the Federal Financial Institutions Examination Council asked John G. Medlin to discuss credit quality with a group of high-level bankers.

The choice was logical. Under Mr. Medlin -- and before him -- chief executive officers of the Winston-Salem, N.C.-based bank were paragons of sound banking. The company's loan-loss ratio was about the best in the business, even in times when other banks were facing crippling losses.

But no longer. Over the last few years, under Mr. Medlin's successor, chairman and chief executive officer Leslie M. Baker Jr., Wachovia has lost its pristine reputation as a lender. Not only have its problem loans risen, but the reserves against them have slipped. Its ranking in terms of loss reserves to total loans dropped to near the bottom among the 50 largest banks in the second quarter, according to Keefe, Bruyette & Woods Inc.

Wachovia, which has $67 billion of assets, remains a fine bank, analysts agree, but it is not what it was.

The sum of these factors can be read in Wachovia's price-earnings ratio, which stood at 17.5 times estimated 2000 earnings last Friday, about average for the industry. Its P/E ratio, once among the highest, is now far lower than that of such new leaders as Milwaukee's Firstar Corp.'s 24 multiple.

Wachovia is even losing ground in its home state. It has dropped to fourth place in its share of North Carolina deposits, from first in 1997. Adding insult to injury, it is being nudged down by a relative upstart, BB&T Corp., which now has the second-largest market share, and whose profitability and loan quality resemble the Wachovia of old.

Nationwide, Wachovia has shrunk in relative size to its North Carolina neighbors by shunning the gobble-up approach to out-of-state acquisitions adopted by the $614 billion-asset Bank of America Corp. and $230 billion-asset First Union Corp. Instead, Wachovia has focused on acquiring smaller banks. Just last month it agreed to buy B C Bankshares, a $395 million-asset bank based in Canton, Ga.

On the positive side, Wachovia produced handsome earnings in the third quarter. Its return on equity was 19.1% and its return on assets was 1.59%. Even before these numbers were released, Mr. Baker insisted in an interview that Wachovia's performance remains strong.

But he declined to answer questions about Wachovia's loan quality and reserves, issues that are particularly troubling to some analysts.

When reporting for this year's second quarter, Wachovia stunned analysts when it reported that its nonperforming loans ballooned 31%, to $210 million, or 0.48% of total loans. Wachovia, which for years had been among the industry's best in its reserve ratio, sank to the 48th spot out of the biggest 50 banks tracked by Keefe, Bruyette & Woods in the second quarter, the latest period in which Keefe Bruyette has compiled peer group comparisons.

If Wachovia were to bring its reserves to the 1.75% level of 1991, which would have ranked it 13th in the second quarter, the cost would be $222 million.

A large part of the problem was the bankruptcy last June of the Loewen Group, the second-largest funeral parlor business in the United States. Wachovia had loaned about $52 million to Loewen, which is based in Burnaby, British Columbia.

Some analysts are concerned that Wachovia has not been building its reserves quickly enough, especially considering that regulators have been warning of waning loan quality at banks across the country.

"We may have reached a point of inflection," said Nancy Bush, an analyst at Ryan, Beck & Co. in Livingston, N.J. "If nonperforming loans start to rise more dramatically, Wachovia will not be prepared for it, and that is totally contrary to the tradition of the company."

Even in the early 1990s, when problem real estate loans boosted many banks' nonperforming-assets-to-total-loans ratios as high as 17%, Wachovia's ratio never exceeded 1.5%. Between 1995 and 1997 that ratio hovered between 0.25% to 0.29%.

Ms. Bush said the problem is that Wachovia has not been adding to its reserves despite increased lending. As a result, its loan-loss-reserves-to-total-loans ratio tumbled to 1.20% at the end of 1998, from 1.80% in 1992, according to Keefe Bruyette's statistics. In the second quarter the ratio dropped to 1.13%, far lower than the 1.5% average of its peers, Ms. Bush said. "If you have a low level of loan-loss reserves and your nonperforming loans tick up, then you have to hit your earnings."

