After several years of finding itself, SunTrust Banks Inc. is finally poised to capitalize on one of the best banking territories in the country, its chairman and chief executive says.
L. Phillip Humann says the $179 billion-asset Atlanta company has what it takes to remain independent despite persistent analyst speculation that it might have to sell itself.
In a interview at the company's headquarters in early May, Mr. Humann acknowledged that SunTrust has "sort of spent the last few years basically getting our act together."
It has improved its sales culture and built up business lines needed to round out its product offerings, he said. "At this point if you combine where we are with what we believe is the best footprint in America from a growth and demographic standpoint then … I feel the best that I have ever felt about this company," he said.
SunTrust has branches in 11 states in the South and Southeast stretching from Maryland south to Florida and as far west as Arkansas.
In the last few years Mr. Humann, 60, has also ventured back to the acquisition arena. In 2004 his company bought National Commerce Financial Corp. of Memphis for $7 billion. In 2001 it lost a bitter hostile bid for Wachovia Corp. of Winston-Salem, N.C., which First Union Corp. of Charlotte had already agreed to buy. (First Union ultimately bought Wachovia, took its name, and made its headquarters in Charlotte.) In 1998, SunTrust bought Crestar Financial Corp. of Richmond, Va.
However, analyst speculation about SunTrust's ability to survive as an independent company has dogged it ever since the battle for Wachovia. SunTrust would have the "highest potential upside" if it were sold, wrote Citigroup Inc. analyst Keith Horowitz in a May 22 note to clients.
Analyst Christopher Marinac said the same day that though SunTrust can still make a case for staying independent, "the issue for them is performance."
"It's incorrect to throw them under the bus, but their performance over the next two years is critical," said Mr. Marinac, who works for FIG Partners LP in Atlanta.
John Pandtle of Raymond James & Associates was more blunt about the lingering effect of past underperformance. "In banking, when you have such a disparity, you don't last over time," he said. "Those companies tend to get acquired."
Mr. Humann dismisses such speculation. SunTrust now has a "full product set and a lot of capital" that should win it a place in the endgame scenario that many banking chiefs have forecast in recent months, he said.
"There's just no reason for us to think we can gain anything by doing an M&A transaction on the sale side," Mr. Humann said. But there are challenges, he acknowledged. Priorities include dealing with the "nonexistent" yield curve and following through on initiatives begun since National Commerce was acquired, he said.
"We're keeping our heads down right now," Mr. Humann said.
SunTrust has undergone a major overhaul since the purchase of National Commerce, which he said at the time would "absolutely ensure our independence." In December 2004 he handed over his title of president to James M. Wells 3d, a vice chairman who also became chief operating officer. At the same time another vice chairman, William R. Reed Jr., who had been National Commerce's CEO, was named to oversee retail banking and to reinvigorate the sales culture.
SunTrust has also started to focus more on cross-selling, with a particular emphasis on mortgages. Last year it was the nation's 19th-largest mortgage originator, with $47.6 billion in volume, up 57% from a year earlier, according to National Mortgage News' quarterly data report. In this year's first quarter its mortgage business earned $79.7 million, more than double the year-earlier figure.
SunTrust reported total first-quarter net income of $531.5 million, up 8% from a year earlier. Per-share earnings of $1.46 beat analyst estimates by 3 cents.
Mr. Reed said this month that the Carolinas, in which SunTrust established itself by acquiring National Commerce, is where it expects to significantly build its mortgage business. It booked $332 million in mortgages there last year, and he said the number should "easily double" this year.
SunTrust is also looking to market more wealth-management services to its retail and commercial clients. It built its investment advisory platform through a series of small acquisitions from 2001 through 2004. "The demographics say this is where we need to be at least for the next few decades," Mr. Humann said.
For the first quarter its wealth management division reported earnings of $45.7 million, up 7% from a year earlier.
"There's a lot going on under the surface to make this a better-performing bank," said Anthony Davis, an analyst at BankAtlantic Bancorp's Ryan, Beck & Co. "They have not really capitalized on having a bank in banking heaven, … but they have done a good job in the last 18 to 24 months to try and rectify that."
Mr. Humann said cross-selling and building branches have become higher priorities than bank acquisitions. He sees no need for SunTrust to further expand its product set. "We're deep in the execution of blocking and tackling and trying to maximize the opportunities that our footprint gives us," he said. "I don't see any need for diversification into other lines of business. We are pretty much covered."
