The Rebirth of a Bank

In the early winter months of 2009, shortly after the board of directors at Huntington Bancshares Inc. hired Stephen Steinour to take over as chairman and chief executive officer, David Porteous, the bank’s lead director, had a surprising exchange with a bank employee.

Columbus, Ohio-based Huntington, which has $57 billion in assets and ranks as one of the country’s largest banks, had been roughed up by the financial crisis of 2008, and its future still seemed in doubt. The highly regarded Steinour had been brought in to turn things around and he had quickly gone to work, eliminating 500 jobs and reorganizing the senior leadership team, raising capital and imposing a higher performance standard on the entire bank. From all outward appearances, Steinour and the board were doing all the right things to turn Huntington around.

An attorney in private practice in Western Michigan, Porteous happened to be in his local Huntington branch when a teller asked him whether he intended to sell the bank. “We had just gone through this very deliberative process [of deciding to remain] independent, we had just hired a CEO who saw [the bank’s] future as being independent, and I couldn’t believe that someone would ask me that question!” he says. “I said of course not. I was almost dismissive. I went home, explained this to my wife and she said, ‘You’re a lawyer who deals with M&A. What would you think if one of your clients was doing some of the things that you’ve been doing?’ And it was like wow, okay. I could see how somebody might look at the changes and ask whether they were changes for the long-term or changes for the short-term.”

Later, when he told Steinour about the exchange, Porteous suggested the two of them do a series of visits with employees throughout Huntington’s five-state region to talk about the bank’s future. “Steve said, ‘You know Dave, I think that’s a great idea, but I’d like you to do that because I think it would have the greatest impact if people heard it from you,’” he recalls. Porteous was surprised that a CEO would be willing to send a director out as a company spokesman, and he assumed that Steinour would want one of the bank’s public relations executives to accompany him just to make sure he stayed on message.

“But he said, ‘Dave, I want you to do it by yourself,’” Porteous says. “I said, ‘Okay, I’ll get in my car and off I’ll go.’ That was one of those extraordinary moments that I’ve seen in Steve’s leadership. This is a [CEO] who is incredibly transparent and open, and wanted his colleagues to hear from the lead director.”

Perhaps Steinour was self-assured enough to send out his lead director as the bank’s ambassador because this was not his first rodeo as a bank CEO-or his first experience trying to rescue a troubled bank. Back in the early 1990s, the 54-year-old Steinour was a senior executive at the Bank of New England, which eventually failed. More recently he had been CEO at Providence, Rhode Island-based Citizens Financial Group, which has $129 billion in assets and is now known as RBS Citizens Financial Group.

When Porteous and the board recruited him to Huntington, Steinour was the managing partner at CrossHarbor Capital Partners LLC, an investment management firm in Boston.

Huntington’s board was deeply impressed with the depth and breadth of Steinour’s banking experience. He understood all the major businesses that Huntington was in, and had extensive knowledge of credit, which was the bank’s biggest problem. He also radiated a kind of magnetic tenacity-“intense” and “focused” are words that often spill out when people describe what Steinour is like-that the board felt it needed in a turnaround CEO.

“You don’t have to sit down with Steve Steinour for very long to get a sense that this is a doer, this is somebody who’s committed,” says Porteous. Porteous, who prefers driving to flying, began his tour of Midwestern cities in the dead of winter, visiting places like Pittsburgh, Cleveland, Cincinnati, Indianapolis and Detroit. “Those visits included colleagues. They included visits to branches. They included conversations with business people and civic leaders and anyone who might have an interest in Huntington,” Porteous says. And early on, many of those conversations soon got around to what people really wanted to know, just like that teller back in Michigan. “‘Are we going to survive? Are we really going to stay independent? What’s the future going to be?’”

It took Porteous about six months to complete his tour of the region and over that time, the nature of questions changed markedly, a reflection of how quickly Steinour had put the bank on a stronger, more sustainable financial footing, and how dramatically he had begun to change its culture. “The visits I made toward the end were completely different,” he says. “Nobody was asking whether we were going to survive.”

