Bank of America's long trek to recovery. Reorganization and world growth point way out of the woods

Leland Prussia talks calmly about the quakes that have rocked Bank of America. Not the earthquakes, which in themselves sometimes sway the Bank of America tower and other San Francisco high-rises.

Instead, Mr. Prussia, chairman of BankAmerica Corporation, talks about the financial shocks that have jolted Bank of America's financial foundation -- its record $337 million loss in 1985, its deeply troubled loan portfolio -- and how this giant, well-pedigreed bank intends to recover.

B of A got hit sooner with problems that many other banks are only now beginning to have, Prussia says, and is climbing back toward recovery earlier, too.

``Loss ratios of most major financial institutions are rising fairly rapidly. Ours, I think, are going to be going down now. We happened to get there earlier.''

Earlier -- and with a resounding thud throughout the financial community.

The bank's stock price plunged last year. It suspended its dividend for first-quarter '86, fired staff, and got involved last month in a short-lived takeover episode pitting American Express Company president Sanford Weill against B of A chief executive Samuel Armacost.

Things got so bad, in fact, that the bank had to sell its monumental headquarters building last year to cover losses. The plush corporate offices -- commanding a magnificent view of San Francisco Bay -- are leased today.

``They had been a tremendous success in so many areas,'' as Robert Shay, professor of banking and finance at Columbia University, puts it. ``It was a shock when one of the biggest banks in the world came a cropper.'' The disinflation dilemma

But now, maintains Mr. Prussia, the bank knows what the problems are, is tightening controls, and sees a resurgent world economy as likely to aid its comeback.

Unlike many other money-center banks, B of A itself is not heavily committed in the energy sector, although its smaller, Seattle-based Seafirst property is.

But there are plenty of problem loans still on the books: Mexico (both public and private sector), commercial real estate, California agriculture, and shipping.

``To be candid about it, it was a management problem going back some years,'' Prussia admits. ``We didn't tighten our credit screens in areas where our exposure was growing. . . . We have to pin it on management.''

He was part of that management. So was Mr. Armacost. So were others who are no longer involved in managing the institution.

The worst, Prussia maintains, is in the past. The board of directors apparently feels that way, too -- ``otherwise,'' one insider says, ``they would have brought in somebody else.''

And the Weill takeover episode -- as well as overtures by First Interstate Bank -- is an indication that ``sophisticated outsiders'' may be looking at Bank of America as a turnaround possibility, a report by Value Line analyst F. Barry Nelson says. Although he is still cautious on the stock, Mr. Nelson says, ``the outsiders may see an imminent return to profitability that would drive up BankAmerica shares.''

This is because despite its financial problems, Bank of America remains huge and well heeled. With offices around the world and $118 billion in assets, it is the second biggest bank in the United States (after Citicorp).

But it has fallen quite far from financial grace in recent years.

``I wasn't around during the Great Depression,'' says chairman Prussia, ``but given the size of the bank, I don't think there was anything like this. And all the more interesting: It happened while our competitors were doing fairly well.

``So what happened to Bank of America?'' he asks.

What happened, he and others familiar with the bank concede, was a combination of poor lending practices, wrong economic forecasts, and mismanagement at the 82-year-old institution.

The bank lost $1.6 billion in loans last year and then was required to add $600 million to its loan-loss reserve. It was too slow to cut costs, adopt new technology, and run a tighter ship.

Perhaps most important, financial strategists at Bank of America took too long to accept the new, disinflationary economic environment of the 1980s. They continued to make risky loans that inflation had always compensated for in the past.

Says Prussia: ``People tend to think that bankers abhor inflation more than anyone else. But inflation bails out a lot of problems. Disinflation or deflation are much more difficult. Debt service in many cases just disappears. But the same firms in the same industries under inflationary circumstances sail right along.'' Hostages of credit

Through it all, Prussia says, ``the remarkable part about it was that we could absorb those kinds of losses and keep going.''

But banking industry analysts say B of A is not out of the woods quite yet -- a point Prussia agrees with.

As Jeffrey Cohn of Drexel Burnham Lambert puts it, ``they are hostages of their credit quality. There's not a lot of leeway for earnings and not much margin for error.''

If the Latin debt crisis worsens, B of A, with $2.7 billion in loans out to Mexico (the biggest exposure of any US bank to that country), could get socked mightily.

This is why Prussia, Armacost, and other bank officials make frequent warnings about Mexico's plight and strongly support some sort of international scheme for easing the burden on Mexico and other countries.

