Cash over flash

Fifty-eight floors below the conference room where the man who runs the world’s most profitable company rattles off numbers — most profitable, he corrects himself, except for Big Oil — what once was called the Crossroads of the Carolinas crackles with commerce. It’s now a nexus of the nation’s business, all because gall and guile grew a Charlotte bank into a global giant. But up here, above it all, Bank of America Corp.’s chief executive makes it seem dull.

Ken Lewis sticks to the script, meting out the metrics. The room, like the man, says little. There’s a rendering of Bank of America Stadium, where the Panthers play a few blocks away, some plaques and awards, a small flat-screen TV. Performance, he and his surroundings intimate, is what counts, not personality. His predecessor was the most dynamic Tar Heel CEO of his generation. But Lewis has something Hugh McColl never had — some of the best numbers in the industry. “Ken always was a better businessman than I am,” McColl says. “He’s better at making money than I am.”

On Aug. 8, BofA nudged out Citigroup as the world’s most valuable financial-services company, with market capitalization of nearly $240 billion. It has been running neck-and-neck with its New York rival since. After reporting second-quarter earnings of $5.48 billion — more than any other bank — the third quarter’s were up 41%, the $5.42 billion profit just shy of Citigroup’s $5.51 billion. That’s basically a tie, BofA’s chief financial officer argues, if you subtract one-time gains and other factors. Total return on BofA stock has soared 142.2% since Lewis took over five years ago. The average gain for big-bank competitors: 59%.

It’s inevitable that Lewis, 59, be compared with McColl, who built what was once North Carolina National Bank into a behemoth through staccato acquisitions in the ’80s and ’90s. He exhales a barely audible chuckle. “We said in 2001 we were not going to be able to double our size every other year through some megamergers. What I’m proudest of is the combination of all these things. Gains come through getting it right every day, as opposed to episodic events.” Lewis proves, as one analyst has said, that in banking, boring is beautiful. Colleagues call him focused. Critics call him calculating. Either way, his push to make his company the most efficient, most profitable big bank in the country is built on millions of small successes. Court mom-and-pop customers. Sell them credit cards and mutual funds. Outflank the big brokerages by offering some customers free trades. Sell more, and spend less doing it.

Now comes the challenge. Facing regulatory limits on deposits gained by acquisitions, BofA can no longer rely on buyouts to boost revenue. “In terms of another bank acquisition in the U.S., we have very few options,” he concedes. So he intends to grow in three ways: by selling more products and services through a network of 6,000 branches — the country’s largest — by expanding abroad and by making BofA a serious player on Wall Street.

Each requires different skills; each pits the bank against tough competitors. In financial retailing, BofA could face one of America’s most fearsome companies. Wal-Mart, its denials notwithstanding, is almost certain to enter full-service banking in a few years. Abroad, the bank will square off with European companies that long ago embraced international finance. Giants such as England’s HSBC Holdings and Spain’s Banco Santander Central Hispano won’t be the pushovers commercial banks in this country have been. On Wall Street, BofA will tangle with the likes of New York’s Goldman Sachs and Switzerland’s UBS. For a decade, it has tried, with scant success, to be a force in investment banking.

Can Lewis pull it off? Investors seem to think so. In early October, he chalked up another record when BofA shares closed at $54.82, adjusted for splits and dividends. His board apparently agrees, making him one of the best-paid CEOs in his industry: $22 million in cash, stock, options and perks last year. But is the man who made Bank of America live up to its name the one who can turn it into a real world power?

Though he no longer has a formal role in the bank, McColl has offices six floors below Lewis in the 60-story Bank of America Corporate Center. Now 71, he recalls when he first realized that Lewis might follow in his footsteps. It started with a fit of temper. In 1981, he had tried to buy Florida National Bank, one of that state’s largest, but had been rebuffed. “One day,” he railed, “we’re going to own this whole goddamn state.” By the end of the next year, NCNB was on its way to doing that. It had paid $225 million for banks that covered the population centers. More followed. Many resembled little First National Bank of Lake City. It was no bargain, even at $6 million. First National was on a government list of banks that might fail, operating at a Margaritaville pace, paying low interest rates to docile oldsters and making shaky loans to bankers’ cronies. In 1986, McColl decided he needed a new Florida president to whip laggards like Lake City into shape, so he asked Buddy Kemp, a key aide, for advice.

