Suntrust Trims its Properties

A major commercial real estate initiative is only part of the bank’s plans to save money.

Patti Connor

August 5, 2007

Can selling, then leasing back hundreds of its branches and dozens of its office buildings help one of the nation’s largest financial institutions dramatically cut its operating costs by 2009? Perhaps more important, can such a move, performed along with various other measures, including the elimination of 300 jobs, manage to successfully trim extraneous fat, without sacrificing all-critical muscle?

SunTrust is banking on it. In January, the Atlanta-based company unveiled plans for its restructuring plan, “E2 — Excellence in Execution.” The strategy represents the latest in a series of aggressive steps by the company to lower costs while increasing employees’ productivity and efficiency. It is designed to enhance shareholder value, while slowing the rate of growth in operating expenses and providing funding for investment in selected high-growth businesses.

The initiative’s goal is to save $530 million by 2009. The original estimate, based on cost savings to be achieved by the end of that year, was $400 million. The revised total reflects an additional $205 million in cost savings expected to be achieved by 2009. The company also has revised its 2007 estimated cost savings to $181 million, an increase of $46 million from its original plan.

For a company long known for its conservative approach to doing business, the restructuring represents a fairly radical step. “Traditionally, SunTrust has been slow to act. For that reason, they’ve missed out on a lot of opportunities, including the opportunity to merge with Wachovia,” says Lee Bradley, managing director of Atlanta-based SAMCO Bank Development group. “I’ve heard rumors [they] may be an acquisition target … They’re making the effort to become more proactive, and in the long run, that can only help.”

About SunTrust

• Metro Atlanta’s largest bank
• $31 billion in deposits, according to FDIC
• Total assets of $182.2 billion
• Operates 1,701 retail branches
and 2,569 ATMs in Alabama,
Arkansas, Florida, Georgia,
Maryland, Mississippi, North
Carolina, South Carolina,
Tennessee, Virginia, West
Virginia, and the District
of Columbiacontent goes here

Christopher Marinac, managing principal and director of research for Atlanta-based FIG Properties LLC, agrees. He sees the next couple of months as being critical for the company. “ Because of their mix, as far as investors’ and analysts’
perception goes, they’ve been swimming upstream a little bit. They’ve needed an extensive overhaul
for several years, and the fact they’re trying to be more streamlined is good,” he says.

“ Up until eight or 10 years ago, bankers
wanted to own their own buildings,
because that was the way it had always
been done. Now we’re seeing guys who
are realizing the less money you have
tied up in brick and mortar, the more
you have for making loans.”
— Lee Bradley, SAMCO Bank Developmentcontent goes here

SunTrust announced plans June 15 for its sale/leaseback transactions. Forty-eight office buildings and a portfolio of some 425 retail branches will be marketed to developers, brokers, real estate investment trusts and other institutional investors. All the buildings are within its geographic footprint, which encompasses 11 states in the Southeast and mid-Atlantic (specifi cally Alabama, Arkansas, Florida, Georgia, Maryland, Mississippi, North Carolina, South Carolina, Tennessee, Virginia, West Virginia and the District of Columbia). The goal is to close property sales by year-end.

William R. Reed Jr., vice president of the company’s geographic banking organization, emphasizes there will be “essentially no visible impact on clients or most employees.” He adds, “ All branches involved in the program will continue to operate as SunTrust branches.” While SunTrust expects to consolidate some of its space, it also will maintain “a significant presence for an extended period of time” in the office buildings after any transactions are completed, he says.

The willingness to even consider foregoing ownership represents a fairly signifi cant departure for an industry that has long adhered to the tried and true. “Up until eight or 10 years ago, bankers wanted to own their own buildings, because that was the way it had always been done. Now we’re seeing guys in their late 30s and 40s coming in, who are realizing that the less money you have tied up in brick and mortar, the more you have available for making loans,” says Bradley.

8-07 Commercial RE-1_Gary

From a bottom-line standpoint, certainly, the decision is a potentially good one. Gary Montour is senior vice president of Colliers Dickinson, a commercial real estate company headquartered in Jacksonville, Fla. Throughout the years, Montour has seen a number of companies make the switch from owning to leasing. Some 15 to 20 years ago, the head of Zayre department stores’ real estate department approached him. “His philosophy was, ‘Why get a 12 percent return [owning], when [by leasing], you can get 33 percent?’ When you look at the REITs they’re paying, certainly, it makes more sense,” he says.

The second half of the E2 program involves identifying and realizing efficiency and productivity opportunities related to supplier management, offshoring and outsourcing, process reengineering and a structured organizational review. As part of this portion, 300 jobs will be eliminated in the next six months. The company currently employs 33,400 workers — about 900 fewer than it had in September, when a hiring freeze was imposed. According to Mike McCoy, a spokesman for SunTrust, the jobs that will be cut are in middle management, commercial and small-business administration, and operational support.

The company is already outsourcing a number of its jobs overseas. “The question is whether they need to accelerate, or if there are other things they could consider doing as well,” says Marinac. Perhaps most worrisome, according to Marinac, are the job cuts. “So they reduce head count and they reduce costs, but then what? Their challenge is going to be holding on to their best talent — the bright, midlevel managers who are highly sought after by the smaller, more entrepreneurial banks that offer more perks and a greater opportunity for advancement. After all, as the old adage goes, customers do business with bankers, not banks.”

Downsizing may eventually pay off, but only if it’s done right. When used as a quick fix to reduce the costs of doing business, cutting a large number of employees over a relatively short period of time will produce little long-term cost reductions, according to Wayne F. Cascio’s Guide to Responsible Restructuring. Cascio, a professor of management at the University of Colorado at Denver, writes the move may even increase a company’s costs. Aside from the obvious financial and emotional toll exacted on the laid-off workers, he writes that the move may be almost as devastating for “survivors” (employees who do keep their jobs) who can be left without loyalty and motivation.

Downsizing costs may come at a high cost to the companies themselves. According to the guide, most lower-level employees receive one week of severance pay for each year they work for a company. Executives earning $50,000 to $150,000 a year — those in the midlevel range — can expect eight months’ pay. For those making $150,000 to $200,000, the average is 11 months’ pay. Outplacement costs for professionals and other senior executives typically equal 10 to 15 percent of their salaries. Moreover, many companies end up rehiring some of their employees or recruiting new hires to replace them. Recruiting, selecting and training those new hires comprises about one-third of their annual fi rst-year salaries, according to Cascio.