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Following the leader

Ken Lewis is no Hugh McColl.

Ken Lewis is no Hugh McColl.

Start with the obvious: Size. Not just their heights, but their approach to business.

A pugnacious ex-Marine, the pint-size McColl in less than two decades transformed his equally pint-size Charlotte, North Carolina, institution into what is now Bank of America, the biggest retail bank in the country. His No. 1 goal was growth; profits could come later. Before the Internet landgrab got under way, McColl was perfecting the banking version of eminent domain. And he succeeded -- by guile, by force of personality, by the financial world's equivalent of bomb tossing. Inside the bank he fashioned a gung ho, charge-the-hill esprit de corps; outside he twisted arms and knocked heads, making deals and enemies with equal abandon. Those who strayed from the program got summarily executed; those who excelled were awarded crystal hand grenades that they could polish and display on their credenzas.

More of the same might have been expected from Lewis, who had earned plenty of trust and trophies doing battle as McColl's right-hand man and the bank's No. 2 executive from 1993 until April 2001. But for a handpicked successor, Lewis -- a head taller and 12 years younger than the 67-year-old McColl -- is proving to be quite a different CEO. Understated, patient and calm, Lewis has gladly tossed aside the dictates of size and scale, of big visions and even bigger balance sheets, to drill down on results. A by-the-numbers, bottom-line-oriented manager, Lewis has put BofA on a diet, shrinking its loans and assets and fiercely trimming costs.

To corporate customers who don't like the bank's new focus on making every relationship count, he has politely said, Take your business elsewhere. Some have. To motivate employees, he's tossed aside the military trappings and brought in Mickey Mouse -- literally. Retail personnel are now being trained in a customer service program imported from the Walt Disney Co. that is supposed to turn client visits into feel-good experiences.

"We are managing for profitability, not sheer size and league-table rankings," Lewis explains. "There is a direct correlation between customer satisfaction and revenue growth."

In one sense the two CEOs are simply creatures of their eras. It took a McColl, exercising strict top-down command over his troops, to jawbone legislators and make the bold interstate forays that turned the sleepy North Carolina National Bank into the superregional NationsBank in the 1980s and the multinational BofA in the 1990s. But military actions cause casualties, and McColl's all-conquering BofA left behind a scorched landscape of bad loans, back-office glitches, disaffected employees and disgruntled customers. All of which led to deteriorating results that soured investors who nowadays won't tolerate such miscues as the price for achieving grand strategic goals. They remorselessly pounded the company's share price following the over-the-top purchase of Barnett Banks in 1998 and the NationsBank-BofA merger later that year. When vision gave way to execution, the company needed a decisive executive who could pick up the pieces and turn a leaner, more focused operation into a money-spinner. Enter Lewis.

"Ken's a detail man," sums up U.S. Senator Zell Miller, a Democrat who was governor of Georgia in the early 1990s, when Lewis was stationed in Atlanta. "McColl planted far and wide. Lewis has come along to do the weeding and pruning. He is the perfect person to follow Hugh."

Lewis has plenty of company these days among bank CEOs who must clean up messes left by a generation of visionaries who built dynasties that began to crumble before they stepped aside. Notable among these peers is Jamie Dimon, the erstwhile protégé of Citigroup's Sanford Weill, who two years ago replaced John McCoy at the helm of wobbling Bank One Corp. Dimon has returned the Chicago-based company to profitability after working through the bad loans of its First USA Bank credit card subsidiary. Then there's Kenneth Thompson, who succeeded Edward Crutchfield at BofA's longtime archrival, Charlotte-based First Union Corp. Thompson, who inherited a host of system integration problems after Crutchfield's 15-year merger binge, promptly made a name for his hitherto unfamous self by outmaneuvering SunTrust Banks in a brutal takeover battle for Wachovia Corp. last year.

Lewis didn't have anything so spectacular up his sleeve. He has made his presence felt principally by changing the focus -- and the tone -- of the bank. He moved decisively to pare the balance sheet and improve credit quality by shrinking corporate loans and exiting the automobile leasing and subprime real estate lending businesses. Lewis, who speaks softly and wears the trappings of power modestly, has managed this turnabout without explicitly repudiating McColl, whom he loyally served in many capacities throughout his 33 years in the organization. Self-effacing to a fault, Lewis credits all achievements to teamwork. "This is not about me," he protests frequently.

"Ken is a masterful builder of teams," notes BofA personnel director Steele Alphin, who has been with the company for 25 years. "He is 180 degrees different from Hugh McColl."

