Only Humann

In an Atlanta vault belonging to SunTrust Banks lies one of the best-guarded trade secrets in the history of capitalism: the formula for Coca-Cola. The beverage maker's supreme faith in SunTrust is part of a storied relationship between the two Atlanta institutions. Coke's 1919 initial public offering was underwritten by Trust Co. of Georgia, a SunTrust predecessor. Today the bank owns 4.6 percent of Coca-Cola Co., and Coke's CEO, E. Neville Isdell, is a SunTrust director.

The bank's relationship with Coke is emblematic of its conservative, distinctly southern approach. The nation's eighth-biggest bank, with nearly $169 billion in assets and 1,700 retail branches, SunTrust is a sponsor of Nascar and is a leading lender to Nashville's country music industry. Bank officials pride themselves on an operational style that relies on 20

regional CEOs who bring a local-bank feel to customer relations and ensure that few loans go bad. "As basic as grits and butter" is how Prudential Financial analyst Michael Mayo describes the bank.

But like Coke, which has suffered declining sales in a changing market, SunTrust has lost some fizz. Investors are impatient with the stuffy, buttoned-down style of L. Phillip Humann, 59, a pillar of Atlanta society who has been with the bank since 1969 and has been its CEO and chairman since 1998. It's no wonder: SunTrust's shares changed hands for more than $80 apiece when he took charge; seven years -- and several acquisitions -- later, they're worth just over $70.

Critics say SunTrust isn't exploiting its biggest asset: a big retail branch network in the fast-growing southeastern U.S. The population of the bank's core 11-state territory is projected to grow by 8.4 percent in the five years ending in 2008, compared with 4.8 percent for the nation overall, reports SNL Financial, a Charlottesville, Virginia, research firm specializing in bank stocks. (SunTrust operates mainly in Florida, Georgia, Maryland, North Carolina, South Carolina, Tennessee, Virginia and the District of Columbia, so it was not directly affected by Hurricanes Katrina and Rita.) Moreover, critics of the bank complain, SunTrust's conservative lending practices may limit nonperforming loans, but they also prevent it from keeping pace with faster-growing rivals.

By many measures SunTrust is a classic underperformer. In this year's second quarter, its return on equity and return on assets lagged those of most of its big-bank peers (see table). Earnings per share declined 6 percent, compared with those of the same quarter last year, and were flat in this year's first half. SunTrust's stock trades at 12.7 times estimated 2005 earnings -- about average for big banks but about 1 percentage point below the price-earnings ratio of, say, San Francisco's Wells Fargo & Co., which does business in a comparably fast-growing region ("footprint," in bankerese), the western U.S.

"Most any shareholder would say that from an earnings growth standpoint, the past five years have been disappointing," says Sandler O'Neill & Partners analyst Kevin Fitzsimmons, who nevertheless upgraded SunTrust from hold to buy after its share price fell about 7 percent over the summer.

The bank's image hasn't been helped by nagging missteps. A bad bet that interest rates would rise in 2002 and 2003 depressed its profit margins. And last November, SunTrust had to restate its first-half 2004 earnings after discovering miscalculated loan-loss reserves. SunTrust says it has fixed the weakness in its financial controls, dismissed three executives and is cooperating with a Securities and Exchange Commission investigation.

SunTrust's uneasy position in the banking world can be traced back four years, to its losing a bitter battle to acquire arch-rival Wachovia Corp. That bank had agreed in April 2001 to merge with First Union Corp. But one month later SunTrust proffered a hostile bid that was roughly $1 billion higher. Wachovia shareholders rebuffed SunTrust, however, in an August 2001 vote, agreeing with Wachovia management that projected cost savings and growth opportunities were greater with First Union.

First Union went on to acquire Wachovia, appropriate its name and build a Southeast banking powerhouse that overshadows SunTrust. Wachovia is today three times as big as SunTrust in assets ($512 billion versus $169 billion) as well as in market capitalization ($78 billion versus $26 billion). In this year's second quarter, Wachovia turned in record earnings of $1.65 billion, compared with just $466 million for SunTrust.

Other big bank deals have put added, albeit indirect, stress on SunTrust. Bank of America Corp. broke into the northeastern U.S. last year by purchasing Fleet Boston Financial Corp., and J.P. Morgan Chase & Co. moved into America's heartland by acquiring Chicago-based Bank One Corp. SunTrust has begun to look like an also-ran in the race for greater scale.

