WINSTON-SALEM, N.C. - L.M. "Bud" Baker Jr. has been CEO of Wachovia Corp. for only 17 months, but he's already put his stamp on the company. Since he took the chief executive's reins from John G. Medlin Jr. last year (Mr. Medlin remains chairman), Mr. Baker has launched cost-cutting programs, divested business units, and restructured management along functional lines. The changes might not yet constitute a revolution, but they do represent a significant shift in Wachovia's tradition-respecting culture. Mr. Baker made these changes because he is preoccupied with demographic and technological developments occurring in the industry at large, which he says will lead to big adjustments in the ways banks interact with their customers. As he makes clear in his first extended interview with the American Banker since he took charge in January 1994, he intends to position Wachovia to meet those challenges. Mr. Baker, 52, possesses a restless intellect. A conversation with him skips easily from a biography of Gen. Douglas MacArthur to a recent visit to London's Kew Gardens, where he pondered the life cycle of trees. Mr. Baker can be a man of action when events require, as his recent initiatives demonstrate. But he's rare among bank CEOs for his propensity to stop along the way to smell the roses and consider the deeper philosophical issues.
Q.: Wachovia hasn't announced a major acquisition since 1991. Are you still interested in geographic expansion?
BAKER: There has been no ruling out a geographic expansion of the franchise. There is no dimming of our interest, and there are key markets around, particularly in the Southeast, that we would be like to be able to participate in.
Our great interest, of course, is in having the opportunity to have a relationship with more customers, because that is the vehicle that will bring about growth in the company. ... If you asked, "Would you like to be in Virginia someday?" the answer is yes.
At the same time, we are very sober and thoughtful about the future of banking, particularly as it relates to what might be called traditional forms of banking. We do think the nature of the business is changing, rapidly.
As we talk to our customers, for example, we find that a certain number of them don't come in our branches anymore. It's not that they don't like us; it's that they're busy. What that says is, the way we'll deal with customers in the future will undergo change, and that change will be fairly dramatic and take place over time.
It's a complex situation made more complex by the changing patterns of behavior of customers, who now deal with us through telephones, computers, and alternate methods of communication.
Our sense is that acquisitions can be a key part of our plan for the future. I look at them in three categories.
The first is using acquisitions to gain capabilities. We would be open to looking at opportunities for acquisition, for investment, for merger if it was a way of building a product line where we would like to be stronger, a line of business - acquisitions that made us better.
You might ask, "Are you going to go out and buy a gigantic mutual fund?" Probably not. But who knows? You just don't know what that means until you work your way through the process.
The second category is geographic expansion, which we've already discussed.
The third area is a larger merger with another banking company, sometimes known as a merger of equals. I would say there probably are circumstances where such a merger could be attractive. Ideally, what you would want to do is merge with someone whose growth rate is actually stronger than your own, because if you merge with someone whose growth rate is less than yours, there's a good chance they'll pull you down to their level.
The problem with large mergers is they're enormously time consuming, they require a great deal of effort, and if everything goes perfectly, then you hope to maintain your growth rate. But if you fall off, then there's a real possibility in the early years of the merger that the company won't grow. Then in the out years, the shareholders never get that back.
Q.: What are your thoughts on the so-called dream merger of Wachovia and SunTrust Banks Inc.?
BAKER: Our two companies have been very close over the years. I know (SunTrust CEO) Jimmy Williams, I like him, and have a great deal of respect for him. I stop by and see him sometimes when I'm in Atlanta. We mainly talk about how tough business is. If you said to me, "Bud, who are the banks you really admire?" they would surely be on that list.
But the question of putting the two together into some big company - it certainly looks like a dream on paper, but if you get into the hard issues of how our customers, shareholders, and employees would be better off, those things are very complex.
Q.: My conclusion from listening to you is that your greatest interest right now would be the product capability, or business line acquisition. Correct?