And Lewis has begun to deliver results. Though revenues were flat in this year's first half, at $17.4 billion, net income rose 13 percent, to $4.4 billion; earnings per share were up 16 percent, to $2.77; and return on equity jumped to 18.55 percent, from 16.27 percent in the 2001 period. To be sure, some of the improvement reflects write-downs taken last year, but cost controls engineered by Lewis are also playing their part. Noninterest expenses fell 5 percent in the half, to $9 billion, and the efficiency ratio, which measures overhead as a percentage of revenue, declined an impressive 304 basis points, to 51.54 percent. Shareholder value added, or ROE minus cost of capital, one of Lewis's preferred metrics, climbed 13 percent, to $1.7 billion.

Not that Lewis is satisfied. He has set more aggressive targets: 6 to 9 percent annual revenue growth, 10 percent annual growth in earnings per share and a 20 percent return on equity. Like many rivals BofA is being buoyed by retail, a vast operation with the nation's biggest store of deposits ($279 billion of BofA's $361 billion in deposits are retail) and 4,232 branches, which accounts for 65 percent of total revenues. Lewis must kickstart the bank's two other main business lines -- asset management and corporate and investment banking -- which have been struggling in the rough financial markets. Over five years he aims to boost asset management's revenue share from 7 percent to 12 to 15 percent; investment banking would decline to about 20 percent of revenues, from 25 percent, though with greater profitability.

Lewis has a long way to go in both areas, but he's won the market's relative favor for now. BofA's stock price in late September was about where it was on January 1 -- $63. The $1.1 trillion-in-assets Citigroup and $742 billion-in-assets J.P. Morgan Chase & Co. were both down 47 percent. The difference? BofA took its bitter medicine last year. Moreover, because McColl's efforts at pushing into higher-margin, higher-risk businesses like investment banking were inconclusive, the bank has so far escaped the kinds of exposures that J.P. Morgan and Citigroup have with Enron Corp. et al., through fancy financing structures.

"Bank of America has separated itself from the pack," declares U.S. Bancorp Piper Jaffray bank analyst Andrew Collins. He credits Lewis: "He improved customer service in the retail bank, eliminated a lot of the risk in the company and improved operational efficiency. He is going to increase shareholder value."

But Lewis is the first to admit that it's a work in progress. "Relative to the competition, we've had a great run," he says. "The question is, Can we sustain and accelerate that momentum?"

KEN LEWIS IS A NUMBERS MAN. HE'LL TOTE them anywhere, including to Southern Comforts, a trendy restaurant in the historic Dilworth section of Charlotte that is owned by his 30-year-old adopted son, Shayne. It's 6:00 p.m., the lights are low, the blues are playing at full tilt, and Lewis has in front of him a sizable helping of barbecued chicken that he has barely touched.

"These are the things that keep me up at night," he shouts over the din.

He doesn't mean the wings. He is pushing a piece of paper covered with numbers that are hardly visible in the dark room. On it is a chart of BofA's share performance versus its peers'. Early this year, before worries about Enrons and WorldComs hurt other big banks, Lewis was one frustrated CEO. Though his shares were up 27 percent in a year, his price-earnings multiple, at 12, trailed those of Citi, J.P. Morgan and regional powerhouse Wells Fargo & Co., the fourth-biggest bank. "I'm insulted by that, and I get up every morning and think about it," Lewis groused. (Lately, he has been savoring his company's surge. BofA's forward P/E, at 11, now exceeds Citi's 10 and J.P. Morgan's 9, according to Piper Jaffray. Wells still leads the group, at 13.)

Other statistics perturb Lewis. Credit risk is a big concern in a sputtering economy, especially with corporate defaults running at a fever pitch. His preemptive actions have helped; corporate loans, $99 billion in August 2000, are now $60 billion; the telecommunications portion of that has fallen by 45 percent over 18 months, to $3.7 billion. Nonperforming assets are down to $4.9 billion as of June 30, a drop of $1 billion since Lewis became CEO. "The entire risk culture has changed," declares chief financial officer James Hance. "Now we look at our relationships with customers holistically, and if we're not being compensated for the risk we take, we're saying bye-bye."

Lewis developed his hard-nosed approach to business early. Born in Meridien, Mississippi, the son of an enlisted army man and a nurse who divorced when he was seven, Lewis grew up in a working-class household with his mother and older sister in Columbus, Georgia. To help the family make ends meet, he sold Christmas cards door-to-door, bagged groceries at the A&P and delivered newspapers. In high school he worked part-time at a service station, a women's shoe store and a shipping and receiving dock.

