Bof A: A Megabank In The Making

Hugh McColl has yet to make his spending spree pay off

When Hugh L. McColl Jr. let longtime friend Reitzel Snider talk him into hiking through the Alps a few years ago, McColl was assured that it would just be a relaxing trek in the Swiss countryside--and nothing that would set off his acrophobia. "I promised him it would be like a page out of Heidi--rolling hills, flowers, cows, and yodelers in lederhosen," recalls Snider, who now admits he was just relaying what he had been told by his Swiss hosts.

But for McColl, Snider, and the rest of their small climbing party, what was supposed to be a bucolic hike turned out to be a harrowing climb up the Jungfrau--one of the highest peaks in the Swiss Alps--that left the two novices at times wondering if they would live to see their families. The pair endured not only a terrifying 1,500-foot vertical climb up a glacier, but in McColl's case, leg cramps and hyperventilation attacks from the altitude, and an unnerving 100-foot slide that could have left him seriously injured.

As chairman of Bank of America Corp.--the $614 billion megabank formed by the merger of McColl's Charlotte (N.C.) NationsBank Corp. and San Francisco's venerable BankAmerica Corp.--the feisty ex-Marine is still climbing heights that few bankers have ever experienced. Thanks to his savvy dealmaking, McColl stands atop a vast empire of 4,500 branches and 14,000 ATMs holding 8.6% of the nation's deposits--a cushy three percentage points more than the next contender, First Union Corp.

TREACHEROUS FOOTING. But like his Swiss excursion, McColl has found the footing far more treacherous than he expected 17 months ago when, on the day the merger was unveiled, he boasted, "Bigger is indeed better. We're not in any business we don't understand." During the first year alone, McColl confronted a rash of defections, not just from the former BankAmerica but from the Montgomery Securities unit that he had acquired the year before. McColl has also been tripped up by a $372 million writedown taken on a hedge-fund deal initiated by the former BankAmerica management, as well as a bad bet on interest rates that has saddled him with more than $2.4 billion in paper losses in his bond portfolio.

But for McColl and his troops, there's no turning back. And with just under two years left until retirement, the 64-year-old McColl is now facing the final hurdle he needs to secure his legacy: to tie his disparate acquisitions together and prove that he can deliver the elusive payoff from two decades of aggressive dealmaking. According to Salomon Smith Barney analyst Henry C. Dickson, Bank of America's operating income, on a per share basis, has grown by an average of 7.3% annually in the 1990s vs. the 10.9% mean of the 50 largest banks. That woeful performance has left McColl's stock lagging behind the rest of the industry (table).

Yet in some ways, the task facing McColl has become even tougher. While many past acquisitions succeeded largely on McColl's ability to slash costs, his latest deals for BankAmerica, Montgomery, and Florida's Barnett Banks Inc.--all among the largest and most expensive in banking history--will test McColl's mettle as a marketer, as he tries to generate new profits by cross-selling more products to his vast customer base. Yet some of McColl's longtime rivals remain unconvinced he can develop synergies from his latest acquisition. Edward E. Crutchfield Jr., chairman of crosstown rival First Union, noted in a recent broadcast to his employees that McColl is "going to have to find a model that is going to work, because just getting bigger as a traditional bank will not work."

McColl readily acknowledges that it's a new ballgame--and that the massive buildup of the past two decades is merely a prelude for what lies ahead. Indeed, the man who struck fear into the hearts of rival banks--who worried that they were always one misstep away from being forced to sell to McColl--now vows that he has bought his last bank. "There are no deals left in my quiver," McColl says, in an interview from his Charlotte headquarters office. "We've expended tremendous amounts of energy and money hammering together a franchise and not exploiting it. Our opportunity lies now with the customers we have." That's a message that McColl has drilled into his executives. "You don't hear Hugh talking as much about size these days as about our return on equity," says Michael J. Murray, president of global corporate and investment banking.

There's a lot to exploit now: Thanks to his flurry of acquisitions, McColl has his foot in the door of more than 2 million businesses, including 85% of the 500 largest U.S. companies. Likewise, 30 million households--one out of every three homes--now have an account at Bank of America, a franchise that the ever-immodest McColl crows is "unmatchable." So pervasive is BofA's role now in the U.S. economy that the bank processes more than 25% of all checks, credit cards, and ATMs and other electronic transactions in the country--more than the Federal Reserve itself. When the merger dust settles, Bank of America "will become a major consumer banking powerhouse," predicts ING Barings analyst Andrew B. Collins.

