How Stephen Steinour Is Transforming a Chronic Also-Ran Into the 'Best

July 2010 us-banker.com

How Stephen Steinour is transforming a chronic also-ran into the ‘best bank it’s been in decades.’ Huntington’s

HopeBy John Engen Considered near death just a year ago, Huntington Bancshares put up a surprise $40 million profit in the first quarter. Credit CEO Stephen Steinour, who has attacked credit problems, replenished capital, slashed expenses and, most notably, changed the culture at the chronic underachiever. Once an apparent takeover target, it’s now on a short list of likely Midwest consolidators.

alking with Stephen Steinour can to invest in growth, and we intend to seize problems to go away before we started feel oddly refreshing, much like it,” he says. investing” in growth, says Daniel Benhase, T stepping into a time machine and Under Steinour, a former CEO and a senior executive vice president in charge going back five years or so to a simpler, hap- president of Citizens Financial Group in of private banking. “The pace of play and pier time. The chairman and chief executive Providence, Huntington has won kudos sense of urgency in the company are much of Huntington Bancshares spends a lot of for attacking its credit woes aggressively. higher today than they ever were before.” time discussing branding, product devel- Since he took the helm in January 2009, the That high-energy, pedal-to-the-metal opment, cross-selling and—gasp!—loosen- company has set aside $3 billion in loan-loss approach appeals at a time when external ing underwriting standards, all with an eye provisions, cut expenses and done deep-dive pressures—still-hefty credit problems, toward stealing business from rivals, build- reviews of the subprime mortgage, commer- Washington’s crackdown on fees, higher ing wallet share and growing revenue. cial real estate and construction loan port- regulatory expenses and meek loan If you didn’t know better, you might folios that have given it so much trouble. It demand—are placing added pressure on think that the country was no longer in the also has raised $1.8 billion in new capital. industry earnings. midst of a devastating banking crisis, or Such moves have revived Huntington’s “The real issue for all banks going for- that the $52 billion-asset Huntington hadn’t vital signs. In the first quarter, the compa- ward is, how will they grow coming out of When Steinour took the helm, ‘a lot of Citizens’ executive team bought Huntington stock,’ Fish says. ‘We know what he’s capable of.’ recently survived its own near-death experi- ny’s Tier 1 capital ratio was 11.94 percent, this cycle?” says Fred Cummings, a longtime ence. The Columbus, Ohio, company lost while its tangible common equity ratio was Huntington follower as an analyst and now $3.1 billion in 2009, buried under a moun- 5.96 percent. president of Elizabeth Park Capital Manage- tain of toxic subprime housing, construc- Nonperforming assets were still evel- ment, a $30 million fund based in Cleveland tion and commercial real estate loans, and vated at $1.92 billion, or about 5.2 percent that invests in banks. The short answer, at its survival was in doubt. of loans, but the figure was smaller than the least in the Midwest, is to steal business from But it is poised for a strong recovery quarter before. Net chargeoffs were $238.5 competitors. now, asserts Steinour, 51. As proof, he million, or 2.58 percent of total loans on an “What’s going to differentiate one bank offers up Huntington’s surprising first-quar- annualized basis—a 46 percent drop from from another in the next couple years will ter profit of $39.7 million. Nonperforming the previous quarter’s levels. be how much momentum they have in their assets, chargeoffs and loan-loss provisions “A year ago, there were some legitimate core businesses,” adds Cummings, whose all declined. Like others, the company has questions about whether Huntington would fund owns Huntington shares. “When you taken to publishing “pre-tax, pre-provision” still be around,” says Scott Siefers, an ana- look at Huntington, they’ve been dealing income numbers to demonstrate its operat- lyst with Sandler O’Neill & Partners. Today, with their credit problems. But they’ve also ing health, and again the news looks good: “survivability is no longer a concern.” plotted a strategy for revenue growth.” $252 million in the first quarter, up 12 per- None of this is a surprise to the people cent from a year earlier. untington isn’t alone in having suc- who know Steinour well. Larry Fish, Citi- Huntington might not be out of the cessfully tackled its credit woes. zens’ former CEO and chairman, says his woods yet, but it appears to be a couple HWhat’s really turning heads is the protégé has trained his whole career to be of paces farther down the path than most assertiveness with which Steinour is posi- a bank CEO. rivals. That, Steinour explains, provides a tioning his company for the future. “It was always his ambition—almost a des- powerful advantage as banks everywhere “From the day Steve arrived, the mes- tiny—and he was ready for it,” Fish says. ponder how to position themselves for the sage has been to get ahead of the credit and During his 28 years at Citizens, post-crisis world. “There’s a moment here capital problems ... and not wait for those Steinour became a “complete banker,” Fish says. “He’s one of those executives Stuart to conduct a national search, and four who can tell you how checks are pro- months later Steinour, who was managing cessed, how credit is underwritten, how Huntington attributed its strong partner for Cross Harbor Capital Partners, ﬁrst-quarter earnings to improved deposits are priced, how M&A contracts credit quality a Boston private-equity shop, emerged at are completed. He knows every facet of the top of the list. the business.” Steinour says the company’s troubles When Steinour took the helm, “a lot of were “part of the allure” of the job. Hun- Citizens’ executive team bought Hunting- tington hadn’t been aggressive enough ton stock,” Fish adds. “We know what he’s on its credit issues, he says, and also had capable of.” an opportunity to grow. As a former com-