What Porteous found instead was a new sense of optimism about the bank’s future, and a new self-confidence. Not every Huntington employee was comfortable with the new culture that was emerging under Steinour, who demanded long hours and a higher level of accountability, and was generally shaking things up with bulldog determination. But those who stayed and met the challenge were beginning to see new possibilities in the bank, and in themselves.

“Now I think our colleagues have the capacity to do things that they weren’t even sure they could do before,” says Porteous. “I have that feeling too, you know.”

Much of the U.S. banking industry is still trying to recover from the financial crisis, and for many institutions, the past four years has been one long exercise in retrenchment. The drudgery of raising capital, writing off bad loans, rationalizing overgrown branch systems, laying off employees and adapting to a tougher regulatory environment have become sine qua non for banking. On top of that, the recovery of the U.S. economy has been so languid that generating organic growth has become one of the industry’s biggest challenges.

Huntington’s comeback has been impressive because of how quickly it has occurred. After losing $3.1 billion in 2009 (a loss that was inflated by a $2.6 billion write down of goodwill), the bank earned $312 million in 2010 and $543 million in 2011, which lifted it to a second place finish on Bank Director’s 2012 Bank Performance Scorecard for banks with $50 billion or more in assets. Huntington made $306 million through the first six months of this year, putting it on track to comfortably exceed its 2011 earnings performance, despite the difficult operating environment. Its return on assets and return on tangible common equity at the half-year mark were a highly commendable 1.11 percent and 13.3 percent, respectively.

The bank’s strong recovery has also been notable because it is being driven by that scarcest of commodities in today’s economy, top line growth. Huntington focuses on six core businesses: retail and small business banking, mortgage origination, commercial banking, commercial real estate finance, auto finance and dealer services and private banking. And two of those units-retail and commercial-are adding new customers at an impressive rate.

Some of this overall growth is attributable to the economy in Huntington’s six-state region, comprised of Ohio, Pennsylvania, West Virginia, Indiana, Michigan and Kentucky, and some of those states are healthier than others in the country. But credit also goes to Steinour and the board, who in the latter half of 2009 made the strategic decision to grow Huntington’s commercial banking operation even though the so-called Great Recession had barely ended. Many of its competitors were still more focused on their own problems and that allowed Huntington to get a head start.

“We invested [for growth] and went at it early,” says Steinour. “In the early part of 2009, I didn’t believe the bank understood the risk that was on its balance sheet and I didn’t want to lend until we knew what we had. In September [2009], we opened up. Remember, most banks were cutting back in 2009 and 2010. By the first quarter of 2010, we were getting net commercial [loan] growth and we were adding bankers. The board took a contrarian view and said now is the time to grow and we’ve had 11 consecutive quarters of commercial loan growth.”

Huntington’s ability to put new commercial loans on the books sets it apart from many other commercial banks today. “This is an asset starved industry,” says R. Scott Siefers, an analyst who covers Huntington for Sandler O’Neill + Partners L.P. in New York. “Investors are looking for banks that have some absorption capability to put deposits to work and Huntington is perceived as being one of those.”

In the second quarter alone, Huntington’s commercial and industrial (C&I) loan portfolio grew 9 percent-or 34 percent on an annualized basis. The bank also grew new commercial relationships at an 11.9 percent annualized rate in the second quarter, and 32.6 percent of its commercial clients had purchased four or more products or services from the bank, compared to 26.7 percent in the second quarter of 2011.

“Our growth is coming from everywhere because we have the opportunity to grow everywhere,” says James E. Dunlap, a senior executive vice president who runs Huntington’s regional and commercial banking operation.

In addition to traditional C&I lending, Huntington’s commercial banking operation includes a variety of fee-based cash management, deposit and electronic payment services, a lease finance arm, institutional money management and a capital markets group that provides basic investment banking services as well as derivatives and interest-rate risk management products.

The bank’s lenders spend a lot of time getting to know their business customers and studying their behavior. Dunlap says he looks for solutions-based rather than transaction-based customers, and if a company is too focused on price “we won’t pursue or renew. Their buying behavior is critical to us.”

Huntington’s retail banking business has also been growing since Steinour took over. The bank added new consumer checking account households at an 11.6 percent annualized rate in the second quarter, and some 76 percent of Huntington retail customers purchase four or more products or services from the bank, compared to 71.3 percent a year earlier. Average core deposits also grew at an annualized rate of 13 percent in the second quarter.

