BIRMINGHAM, Ala. -- SouthTrust Corp., the largest bank holding company in Alabama, has prospered by ignoring conventional wisdom.

In the last 20 years, SouthTrust has grown from a $500 million-asset local Alabama bank into a kind of mini-super-regional, with $11.6 billion in assets and 336 offices in six states.

The company has accomplished this feat by violating a cardinal rule of banking, namely that one should buy big market share. Instead, SouthTrust bought small and relatively cheap community banks and provided them with marketing and financial resources to improve profits.

At the same time, while competitor banks become ever more centralized, SouthTrust bucked the trend by maintaining separately chartered subsidiaries, each with a nearly independent chief executive and board.

A Generous Return

The formula produced an enviable record: a 664% reinvested return to shareholders between 1981 and 1991. First Boston Corp. calculates that only Wachovia Corp., Winston-Salem, N.C., did better in the Southeast.

Now SouthTrust is about a enter a new phase of growth that will put its strategy to a more rigorous test. Chairman and chief executive officer Wallace D. Malone Jr. says his bank has completed its geographic expansion and will now focus on building its presence in existing markets.

"Market share is the name of the game for everybody and we're the same way," Mr. Malone said. "We have every intention, through internal expansion and growth and external expansion, too, to build a larger market presence everywhere we are."

More Growth Available

SouthTrust, which earned $82.4 million in the first nine months of this year, clearly has the necessary firepower to keep growing. The Birmingham-based company recently raised $70 million in a common stock offering, and its stock sells at a healthy 1.45 times book value. In late trading Monday, the shares were up 12.5 cents, to $24.50.

But Mr. Malone's insistence that he will not do any megadeals could make it difficult for SouthTrust to be anything more than a bit player in some of its key markets.

Take Atlanta, for instance. SouthTrust will have $2.5 billion in Atlanta assets after completing a thrift acquisition early next year. That's still only a sixth-place ranking in one of the most competitive banking markets in the country.

Mr. Malone, 56, acknowledges that the likelihood of an expensive bidding war "almost precludes" him from attempting to acquire the only two sizable independent institutions left in Atlanta: Bank South Corp. and Georgia Federal Bank, both with about $4.5 billion in assets.

"You've got some other people out there who are much larger than we are that I think personally would give the store away," Mr. Malone said.

Still, Mr. Malone insists that SouthTrust can more than hold its own against some of the nation's most savvy competitors, including NationsBank Corp. and First Union Corp.

All the Elements

"We've never had trouble competing," Mr. Malone said. "If you have good people, and a good product, and a good plan, you can compete in the industry, and I don't care who the competition is -- you can just put that in the book," he said, employing a favorite phrase.

SouthTrust's iconoclasm is a reflection of Mr. Malone's style and character. A bear of a man lauded by hunting companions as a crack shot, Mr. Malone doesn't fit the image of a buttoned-down, pinstriped banker.

In a recent interview, he was bedecked in a grey sports jacket and sat slouched in his chair, periodically reaching down to pull up his socks. Through much of the conversation, he cleaned his nails with a penknife.

So it may come as surprise to some that Mr. Malone holds a masters degree in business from the University of Pennsylvania's Wharton School and speaks passable German and Spanish.

Mental Number-Crunching

He is regarded as a computer whiz and likes to intimidate his executives by doing complex mathematical calculations in his head.

"He seems laid back, but if you peel back the veneer, you do find a very sophisticated individual," said Allerton "Tony" Smith, a fixed income analyst with First Boston Corp. in New York.

Mr. Smith, who touted SouthTrust when he analyzed banks for First Boston, said he considers Mr. Malone "one of the most dynamic chairmen I've seen in a regional banking company."

The major question about Mr. Malone is whether he's too dynamic. From time to time, some analysts have fretted about SouthTrust's growth. Total assets have surged 16% since the third quarter of 1991, mostly because of recent acquisitions.