Ask colleagues to describe Steinour, and Q3'09 Q4'09 Q1'10 petitor, “I knew that, historically, it’s always the words “intense,” “tireless” and “worka- been very difficult to pry a customer away holic” come up. With his family still in Phila- from Huntington.” delphia, he’s pretty much all business, all Bank acquisition in 1997, an ill-fated foray On the flip side, Huntington’s board was the time—a demanding boss who puts in 15- into Florida (though it did exit the state impressed with Steinour’s background, hour days, expects his charges to know their before real estate prices imploded), and including a stint early in his career with the numbers, and isn’t much for idle chitchat accounting troubles in the early 2000s that Federal Deposit Insurance Corp. and his or joke-telling. Benhase calls the measure- sparked regulatory investigations and finan- connections with the investor community. ment, tracking and level of dialogue under cial penalties. “Steve was the complete package,” says the new boss “the most intense I’ve seen in Former CEO Thomas Hoaglin, an old David Porteous, the company’s lead direc- my career.” When meeting with Steinour, Bank One hand who took the reins in 2001, tor and head of the search committee that he adds, “you’d better know your numbers. mimicked his former employer by introduc- landed Steinour. “When we overlaid his He expects high things from you.” ing a decentralized culture that promoted experience with our needs, it was very evi- local decision-making. The plan worked, to dent he was the right person.” hat Huntington, a perennial also-ran a certain extent, with respectable, but not in a recession-battered region with knock-your-socks-off, returns, but also cre- he initial going was rough. The Ta reputation for sluggish growth ated vulnerabilities. week Steinour’s hiring was and too many banks, is winning accolades In 2007, Huntington completed a $2.7 Tannounced, Huntington’s share as an industry model might be a shocker. billion acquisition of the Bowling Green, price plunged by nearly a third, to near $4. The Midwest has 22 percent of the Ohio-based Sky Financial Group, itself a Within two months, it bottomed out at about nation’s population, but 44 percent of its serial acquirer. Buying the $17 billion-asset $1. This was early in 2009, and the entire banks, says Tony Davis, an analyst with Sky and its 330 branches boosted its size industry was in turmoil over the economy, Stifel Nicolaus & Co. In Ohio, home to and promised some big cost savings from government stress tests and the like. Even nearly two-thirds of Huntington’s deposits branch consolidations. But the deal also so, “seeing a new CEO really spooked a lot and a 10.9 percent unemployment rate, the included a $1.7 billion-in-loans partnership of investors,” Siefers says. list of competitors includes Pittsburgh’s with subprime mortgage originator Frank- Almost immediately, Steinour went to PNC Financial Services, Cincinnati’s Fifth lin Credit Management Corp.—and the tim- work, biting the bullet on loan-loss provi- Third Bancorp and Cleveland’s KeyCorp. ing couldn’t have been worse. sions, overhauling Huntington’s relation- JPMorgan Chase & Co. and U.S. Bancorp Within months, the Franklin portfolio ship with Franklin and cleaning up the bal- also boast strong Ohio roots. began to sour badly. In December 2007, just ance sheet. In his first six months, he laid Long rumored as a takeover target, the five months after the deal closed, Hunting- off more than 500 employees in a cost-cut- 144-year-old Huntington has floated for ton announced a $300 million charge related ting move, slashed the quarterly dividend decades in the murky middle of banks—con- to its recently acquired loans. Sky’s former to a penny and raised about $1.8 billion in sidered too big to offer the same level of ser- CEO—and Hoaglin’s heir apparent—Marty badly needed capital. vice as a community bank, too small to pro- Adams abruptly resigned as president. Steinour also installed two new board vide the products and reach of the big guys. It Hoaglin had publicly stated his intention members, both with banking experience, has stubbornly defied the cynics, performing to step down by 2011; with Adams gone, and hired a number of key managers— just well enough to retain its independence, most analysts assumed he’d stay. Instead, including those in credit, strategy and but never truly distinguishing itself. in late summer of 2008 he quietly prodded development and commercial real estate. Huntington’s recent history has included the board to begin searching for his replace- Others were let go. “We had some individu- the botched integration of its First Michigan ment. The board hired headhunter Spencer als who let the company down in our risk area,” he says. “They’re not with the com- decision,” Navarro explains. “By the time you “You can’t opt-out,” he says. “There’s an pany any longer.” rolled it all up, the overall company might have insistence and accountability about working The entire organization was restruc- had a higher risk profile than we wanted.” together.” tured to foster better controls and account- Those initiatives have been backed with ability. Commercial real estate, which