John G. Medlin Jr., the chairman and chief executive of Wachovia Corp., runs what is widely perceived as one of the nation's healthiest and most profitable banking companies.

At a recent conference sponsored by First Boston Corp., he gave his thoughts on the need for disciplined management in today's unfriendly financial and regulatory environment, and sought to dispel the notion that Wachovia's culture is too conservative.

His remarks are excerpted below.

The economy and the financial system still are in the throes of adjustment from the excesses of times past. The favorable effects of lower interest rates are being moderated by the enlarged debt burden, layoffs from restructuring, a decline in the young-adult population, and stifling regulation. These factors are restraining growth in employment, income, spending, and credit.

Despite these impediments, the economy appears likely to continue growing moderately for the near term.

However, the longer outlook is clouded by the promise of huge tax increases, the relentless growth in federal spending, the persistence of large budget deficits, and the prospect of more government. These also are serious concerns and risks on the international scene.

Tight Controls Essential

Therefore, financial institutions can't effect much more help from the economy. Their near-term success will depend more on control of operating expenses, reduction of credit losses, and improvement of risk compensation than on business growth.

There will not be a strong economy or a willing Congress this time to bail out careless management, liberal lending, or excessive costs.

While the credit losses of the financial system have declined, the level of problem assets remains historically high. Some borrowers wounded by the recession are having difficulty surviving in a slow-economy.

The worst should be over, but lingering credit problems will haunt some banks for many more years.

Margin Worries

The sharply sloped yield curve is both a blessing and a curse. It has widened interest spreads but also is causing an outflow of consumer savings to high-return investments.

This could lead eventually to funding problems and increased money costs for lesser-quality institutions. An inevitable rise in short-term rates will narrow interest margins for the strong and the weak.

Other challenges include more stringent banking laws and regulations which make it more difficult and costly to serve customers.

This is a natural offspring of a financial system where the federal safety net breeds excess capacity, protects unsound institutions, and encourages uneconomic credit and pricing practices.

Also, there is growing need for more complex and expensive information and service-delivery systems for banks to be efficient and competitive.

A Time of Testing

Thus, the conditions which lie ahead will continue to test the credit quality, operating efficiency, financial strengths, and management skills of banking companies.

The differences among individual institutions have grown wider and more apparent with each passing economic cycle. More quality awareness and sensitivity by customers and investors should provide even better rewards to strong and soundly managed banks prepared to meet the challenges.

Wachovia's guiding principles and basic strategies remain the same in difficult or easier times, but they are especially appropriate for the present and prospective conditions.

Our steadfast approach is to pursue progressive business strategies but within the disciplines of sound financial principles.

In order of priority, the emphasis is on soundness, profitability, and growth.

Equal importance is placed on marketing, risk management, and efficiency. This requires maintaining careful balance among the business development, credit administration, funding management, and operations functions.

Recipe for Excellence

Our objective is to have above-average loan growth, net interest margins which are at least average, and below-average credit losses and operating costs.

Mixed with capable people, that is the basic recipe for excellence in banking.

The top-priority emphasis on soundness causes some to characterize us as conservative. In reality, we are creative but disciplined risk takers who have good loan growth as well as good credit quality.

It is possible for our bankers to sell more aggressively and lend more safety because they are better trained and more skilled in evaluating, structuring, and monitoring risks.

This is especially important in a slower-growing economy, which requires more determined business development but is less forgiving of marginal credit judgments.

Goal: Annuity like Profits

Other key strategies are to provide superior customers service, to develop broad and enduring relationships, and to avoid excessive concentrations of business and risk. Technological and operational excellence and financial strength and flexibility also are top priorities.

Our ultimate goal is to maximize shareholder value by building steadily and annuitylike stream of higher-quality and more dependable profits, which deserve a premium price-earnings ratio.

The guiding principles of Wachovia are sacred, but they are applied in new and different ways as times and conditions change.

Complacency is not one of our soft spots. The wind of change blow freely across our organization, but we also have a good record of resisting risky fads and passing fancies.

Merger Considerations

Acquisitions of banks in other southeastern states will be considered whenever they can enhance per-share earnings and market value.

This require a realistic assessment of the cost to bring an acquiree up to our high standards of personnel professionalism, operational excellence, and credit quality as well as considering possible synergies and cost savings.

Also, care must be taken today not to pay too much for branch banking networks supported heavily in the past by cheap consumer deposits, which now are migrating to higher-yield investments.

Meanwhile, Wachovia has three strong banks which cover three excellent states [North Carolina, South Carolina, and Georgia] with above-average economic prospects.

It also has a prominent business presence and good growth potential in corporate banking services for a select clientele across the nation and overseas.

The organization is big enough to afford modern systems and to compete effectively with larger institutions while being small enough to maintain Wachovia's special character and qualities.

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