The proxy battle for Wachovia didn't just bruise SunTrust's image; it also diverted the bank's executives from repairing problems in their core business, particularly an underperforming retail operation and what many critics call an overly guarded approach to lending that needlessly sacrifices profits.

"I like Phil Humann a lot," says Thomas Brown, CEO of Second Curve Capital, a New York hedge fund that specializes in bank stocks and has no investment in SunTrust. "But he doesn't have a will to win. Instead of focusing on Wachovia, he should have been saying: 'We are a mediocre institution. We have the best footprint of any bank. We need to get out and fix our core business.'"

Humann, who has a deep drawl and a thoughtful manner, downplays the Wachovia episode. "It's ancient history," he says. "We didn't feel like we had to do anything differently because we still had one of the best footprints in America. We're in the lucky position of not having to do mergers and acquisitions to keep the growth needle moving."

Nonetheless, SunTrust did make that lunge at Wachovia and, in October 2004, bought National Commerce Financial Corp., a $23 billion-in-assets Memphis bank, for $7.4 billion. The deal's immediate boon is 46 fast-growing NCF branches inside Wal-Mart stores throughout the Southeast. And as modest as the merger was -- Bank One, by comparison, rang J.P. Morgan's register for $58 billion -- it may provide sweeping longer-term benefits: If NCF's famously hard-charging sales mentality and calculated risk-taking spread through stodgy SunTrust, the purchase could be transformational.

"If SunTrust can add an element of cultural aggressiveness, better leverage core assets and get a little more hustling in terms of sales, then it can raise returns and the share price," says John McDonald, a New York­based analyst with Banc of America Securities. "The story line has become, 'Let's see if these National Commerce guys wake up SunTrust's crusty old culture a bit.'"

Yet even as Humann makes a nod toward becoming more gung-ho about growth, he's not thrilled with the notion of his grand old bank's becoming more like NCF. "This wasn't a merger of equals," he notes wryly. "This was a larger company buying a smaller one."

Not that SunTrust is resistant to all change. The bank has just wrapped up an extensive reorganization that centralized scattered back-office operations, gave greater autonomy to regional managers and instituted incentives based on quantifiable performance to light a fire under sales managers.

"We have the best sales culture we've ever had," boasts Humann. "We do have a will to win."

Still, if Humann doesn't deliver, look for SunTrust to come under pressure to sell to a bigger competitor, such as Citigroup, J.P. Morgan Chase, Wells Fargo or -- gasp -- Wachovia. All four have market caps at least three times as big as SunTrust's, though a deal with Wachovia might raise antitrust issues because of the two firms' concentration in southeastern markets.

"SunTrust is an underleveraged franchise that's not taking full advantage of its footprint," says BofA's McDonald. "Clearly, the company would be attractive to a bigger buyer."

A BIG BEAR OF A MAN WITH A STARCHED, FORMAL manner, Phil Humann looks cast for the role of southern banker. The CEO was in fact born in Independence, Kansas, in November 1945. He moved to Atlanta as a teenager when his father took a job with an oil-and-gas shipper now known as Colonial Group. Phil attended Sandy Springs High School before heading to Auburn University in Alabama for BS and MS degrees in economics.

Humann has spent his entire career in banking, relying on his even-keeled temperament to see him through boom-and-bust cycles. He fit seamlessly into SunTrust's staid culture. The bank prided itself -- and still does -- on lending only to the most-established, creditworthy clients, often placing hundreds of covenants and specifications in its loans.

In 1969 he joined the training program at Trust Co. of Georgia, a venerable Atlanta institution founded in 1891 and entrenched in the city's social as well as its economic firmament. During the real estate bust in the mid-1970s, Humann headed a loan workout group -- and has never forgotten how bad things can become at the bottom of a credit cycle. "That job gave me more experience in a shorter period of time than any one I've had," he says.

Promoted to executive vice president of corporate banking in 1978, Humann was clearly seen as a rising star. In 1985 -- by then he headed Trust Co.'s whole Atlanta operation, wholesale and retail -- the bank merged with Orlando, Florida­based Sun Banks in the country's first big interstate bank merger. The prospect of Trust Co.'s profitable corporate lending business's combining with Sun Banks' underperforming retail franchise had the market buzzing about possibilities.