Ironically, the growth in household checking accounts can be attributed in part to two federal regulations that put enormous pressure on the profitability of the retail banking business. A new rule issued by the Federal Reserve Board in July 2010 prohibits banks from charging overdraft fees on automated teller machine (ATM) and one-time debit card transactions unless consumers have opted in to their overdraft service and agree to pay a fee. And the Dodd-Frank Act also directed the Fed to impose a ceiling on the fees that banks may charge merchants on debit card transactions. A cap of 23 cents per transaction went into effect in October 2011-a painful reduction from the previous average of 44 cents.

While some large banks scrambled to enroll their customers in overdraft programs and even experimented with customer debit card fees, Huntington went the opposite direction. In a series of employee town hall meetings that were held soon after Steinour took over, branch employees often complained about the bank’s overdraft practices, saying that customers felt they were unfair. Out of that came a service called “24-hour grace” where the bank will now waive the overdraft fee when a customer overdraws their account if they make a deposit the next business day to cover the amount. The bank has included that feature in a product called “Asterisk Free Checking,” which requires no minimum balance and does not charge a maintenance fee or fee for debit card usage.

Mary Navarro, a senior executive vice president who runs the retail and business banking operation for Huntington, says its free checking product has helped drive the growth in consumer households-and that in turn has helped offset much of the impact of the new restrictions on debit card fees, which initially slashed fee income of her group by 65 percent. “If you’re growing 10 percent at the household level, that helps a lot,” she says.

Siefers at Sandler O’Neill credits the bank for “doing a very nice job of growing relationships,” but says “this is an industry that is awash in deposits. The real test of Huntington’s retail deposit strategy will come when rates go up and customers have some choices in terms of yield alternatives.” Until Huntington shows that it can still build relationships in a higher rate environment, some investors will remain skeptical, he adds.

Steinour is a big proponent of the bank’s retail growth strategy, even if its immediate economic benefits are somewhat muted by the flat yield curve. “Our fundamental strategy is to grow market share and share of wallet,” he says. “When you have an abnormally low interest rate, the value of that growth gets masked. But whenever it reverts to norm, the value of that checking account household growth [will be] extraordinarily beneficial.”

Although he does not rule out future acquisitions as a source of expansion, Steinour seems to favor an organic growth strategy for now. Huntington was rumored to be a possible bidder for Flint, Michigan-based Citizens Republic Bancorp Inc., which would have strengthened Huntington’s franchise in Eastern Michigan. However, Akron, Ohio-based FirstMerit Corp. announced in September it would buy Citizens for $912 million. Siefers at Sandler O’Neill says institutional investors who were concerned that Huntington might get into a bidding war over Citizens now have some confidence that Huntington won’t overpay for an acquisition. “Given an opportunity to bid pretty aggressively they stuck to their knitting and showed some discipline,” he says.

When Steinour took command of Huntington in January 2009, the company was listing badly. The collapse of the subprime mortgage market in 2007 had already forced the bank to set aside more than $1.7 billion in reserves for bad loans, with more to come. Huntington had been the victim of horrible timing. In December 2006, it had acquired Sky Financial Corp., a smaller regional bank in Bowling Green, Ohio, that had a lending relationship with Franklin Credit Management Corp., a New Jersey mortgage company that originated subprime home loans. Sky provided Franklin with funding that was secured by the underlying loans, and Huntington inherited that relationship just as the subprime market was beginning to tank. Franklin alone would end up costing Huntington hundreds of millions of dollars in loan losses.

The board and then-CEO Thomas E. Hoaglin had spent most of 2007 and 2008 dealing with the severe impact that the subprime crisis and a sharp recession had on Huntington’s balance sheet. In addition to the losses from Franklin, Huntington had plenty of problems in its own loan portfolio, including commercial real estate, loans to the home builders and home equity lines of credit. The losses had so depleted Huntington’s capital that in November 2008, it had been forced to accept $1.4 billion in preferred stock from the U.S. government’s Troubled Asset Relief Program.

“I think Huntington was considered to be one of the weaker sisters in a real weak industry,” says Siefers.