Some other big southeastern rivals have shown no reluctance to do deals lately. Charlotte's Bank of America Corp. and Wachovia Corp. are integrating acquisitions, as is BB&T Corp. of Winston-Salem - and on Thursday, Regions Financial Corp. and AmSouth Bancorp. announced a $10 billion merger deal.
But on Friday a SunTrust spokesman, Barry Koling, said, "We don't think that the transaction changes anything we said before the announcement."
Mr. Humann also has no plans to buy a large mortgage originator, though SunTrust wants to gain market share in the mortgage business. The company has grown by hiring "hundreds" of new loan officers and originators from rivals, some of which have faced hardship as the housing market has cooled.
"The mortgage business is very fragmented," Mr. Humann said, "and the ease of entry is very significant."
"We open mortgage offices all the time, because what you really need is the right people and the office space," he added. "Unlike the national statistics, we are in predominantly purchase markets, meaning large and growing urban areas - so almost irrespective of the rate cycle and rate movement, a larger percentage of our originations are people actually buying homes, as opposed to refinancing."
SunTrust is also expanding through National Commerce's strategy of in-store branching. Its in-store network grew 8.5% last year, to 456. A big chunk of them were in Wal-Mart stores, where it now has 95 and plans 20 more.
SunTrust used in-store branching to accelerate its entry into the Charleston, S.C., market, where it has opened five branches, including three in Bi-Lo grocery stores. In the January-March quarter, its first in that market, it generated $5 million of deposits and $1 million of loans there.
Mr. Reed said it could use in-store branches to enter other southeastern markets - for example, parts of coastal North Carolina, where it has few branches - or expand into contiguous markets.
Christopher Whalen, an analyst at Lord, Whalen LLC's Institutional Risk Analytics, said the decision to avoid large deals may serve SunTrust well. "Part of the issue with them was that they hadn't stood still long enough to process their acquisitions," he said. "As a result, their asset and equity returns have not been particularly impressive."
SunTrust hopes in-store branching can help generate lower-cost deposits to fund its loan growth, which has been significant in recent quarters. It had $118 billion of loans in the first quarter, 3% more than in the fourth and 13% more than a year earlier, but its net interest margin, 3.1%, was flat with the fourth quarter and down 15 basis points from a year earlier.
Mr. Humann blamed the margin problem partly on having a third of its deposits in Florida, where a disproportionate population of retirees are buying certificates of deposit because of rising rates. "That is a game you have to play, but you have to be very careful," he said. "Most of those clients are single-service customers who are basically shopping for the best rates."
But Mr. Humann believes that the rising rate environment that has pressured SunTrust's margins will end "sooner rather than later." In expectation of its doing so, SunTrust sold $24 million of excess mortgage-servicing rights in the first quarter and reported a gain on an asset that Mr. Humann said would "basically vaporize" when the cycle turns.
The loan book has continued to "grow nicely," Mr. Humann said, even though SunTrust has backed away from indirect auto lending because of undesirable margins. "We've had very balanced, strong loan growth, and we don't see it falling off anytime soon," he said. "The economy down here is actually pretty good."
Most of the company's lending has remained in the Southeast, and Mr. Humann said that is not expected to change. The company is reluctant to "chew up capital" by making out-of-market loans, particularly corporate loans, to borrowers unlikely to use the rest of its services, he said.
But SunTrust's rapid loan growth has drawn attention from some analysts because of the impact on its loan-loss reserve, which stood at 0.88% of total loans at the end of the first quarter, a mark that several have said puts it among the least-reserved among large banking companies.
How SunTrust handles reserves has drawn scrutiny before, but it used to be about being overreserved. In 1998 the Securities and Exchange Commission said it had overreserved and required it to restate earnings. In 2004 it restated several quarters of earnings after overstating its quarterly allowances for loan losses; the SEC is still conducting a formal investigation into that matter.
Mr. Humann said concerns over its current reserve levels are overblown.
"Our loan growth has been in the low-loss or no-loss categories," he said. "The fact of the matter now is that we've got a robust loan-loss methodology, and the banking regulators are completely happy. … In fact, we've got more dollars in the reserve than we've ever had."
SunTrust's reserves will fall in line with the 1% ratio that many analysts' feel comfortable with when loan growth inevitably slows, he said. "For the immediate future I don't anticipate any big credit events out there," he added.
Analyst Jeff Davis said evaluation of SunTrust's role in the next round of bank consolidation will spotlight its credit quality.
Criticism of its loan-loss reserves is unwarranted, though, given the low risk of its loan portfolio, said Mr. Davis, who works for First Horizon National Corp.'s FTN Midwest Securities Corp.
"They're keeping the ball in play." It can remain independent "if they don't blow it up on credit."
