has focused its expansion on consumer banking. It ain't sexy, but it pays.

McColl and Lewis could hardly be more different. McColl made deals; Lewis watched the overheads and boosted the sales-per-manager ratio. Lewis is an introvert, McColl a hearty backslapper. McColl is colorful, Lewis is, well, not. "What does he like to eat?" asks his buddy, restaurant entrepreneur Dennis Thompson. "Steak, steak, and more steak."

Like McColl, though, Lewis hates to lose. "Ken is one of the most intense, competitive people I've ever met," says Bill Vandiver, who retired as head of BofA's risk management. "He's a bulldog." McColl distills his respect in a sentence: "Whatever the situation, he always made money."

Lewis achieved stardom in the late 1980s and early 1990s by parachuting in to impose consistent sales and expense practices on the hodgepodge of banks that NCNB was acquiring. In Florida, NCNB was the first out-of-state bank to buy local ones, many of which were poorly run and ripe for the picking. "Bankers went there from all over the country not to work hard," says Lewis. At first NCNB struggled to book piddling profits. McColl sent in Lewis in 1985. In three years he transformed the sleepy branches into selling machines.

In 1988, McColl dispatched Lewis to Texas at the height of the S&L crisis. NCNB had just doubled its size with a deal to buy First Republic from the FDIC for $1.3 billion. First Republic was riddled with dud loans in two reeling industries--property and oil and gas. But the situation was actually a good one: NCNB could keep whatever it could collect, while the FDIC got the losses. If Lewis could get the retail business going, NCNB could make a ton of money.

What he found reminded him of Florida. In both states, each branch was run like a separate business. Instead of pooling their purchasing power, the branches did all their buying separately, placing small orders at unfavorable prices. The managers spent most of their time on tasks like negotiating rents and finding the best phone deal, instead of rallying their staffs to sell things. "They viewed their bankers as order takers," Lewis recalls.

Lewis radically changed the template. He centralized all expense management, including staffing, and measured bank managers strictly on sales and customer service. The new strategy, along with a reviving Texas economy, made the First Republic deal probably the best bank acquisition of the last quarter century. It's the only part of the experience Lewis remembers with pleasure. "We were considered carpetbaggers," he says. "The other bankers wouldn't let us in their circle and certainly not in their country clubs. So we formed a family with our own associates. It was us against the world."

The deal that busted McColl and Lewis out of the pack of ambitious Southern banks came in 1998 with the purchase of California's BankAmerica. They proudly called the new entity Bank of America, but the deal looked like a poor one for Lewis. Until then he had been heir apparent. But to get the deal done, McColl pledged to make David Coulter, BankAmerica's CEO, his successor. Stung, Lewis refused to report to Coulter.

In fact, Lewis had nothing to worry about. He was given control of consumer banking, while Coulter was banished to the hinterlands: risk management and technology. "I gave him nothin'," says McColl with satisfaction. Within a few weeks Coulter left, a casualty of the BofA brotherhood. Thinking back over this period, Coulter says that "McColl always did favor Lewis," but insists that he didn't covet operating authority. "The executives would have reported to McColl anyway," he notes. True, but perhaps beside the point: He was gone, and Lewis wasn't.

The BofA deal came on the heels of two other huge acquisitions in 1997 and 1998, Boatmen's Bancshares of Missouri and Barnett of Florida. BofA vastly overpaid for Barnett and then blew the transition. Computer snafus and poor service sent customers fleeing. Three big acquisitions in two years, all at a frenzied pace, "was just too much integration to do in too short a period," admits Lewis. The tumult undid much of the improvement to customer service. The stock sank.

In 2001, McColl finally stepped down, handing off a big but slightly bruised BofA to Lewis. With all due respect to the legend, Lewis promised to do things completely differently. No more acquisitions for a while, he said, just a strict and steady emphasis on the things he really loved: process improvement and internal growth.

It was the right move, and Wall Street rewarded the hunter-turned-rancher with praise and a rising stock. But perhaps Lewis was more like McColl than even he knew: The retrenchment lasted only two years. In 2003, Lewis dropped a bombshell, announcing the $47 billion deal for Boston-based Fleet. Investors considered the move reckless--the price was a 40% premium, a figure reminiscent of the markup on the Barnett deal--and promptly knocked the stock down 10%. Lewis's fortunes sank even lower that year when Italian food conglomerate Parmalat went under in an ugly scandal. BofA took a $450 million writedown. Its image also suffered a blow: Three of its former employees in Italy have been indicted, and it faces civil suits from the Milan regulators in Italy and from Parmalat's bankruptcy administrator in the U.S.

To make matters worse, New York State Attorney General Eliot Spitzer and the SEC alleged that BofA helped clients pocket illegal gains from mutual fund trading in mid-2003. The encounter with Spitzer still hurts. "It was one of the most unpleasant meetings I've ever been through," says Lewis. The company never went to court, but in March 2004 it paid investors who had suffered harm $250 million, plus an additional $125 million in fines.

None of this was fun. What may matter more, though, is that BofA was able to take such lickings and still perform. The Fleet deal looks like a roaring success. For one thing, BofA exceeded all its cost-cutting goals. For another, most companies that are bought out lose customers; instead, between April 2004 and June 2005, the former Fleet franchise added 600,000 new checking and savings accounts.

Lewis is working two levers to keep BofA healthy and growing. First, he's slowly moving into international banking, an area McColl shunned. In 2002, BofA paid $1.6 billion for a 25% stake in a big Mexican consumer bank, Grupo Financiero Santander Serfin. Mexican Americans can now send money home by wiring funds to an account at Santander; their relatives retrieve the pesos by using an ATM card at a Santander branch. Lewis is also placing a sizable bet on China, paying $3 billion for a stake in China Construction Bank. It's unlikely his international ambitions will stop there.

Second, he is shifting more of BofA's deposits into higher-yielding loans. That's a major rationale behind the MBNA acquisition. BofA has far more deposits than it can or wants to lend out. The reason: Growth in small-business loans is sluggish, and BofA has cut back credit to big corporations. But it has loads of deposits just waiting to be put to work. Enter MBNA, which has $80 billion in credit card loans that it's funding mainly by selling securities backed by the loans at market rates. Lewis plans to start funding those credit card loans with BofA's deposits, which are cheaper. What makes the deal even more promising is that MBNA's loans have higher yields than the rates BofA now collects by investing deposits in government bonds, around 3.5%. It is, in short, a perpetual money machine.

Can the same be said for BofA as a whole? The company has never been a favorite on Wall Street, and it trades at a relatively low multiple, under 11. One concern is that the company gets a good chunk of its income from nonrecurring assets, like sales of securities. But the larger one is that Lewis, like his mentor, will hit a point where he allows his reach to exceed his grasp. "Lewis is a size-driven egomaniac," says hedge fund manager Tom Brown. "He views success as being the biggest and a survivor."

Brown is a particularly acerbic critic of Bank of America, and he doesn't hold its shares in his fund. But his thinking hits a nerve even with less skeptical investors. A close associate says flatly that Lewis's goal is to build the world's top global bank. Lewis himself says only that major international expansion is a few years off. But the ambition of the man is palpable--and the recent deals in Mexico and China look like appetizers. What keeps investors awake at night is the specter of BofA doing too much risky business----either on trading desks at home or by diving into international waters and getting expensively soaked. Wall Street would really like Lewis to just settle down and digest everything he has swallowed. Don't bet on it. After all, there's an enemies list in his pocket.