The state of California and the Bank of America have a lot in common, says BofA Chief Executive Brian Moynihan.
Both were all but written off by critics as the economy tanked. Both endured painful budget cuts and remain hampered by unemployment and housing issues.
And yet each is now well positioned as the economy recovers, according to Moynihan, who spoke to The Times during a recent round of visits with California business owners and venture capitalists.
Despite lingering image problems, BofA is gaining traction, Moynihan says, thanks to what he calls "addition by subtraction." Here again, he draws the comparison to California, which was forced to rein in its budget before tackling other priorities.
"The same thing happened with us," he said, describing the way he's tried to downsize the behemoth bank into stability.
Nearly four years into his tenure as CEO, Moynihan wins praise from analysts for slicing away billions in expenses at a bank left bloated by past acquisitions. The question now is whether Moynihan can be as effective in growing the business.
His mantra — "We don't have to be the biggest" — is reflected in a 7% decline in the number of branches. Once the biggest U.S. bank, BofA now has about 5,300 retail offices, fewer than Wells Fargo & Co. or JPMorgan Chase & Co. Staff head count is down 11%, the equivalent of 33,000 full-time jobs, since he announced his downsizing plan in September 2011.
BofA is still fending off legal attacks stemming from its purchase of high-risk home lender Countrywide Financial Corp. of Calabasas, whose skyrocketing delinquencies helped usher in the financial crisis. The Countrywide takeover, among the worst deals in banking history, was one of six major U.S. acquisitions by Moynihan's predecessor, Ken Lewis.
But years of loan modifications, short sales and foreclosures have reduced BofA's total of delinquent home loans to fewer than 500,000, down from a peak of 1.4 million. Litigation expense fell by $1.4 billion last year to $4.2 billion.
With savings on payroll and legal bills dropping straight to the bottom line — and business lending and investment banking picking up — the Charlotte, N.C., bank earned $6.6 billion in the first half of 2013. It is poised for its most profitable year since 2007.
One Moynihan achievement may impress analysts more than customers: BofA generates more fees per dollar of assets than any other major mainstream bank, according to Lake Bluff, Ill., bank efficiency consultant Mike Moebs.
"Moynihan controls expenses and manages fees better than anybody else among the big guys," Moebs says with admiration.
But the American public may be a harder sell if Moynihan is to fulfill the second part of his mantra: "We have to be the best."
J.D. Power customer satisfaction ratings rank BofA near the bottom of all major banks, scoring below average in California and five other regions of the country.
In an American Banker-Reputation Institute survey, customers ranked BofA last among 30 big financial firms, with 53 points on a scale of 100 — a "weak or vulnerable" score shared by just two other banks. Non-customers scored it 35, making BofA the only bank in the "poor" category.
To be sure, the bank's poor reputation has roots in missteps made before Moynihan took the helm. Bailout bitterness is a factor: BofA required two rounds of taxpayer assistance during the financial crisis, for a total of $45 billion — money the bank repaid in December 2009, just before Moynihan took over.
The purchase of Countrywide struck another huge blow to BofA's image. Before its collapse, Countrywide had become America's largest home lender by generating a flood of high-risk loans that its customers proved unable or unwilling to repay.
Countrywide's acquisition has cost BofA more than $40 billion in loan losses, legal costs and settlements. Five years after the deal was done, legal claims continue to erupt.
Just last month, the Justice Department and Securities and Exchange Commission filed lawsuits targeting loss-plagued mortgage securities — bonds concocted not only by Countrywide but also by Bank of America. A bank spokesman blamed the losses on the housing market's collapse, saying the loans performed better than similar mortgages from the same period.
There was also a major reputational stumble on Moynihan's watch, just weeks after he unveiled his cost-cutting campaign. As Occupy Wall Street protesters raged in the streets outside BofA branches — and sometimes invaded them — the bank said it would impose a $5 monthly fee for debit cards.
Steamed customers headed for credit unions, consumer groups vented, and elected officials all the way up to President Obama tossed barbs. Moynihan, chastened, backed off a month later. But the memory lingers.
"They are carrying the burden of being the big bank with the most tarnished name from the financial crisis," independent bank analyst Nancy Bush says. "And these lawsuits from the SEC and Justice continue that."
Moynihan says he's heard all this before. "I read the same articles you do," he says.
He declined to comment on the latest suits, or to predict when BofA might finally emerge from the legal morass over Countrywide. "We've settled and put a lot of stuff behind us," he says.
As for surveys, he says the ones that count are BofA's internal assessments of customers, in branch-level detail.
"Our scores have continued to come up every quarter, and our attrition [loss of customers] is at an all-time low," he says.
Moynihan emphasizes that he's focused on growing the bank as well as cutting costs. His slimmed-down consumer businesses are beginning to regain market share, he says.
Deposits in the bank's consumer and small-business section grew by $20 billion, or 4%, during the second quarter to an average of $522 billion. More than half the increase was funds transferred in by customers of BofA's Merrill Lynch brokerage unit, an example of the synergies Moynihan hopes to foster.
Even the much-shrunken mortgage business has begun to grow. Moynihan initially cut back the business, shutting down mortgage operations that made loans through independent brokers or bought loans from smaller mortgage banks.
These channels generate more complaints and problem loans than the bank's mortgage employees do, and they don't establish direct contact with customers — the relationships banks covet as a way to sell more financial products.
Now BofA generates all of its mortgages through direct sales to retail consumers. Its share of the overall market expanded to 5.2% at the end of the second quarter, from a low of about 4%. Writing conservative home loans is a profitable business at BofA, Moynihan says, but the roughly $1 billion spent each quarter cleaning up the Countrywide mess has kept the overall mortgage operation in the red.
Despite the demands of overseeing such a sprawling company, Moynihan says he stays in touch with retail customers, reading their letters and emails and sometimes learning about them firsthand, as happened during his visits with venture capitalists and business owners.
"Say I'm going to see the CEO of X company," he says. "We've got their personal accounts; we've got their kids' personal accounts; we've got their cousins' personal accounts. You get plenty of feedback in terms of what goes right and wrong."
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