Wachovia Corp. used to be the bank that never surprised.

With bank loan portfolios souring as the U.S. economy slows, this could have been Bud Baker's moment. As chairman and chief executive of Wachovia Bank, Mr. Baker, 58, is a banking leader who believed in measured growth at a company that had long been the industry's gold standard in credit quality.

Instead, as announced Monday, he has sold out to First Union Corp., an aggressive acquirer that grew wildly and has had problems finding a course that worked. In short, a bank whose image is almost the antithesis of Wachovia's.

Mr. Baker's decision could turn out to be a contrarian's inspiration or the worst move of his 32-year career.

But though it comes suddenly, there have been mounting indications over the past year that he could not go it alone.

Last July the 122-year old Winston-Salem, N.C., company, with $77 billion of assets, was among the very first big U.S. banks to report an upsurge in problem loans when it announced a $200 million charge for increased loan-loss reserves. Earnings last year fell 18%, to $832.3 million, as nonperforming assets shot up 133%.

In February, a few weeks after releasing those results, and with the bank's stock down by half from its 1998 highs, Mr. Baker spoke as if the writing was on the wall for his seven-year reign as CEO.

"I was the company's credit officer during the entire decade of the 80s," Mr. Baker said, "and if anybody should be able to spot a bad loan, I should be able to smell 'em coming a mile away. Was it a personal disappointment to announce an additional loss reserve and see your stock price go down? Absolutely. The deterioration in these loans has been as rapid as anything I have seen in my entire career in banking. I probably did not see the changes coming fast enough. You can blame it on me - I should have known."

The price has been measured in layoffs and, more recently, sold businesses. Last month, when Wachovia executives told Wall Street analysts that the bank would not put the loan quality issue behind it until this year was over, they also warned that new problems could arise if the economy does not rebound.

But Mr. Baker's supporters say that for all his conservatism, he is capable of taking off in new directions to help the bank out of its slump.

"He thinks about the business in subtle and complex ways," says Thomas K. Hearn, Jr., the president of Wake Forest University in Winston-Salem, and a member of Wachovia's board. (Mr. Baker is a director at Wake Forest.) "He is a multi-dimensional man."

His eclectic mix of interests is well known. Before getting an MBA from the University of Virginia, he majored in poetry at the University of Richmond. He carefully crafts his own speeches and is an avid reader. He drives a BMW and a pickup truck. "Someday he will write the great American novel," said Mr. Hearn.

Mr. Baker showed some of this eclecticism by inching away from the regional model started by his predecessor, John Medlin, and diversifying through acquisitions.

"We've done a number of mainly smaller acquisitions in which we have merged with companies that give us very special capabilities," Mr. Baker said.

Since 1999, Mr. Baker bought a regional brokerage firm, three small insurance brokers, and a private bank. The buying - not quite a spree, except perhaps by internal benchmarks - gave Wachovia a new level of diversity. But rumors persisted that a bidder would strike while Wachovia was struggling.

"This is a world today where if you don't perform, someone will be looking," said Mr. Baker.

Some of Wachovia's plans are likely to be woven into the combined company's strategy. Mr. Baker will still be around as chairman, and a much of the company's character will continue to reflect his leadership.

Wachovia's mantra had become "asset and wealth management" for higher-end customers, an area many banks, First Union included, also are eyeing. Wachovia has about 3.5 million retail customers, about 500,000 of whom are defined as affluent. But only 50,000 are customers of the private bank, Baker said. "So if you said, 'What are the things you could be working on over the next few years?' there's 400,000 to 450,000 households who we are not serving as well as we could."

"We feel driven to do a better job for the people we have now," Mr. Baker said. By focusing on segments, he said, "We're trying to break away from the idea of the retail bank as a huge monolithic McDonald's-like process, with the same hamburger in Virginia and Vermont."

Mr. Baker said that the wealth management strategy dovetails Wachovia's corporate banking strategy, which is increasingly focused on smaller businesses. These enterprises are often run by affluent people whose personal and business banking needs are interwoven. While Wachovia's "major growth initiative underway right now is in wealth management," Mr. Baker said, its next be "a major initiative in small business."

Rather than just plunge in, Mr. Baker said, he has been reflecting on the nature of small-business banking. "I'm becoming more and more convinced small-business banking needs to be done in a different way," he said, adding, "it's still linked to the branches."

Though many bankers boast about small-business people coming into their branches a few times a day, Mr. Baker said, "They don't do that because they want to. They don't get up every day and say, 'Wow, today I get to go to the bank twice.' They do it because they don't have a choice. So the question is, 'What should we be doing for them? Should you have Federal Express pick up their stuff? Should you put someone out there in a van?' I think we'll take a look at that."