DYNAMO. It has been an extraordinary odyssey for McColl, a 5-foot, 6-inch dynamo who was steered toward NationsBank's predecessor by his iron-willed father. McColl's dad decided that he didn't need Hugh's help running the family's small bank in rural Bennettsville, S.C. He would be proud now: Since taking the helm of the old NCNB in 1983, McColl has acquired more than 50 Sunbelt banks--and still displays their charters outside his door like so many big-game trophies.

But much like his great-grandfather, who created the ambitiously named South Carolina & Pacific Railroad, McColl long perceived California as his manifest destiny. And even now, McColl sees a lot of fertile ground in the old BankAmerica franchise, whose typical customer held only an average 1.6 banking and other financial products--well below the 3.0 average for NationsBank. Already, Bank of America is expecting to generate $8 billion in new loans from a 15-year mortgage product--used largely by customers for debt consolidation--that McColl & Co. introduced in California after the merger.

But even for an old pro like McColl, digesting the old BankAmerica is proving a daunting task. Given the breadth of the new Bank of America, even McColl has told subordinates wistfully that he can no longer "manage by walking around," as he did for years. (Jokes one Charlotte executive: "If you ever held a staff meeting with the doors shut, you could always count on Hugh coming through the door to see what was going on.") While McColl's SWAT team has already merged the old BankAmerica branches in Texas and the Southwest into the old NationsBank computers, they won't finish absorbing all of the West Coast branches until early 2001. James H. Hance Jr., the bank's chief financial officer, admits that "one of the greatest frustrations we have in our company today is that we are looking at a 2 1/2-year time frame for the transition."

There's no doubt that the payoff is coming a little slower than expected. Second-quarter profits fell 17%, to $1.92 billion, largely on merger-related expenses. And thanks to the heavy costs associated with consolidating the two banks--including a series of moves by McColl to scale back his new bank's international exposure--analysts have already lowered their earnings estimates 16% below what Bank of America officials first promised last April. As a result, most investors are taking a wait-and-see approach. Bank of America's stock is trading at a mere 13 times this year's projected earnings, vs. 16.4 for Citigroup and 18.1 for Wells Fargo.

What's more, the 21% year-over-year rise in nonperforming assets--coming in a booming economy--is leading some analysts to question whether the bank might be stretching on the credit front as well to meet Wall Street's expectations. "They are having to strain to meet their numbers," surmises Edward Jones analyst Michael Ancell. "And if the economy turns down, we're going to see more credit-quality problems." Analysts are tracking the bank's exposure to such troubled borrowers as footwear retailer Just For Feet Inc. and Mexican steelmaker AHMSA, as well as its significant financial exposure to nursing-home operators, many of whom are struggling to adapt to Medicare cutbacks. Hance maintains that the bank hasn't compromised its credit policies, and notes nonperforming assets fell slightly in the second quarter.

Still, McColl believes there's a huge opportunity for banks like his to improve on the industry's spotty record for service. And Bank of America isn't above reproach: Its acquisition of Barnett Banks Inc. in Florida was initially plagued by software snafus that fouled up customer statements and employee cuts that created interminable waits at branches--all of which triggered withdrawals that cost McColl & Co. at least two precious points of market share in Florida. McColl's new mission: To "redefine banking," he says, "and make this bank work for customers and clients as no other bank before."

Already, McColl has commissioned a flurry of initiatives to do everything from speeding up and simplifying the often tedious task of getting a loan to empowering branch employees to resolve most customer disputes on the spot. To prevent its customers from drifting to Fidelity Investments or Vanguard Group, Bank of America is offering more mutual funds managed by respected outside managers like Putnam, Invesco, and Thomas Marsico, the former Janus Funds whiz who now runs his own shop.

FAST TURNAROUND. What's more, by consolidating the bank's vast account databases onto a single system, McColl hopes by next year not just to start providing on-the-spot approval for mortgages and other loans to many current customers, but to actually cut the check within hours--a feat that few other large banks can pull off on any scale. And Bank of America is working feverishly to provide business customers with real-time notification of account activity--such as the receipt of a critical check--at first by fax, but soon after by E-mail, cell phone, or PalmPilot.

McColl's moves to cross-market everything from mutual funds to mortgages is also critical for other reasons--namely to help Bank of America build a more stable stream of fee-related businesses. For all its bulk, McColl's new Bank of America is basically still an oversized regional bank that's too dependent on the volatile lending business. For all its moves to diversify, Bank of America will still derive 57% of its revenues this year from interest-rate-sensitive activities, vs. 41% for Chase Manhattan and 18% for J.P. Morgan & Co. And as long as the yield curve is still relatively flat--the recent rise in rates notwithstanding--Bank of America's margins and its revenue growth will remain under pressure. Collins, the Barings analyst, projects Bank of America's revenues will grow only 4% through 2002, vs. 18% for Morgan.