He enrolled at Georgia State University in Atlanta in 1965 and worked his way over four years to a finance degree; his employers included a fire insurance underwriter, a bond agency accountant and United Airlines, for which he worked nights as a reservations agent. He got married during his sophomore year.

Upon graduation in 1969 Lewis went to work in Charlotte for North Carolina National Bank because, he says, it had "big ambitions" that seemed to match his own. "I came to this company knowing I'd like to be in charge of it some day," he says flatly.

Lewis keeps that drive under wraps. "He does not flaunt his ambition," says Walter Massey, president of Morehouse College in Atlanta and a Bank of America board member since 1993. "He worked his way up. He went to state schools. He is soft-spoken, very personable. If you were to meet him in a grocery store wearing casual clothes, you would never think he was the CEO of one of the largest banks."

Lewis rose swiftly through the ranks. He started as a credit analyst and within 13 months won a promotion into the national lending division -- "where all the stars were," including McColl, the group's chief. Nicknamed "Kiddle" because of his initials, KDL, Lewis at 23 was managing the bank's relationships with a small group of corporate clients in the Southwest. Promotions followed. By age 30 he was in New York running the bank's modest international division, which had $1 billion in assets and offices in London and Hong Kong. Two years later he moved back to Charlotte to run all U.S. commercial banking.

By 1983, the year McColl became CEO, Kiddle was ruling a miniempire; he had added middle market lending, international banking and treasury management to his portfolio. Soon McColl would begin a headlong expansion of NCNB, then with $13 billion in assets, into South Carolina, Georgia and Florida -- states that had joined North Carolina in passing reciprocal interstate branching laws then known as the Southeast regional compact.

In 1985 Lewis moved with his family -- he had divorced in 1978 and in 1980 married his present wife, Donna, Shayne's mom -- to Florida to run the company's budding operations, a small trust company and the First National Bank of Lake City, on the interstate banking frontier. Lewis drove his small staff relentlessly, and profits tripled, to $45 million, in the first year. Rival Florida companies, he says, "kept talking about North Carolina bankers coming down on flatbed trucks. But we got our revenge. The competition was not very good."

In 1988 McColl struck a complicated, first-of-its kind deal with the Federal Deposit Insurance Corp. to buy Dallas-based First RepublicBank, a casualty of the crash in the oil and real estate sectors. NCNB, then with $29 billion in assets, took on First Republic's $31 billion in assets and 178 branches -- and Lewis took the reins in Texas, helping to put NCNB on a course to go national. Lewis, by keeping a lid on costs and tirelessly pursuing new commercial accounts, pushed profits in Texas from virtually nil in 1988 to $165 million in 1989, 37 percent of NCNB's total earnings.

Lewis's next big assignment was in Atlanta, running the General Bank -- the forerunner of the retail unit now called the consumer and commercial bank -- from 1991 to 1994. Lewis oversaw the integration of C&S/Sovran Corp., a regional bank that NCNB acquired in 1991, which triggered the change in the corporate name to NationsBank. While there, Lewis began making investments in the technology platform for NationsBank's anticipated nationwide expansion.

Then Lewis was again called back to Charlotte -- to become president and heir apparent. Now he had leeway to do some deal making of his own, and in 1996 he negotiated the $1.69 billion purchase of BankSouth Corp., a $7.4 billion-in-assets Atlanta bank. The deal was expensive -- at 2.4 times book value, it was 600 basis points more than what was usual at the time. Lewis, however, wielded a heavy ax and achieved unheard-of efficiencies: He closed 100 of BankSouth's 149 branches and laid off 2,000 employees. "He promised 65 percent cost saves, and no one believed he could do it," says merger lawyer Edward Herlihy of Wachtell, Lipton, Rosen & Katz, who has represented BofA and its predecessors for 20 years. "But working with the numbers, driving it forward, he did it." The transaction insured NationsBank's dominance in Atlanta.

The juggernaut ran aground in 1998, when NationsBank bought Jacksonville, Florida­based Barnett Banks. McColl paid $15 billion -- a whopping five times book value -- to become No. 1 in Florida, but the takeover was poorly executed. Systems broke down, service deteriorated and customers defected in droves. BofA's share of Sunshine State deposits contracted from 27 percent in 1998 to 21 percent in 2001. Lewis and his retail team -- including R. Eugene Taylor, his chief retail lieutenant, who was running the Florida business at the time, and chief marketing officer Catherine Bessant -- were duly chastened. "We used to do things fast and always the NationsBank way," says Bessant. "It was very hard on the customer."

