CHARLOTTE, N.C. - For Hugh L. McColl Jr., the future is always within reach. In 1988, when Nationsbank Corp.'s predecessor had only $29 billion of assets and was confined mostly to the Carolinas and Florida, Mr. McColl gave a speech to business students at Catawba College near Charlotte. He predicted that a new class of mega-regional banks would soon emerge to compete directly with the New York-based money-centers, traditionally the locus of banking power in the United States.
"With technology going in the direction it is, you won't have to be at the money center to have a money center bank," Mr. McColl told the students. "You could have those financial institutions located anywhere - even down the road in Charlotte."
Six years later, the chairman and chief executive of Nationsbank has indeed built himself a money-center bank down the road in Charlotte: the third-largest in the nation with $158 billion of assets.
Typically, Mr. McColl, 58, has barely paused to catch his breath before rushing on to the next frontier, which is to create a nonbank financial company along the lines of General Electric Capital Corp.
For his unrivaled ability to act on his visions and turn them into reality, the American Banker has selected Mr. McColl as its 1993 Banker of the Year.
While the deal-making prowess that enabled Mr. McColl to build his empire within an astonishingly short period of time" has long been recognized, performance was a lingering question at Nationsbank. But 1993 went a long way towards resolving that issue.
Nationsbank earned $1.5 billion last year, up 31% from 1992, bringing return on assets to an unprecedented 1.12%. More importantly, Nationsbank's 10% internal loan growth led the region, providing a hint of what Mr. McColl's mighty machine could do when it fired on all cylinders.
Investing in the Future
It was also a year in which Nationsbank made solid investments for the future. The March acquisition of Chicago Research and Trading Co. gave Nationsbank the ability to offer a broad array of derivatives, enhancing its already sophisticated corporate banking efforts.
The July purchase of US West Financial Services, a commercial finance firm, dovetailed nicely with the November 1992 acquisition of Chrysler Corp.'s consumer Finance subsidiary to further Mr. McColl's dream of a nonbank financial company rivaling GE Capital Corp.
And finally, the acquisition of Baltimore-based MNC Financial Inc. in February expanded the geographic reach of Nationsbank's retail banking operation, which now enjoys arguably the best franchise in the country, with 1,900 branches spread across nine growing Sunbelt states and the District of Columbia.
There have been some bumps along the way. Many top executives from acquired banks defected to competitors. In December 1992, a back office computer glitch caused a four-day interruption in the processing of retail transactions at the company's South Carolina bank.
During a recent interview with three American Banker staffers - Atlanta bureau chief Kenneth Cline, senior editor John Racine, and regional banking editor Jacqueline S. Gold - Mr. McColl acknowledged that "operational risk" is the greatest risk faced by NationsBank.
"As you have a large institution, you have many more widgets to be processed every day and downtimes, problems in your software, can cause humongous problems," he said.
A related problem is cost. NationsBank is forced to spend enormous sums - $200 million a year, by Mr. McColl's reckoning - to integrate all the data processing systems it has inherited from acquired banks. This put a strain on NationsBank's efficiency ratio, which at 63% is considered mediocre by peer standards.
Because of the high level of systems expense, cost savings from recent deals such as the December 1991 acquisition of C&S/Sovran Corp. tend to get lost during their drift down to the bottom line.
Mr. McColl realizes that Wall Street is unhappy about the situation - an unhappiness reflected in the company's stagnant stock price. But, he says, "I get paid to do what's right for the company in the long run."
Long after the formal interview is finished and he's being positioned for a photo session, Mr. McColl abruptly breaks away from the camera to wag his finger at a repotter. Remember, he says, all the banks he has been compared to in the past, such as Allied Banks of Texas and MNC Financial.
"I'd just like to make the point," he says, "that I'm here and they're not."
NationsBank Pressure Cooker
Q.: Do you feel like you've accomplished the major part of your life's work? Are you secure in what you've accomplished?
McColl: No, I don't feel secure. I don't have a contract like some people. I am proud of what my associates and I have been able to accomplish. I did come to work for a very small institution and it is not an accident we're sitting here today.
My teammates, my predecessors - Addison Reese, Tom Storrs - people I work with today, have done remarkable things. And we're proud of it. It's funny you asked. I asked my vice chairman and chief financial officer, Jim Hance, this morning. We were talking about pressure.
A person who had come to work for our company had found the pressure intense.I said, "Do you really think this is an intense company?" Because I don't, of course. And he (Mr. Hance) said yes. And I said, well, I've never worked anywhere else so I have nothing to compare it to.