McColl's most ambitious efforts to boost fee income are coming on the corporate side, where he's aggressively expanding his reach into underwriting and merger-advisory services--all supported by the largest trading floor outside of New York. And rather than having a bevy of its bankers and investment bankers all separately knocking on a customer's door, Bank of America is moving to offer these services in a fully integrated fashion. "No one else has done that. Not Citigroup, no one," boasts Hance. Nor, adds Hance, can they. "Chase doesn't have equity powers. Morgan Stanley and Goldman don't have the balance sheets or capital structure to be a lender."

Already, the new Bank of America is becoming a force to be reckoned with in the lucrative loan-syndication and leveraged-loan markets, where it has established a virtual lock on middle-market deals. "They've gained a lot of credibility in a short period of time," notes Jim Davis, president of Loan Pricing Corp. "A lot of CFOs and treasurers that might before have gone to Chase are now going to them." And with its sprawling network of 4,500 branches in 21 states, the creation of the first true coast-to-coast bank has been a boon for companies with far-flung operations, particularly retailers like McDonald's Corp., who can now rely on a single bank to handle cash deposits for half the country. "Having a nationwide network for gathering cash and putting it in one spot should increase our efficiency," notes McDonald's Treasurer Carleton D. Pearl.

CULTURE CLASH. At first, Montgomery--a respected boutique investment bank also based in San Francisco--was supposed to be at the center of this integrated strategy. But in a matter of months after it was acquired in 1997, Montgomery's managers started clashing with Charlotte over everything from partner salaries to the firm's pricey art collection. Tensions came to a head last September--on the eve of the merger between NationsBank and the old BankAmerica--when Edward J. Brown III, a key McColl lieutenant, moved to consolidate the high-yield and private equity efforts of these entities back in Charlotte. But when Montgomery founder and CEO Thom Weisel phoned McColl to complain that he was being relegated to a bit player, McColl responded: "Thom, I thought we bought you." Weisel quit and launched his own firm--taking more than a dozen partners, and key clients like Yahoo!, with him.

Clearly, the turmoil at Montgomery has taken its toll on McColl's investment banking ambitions: With more than half of Montgomery's 67 partners now gone, headhunters say that Bank of America's new investment banking chief Carter McClelland--a Wall Street veteran who most recently built up Deutsche Bank's Wall Street arm--has been forced to dangle packages worth $6 million a year to woo bankers away from rival firms. Worse, many old Montgomery clients remained fiercely loyal to Weisel. "I'm not even sure who to call over there sometimes, whereas Thom Weisel knows us well," says Mirage Resorts Chief Financial Officer Daniel R. Lee. "Why should I call a stranger and ask his opinion just because his business card says Bank of America?"

As a result, Sanford Robertson--whose own investment bank, Robertson Stephens & Co., was sold to the old BankAmerica in 1997 and then resold to BankBoston Corp. last year--now estimates that Montgomery is worth less than half the $1.3 billion McColl paid just two years ago. Bank execs dispute Robertson's estimate. "How would Sandy Robertson know? He's got his own problems with BankBoston," counters Hance, who points to the 117% second-quarter rebound in corporate banking fees as evidence that the new hires are bringing in new business. Bank executives argue that if such clashes were inevitable, it was best they played out quickly. "As Hugh says, `I'd rather run through fire than walk through it anytime,"' shrugs President Kenneth D. Lewis, who is now viewed as McColl's heir apparent. "I am very pleased at where we are. Montgomery is distant in my memory."

ONE VOICE. And while rivals like Citigroup have their lending officers and investment bankers making joint customer calls, Brown believes that BofA's approach--appointing a single lending officer to sell various capabilities--will enable the bank to speak with one voice. "I think you're going to get better music out of an orchestra that has a conductor," he says. Murray agrees: "No one has done this properly yet," he says. "But if we can get this right, it will be a huge competitive advantage."

McColl still faces hurdles to get to the pinnacle of banking. But he's not quitting. After three grueling days of scaling the Swiss Alps, McColl and his fellow climbers awoke the final morning to a panoramic view below that seemed to justify all of the risks they had taken. "Postcards could never do it justice," recalls Snider. Now, in the twilight of his storied career, the sooner McColl pulls together his vast empire, the sooner he can enjoy the view.

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