"Don't be stupid."
That's my answer when asked what I learned from investing in a bank that was later seized by regulators, briefly placed into conservatorship, and then given (most assuredly not sold!) to a better capitalized competitor.
I know that sounds curt and pejorative, but it's true. Like the Federal Reserve, which is tasked with removing the proverbial punchbowl just as the party's getting started, a good banker knows that his principal responsibility is to always swim against the tide.
When credit expands as it did before the financial crisis, a good banker pulls up on the reins, coalescing her loan officers around the principals of sound risk management. And when credit thereafter contracts, as it invariably does, the good banker attacks, exploiting the excesses of its less disciplined competitors, which are by then stuffed to the gills with nonperforming loans.
Perhaps no one has better articulated, albeit with an unmistakable hint of irony, the failure of most bankers to abide by this fundamental precept than Peter Arno, the author of the timeless Where Are the Customers' Yachts:
Your truly conservative banker cannot be stampeded into unwary speculation by the hysteria of a boom. He reminds me a little of what I once heard one doctor say of another: "He doesn't know enough medicine to do a patient any harm." He sits tight through '26, '27, and '28. Unfortunately, he begins to come into the market in '29. He begins cautiously enough, like an old maid trying out lipstick in the privacy of her room. But he pulls out again, and, while a nice piece of money is lost, no one is ruined. He apologizes to himself for having had a human moment and resumes his thirty-year-old policy of listening attentively and saying "no."
Because the cyclical ebb and flow of the credit cycle is so well know, to do otherwise, quite frankly, is stupid. And, while I know that made for a long lede, it's for this reason that I couldn't agree more with American Banker's decision to name Stephen Steinour of Huntington Bancshares (NASDAQ: HBAN) its 2012 Banker of the Year, beating out competition from the likes of Grayson Hall of Regions Financial (NYSE: RF) and Kelly King of BB&T (NYSE: BBT).
A good banker is a contrarian banker
Banks with analogous problems to Huntington's during the financial crisis retreated to shore up their ailing balance sheets in its wake. Bank of America (NYSE: BAC) serves as the poster child of this, shedding assets at a dizzying clip since its ill-fated acquisitions of Countrywide Financial and Merrill Lynch. It sold an insurance subsidiary, its international private bank, and exited both correspondent and warehouse lending, which together accounted for over half of its mortgage production volume.
Yet under Steinour's leadership, Huntington has done just the opposite, choosing instead to fill the void left in its retreating competitors' wake. When other banks reduced their exposure to automobile loans, Huntington expanded its car lending operations, spawning a $1 billion, fully subscribed automobile loan securitization in October of this year. And while regional competitors like KeyCorp (NYSE: KEY) were busy licking their wounds at the beginning of 2010, Huntington hired dozens of business bankers. It's since added 25,000 commercial relationships and gone from being the country's No. 15 Small Business Administration lender before the hiring spree, to No. 3 today.
But Huntington's biggest contrarian move under Steinour has been its aggressive branch count expansion. Over the past two years, Huntington has entered into agreements with two regional supermarket chains to install more than 200 branches in their stores throughout Michigan and Ohio. As Steinour told American Banker, "We can open nine [supermarket] branches for the cost of one freestanding branch." Not to mention, while customers are visiting bank branches less and less frequently, the average household makes 2.4 trips to the grocery store each week.
Management matters
In a recent article outlining eight of Warren Buffett's secrets for investing in banks, the second one identified by my colleague Matt Koppenheffer is that "management matters." What I'd add to this is that not all management is created equal. In the banking industry, contrarian management matters most. And it's here where Huntington, and Stephen Steinour specifically, shine above the rest.
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