McColl put the Barnett fiasco behind him and crowned his career -- and completed NationsBank's coast-to-coast march -- by agreeing in April 1998 to purchase BankAmerica Corp. for $60 billion. The move put a temporary halt to Lewis's relentless march to the top, because BofA's CEO, David Coulter, had negotiated the title of president for himself. Lewis went back to being head of consumer and commercial banking, only to face angry staff members at the acquired bank who were suddenly reporting to distant Charlotte. "I spent about four months full-time in San Francisco," says Lewis. "It was all-consuming. I met with 10,000 associates in these rough town hall meetings. You could feel the bitterness in the air."

A month after the acquisition closed, the quarterly earnings were wiped away by a money-losing relationship that Coulter had entered into with New York hedge fund manager D. E. Shaw & Co. Coulter took the fall and resigned, and Lewis regained the presidency. Over the next three years he took on more and more responsibilities as McColl became less and less engaged with day-to-day concerns. With a few key decisions in the summer of 2000, Lewis began to signal where he wanted to go as CEO: He authorized the purchase of the 50 percent of Marsico Capital Management that BofA didn't already own, underscoring the importance of asset management; he launched a retail initiative known as "the Atlanta prototype," the experimental redesign of 20 branches that would lead to a revamping of the entire retail network; and he began the process of selling and writing off questionable loans, reversing the go-go balance-sheet growth of the 1990s.

When McColl retired in 2001, Lewis took full charge of the $638 billion-in-assets, 137,000-employee behemoth with its 32 million retail and small-business customers, relationships with 95 percent of the Fortune 500 companies and $300 billion in client funds under management. But the bank was saddled with almost $6 billion in nonperforming assets, and its efficiency ratio, though improved from 60 percent during the Barnett crisis, was still north of 54 percent. Lewis, in talking up an integrated consumer-commercial-investment banking strategy, faced quite a bit of skepticism; after all, he and his heads of retail and corporate banking, Taylor and Edward Brown III, were all 30-year veterans of the company. The Street was skeptical about whether they could change from the McColl way.

"Lewis had always worked for McColl, and there were questions about what he was going to be like on his own," says a senior banking analyst who has followed BofA for many years.

LEWIS'S GOAL IS TO RIDE OUT THE CURRENT cycle while implementing performance-improvement initiatives so that BofA is ready to hit its targets when the economy picks up. Foremost in his mind is customer service.

Last year in Taylor's retail unit, the consumer and commercial bank, only 42 percent of customers rated BofA a 9 or 10 on a scale of 1 to 10, where 10 represents maximum satisfaction. Lewis wants to get that score up to 56 percent this year and 90 percent within five years. "The cost of poor quality can be 25 to 30 percent of revenue," says Lewis. "But corrective efforts can increase revenue up to 10 percent a year."

That's where Mickey Mouse makes his entrance. In hotel-ballroom presentations and in one-on-one coaching, staff members are learning to treat every customer contact as a theatrical event. By the end of this year, all 75,000 BofA retail employees will have been exposed to the program, titled Bank of America Spirit. Just as Disney drums its corporate values into theme park "cast members," BofA employees learn the difference between being "onstage" and "offstage."

"Onstage behaviors include always welcoming the customer to Bank of America, addressing the customer by name, thanking the customer and asking if there is anything else that they can do to help," explains James Buchanan, a BofA senior vice president and the Spirit program's coordinator. Offstage behaviors -- loosening one's tie, leaning back in a chair, showing dissatisfaction -- "are not acceptable in front of a customer," Buchanan says.

Complementing Bank of America Spirit, Lewis also requires each of his top managers to undertake an efficiency- and quality-improvement project following the Six Sigma methodology made famous by General Electric Co. and other big industrials; they are on course to cut $1 billion in expenses this year. BofA's program is headed by executive vice president Charles Goslee, whom Lewis hired last year to apply his experiences with the quality-assurance regimens at Eastman Kodak Co. and Xerox Corp. Lewis's personal Six Sigma task is to reduce the customer complaints that are so severe or poorly handled that they come to the attention of senior managers. "There are a lot," says Lewis. "More than you would think. More than there should be."