SunTrust failed to fulfill its promise, analysts say, because Trust Co.'s corporate bankers, set in their ways, didn't turn around Sun's sluggish retail business. It didn't acquire enough new customers or generate sufficient sales from existing ones, especially considering its fast-growing territory. Still, SunTrust's earnings were rising by 11 percent a year.

After five more years as head of the Atlanta operation, Humann was promoted to president in 1991; seven years later he succeeded the strong-willed James Williams as CEO.

As chief executive, Humann has been a reliable steward of SunTrust's sedate lending and operating culture. Nevertheless, he has also audaciously pursued mergers. Almost as soon as he took over, Humann agreed to pay $9.5 billion for Richmond, Virginia­based Crestar Financial Corp., a $26 billion-in-assets institution with a strong retail presence in its home state. (SunTrust also acquired its current operating chief in the deal: former Crestar president James Wells III.) The acquisition, priced at 31 percent over Crestar's market value, shocked investors. SunTrust's shares plummeted 10 percent the day after it was announced and have yet to fully recover.

Humann contends that the deal hurt SunTrust shares not because it was ill conceived but because the market had previously viewed SunTrust as a takeover candidate. "Once we did a deal of Crestar's size, the market thought we wouldn't be acquired," he explains. "It took the takeover premium out of our stock."

In any event, the market's reaction did little to keep Humann from further deal making. Over the past five years, SunTrust has acquired 15 financial institutions at an aggregate cost of $18.8 billion. Humann's targets have included several small asset managers and Atlanta investment bank Robinson-Humphrey. The acquisitions diversified SunTrust's business and boosted its fee revenues. But critics say they distracted the bank from making fundamental fixes in its retail banking and corporate lending operations that would have substantially improved performance.

Since buying Asset Management Advisers in 2001, SunTrust has grown the Jupiter, Florida­based firm's assets from $1 billion to $10 billion. More recently, the bank bought a majority stake in Seattle boutique Zevenbergen Capital Investments and acquired Seix Investment Advisors, of Woodcliff Lake, New Jersey. "Forget what the market does," says Humann. Money management "can be a consistent double-digit grower just by bringing in new assets under management."

Humann has bolstered SunTrust's core banking franchise through acquisitions as well. Among them: the $705 million purchase in 2002 of 59 Florida branches, representing $4.5 billion in assets, from Columbus, Ohio­based Huntington Bancshares; and the $130 million purchase one year later of Lighthouse Financial Services, a $580 million-in-assets private bank in Hilton Head, South Carolina.

Apart from being acquisitive, Humann has operated in a low-key fashion, running SunTrust in the slow and steady, attention-shunning manner long characteristic of the bank. The CEO himself is intensely private. In business gatherings "Phil's usually very quiet," says Rawson Haverty, an old friend and director of 120-year-old Haverty Furniture Cos. in Atlanta. "But when he says something, it's very astute," adds Haverty. "You get the impression he knows exactly what's going on." On a personal level, he adds, Humann "comes off as dry until you get to know him -- then he's very funny."

Humann and his wife, Jane, have three children, two grown and one in college. The CEO is active in civic affairs as a director of several Catholic Church­sponsored groups and of the Carter Center, an Atlanta human-rights organization run by the former president. On Sundays he likes to play at Atlanta's exclusive Peachtree Golf Club. Golf Digest magazine once ranked Humann the No. 1 golfer among big-company executives in Georgia. (He boasts a 9.8 handicap.) He takes two or three trips a year to angle for redfish or sea trout in Florida.

Some investors appreciate Humann's efforts to preserve his bank's traditional culture -- particularly in lending. SunTrust's loan charge-off rates -- 0.14 percent of the portfolio in the first quarter -- rank among the lowest of big U.S. banks. Its 0.4 percent total for nonperforming loans is 10 basis points below the average of its peers, according to Prudential's Mayo. "SunTrust is better positioned than most competitors to handle an increase in credit problems," contends Lisa Welch, who runs three portfolios for John Hancock Funds in Boston that hold a combined 1.3 million SunTrust shares.

Is SunTrust's ostensible prudence, though, sometimes just timidity? Increasingly, Humann has had to confront that touchy issue. The CEO's sweeping reorganization, phased in over the past six years and presented to SunTrusters as "One Bank," is designed to produce a bolder, more efficient, faster-growing company. Traditionally, SunTrust had been run as a set of independent local banks under a capacious corporate umbrella. But the Crestar acquisition made the bank too big for such an arrangement. The reorganization significantly tightened operations.