Hoaglin, a veteran banker who had come over in 2001 from Columbus, Ohio-based Banc One Corp., informed the board in 2008 that he intended to step down as CEO. Because there was not an internal successor, the board spent some time deciding what it should do next. Porteous says the board brought in a facilitator who led the group through “a very robust discussion” in search of a consensus about what the bank’s future should be. Ultimately, the board decided that Huntington’s best future was to remain independent.

The executive recruiting firm Spencer Stuart was retained to conduct a nationwide search for a new CEO and introduced Steinour to the board. “This was an individual who had an amazing 30-years-experience with an understanding of the regulatory environment and the importance of having a solid relationship with regulators,” says Porteous, who chaired the board’s search committee. “He understood the bank in a very deep and fundamental way and would be able to come in and provide almost immediate impact in terms of getting us positioned to deal with the financial crisis that all banks were facing.”

The board realized pretty quickly that Steinour is a driver. “We knew that we needed someone who would challenge us,” says Porteous. “It wasn’t very long before the interview switched and he began almost interviewing us. He wanted to know about our commitment and about the things that had happened at Huntington and what we had learned. Did we have the commitment, the energy and the passion to take a long-term approach that was going to require extraordinary amounts of people’s time and energy? This wasn’t going to be a sprint; this was going to be a marathon and frankly were we up to it?”

Steinour had known Huntington from his Citizens Financial days because the banks had overlapping markets in Northeast Ohio and he felt its reputation for active community involvement and strong customer service were assets that he could use to rebuild the institution around. Also, it was important to Steinour that Huntington was a regional bank for a very personal reason. He had left the CEO’s job at Citizens Financial because the bank was a subsidiary of The Royal Bank of Scotland Group and the demands of traveling regularly to the parent company’s headquarters in Edinburgh took him away from his family too much, including his adolescent children.

“The essence of a regional bank is the ability to generally get home at night,” Steinour says. “When you’re with a global bank that changes.” On the day that he was interviewed for this story, Steinour was planning to attend an event in Columbus that his son, now a junior in high school, was involved in. “I would never have seen that before,” he says. “So the quality of my life is much different.”

Although he was taking over as CEO at a troubled bank in the middle of a global financial crisis, Steinour did not regard it as a suicide mission. “The key was the board,” he says. “With the board aligned and committed I was quite confident we could survive.”

Still, there were plenty of challenges facing Steinour and the directors as they worked to turn the company around that first year. One of Steinour’s first moves was to order a thorough review of the loan portfolio-a process he immersed himself deeply in, drawing on his background as a former chief credit officer. As a result of that review, the bank added another $705 million to loan loss reserves in the first six months of 2009.

Steinour also set out to rebuild the bank’s credit culture. Sky Financial was the product of 17 bank acquisitions and lacked a unified set of credit policies, and Huntington’s decentralized organizational structure made it more difficult for the bank to understand its overall credit exposure. “We made a decision, that because we had so many people from different cultures we needed to move to a homogenous credit culture,” he says.

In late 2009, the bank also put its lenders through what Steinour calls a credit skills assessment process. “If they didn’t pass that, and there were eight elements of it, they had to take mandatory training in early 2010, and if they didn’t pass it they had to take it again,” says Steinour. Steinour also brought in Kevin Blakely, a veteran banker with an extensive credit background who had previously been CEO of the professional association called The Risk Management Association, to be Huntington’s chief risk officer and help rebuild the bank’s credit culture. Blakely worked with Steinour to put in place concentration limits, which are common throughout the industry but hadn’t been used at Huntington, and improved its data collection and reporting capabilities. The bank also moved to a centralized credit review process and began to use forward looking analytics to anticipate the impact that macroeconomic changes could have on the bank’s loan portfolio.

“Steve dealt with asset quality from day one and it gained him a lot of credibility in the marketplace,” says Blakely. “I have to give Steve credit for everything we did. He is an intensely focused individual and knew what needed to be done.”

Steinour is still involved in the credit review process, which helps set the tone at the top. “I have a background in this and love it,” he says. “I look at everything that goes to our credit committee every week, and then we review our top 100 credits with the board. When I say we, I do it with my executive team in detail.”