Kemp, who died in 1990, suggested Lewis, a middle manager who since joining the bank as a credit analyst in 1969 had earned a reputation as a fierce cost cutter and fanatic about the bottom line. Some called him “Little Hugh.” Though his standoffish personality was a pole apart from that of flashy McColl, he shared the man’s competitive streak. “I picked up the phone and asked him to come up to my office. I said, ‘I want you to go run the Florida bank,’” McColl recalls. “He said, ‘Yes sir.’ I said, ‘When can you go?’ He said, ‘As soon as you finish talking to me.’ That was the turning point, in my opinion, of his career.”

While others at the bank might have seen similarities between them, Lewis knew early on that trying to ape McColl was a fool’s game. “Every era might need a different personality,” he explains, noting that McColl’s predecessor had been the cerebral Tom Storrs, who had a Ph.D. in economics. “I wouldn’t describe myself as outgoing, liking the limelight. But I also saw in my career people trying to emulate Hugh McColl and not succeeding at it, because he’s unique.” In fact, for two white Southern bankers, their backgrounds could hardly differ more. McColl comes from an affluent South Carolina family, the son and grandson of bankers. He loves to portray himself as a scrappy outsider, but even if he hadn’t ended up rich and powerful, he was headed for a life of social prominence. Lewis started out on the wrong side of the tracks. He was born in Meridian, Miss., but his people were from Walnut Grove, about an hour away. Mayor Grady Sims says the town today has about 500 “good family people.” None of the Lewises among them remembers Vernon Lewis and his wife, Byrdine. Or their oldest child, Kenneth Doyle Lewis.

Lewis’ father got no further than elementary school. His choices, Sims says, would have been working in the poultry plant or lumberyard. With a wife and son to support, he joined the Army after World War II, served in Germany and, when his son was about 7, was stationed at a base near Columbus, Ga. The marriage ended there in 1958, and his father dropped out of Ken Lewis’ life. His mother, a nurse, struggled to pay the bills and keep their small tract house. “She essentially raised my sister and me,” Lewis says in a published oral history of his family. “One of the things I remember most is her work ethic.” She often had to pull double shifts, working from 7 a.m. to 11 p.m. Little Ken pitched in. In a nearby trailer park, he sold Christmas cards and Grit, a tabloid newspaper popular in rural and small-town America.

Even back then, he tried to work smart. As a high-school senior selling shoes, he memorized the sizes in stock. “If somebody asked for a certain shoe, I’d remember that we didn’t have that size and wouldn’t have to go all the way back to check. You could be much more efficient.” He earned a 6% commission on $6 shoes. Knowing he had to work his way through college, he chose Georgia State University, figuring jobs would be plentiful in Atlanta. He held several, including accountant for a bond firm and reservations agent for United Air Lines. The experience bolstered the finance degree he earned in 1969. “I felt like when I went into the business world, not only did I have a business degree, but I had some background that maybe others didn’t have.”

Intensely private, he admits, “I do better with business questions than I do with personal ones.”

Lewis interviewed with several banks, including Atlanta-based C&S, Charlotte-based First Union and Winston-Salem-based Wachovia. (The latter two are now merged as Wachovia.) Offered jobs — in several cases, on the spot — he dismissed the established banks as stuffy and said yes to scrappy NCNB. McColl, then a comer within the bank, noticed him. “I’d say it was probably in 1969. I’d been with the bank about 10 years then, and I met all the trainees. Most came in as credit analysts.” He and Lewis had something in common. “We both wanted to be president of the bank, and as a result, we were both willing to do whatever we were asked to do. I used to run into people who wanted to be the best loan officer or the best bond trader or this or that. You didn’t run into a whole lot whose goal was to be the president. His was.”

Their similarities ended there. McColl, who had served in the peacetime Marine Corps, styled himself as a hard-charging warrior, Errol Flynn in a banker’s blue suit. He had a vision, too: a Southern-based bank stretching from coast to coast, a financial rebel yell that would shatter the dominance of the Northern money centers. Lewis, in contrast, was a detail man, the buckle to McColl’s swash. McColl made the deals, but in many cases it was Lewis who made them.

In the ’80s and early ’90s, McColl hustled Lewis from crisis to crisis. After Florida came Texas. In 1988 in a $1.3 billion deal, NCNB gobbled up the state’s biggest bank, First Republic, which was choking on bad oil and gas loans. McColl says each First Republic branch ran independently, canceling any economies of scale the bank’s heft offered. Lewis consolidated back-office operations and began rewarding managers based on performance. Texas politicians railed against the Carolina carpetbaggers, but First Republic began bringing in profits. “That’s when Ken’s stock really started to rise in the company,” McColl says.