previ- alfway through 2009, even as technical support and spending. A new cus- ously had been part of commercial banking, the company was still working tomer relationship management system, for became an operating unit of its own. In the Hthrough its credit problems, Stei- instance, is being installed to replace five retail-banking group, the number of district nour put senior management to work on different systems presently in place around managers dropped from 51 to 32. a three-year strategic plan, with an eye to the company. Post-crisis, risk-management has been capitalizing on the disruptions in the mar- In recent months, Huntington has hired a high priority. One of Steinour’s first hires ketplace and growing revenues. While about 500 people—roughly the amount it was Kevin Blakely, former president of the somewhat counterintuitive in the midst of cut early last year. It also has renewed the Risk Management Association, as chief risk a crisis, “being able to say, ‘We’re going lease on its headquarters office, ahead of officer. Business units have been imbedded to set some growth goals and invest in schedule, opened six new wealth manage- with their own risk-management officers. the business,’ had an energizing effect on ment offices and boosted its spending on Those teams pull together audits and exam employees,” Benhase says. corporate marketing by 36 percent in the data, but also spend time “process-mapping Huntington had strengths to build on, first quarter versus a year earlier. everything ... so that everyone understands including a highly rated online banking “I’ve been asked many, many times to what moderate-risk and low-risk mean,” says platform and strong customer-service rank- grow retail 15 percent year over year, while Mary Navarro, senior executive vice president ings. Some product lines were targeted also cutting expenses,” Navarro says. “This for retail and business banking. for enhancement. One example: foreign is different. We’re getting support to achieve Big-picture risk-management goals were exchange, where officials saw an opportu- our goals.” set, such as reducing the loan-to-deposit nity to build on relationships with middle- To promote his agenda, Steinour has ratio (it has dropped from 108 percent a market clients. become cheerleader-in-chief, making near- year ago, to 92 percent today), backed by Another is small-business lending, quarterly bus journeys around Huntington’s changes to incentive plans. “We used to be where Steinour has committed to relaxing six-state franchise to transmit his energy a loan machine,” Navarro says. Last year, Huntington’s underwriting standards, with and answer questions in town hall-style the incentives on selling checking accounts an eye to doubling originations by 2012, to forums. were doubled, while lending targets were about $1.5 billion. All of these are first steps, and it’s frankly too tamped down. Steinour offers as an example an other- early to say for sure if they will produce lasting Individual units have goals of their own. wise solid small business that lost money in change. But it seems clear that Huntington will The CRE team, for instance, has broken down 2009, due to the economic conditions, but emerge from the financial crisis better off, its present-day problems in its $7.5 billion portfo- now is turning a small profit. “Historically, independence more assured than it was before. lio into “core” and “noncore” segments. that’s not a loan a lot of banks would make. For the third quarter, Steinour is openly tar- The approximately 60 percent of the But it’s a smart, prudent business decision geting pre-tax, pre-provision earnings of $275 book considered core—or worth keeping— to find those [clients], make sure you under- million, which would mark a nearly 10 percent is treated with kid gloves; noncore loans, stand the circumstances, and then get behind increase from first-quarter levels. including those outside of Huntington’s them and make some loans,” he adds. “We Some analysts predict it won’t be long geography or risk tolerance, are handled need to restart the economic engines.” before Huntington heads out on the acquisi- more aggressively. In a part of the country saturated by tion trail. “The beneficiaries coming out of this Business line heads are held accountable banks, getting more business from exist- cycle will be the banks that are positioned to for their troops’ results, but they also have ing customers has emerged as a top prior- be consolidators. Huntington is a candidate to help in the form of greater centralization. ity. “Cross-sell is the mission of the com- be one of them,” Stifel’s Davis says. It’s now part of the process for higher-level pany at this point,” Benhase says, noting Steinour “has set some aggressive executives to sit around the table and cri- that incentive plans and measurement all objectives and been relentless in achiev- tique how one manager’s initiatives might have been reworked to emphasize working ing them,” Davis says. “In the process, he’s impact the greater whole. together to get more business from indi- turning Huntington into the best bank it’s “Before, we had each group making its own vidual clients. been in several decades.”