Wachovia attributes its low ratio to its credit card portfolio, because banks must write off nonperforming credit card loans on a quarterly basis. "But when you pull out the credit card part of it, the ratio is still below the industry average," Ms. Bush said.

Some analysts said that part of Wachovia's problem is that it has been groping for more revenue, sharply increasing its lending and driving its reserves-to-loans ratio lower.

Loans grew at an annual rate of 15.6% for the five years ended last Dec. 31, according to Keefe Bruyette. That was on the high side, but not startlingly so. The problem, analysts say, is that Wachovia has failed to keep the growth in its reserves in pace with the growth of its loans.

It is clear that Wachovia is looking for new revenue-producing products.

In 1997 it bought a Brazilian bank from Portugal's Banco Commercial Portugues SA, a move that was out of character. Wachovia executives acknowledged at the time that the acquisition ran counter to the bank's long-running strategy of not opening full-fledged banking offices overseas.

Hugh Durden, an executive vice president responsible for corporate lines of business, said at the time that the acquisition was in direct response to demands from Wachovia's corporate customers for international services.

The Brazilian bank, now known as Banco Wachovia SA, appears to be doing well, but there seems to have been no follow-up on the overall strategy.

In the meantime, Wachovia is turning its attention to beefing up its dealings with the wealthy, and has made several acquisitions this year for that reason.

It bought Offitbank Holdings Inc. in New York, a global money management company catering to the wealthy, and Hunt, Dupree, Rhine & Associates of Greenville, S.C. a benefits consulting company, and its affiliate, Retirement Plan Securities Inc., a money management firm.

Wachovia also bought Interstate/Johnson Lane Inc. of Charlotte, N.C., last April, a securities firm. And it bought a North Carolina-based life insurance broker, Barry, Evans, Josephs & Snipes Inc., which specializes in designing, implementing, and funding wealth transfer strategies for affluent families and benefit plans for corporate executives.

In addition, it bought Macroworld*Research Corp., which provides financial information, news, and stock and mutual fund ratings to subscribers.

Though Mr. Baker declined to discuss Wachovia's loan-loss problems, he spoke at length about his acquisition strategy, and displayed annoyance about calls by bank stock analysts for him to do a "big" merger.

Large banks are not necessarily the best banks, he said. The company plans to continue its disciplined merger strategy of buying good companies mostly in the Southeast at excellent prices.

Under Mr. Baker's stewardship, Wachovia seized a substantial share of the Virginia market with two sizable acquisitions -- $2.1 billion-asset Jefferson Bankshares of Charlottesville, and $10.6 billion-asset Central Fidelity Bank of Richmond. He also obtained a toehold in Florida with a small acquisition.

Mr. Baker said Wachovia still wants to expand in Virginia and Florida because of high growth potential, and he said that Wachovia does not need to make an acquisition to stay relevant.

"People say that Wachovia is dying to do an acquisition," Mr. Baker said. "That is the most ridiculous thing that I've ever heard. We are busy focusing on our bank and not sitting around thinking about who we are going to buy next."

That does not satisfy some analysts. "They haven't had much of a strategy in the last three years," said an analyst who requested anonymity. "Their acquisitions have been somewhat scattered. They have not been buyers of big premier franchises. To some degree they are stuck. If Wachovia buys a company that is not of equal quality, it will dilute their stock. On the other hand, they have to do something because they are in the midst of giants."

"If you are looking for performance you will not find it in the largest companies," Mr. Baker countered. "Maybe that will change. And sometimes bigger banks can rough you up in the market place, but that is okay. But our internal growth is so strong, and that is why we spend more time on performance and growth.

He also pointed out that some banks that merged recently have ended up disappointing the market. "The market has exerted discipline on acquirers," Mr. Baker said. "I sense a wariness which should have always been there. Banks should pay a reasonable price for their acquisitions.

"I would say by and large, the market is pretty perceptive in the long scheme of things," Mr. Baker said.

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