BAKER: Well, I'm still, as you know, from Virginia, and my father has to bank with NationsBank. And that is painful to me. The thought of turning my father over to Hugh McColl is almost ... it's not a point of dishonor in the family, but I still wish someday we could be in Virginia. The state looks good. It's our kind of place.
In terms of the merger of equals and the geographic franchise expansion, I would say it's going to be very difficult for us to do a transaction that can be shown to be in the best interests of our shareholders. To go to another state and pay an enormously high premium for a company that might not grow very well in the future would be something you'd have to think through.
Q.: Is there any regret at Wachovia that you didn't expand further in the late 1980s?
BAKER: I don't think so, at least I don't have any. You can always look back and say, "Well, gosh, we could have done that." But we have a company now that is essentially one company. The fact is, our people think alike and our systems conform. I think there's one exception, our safe deposit box system. I think that's the only system we have left that's not conformed and that's not big enough to worry about.
When the next opportunity comes along, we're ready for it. If we had done a string of mergers over these years, I'm not sure we would be ready.
Q.: In the first quarter, we saw credit problems tick up for the first time in several years. Will loan quality become a serious problem for the industry in 1995?
BAKER: My guess is that we could be at the peak of the credit quality cycle. It's simply logical to say that as we move forward, the outlook for the economy is that it will be somewhat more subdued.
It could be that the consumer hasn't felt higher interest rates yet. Many people have variable-rate mortgages. Those mortgages typically reprice once a year. You could have a little surprise coming. Also, with these low- rate credit cards, some of those have not yet priced up.
All of that is a way of saying that 1995, I think, will be a good year, probably a lot like 1994. But at the same time, we're in our fourth or fifth year of expansion of the economy and this expansion phase has some age on it. At some point, the economy will flatten down some.
We are seeing higher levels of delinquency in consumer-type credit. As to how severe it will be, that's impossible to predict at this time.
The corporate side is worth paying some attention to, particularly in large corporate credits. Because it is in this area that we have seen some softening of credit standards. In a weaker economy, you might expect to see some companies fall by the wayside.
My guess is that will not come in 1995, that what you will begin to see is a subtle building of problems. But somewhere out there - it could be 1996 or 1997 - there is an adjustment coming. How severe it will be is debatable. But I think it will be enough to get your attention.
And in the banking business, it could come at a time when margins have contracted. We've done a lot of expense saving already, so there's not much of that to be done. And all of a sudden, loss provisions have to go up.
And that is a formula for consolidation of the banking industry.
Q.: With a 54% efficiency ratio, Wachovia is already the most efficient of the 25 largest banks in the country. Yet you recently announced a major cost-cutting program. Why are you so focused on efficiency?
BAKER: Because in a slower-growing economy you cannot absorb inefficiencies without paying a price. You cannot deliver products effectively to the customer if you're not efficient.
The other thing, and I say this to our people sometimes, you have to be very careful about comparing yourself to a bank. Because you have to remember a great deal of our competition does not come from banks.
We can be in the residential mortgage business, but the truth is, we're competing against Countryside and all these people who have wonderful systems - in many cases, better than ours - and yet they are not burdened with our regulation.
Now I'm realistic. I know we can never be as efficient as a very specific, systems-driven company that's in some form of service. But that has to be where we're headed. The key to this business in the future will be the most effective process for delivering products and services.
Q.: Do you have a target efficiency ratio at Wachovia?
BAKER: Not really. We keep talking about 50%, but I don't know. I sort of approach this from the standpoint of watching our performance and thinking about the key elements in the sense of what level of expense burden is reasonable in line with our revenues.
Q.: Do you emphasize technology more than your competitors?
BAKER: We spend a lot of time and a lot of money on technology. It's an integrated part of what we do. Our technology chief has always reported to the CEO. Frankly, we think that in the future if you allow yourself to fall behind in technology, your risk is so great that you could almost literally be put out of business.