But apparently, it is an intense company. And that intensity, I think, gives us the drive to go forward. So no, we're not satisfied. We're proud, but we're not satisfied. And there are many more things to accomplish.
The Vision Thing
Hubris, I guess, is the thing we need to avoid, isn't it? I wrote my officers, saying, "The biggest risk we have is to believe that we have arrived." Because once you think you're there, you won't be there long. Somebody will take you out.
So there's nobody in this company that thinks we've arrived. None of us have stacked arms. We are the same people, and we intend to press forward - whatever that means - and not believe we're there. And I don't know when we'll get there. But it won't be while I'm here.
Because I don't have a "there." My there is over on the other side of the mountain somewhere. And I don't know what it looks like.
Q.: You don't have a clear, definite vision of where you would like to be?
MColl: Yes, I have a plan. I want our company to be the preeminent financial institution in this country. I don't know exactly, though, what that means. But I'll know when I get there, if I get there.
We had a little litany that we loved, that we wanted to build the dominant financial institution in the Southeast from Baltimore to Miami. And we did that.
We today would like to achieve excellence in some areas where we're not excellent. We would like to have a reputation of having highly reliable services. If you did business with us, you could count on it being done right.
And we don't have that reputation today, and we want to earn it. You can't be the preeminent financial institution without it.
But that itself is not the god. Being preeminent is the goal. Being highly responsive and reliable is part of achieving that goal.
I guess in my mind's eye, I would like to have a nationwide company that was perceived as the best place to do business in America. That's where I am. But the point is, my goals are to build a really strong and well-diversified financial institution that will survive another 100 or 200 years.
That's something that drives us. We want to be masters of our own fate.
Alliance for Progress
Q.: So your goal is more to build on what you have?
McColl: Right. We do not have, really, geographic ambitions. The Dean Witter joint venture experience has been very good for us.
I think you will see NationsBank achieve more strategic alliances as we go forward: technology alliances, perhaps alliances with businesses that are in the financial services area. I would predict with some certainty that we will make more strategic alliances.
Q.: In what areas?
McColl: Well, it will always be in the financial services area. It could be mutual funds, it could be technology delivery - long lines, cable TV - getting to the house, in effect.
Q.: Telecommunications companies?
McColl: There's no reason we couldn't. And we are going to do some things like that. Its advantage is that it helps you forward in technology.
Q.: You have a closely watched joint-venture with Dean Witter Reynolds. Is acquiring a securities firm something you want to do, or would you want to start one?
McColl: We could legally do it, but the facts are we didn't have the technology or the ability to recruit account executives as well as Dean Witter does.
Just to illustrate with one simple fact, when they came in and we started using their clearing system for securities, it cut our clearing costs by a factor of 91%. In other words, ours was 11 times more expensive than theirs. That's the kind of thing they bring to the table.
If we had built it at our own pace, the brokerage business would have always competed with all our other businesses and would not have won.
A Tale of Two (or More) Banks
Q.: How would you categorize NationsBank'? Superregional, money-center or hybrid?
McColl: There are very few companies that look like ours. Perhaps none. I would say that we have three distinct companies. One is a superregional, a very large regional bank that operates in 10 states. it does anything anybody else can do and perhaps a little more.
Within that bank, we also house some very large businesses, such as our trust business, and things like the fourth largest automobile finance company in the United States. What we call our general bank, you could argue, is in fact a superregional.
Then, in our institutional bank, where we have our corporate bank, our investment bank, and our global trading and dealing operation, there we have a company that you could argue looks more like J.P. Morgan.
Then the third company is very small compared to the general bank and the institutional bank and that is the nonbank finance company, which I would say looks like GE Capital, albeit a very small example of it. But if we had a model, that's who it is.
Over time, my view would be that those (companies) would come into equilibrium with each other and perhaps even have some shift of business from the banking business to the nonbank side. That is, some shift of activity into the noninsured bank.
Being candid, our goal would be to have less regulation, not more. And that's where we're trying to go.
Q.: So you're talking about two separate companies, bank regulated and nonbank regulated?
McColl: Yes, I'm talking about at least two separate companies. We could see ourselves having as many as four. But three certainly loom large in our minds and the three are the three I just described to you.
Q.: What would be the fourth?
McColl: Well, the fourth could be the fiduciary business. We might well take the trust group and make a separate corporation out of it. And the reason we would do that is that it would take very little capital, it would have a very high return, it would highlight the earnings we get from that area, and maybe we'd get a higher multiple for it.
In other words, as you try to build shareholder value, we realize that one of the problems we have is getting Wall Street to acknowledge that we have these strong businesses. And rather than being confused by them, we'd like them to see the benefits, that they offset each other in periods of turbulence.