Expenses Have Mounted

The rapid growth has caused SouthTrust's noninterest expenses as a percentage of total assets to rise steadily since 1988 because of the expense of assimilating new banks. And while its stock trades at a relatively healthy premium, it is still considered undervalued for a company with its earnings power.

Analysts say SouthTrust is penalized for being an aggressive acquirer. "The market has been very nervous. So a bank that relies more heavily on acquisitions than its immediate peers is maybe a little more suspect," said J. Frederick Meinke, with Raymond James in St. Petersburg, Fla.

But if there are bad loans lurking in the acquired portfolios, they haven't turned up yet in the published numbers. SouthTrust's ratio of nonperforming to total assets is a comfortable 1.79%. The company passed its last two regulatory examinations without incident.

SouthTrust was founded, in 1972, as a union of four banks, the largest of which was based in Birmingham. Mr. Malone contributed his family's bank, which was based in Dothan, and became SouthTrust's No. 2 executive, with responsibility for acquisitions outside Birmingham.

A String of Takeovers

Between 1972 and 1987, under Mr. Malone's direction, SouthTrust engineered 28 acquisitions in Alabama.

Starting out as half the size of AmSouth Bancorp., it surpassed AmSouth in the third quarter of 1989 as the state's largest bank holding company.

SouthTrust switched its focus to neighboring states after Alabama opened itself to interstate banking in 1987. The company still has 69% of its assets in Alabama, but expects to reduce that to below 60% with continued acquisitions.

Strategy Evaluated

While AmSouth followed the conventional strategy of buying large market share with each acquisition, SouthTrust always bought small. Of the 17 acquisitions outside Alabama accomplished to date most have been under $200 million in assets. The only exception is in Atlanta, where SouthTrust felt the need to make a bigger splash.

"The advantage of the strategy is, you avoid dilution and loan quality risk," said Henry J. Coffey Jr., a banking analyst with J.C. Bradford & Co. in Nashville.

Whereas AmSouth stumbled badly with a big thrift acquisition in Pensacola, Fla., SouthTrust has sustained only minor bruises from its purchases, "nothing huge, traumatic or permanent," as Mr. Coffey puts it.

But the true test is yet to come. To compete with the superregionals in cities like Atlanta, Charlotte, Nashville, and Tampa, SouthTrust needs to keep growing in those places. The greater exposure eventually could lead greater risk.

Mr. Malone has no doubts that SouthTrust is up to the challenge. Such self-confidence comes naturally to him. The son of a banker who learned the business from the ground up at his family' bank in Dothan, he says proudly, "There's nothing in a bank I haven't done. I've run teller windows, file checks, done commercial lending -- you name it."

Stand and Deliver

Mr. Malone is clearly the dominant personality at SouthTrust. He is also one of the largest shareholders, with a 1.18% stake. But that hasn't prevented him from retaining the loyalty of a close-knit group of senior executives. The top five officers under Mr. Malone have each been with SouthTrust for a decade or more.

"While we have a very demanding boss in Wallace Malone, he basically lets us operate as long as we create results," says executive vice president Frederick W. Murray, Jr., who oversees acquisitions.

To make sure loan quality doesn't get out of hand, SouthTrust backstops its presidents with a credit-control system centralized in Birmingham.

Executive vice president James W. Rainer Jr., SouthTrust's "credit czar," oversees a process where loans are graded at both the subsidiary and holding company within a week after being put on the books. Subsidiary banks are also subjected to an intensive annual audit.

No Compounding of Errors

"If loans are made that we don't like, we can step in there so there's no repetition," Mr. Rainer says.

Another built-in protection: subsidiary banks tend to focus on consumer and small business loans, while large corporate and specialized industry loans are made by the Birmingham bank.

So far, so good. At the end of the second quarter, SouthTrust's 1.93% nonperforming assets ratio was 10th lowest among the nation's 50 largest banks, according to Keefe, Bruyette & Woods Inc. in New York. It ranked fifth in net chargeoffs to average loans, just behind Wachovia.

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