The emphasis on smaller businesses is a change of direction for Wachovia. "We have corporate relationships with most of the Fortune 1000," he said, we're probably the tenth or twelfth largest corporate bank in America."

This business grew as traditional Carolina industries, like textiles and tobacco, began fading years ago. To replace them, the bank became a sizeable player in syndicated lending to big companies around the country. But now, the bank is increasingly drawn to the New South economy with its plentiful, growing manufacturing companies and real estate financing opportunities.

Most recently, Wachovia has launched special initiatives in the Raleigh, Durham, and Chapel Hill market and in northern Virginia to capture the region's burgeoning array of high-tech companies.

"It used to be that the corporate bank was hugely larger than the retail bank," Mr. Baker said, but "in recent years, in terms of profit contribution and the overall level of business, the retail bank has gotten a lot larger. I would say today, that the corporate bank is probably 50% of the company and retail is about 50%."

"I think the retail bank will continue to grow," he said, but meanwhile, "the growth of the corporate bank will be a little bit more moderate in the next couple of years because we're cleaning up some of these credit issues. And that will take some of the growth edge off the corporate."

Ah yes, the credit issues. Some 70% of Wachovia's problem loans involve 15 large corporate customers, and that may help explain some of Wachovia's current enthusiasm for smaller companies. Wachovia reportedly has loans to several sizable companies facing asbestos litigation, including Federal-Mogul, W.R. Grace, Owens-Illinois, and Armstrong World Industries. Wachovia was also lead banker for Carmike Cinemas, the nation's third largest movie theater operator in terms of number of screens, which filed for bankruptcy last August.

The credit problems weren't a complete surprise to Baker: "Coming right out of the box in 2000, we began to see what we thought were signs of a weakening economy, and we also saw trends in credit that were not very positive, principally in large corporate lending." By midyear, he said, "We were convinced we were entering a credit cycle, and that before that cycle as over, we would need additional reserves against bad loans."

Moreover, he said, Wachovia should be credited with facing up to problems and reporting them to the public, rather than trying to hide them. "I always hate to see our reputation suffer, but I have a sense that long-term, things will work out fine," he said.

Last September, Wachovia's 55-year old president chief operating officer E. Joseph Prendergast suddenly announced his retirement. Was he a sacrificial lamb perhaps? No way, Baker says: "Joe is one of my best friends in the world. Joe is a little younger than I am, but not a lot, so from a succession standpoint, Joe knew that he would be leaving when I left, and so he wanted to go. It was absolutely his decision to do it."

Baker is convinced Wachovia's focus on quality will win out. "Credit quality continues to be the high altar here," says senior executive vice president Stanhope Kelly. The emphasis on teamwork is another focal point, says senior executive vice president Jean E. Davis: "Our culture is not one that elevates a star above others. There's really a sense that we all pull together and we all expect a lot out of ourselves and each other, but we all win together."

Baker is credited with dispersing authority through the organization and hiring talented people. Said Kelly: "From a style perspective, Bud has been someone who has given many of us a lot of latitude to grow the company, to take risks, personal risks. He's kept us knitted together as a team on the one hand, and on the other hand, he strongly encourages personal initiative and has allowed us to reach for levels that in some ways we never knew we could."

Mr. Baker's two-year diversification program is also expected to pay dividends for the merged companies. Interstate/Johnson Lane, Inc. gives the new Wachovia a regional broker headquartered in Charlotte with more than 60 offices in the Southeast. Barry, Evans, Josephs & Snipes in Charlotte, sells insurance as an investment for upscale entrepreneurs and executives. The bank also owns DavisBaldwin Inc. of Tampa, Florida and in March, Wachovia agreed to acquire Hamilton Dorsey Alston of Atlanta. As a result, Wachovia Insurance Services is a leader in the Southeast and one of the 25 largest brokers in the U.S.

Perhaps Mr. Baker's most eclectic acquisition was his private banking acquisition, New York-based OffitBank. This private bank, which started life serving very rich New Yorkers, is now owned by a Southern bank catering to the middle classes and smaller businesses.

But Mr. Baker sees this as another important part of Wachovia's growing wealth management focus. OffitBank is helping Wachovia crack the extremely wealthy end of the market - its clients typically have accounts in the $20 and $30 million range. OffitBank has opened offices in Atlanta and other major Southeastern cities.

Stanhope Kelly said, "This has given us another level of service, another service model at the top end, that allows us to serve our customers in a more holistic way."

How this all works as part of acquisition machine is still uncertain. Mr. Baker insisted he had a clear vision of regional banking, a vision based on delivering first class services to households and smaller companies throughout the Southeast, a vision of integrated financial services for home and office, for depositors and investors.

Said Mr. Baker: "I always hate to see our reputation suffer but I have a sense that long term, things will work out fine."

Mr. Shapiro is a freelance business writer in New York.

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