Humann has consolidated SunTrust's 27 local bank charters into one. Although the 20 regional banking divisions, each with its own CEO, remain intact, they now share technology and infrastructure. That has cut costs and boosted efficiency. Overlaid on this structure are five business groups -- retail, commercial, large corporate, mortgage and construction -- to oversee products and strategy. Each of the 20 regions is encouraged to operate like a community bank. Their CEOs decide on pricing, marketing and community involvement. This strategy, says Humann, helps set apart SunTrust from "those windowless credit factories in Charlotte" -- a dig at BofA and Wachovia.

To remedy a lax sales culture, Humann instituted specific incentives and benchmarks. Since 2000 the bank has ranked all credit officers using daily individual performance reports that get posted on branch walls and internal Web sites. After the first round of such evaluations, the bottom-performing third of the sales force was let go. "There's constant inspection on product sales, customer acquisition and retention and profitability and sales metrics -- by product, region and individual," says CFO Mark Chancy. Branch managers now can say "exactly where they stand in terms of home equity lines, new checking accounts, mortgage and wealth management referrals" and other key sales areas.

SunTrust has stepped up bonuses and even dangled expensive vacations. Some 400 top producers recently got a week in Cancún, Mexico. The bank has begun to systematically groom lower-level managers for senior roles, a process that used to be strictly ad hoc. Twice-a-year performance reviews help SunTrust identify those managers who have topped out in the organization.

SunTrust officials say the results have been heartening. In this year's second quarter, loan volume grew 12.9 percent over the same period in '04 and 3.6 percent over this year's first quarter. That bested the comparable reckonings for Wachovia (1.9 percent year-over-year and 1.2 percent vis-à-vis the first quarter) and for Wells Fargo (4.9 percent and ­0.9 percent).

Humann's critics insist that SunTrust still doesn't take enough risk to achieve acceptable growth and that the CEO's deal making has done little to improve matters. They cite the bank's approach to corporate loans, one third of its credit portfolio, noting that it continues to concentrate on big investment-grade companies -- like longtime clients Coke and Home Depot -- and eschews the smaller, riskier ones that can be more lucrative.

What's more, SunTrust has avoided long-term fixed-rate loans in favor of short-term variable obligations. This virtually guarantees that the interest it charges debtors will reprice along with its payments to depositors, leaving it less exposed to interest rate risk. Nonetheless, competition among banks for the short loans has compressed spreads, hurting their profitability. A key indicator is SunTrust's net interest margin, which was 3.16 percent in the second quarter. Peers, such as U.S. Bancorp and Wells Fargo, do much better -- 3.99 percent and 4.87 percent, respectively.

"SunTrust has never really understood the concept of pricing for risk," says Second Curve's Brown, a former bank analyst for PaineWebber and Donaldson, Lufkin & Jenrette. "They think a lower charge-off ratio is automatically better. But a really good bank views charge-offs as part of a larger equation. They'll say, 'If we get a high-enough yield, then we can afford a 30-basis-point increase in that number.'" Adds BofA analyst McDonald, "They're leaving money on the table by not taking some risks and getting paid for it."

Furthermore, skeptics are not convinced that Humann's reorganization has cured ills in retail banking, which generates 45 percent of earnings and 70 percent of net interest income. Consider SunTrust's pursuit of deposits in fast-growing Florida and Virginia. From 1999 through 2004 its share declined from 12 to 10 percent in Florida and from 16 to 9 percent in Virginia, according to Federal Deposit Insurance Corp. figures. Even in its home state of Georgia, SunTrust ranks second to Wachovia, though its market share rose from 12 to 15 percent during the five-year period.

INVESTORS ARE INCREASINGLY LOOKING TO NCF to rejuvenate SunTrust. Its 256 branches in the Carolinas, where the bank once lacked a presence, are certainly a plus. So is its promising relationship with Wal-Mart Stores, which could lead to branches in many more retail outlets, including some outside the South.

But more than anything else, NCF brings attitude. William Reed Jr., the company's CEO at the time of the deal and now SunTrust's vice chairman in charge of geographic banking and sales, sounds eager to share his old bank's culture with his new employer. For a start, he'd like to make SunTrust more customer-friendly. In corporate lending, for instance, Reed wants to extend more long-term fixed loans to small companies.