Clambering up the corporate ladder, Lewis worked in nearly every department, readily accepting transfers as his reputation as a fixer grew. “I know I sent him at least five or six different places,” McColl says. The broad background has helped. “In many cases, yes, I’ve grown up with the company,” Lewis says. “I’ve run most of the businesses.” Even as he rose into increasingly public roles, the intensely private Lewis remained ill at ease in some social settings and uncomfortable revealing much about himself. “I do better with business questions than I do with personal ones,” he says. After divorcing his first wife in 1980, he married a staff member. A friend says he’s making a conscious effort to loosen up socially by pursuing the passions of many an arriviste CEO — expensive wine and fine art. He has filled an Aspen, Colo., vacation home with Persian carpets and Wild West art.

His owlish exterior masks a hawkish heart. Past and current colleagues portray him as fiercely — sometimes ruthlessly — driven and canny about people. Karen Geiger, now a professor at Queens University of Charlotte, recalls her job interview in 1982. He asked one question — why should we hire you? — then let her squirm. “He sat there while I talked for 45 minutes. I was thoroughly intimidated. I’d stop, then he’d wait for me to start again.” When she left the bank in 1993, she was senior vice president for training and family programs.

As Lewis notes, there are different styles for different times, and his might fit these better than McColl’s would. “There was a period in the ’90s when CEOs became like rock stars,” says Joel Smith, a former BofA executive who is dean of Moore School of Business at the University of South Carolina. “People like Carly Fiorina [Hewlett-Packard’s chief executive from 1999 to 2005] were more show ponies than CEOs. A CEO now has the luxury of being who they want to be, not to fit in somebody else’s image.” But in public companies, they still have to politic. They might not seek out the limelight — that might even be frowned on today — but they can’t shun it. They must personify their companies in front of Wall Street, the public and the press. That’s a role in which Lewis remains uncomfortable. In a recent public-television interview, he initially looked wooden, blinking and nervously licking his lips. But when the questions turned tough, he reeled off what he considers the bank’s achievements since he has been CEO.

One was the $35 billion acquisition of Wilmington, Del.-based MBNA, the country’s largest credit-card issuer. Yes, he replied to a question, he had to cut 6,000 jobs. “But it makes us the largest credit-card company in the world.” And if the bank’s size and aggressiveness worry many in the industry, so be it. “I hope so,” he says. “I don’t necessarily want any of them to like me. I don’t mind a little fear when they hear Bank of America.”

He likely inspires fear within BofA, too. Given his relentless cost cutting, many employees come to work fretting about their future. Since taking the reins, he has slashed about 35,000 jobs, including those in banks it acquired. BofA employs about 205,000. “It’s not because I’m a bad guy,” he told the TV reporter. Layoffs are “a brutal fact,” when any industry has overcapacity, which banking does. About half of the nation’s banks that existed in 1980 were bought out by 2000 — some 3,000 disappeared in the ’90s alone — creating massive duplication. Lewis’ cost cutting has paid off. In 2005, he pushed the bank’s efficiency ratio — expenses as a percentage of revenue — below 50% for the first time. In 1998, the year McColl acquired San Francisco-based BankAmerica, it was 61%.

He also has pulled off three major acquisitions. Besides MBNA, he bought FleetBoston Financial in 2004 for $48 billion and a 9% stake in China Construction Bank last year for $3 billion. He says the deals prove analysts were wrong when they concluded that BofA’s acquisitions ended with McColl’s retirement. Tom Brown, an analyst with New York-based Second Curve Capital, argues that this legacy isn’t one that Lewis should boast about extending, saying McColl’s merger binge destroyed shareholder value.

Bumping against a federal limit that says no bank can gain more than 10% of the nation’s deposits through acquisition, BofA’s expansion in the United States depends on other kinds of deals — buying an investment bank would be allowed — or organic growth. It will have to sell more products and services to customers or find ways to lure new ones into its branches. And of course, Lewis will continue to try to wring efficiency out of his far-flung franchise. “Our business — banking — is relatively mature, and you have to focus on operating revenues — the relationship between revenue growth and expense growth. And you have to focus on productivity, to make sure you’re getting gains to be able to reinvest.”

Domestically, Lewis says, the bank is sailing on strong currents. It’s used by nearly 4 million Hispanics — about 57% of the Hispanic households in its territory — and fares well with older customers. But Wal-Mart, the possible threat to its retail banking supremacy, has been just as deft at wooing Latinos. In April, it asked regulators to allow it to offer credit- and debit-card services and electronic-check transactions. Company officials say Wal-Mart doesn’t want to go into full-service banking, but few analysts believe them.