``My own personal view is that it will remain manageable,'' Prussia says. ``Not so much because Mexico is going to make some kind of miraculous recovery, but because the United States and other industrial powers are not going to let this thing collapse as a result of declining oil prices.''

He feels major industrial powers are going to get together a program for dealing with third-world problems.

This probably would include more ``direct support'' to these countries and may entail a massive debt restructuring -- perhaps along the lines the New York City bailout in the mid-1970s.

Even so, he admits, the bank will remain heavily exposed to the private sectors of Mexico and other third-world countries. Only global economic growth can help here.

``We will take losses in the private sector of these countries, as we have,'' says Prussia, ``so that problem generally is going to remain with us.''

Mr. Cohn of Drexel Burnham Lambert says that while the bank is unlikely to see much growth in per-share earnings soon, ``they should work through their credit quality problems eventually.'' All things to all people

Except for the past few years, Bank of America has been an unrivaled success story for much of this century.

Founded in 1904 by Amadeo P. Giannini, son of an Italian immigrant, and originally named the Bank of Italy, Bank of America aimed to help small farmers and businessmen at a time when existing institutions catered only to the wealthy and well established.

The bank rode the wave of California's fabled prosperity throughout the first half of the 20th century. It lent to movie moguls, vineyard planters, oil companies, and thousands of other enterprises -- first in the Golden State, then nationally, then internationally.

By 1949 Bank of America had eclipsed Chase Manhattan as the biggest private bank in the world.

With its central-bank-sounding name and its omnipresent branches throughout California, ``a lot of people out there almost think we're a government bank,'' says James Wiesler, vice-chairman for global consumer markets.

That can be both good and bad. It lends stature. But Mr. Wiesler says it also means that people without accounts feel Bank of America is somehow obligated to cash social security, welfare, unemployment, and even payroll checks -- and ``that adds to the overhead.'' Wiesler is trying to devise a way to collect for these services.

Bank of America's greatest asset, of course, remains its broad base in this fabulously rich, fertile, and always-growing state. It has 80,000 employees, 150,000 shareholders, 1,000 branches -- and 1 in 4 four households in California does business with the bank.

``It's hard to find a Californian who doesn't have his checking account with us, or work for us, or own shares in us,'' says corporate relations director John Keane. ``It's pretty common to find people who do all three.''

The bank values its humanitarian reputation and thus has been reluctant to close uneconomical branches, fire employees, or call in debts that have gone bad. ``The bank has been so face-to-face, customer-service oriented,'' says a former employee, ``that it was hard to visualize the bank without all its branches and employees.''

But its vast branch network is ``like living in the '40s,'' one official complains. Only in the past few years has the bank begun installing automatic teller machines and shuttering low-volume, high-cost branches . Adding more focus

That less-than-keen approach to efficiency got carried over into loanmaking as well.

Loan officers in the US and abroad went heavily into high-risk real estate, agriculture, shipping, and private-sector investments in the developing world.

As vice-chairman Wiesler puts it: ``We have a great machine here, and when we turn it on, if we're not careful, it overgenerates the goal we've set for ourselves.''

The bank, Wiesler confesses, was ``20 years behind Citicorp in going overseas at a time when there were high spreads and low risks.''

When that happens, he says, ``you get the crumbs.''

One former official says that the bank's assessment of risk was allowed to be too subjective, and Prussia says that the committee system of decisionmaking blurred the taking of responsibility. He says that has now changed and the bank uses ``individual signature authority.''

Another item on the long list of management problems, one source says, is that throughout the bank there existed a culture in which problems were simply not brought up and ``rewards were tied in with how many people worked for you.''

But now, say executives, the bank knows where it is going.

Its 1982 acquisitions of the Charles Schwab discount brokerage and of Seafirst Corporation in Seattle, and its sale of its FinanceAmerica lending affiliate, have given it the means to compete. Staff has been trimmed, and another 5 to 10 percent in cuts may be made.

Robert Frick, vice-chairman in charge of the world banking division, says the plan now is for B of A to position itself as a world player, all the while using ``fewer people and fewer branches.''

Mr. Frick elaborates a strategy in which the bank is trying very clinically to examine businesses it is involved in and determine whether to ``grow, hold, or disengage'' from them.

Globally, he says, the bank is trying to do business only with the big, international companies -- the General Electrics and IBMs.

The old approach, says corporate planner Stephen McLin, was puzzling. ``I sure didn't have a grasp of how our `cover-the-earth' strategy would put us into a lot of bad credits. But it went from good to bad quickly.''