Q.: What's your outlook for growing those businesses, in terms of priority? McColl: We have no real desire to grow the assets of the banking side of the business, period. We want to create a lot more assets, but we'll use the distribution arm of our investment bank to package and sell a lot of this paper. So we see ourselves continuing always to be a lender, always to create earning assets, although we may sell a lot more of them rather than keeping them on the bank's balance sheet.
On the other hand, we want to grow our nonbanking company at a pace that is consistent with having a high bond rating - perhaps double A, if not triple A - on that company. So we'll grow it at a pace that our capital allows it to grow, and no faster. But having said that, our idea of slowly is faster than most people's.
There are other things that we want to consider. There could be shifts within the insured bank and noninsured company. Illustratively, we might take all real estate lending activities out of the insured bank and put them into the nonbank company and do so to avoid some of the onerous fiddle-faddle that goes on with real estate lending in the insured bank.
And we think we could eliminate overhead that serves no useful purpose. It could only improve profits.
Q.: Over what period of time do you see this happening?
McColl: Well, I would say it's an evolutionary process. it might take five years, because to do it in a revolutionary fashion causes you to spend too much money. A lot of the legal contracts we have on pieces of property and whatever are all geared to the bank. You run risks in messing around with that.
Secondarily, and perhaps more importantly, though, we do not want to put huge financing strains on the nonbank sub until it can be seen clearly by the market as creating its own earnings and having the financial strength to raise money on the capital markets - not at the parent level, but at a super sub level. We see raising money at an intermediate subsidiary, nonbank subsidiary level.
Q.: Did you say earlier you had no interest in adding more assets to the general bank?
McColl: I don't mean to suggest we wouldn't add some. But that's not a goal in itself.
Q.: So you're satisfied with the geographic franchise you have now?
McColl: I think we have a wonderful franchise in the best part of America, in the Southeast. Certainly Texas enhances that. Without Texas, our franchise wouldn't be nearly as exciting as it is. Others have the same franchise. less Texas.
We could see ourselves over time expanding in the Southeast. But again, it would have to be opportunistic, at the right price. That will happen, but at what pace ... I can't see it happening at any torrid pace.
We have asked ourselves, in a geographic sense, are there any other places that we'd like to go. That question really takes the form of: Are there geographic expansions you have in mind for your consumer bank, or your branch bank, and perhaps your middle market bank?
And I guess the area, If we were going to do that, which is most attractive to us, is we believe the Midwest is a very stable part of America with good people and good businesses and has not had the boom and bust of all three coasts, including the Gulf Coast.
We're attracted to the Midwest for a lot of different reasons and one of them is diversification of risk. We think we have good diversification now, with being in Texas and the Southeast, and that certainly proved itself during the difficult times in the Southeast, when our Texas bank was making huge sums of money.
So we wouldn't mind having more economic diversification to protect us against the next round of whatever.
Q.:what kinds of institutions would you look at?
McColl: It seems to us that if we're going to expand, we ought to do it in the $20 billion to $40 billion range, because you can't get economic diversification if you've only got 2% of your assets in the area you're diversifying into. So you need 10% to 20%.
Taking It Apart
Q.: Do you worry about being too big?
McColl: Yes, a great deal. A simplistic answer to that would he that we try to fight our own bureaucracy at every turn, unsuccessfully, I might add. But on a more practical basis, we spent nearly 33 years building this company. Our whole game plan was consolidate, consolidate, and consolidate. And so we aggregated this company.
For the last two years, almost 100% of our efforts have been to disaggregate this company. We don't mean we have to spin off our company or sell part of it. We have to allow executives to run the businesses for which they are responsible.
For instance, John Abadie runs our dealer finance business, the fourth-largest auto finance company in the United States. He's got a the-three-year game plan that we've approved. John is really running his business. It's a business within the business. And it presents quandaries to you.
That business has become a very commodity-like business. GM wants to sell cars. They're in the finance business to help sell cars. So prices have come down. it's a very thin-margin business. And if you have bank capital against it, you have a low return on equity.
So that argues for us to do two things: moving into the nonbank part of the business and secondly, or first, securitizing the paper and thereby having a high return on equity by lowering the asset size. And that's a great answer for John. He wants to pursue that because that's a great answer for his business.
Now at the aggregate level, it simply gives us more of the same problem we already had. We're generating so much capital, what in the world do you do with it? As he cures his business problem, he simply says back to the parent, "Here's your capital back. We don't want that anymore."