Lewis believes in scale: “I’d rather focus on dominating markets than being unimportant in a lot of places.”

Lewis says his bank has enough heft to fend off the retailer. “The lack of thousands of stores like we have will be a huge competitive disadvantage for them. They don’t have the geographics, and that’s something if they didn’t address, it would be hard to compete as a national consumer bank.” Wal-Mart, with nearly 3,300 U.S. stores, does have fewer domestic locations than BofA. But analysts say Lewis should know that, in an age of electronic bill paying and automated teller machines, folks need groceries and diapers more often than they need to visit a bank.

Lewis is courting the Hispanic market outside the U.S. as well. He has placed a major wager on Mexico, where BofA owns about 25% of Grupo Financiero Santander, the country’s third-largest bank. It’s moving into Europe and Asia, too, but cautiously. Lewis doesn’t see a need for a major retail presence in slow-growing Europe, preferring more profitable spots. China, however, is poised to become one of the world’s largest banking markets, though its state-controlled banking system is fraught with peril. Many banks are larded with bad loans made to state-controlled companies.

Lewis is playing that market prudently, with a relatively small stake in China Construction. After acquiring it last year, he fine-tuned BofA’s Asian presence. In August, he sold a controlling interest in Bank of America (Asia) to China Construction for $1.25 billion. The deal included three offices in Macau and 14 in Hong Kong. He’ll zero in on one of the activities that BofA excels at — selling credit cards — through a joint venture with China Construction. Lewis also recently sold off parts of the bank’s South American holdings to Brazil’s Itau Holding Financeira for a 7% stake in Itau Holding. “In all cases, we’ve said we want a dominant market-share position, or we’ll not be in the business,” he explains. “Places where you’re not important and not in a dominant position, you really can’t get the scale you want. I’d rather focus on dominating markets rather than being unimportant in a lot of places.”

Richard Bove, an analyst at New York-based Punk Ziegel & Co., says Lewis’ bank remains ill-prepared for overseas competition. “Bank of America is domestically bound, and the real growth in the world over the next 10 or 20 years is not going to be in the U.S.” Lewis, he adds, seems unsure of himself when it comes to “doing business in localities where he does not understand business practices, governmental policies and even the language.”

A way to redress that would be to buy foreign retail and commercial banks. But that could force a head-to-head confrontation with Citigroup. “They’d be involved in a tremendous game of catch-up,” says Frank Barkocy, an analyst for New York-based Keefe Managers. “Citigroup is already positioned in those markets in 50 countries.” Even so, rumors of BofA merger discussions with foreign outfits don’t abate. Talked-about targets have included ABN Amro Holding, Netherlands’ largest bank; Mexico’s Grupo Financiero Banorte; and the United Kingdom’s Barclays Bank and Lloyds TSB Group.

BofA is playing catch-up in investment banking, too. Earlier attempts to beef up its presence in the lucrative world of corporate finance haven’t amounted to much. Its 1997 purchase of San Francisco-based Montgomery Securities, for example, was supposed to make it a serious player in high-tech mergers, acquisitions and stock offerings. But about a year after the deal closed, Montgomery CEO Thomas Weisel left to start his own firm and lured several top employees to join him. In an interview with The New York Times, Weisel described the problem between BofA and Montgomery as “cultural — the bureaucracy of a larger bank being imposed on an entrepreneurial shop.”

BofA would face a similar culture clash if it were to try to buy one of the storied New York investment banks — Goldman Sachs, Morgan Stanley or Bear Stearns. Yet that seems to be the only way it could gain the market share to compete seriously. Lewis, not surprisingly, disagrees. “To put it in the proper context, we’re the largest corporate bank in the U.S. and one of the largest in the world. Our global corporate bank this year will make in excess of $6 billion, after taxes, which would rank us high in the world as a separate company. We get lots of revenues from treasury management, foreign exchange, trade finance and not by providing capital but raising capital. We think it’s a logical extension of serving our corporate-banking base by adding investment banking.”

It may be logical, but it won’t be easy. Banc of America Securities ranked 20th in deals, measured in dollars, over the year ended in mid-October, according to SNL Financial. Citigroup and Goldman Sachs topped the list, with volumes 20 times greater than BofA’s.

Six floors down, Hugh McColl scoffs at the skeptics. By the time Lewis’ retires, he predicts, Bank of America will be the second-most profitable company on earth, trailing only Exxon Mobil. “If we could price money like they do oil, we’d already be making more money than they do.”