In 2009, the bank also raised more than $1.3 billion in new equity capital to rebuild Huntington’s balance sheet, which had been weakened by all the credit losses, and repaid its TARP preferred stock in December 2010. The ratio of tangible common equity to tangible assets is probably the most important measurement of a bank’s balance sheet strength because it is bedrock capital-money that shareholders have put into a company that won’t expire and can’t be redeemed or repurchased without the company’s consent. In Bank Director’s 2012 Bank Performance Scorecard, Huntington had the fifth best tangible equity ratio among the 19 banks with $50 billion or more in assets, at 8.2 percent. By the second quarter of this year, the ratio had climbed to 8.41 percent, comfortably above the minimum level required by the federal bank regulators.

Steinour’s greatest impact on the bank is how he has fundamentally changed its culture by imposing a work ethic and demand for accountability that has been felt from the board on down. Porteous says the number of board and committee meetings rose exponentially in 2009 as directors and Huntington’s senior leadership team tunneled through the bank’s loan quality and capitalization issues. Through the first six months of 2009, Steinour says he and his senior executive team took only one weekend off as they worked day and night to stabilize the bank.

Although Steinour and the board are no longer fueled by the adrenalin of a financial crisis, and Huntington is now one of the top performing large banks in the country, the CEO still sets a fast pace for the rest of the bank to follow. Porteous, who served on the board of trustees at Michigan State University for eight years, including three years as chairman, says that one of his good friends is Michigan State head basketball coach Tom Izzo. Izzo has won one national title and taken six teams to the fabled Final Four championship round. “Tom Izzo’s practices are as tough today as they were the first day he was a coach,” Porteous says. “And so it is with Steve. His leadership and what he expects from all of us is the same today as it was during the darkest days of the financial crisis.”

Navarro says that business units throughout the bank now operate with revenue expectations that are two or three times what they were before Steinour arrived, and employees have had to stretch themselves to hit those targets. And yet, the bank’s success under Steinour has left many Huntington employees wanting even more. “People that are here want to be part of a winning team,” says Navarro. “They want to see the company be very successful, not just kind of successful.”

Dunlap describes Steinour as a detail-oriented person who expects his direct reports to know their numbers. “He is in the details in an extraordinary way to make sure he understands what’s happening,” he says. But Dunlap also says there is a measure of “give and take” in that relationship, and he expects his senior team to push him just as hard. “He not only benefits from it, he expects it,” Dunlap says.

It might seem improbable that one person could have such a profound influence on an organization with over 11,000 employees, and yet the people who have worked side by side with Steinour since 2009 speak about him as if he has. “He sets a goal and drives for it and takes everyone with him,” says Blakely, now a senior advisor with Deloitte & Touche LLP’s governance, risk and regulatory strategies practice. Steinour lured Blakely out of retirement to help him rebuild Huntington’s credit culture, and Blakely says they have been friends for years, but even he admits that “sometimes it gets a little intense” working for Steinour.

One thing that Steinour didn’t change was the 146-year-old bank’s commitment to the communities that it does business in. According to Huntington’s 2011 corporate social responsibility report, it invested $7.2 million last year in nonprofit organizations throughout its six-state region, and some 1,200 employees gave 27,000 hours of their time volunteering for a wide range of nonprofit groups. One such venture that Steinour himself participated in last August was an annual two-day bike ride called the Pelotonia, which raises money for The Ohio State University Comprehensive Cancer Center. Huntington was one of several corporate sponsors and Steinour was one of 330 volunteer riders, and 338 “virtual riders,” who had raised $2.25 million by late September.

On one level, Huntington’s community focus is no doubt good for business. “If you have people that respect and appreciate and value what you do in the community, their willingness to do business with you is dimensionally greater,” Steinour says.

But the payoff for Huntington might have been something even more important than higher revenues.

Navarro, who has worked at Huntington for nine years, says it is a company “with a lot of heart and spirit.” The bank has a history of taking care of its communities and employees, and they responded in kind at a time of great need. “I am 100 percent convinced we made it through the financial crisis because we have loyal customers and loyal employees who believe in the company,” she says. “And in the dark days of 2008, that made the difference for us.”