Cutting costs and complaints is one thing, but Lewis knows he must also build his businesses, foremost among them the global corporate and investment bank, which last year generated $9 billion of BofA's $35 billion in revenue. GCIB is "the biggest question mark," says a buy-side analyst at one of BofA's largest institutional shareholders. "They start from a base of very strong relationships with corporations and a strong balance sheet. The question is whether those can be leveraged down the road to earn a significant return."

Under GCIB president Brown, one of the few high-level execs with a graduate degree (in finance, from Harvard University), investment banking has been a question mark since 1997, when NationsBank bought San Francisco­based Montgomery Securities for $1.3 billion. A culture clash between the lower-paid, less-coddled commercial bankers in Charlotte and the high-living West Coast investment bankers caused Montgomery's Thomas Weisel to bolt and form his own firm, taking most top bankers with him.

"We re-created ourselves in 1999," after the NationsBank-BankAmerica merger, says Brown. He steered BofA into a few specialties where it excels -- it is, for example, No. 2 in loan syndications, behind J.P. Morgan, and is the No. 1 placement agent in straight corporate debt issuance -- but not into the bulge-bracket league. Indeed, BofA's equities and mergers and acquisitions businesses lag, and the group has been rocked by turnover, culminating with the forced departure in April of Edward Carter, who headed corporate and investment banking. Carter McClelland, president of Banc of America Securities and one of Brown's direct reports, says that he and Carter "were tripping over each other. There was overlap and confusion."

Brown and McClelland estimate that the worldwide fee pool up for grabs was about $23 billion in 2001, down from $28 billion in 2000. The bank captured about 6 percent of those fees last year and must get to "the 7 percent to 8 percent zone to be sustainable," says McClelland. Unlike some of the commercial banks pushing into the area, BofA is reluctant to use its balance sheet to chase business, though it wants to deepen its relationships in selected sectors like health care, technology, real estate and retailing.

The bank wants its major customers to consolidate business with it. If a corporation doesn't yield sufficient "relationship profit," the bank prefers to let the business go. Explains Lewis: "We measure relationship net income. The vast majority of our customers say, Yes, we want Bank of America, and we're willing to take more products."

But at least one big corporation -- Wal-Mart Stores -- resisted the arm-twisting and reacted by replacing BofA with J.P. Morgan as its lead lender on a loan.

BofA is also driving to improve profitability in the asset management group run by Richard DeMartini, who joined last year after 26 years with Morgan Stanley and one of its predecessors, Dean Witter Reynolds. Second-quarter earnings fell to $72 million from $113 million, which the bank attributed to a single, large, private banking charge-off. If the unit is, as planned, to double its contribution to revenues and profits from last year's 7 percent, much will depend on cross-selling investment services to existing BofA customers. There's ample opportunity; BofA's private banking unit currently serves 100,000 customers with $2 million or more in investable assets, yet executives estimate that 250,000 others with BofA accounts qualify for that elite status but haven't signed up. Still, cross-selling almost always proves more difficult in practice than theory.

DeMartini is upbeat, noting that as tough as 2001 was, his brokerage business added 150,000 customers, 90 percent of them from other parts of the bank. And he is clearly on the same cross-selling and service-quality pages as Lewis. Says DeMartini, "We need to create a common culture, and that will come through training."

Lewis isn't letting the bear market shake his faith in asset management. "It's the single biggest growth opportunity in our company," he says.

That may be, but retail remains the engine. And Lewis is eager to fine-tune it. He has reversed the old BofA practice of paying below-market interest rates to retail depositors -- a habit ingrained during the growth years, when BofA offset declines in market share by making progressively bigger acquisitions. Paying higher rates is costing $300 million a year, but Lewis doesn't want to lose customers. Indeed, he intends to open 200 new branches a year, for an indefinite period, in hopes of attracting more.

"We want to be best in class and one of the most admired companies in the world," he explains. "To do that we have to be totally focused on the consumer, because everything flows from being a customercentric company. We're going to have great service, be overwhelmingly convenient and pay market rates, because we can always make up the difference in productivity so that the shareholder doesn't lose."

That's big picture, to be sure. But Lewis never forgets that the numbers have to add up. Back at the Southern Comforts restaurant, he leaves his table to chase after son Shayne, who, dressed in a T-shirt, jeans, an apron and a baseball cap, drifts from table to table, checking up on customers. When the father, wearing a dark suit, his tie still tightly knotted despite the late hour, finally catches up, he asks, "So, how many entrées did you sell tonight?"