"Culturally at SunTrust, the right place to be has been on the variable-rate side," says Reed, 58, an NCF lifer. "We're saying that in some cases, it's okay to do some three- or five-year term loans. That's where you typically get the optimum yield for the extension of credit risk."

On the retail side Reed sees such marketing enhancements as shorter account statements, an easier-to-navigate Internet site and more-streamlined teller stations. "We can help [SunTrust] most by improving efficiency at the point of doing business and treating customers better," he says.

SunTrust has already made some concessions to its partner's ways. Although his bank has a heritage of catering to upscale clients, Humann embraced NCF's downmarket Wal-Mart branches. "A few years ago the thought of a SunTrust branch in a Wal-Mart would have been ridiculous," notes portfolio manager Welch. (The branches now go by the name "Wal-Mart Money Center by SunTrust Bank.") "That they're embracing the idea and finding they can make some money at it is encouraging."

Some of those lowly Wal-Mart branches have generated more than $70 million in deposits -- about double the national branch average. Humann says that by the end of the year, SunTrust will have nearly 100 branches inside the retailer's high-volume "supercenters" across Florida and Georgia and may launch them in Wal-Marts outside the Southeast.

There are other signs of movement. The bank is relaxing the number of covenants it requires on some small-business and middle-market corporate loans. And it is adopting NCF's brief bank statements and simple Web site design.

Will SunTrust ever embrace its partner's culture in a more wholesale fashion? The answer is as murky as sawmill gravy. The merger did, however, put four former NCF directors on SunTrust's 18-person board, including ex-chairman Thomas Garrott, who was a driving force behind NCF's emergence as a leader in in-store banking. Several high-ranking NCF officials, like Reed, are relatively high up in SunTrust's management hierarchy. Yet it's also true that key NCF executives bailed out, including Chris Holmes, who helped develop the bank's branches-in-supermarkets strategy.

Humann seems at times to feel conflicted. He acknowledges the need for change, then cites the bank's reorganization as evidence that it has already transformed itself. When pressed, he makes it clear that although SunTrust may experiment with strategies to boost retail banking growth, one thing it absolutely will not sacrifice is its conservative philosophy of credit risk.

"A strong sales culture is not at odds with a conservative credit culture," says Humann. "We're not going to stretch to take on marginal business. And we're going to continue to consistently shy away from higher-risk loans."

The very topic brings out a rare intensity in the CEO. "There has been one train wreck after another caused by banks being too aggressive with credit," he says. "We could make more money by stretching on credit -- until the losses occur. And then we'd have to pay for them. So at the end of the day, you're actually worse off by having stretched than by being consistently conservative."

There you have it, critics scoff -- same old SunTrust in a flashier package. "I'll be watching Bill Reed and Tom Garrott," says Sandler O'Neill analyst Fitzsimmons. "If they left tomorrow, it would really cause me some concern. It would say that the company itself is resistant to change."

For Humann and SunTrust, the stakes are high. If the CEO's recent moves boost returns and the stock price, he's a hero; if not, Atlanta's last big independent bank could fall prey to an acquirer.

"This is the deal that will either transform SunTrust from a mediocre performer into a very good one or cause them to sell," says Second Curve's Brown, who expects one or the other to happen within three years. As to whether SunTrust can remain independent, he says, "I'm betting no, but hoping yes."

Not-so-sunny returns
SunTrust, the eighth-biggest U.S. bank by assets, lags most of the top ten badly in terms of return on assets and return on equity, two key measures for bank-stock investors.
	Total Assets	ROA	ROE
Rank	Company Name	($000s)	(%)	(%)
1	Citigroup	1,547,789,000	1.34	18.15
2	Bank of America Corp.	1,246,330,000	1.35	17.46
3	J.P. Morgan Chase & Co.	1,171,283,000	0.34	3.77
4	Wachovia Corp.	511,840,000	1.31	14.01
5	Wells Fargo & Co.	434,981,000	1.76	19.73
6	Washington Mutual	323,533,000	1.05	15.34
7	U.S. Bancorp	203,981,000	2.22	22.62
8	SunTrust Banks	168,952,575	1.13	11.45
9	National City Corp.	143,975,359	1.79	19.61
10	Golden West Financial	117,485,678	1.25	18.59
	Corp.
Source: SNL Financial (figures are as of 6/30/05).