The NationsBank Culture
We're a company that has lived off of change. We've never come into a new year with the same company we entered with the prior year. We're not doing it this year. We've got four different arms this year that we didn't have last year. And knowing us, it will be different by June.
And so we're a company that thrives on change. We can march in another direction and nobody gets excited. Or if they do, they sure don't mention it to the chairman.
Q.: What were the most difficult periods during your career?
McColl: I guess I went through two periods where we were nervous. In 1974, our bank had very little capital arid we had very high leverage and had a lot of nonbank subs and we only had 50% commercial paper covers against our bank lines. And the paper started coming due and we had i real liquidity crisis here in 1974.
It scared the living hell out of me. I was a young president, had just been elected president certainly no more than six months before all of this started, and I knew very little. I didn't know how little I knew until I got in the middle of a crisis.
Another period, candidly, was as recent as the summer of 1990 when the examiners were doing all their real estate exams. It was the first time in my career as president or chairman over a 20-year period that I was not able to tell my board with certainty what our earnings were going to be for some months.
Because they were making up rules as they went along and we were reacting, as a company we no longer felt in control of ourselves. But that only lasted about 60 to 90 days before we did everything to finally understand and conform to whatever the examiners wanted.
But I wasn't doubting survival It was just very difficult and frustrating.
I guess the most difficult periods of my career have certainly been caused by me. I'd say the two attempts to go into Georgia certainly brought me a lot of - perhaps well-deserved - negative publicity.
I guess the period of greatest frustration and yet greatest joy came in going into Texas - all the emotional roller coaster we went on in being told first we might get it and then we weren't, and all that.
The Expense-Control Problem
Q.: Wall Street is still concerned about your efficiency ratio, which was 63% in 1993. When will it improve?
McColl: We're constantly working on that. It got better each quarter in 1993 and will get better each quarter this year. But having said that, people want one formula that fits all.
And if you, for instance, have a big branch banking operation, you're going to have a higher - therefore not as good - efficiency ratio as people who don't have a branch bank. We are a company that has spent a lot of money building who we are.
The record is clear. We were a $6 billion company in 1982 and $158 billion now. Very few people can do that without spending money.
Q.: You spend about $200 million on systems integration?
McColl: Yeah. And I know Wall Street doesn't like that but I don't care. Because I get paid to do what's right for the company in the long run.
We had the efficiency ratio going south and we bought CRT. The nature of their business is that they create a huge amount of expense and a lot of revenue.
They take a small amount to bottom line, but against the capital, it's a large amount. They have high ROE, a very high efficiency ratio - which means bad - but it's a very good company and it's very important to our business.
So those are the kinds of things you run into that interdict this ratio and unless somebody's into the derivatives business, let's say in the trading business, they don't have that particular thing to carry around. So to compare us to Banc One is just not reasonable.
Q.: Your stock has been beat up lately. Does the market not fully understand what you're doing?
McColl: I think it's a combination of factors. They worry we're big and therefore can't keep sustained earnings growth. I think they prefer companies that are less complex, and we're working on that. That's why we're channeling our annual report to report on each of these groups separately, to make it easier for the analysts to understand.
I think there's what I call the "Hugh McColl factor," which is a thing where even if he says he's not going to do something, he will, and by then it's going to be one bridge too far.
And One More Thing ...
I'd just like to make the point that over my career, I have been compared to a lot of banks. I used to have a big shareholder that said to me, "Allied Bank is earning so much, so why can't we be more like them?" And, see, we're not like Allied. They don't exist.
And there were a lot of banks that I was compared to, like MNC, which had very high returns, higher than ours. And they don't exist. And I'd just like to make the point that I'm here and they're not. So, we're quite comfortable with what we're doing. When the shouting's over, we're going to be here.
NationsBank's Track Record
Efficiency ratio 64.7%
Tier 1 7.54%
Number of 50,828
Number of 1,737
Resume of HUGH L. McCOLL JR.
Born: June 18, 1935, in Bennettsville, S.C.
1957: Graduated from University of North Carolina at Chapel Hill with a degree in business administration
Joined the Marines for a two-year stint, leaving as a lieutenant
1959: Joined American Commercial Bank (predecessor of NCNB National Bank) in Charlotte as a trainee
1965: Promoted to vice president of NCNB National Bank
1968: Promoted to senior vice president
1970: Promoted to executive vice president
1973: elected vice chairman and director
1974: Elected president
1981: Elected vice chairman and chief operating officer of NCNB Corp., the holding company
1982: elected president of NCNB Corp.
1983: Elected chairman and CEO of NCNB Corp., which became NationBank Corp. on Jan. 1