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How Umpqua Sustains and Builds On Its ?Pretty Cool? Status
BY PAT ALLEN
The world?s greatest bank? That?s not a marketing message, President and CEO Ray Davis hurries to explain. It?s a mindset for an innovator expected to ?prove itself every day.?
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SYNOPSIS | In an interview, Umpqua Holdings Corporation President and CEO Raymond P. Davis elaborates on the mindset driving ?the world?s greatest bank.? Building lasting customer rela-tionships requires customers to come in to the store ? what Umpqua prefers to call branches ? and Davis? strategic focus since 1994 has been to provide customers with a blend of retail and hospitality. At $7 billion in assets, Umpqua?s growth has been fueled by acquisitions and by the organic growth that Davis says is a must for his innovative organization.
Umpqua Holdings Corporation President and CEO Raymond P. Davis is a lot like other bank CEOs at this point in the fourth quarter of 2006. He?s focused on growing deposits, concerned about the effect of overregulation on the business and he admires Wells Fargo Chairman and CEO Dick Kovacevich.
Then again . . . how many other CEOs are also tracking the sales of their bank?s most recent music CD, contemplating appointing the receptionist ?director of smiles? and anticipating the March 2007 publication of their first book?
It would be the rare retail banker who hasn’t yet heard about Davis, whose innovative embrace of retail strategies led the growth of Portland, Ore.-based Umpqua Bank from $140 million in assets in 1994 to more than $7 billion today. On the following pages, Davis elaborates on Umpqua’s bid to remain a community bank and the challenges of leading an organization and culture that continuously seeks to deliver brand, relevance and an exciting customer experience.
Q: Lately, a handful of banks are positioning themselves as un-banks. But Umpqua was early in 1994 when you marketed it as “Pretty Cool for a Bank,” and you’ve enjoyed significant growth by continuing derivations on the theme. What did you know way back then? How did you know that would resonate?
Davis: I have to say that all of the things that we’ve done are not necessarily rocket science. They are basic marketing and management strategies. I don’t think we’ve necessarily come up with a new idea; however, we have borrowed ideas from a variety of industries.
The big question that I asked myself when I first came to Oregon 12 years ago was: How do you differentiate a bank? We were as good as any other bank in the market. We quickly determined that it made no sense for us to try to differentiate ourselves with more resources, technology or advertising because the big banks had more than we did. And, we felt it made no sense to try to differentiate ourselves with bank products because they truly are a commodity.
So, how do you differentiate banking? We were focused on two things. One was the delivery system; we felt the way you deliver products could be unique. Two, you can create an incredible customer experience. For us, we were clear very early on that it was about brand creation and building a reputation for service. To do this, we really focused on creating our unique customer experience through a measurable customer service program.
When I speak at conferences I tell people, “If I blindfolded all of you, put you on a bus and took you into a bank anywhere, took the blindfolds off and asked, ‘Where are you?’ you would say, ‘I’m in a bank.’” We want our customers — if they went through that same exercise and took their blindfolds off — to say, “I’m at an Umpqua Bank.” Big difference.
Let me tell you one of the reasons I think experience is important. It makes the palms of people’s hands sweat in our industry, and I think that’s good. In our world today, younger generations are showing us in no uncertain terms that they really don’t like to go to the bank. They do everything electronically. Banks are building more branches than ever, yet the next generations are saying, “I don’t want it,” which I believe is a significant disconnect within the industry.
The basic question for us is: “If we’re building branches or stores, don’t we have to make them relevant?"
A lot of our strategy focuses on creating traffic into the store. That’s the biggest challenge. The biggest issue facing bankers today is the rush for deposits. How do we get more deposits? All banks are struggling with this, and yet how do they get more deposits if they don’t have a reason for people to walk into the store? If you’re going to build a lasting relationship with your customers, they’ve got to come in.
Q: What are the risks to your strategy?
Davis: What is the risk of building a store, bank, branch, whatever you want to call it, that is fun for a customer to go in and experience? What’s the risk of that, especially when it costs me less than to build a traditional branch? The risk to me is zero.
We run across people all the time who think that things have to line up just right and it’s got to be 95% in their favor before they say yes. When my people come to me and I ask them what the chances are this might work, and they say 50% - 51%, I say, “That high? That’s incredible, let’s do it.” Because I know we’re going to move 30% just by what we do.
Q: Which do you consider your greater strength — your ideas or your management?
Davis: Management. However, I think you have to have both. My attitude on ideas is that an idea should be able to be turned over to other people and become stronger. If it doesn’t, it was a lousy idea or people didn’t buy it; it’s that simple. You either have to force it, drop it, or make changes that are appropriate. I think those have got to go side by side.
People have asked me many times, “If you really were to sum it up, what do you attribute this culture to?” We can say it’s the great ideas, it’s the strong brand, but it really boils down to the “D” word — and that’s discipline. Not the kind of discipline where you rap somebody on the fingers if they do something wrong, but the self-discipline that we had to have in this organization to say this is what we’re going to do and we won’t let conventional wisdom talk us out of our strategy.
Q: I would have thought it’s the “C” word internally: the culture.
Davis: Yes. Let me say this about culture. Our culture is the most valuable asset this company has, above everything, and I mean everything. But I also say in the same breath, the greatest risk this company has is our culture.
This is a company that’s grown very rapidly over the last 10 years and we’re conscious of that every single day. We’re going to continue to grow, but as we grow our organization, the culture must grow with it, and we stay focused on that. I’ve organized the company around that.
Our executives’ titles are descriptive of what they should be doing. Lani Hayward is executive vice president of Creative Strategies. We need new and exciting creative strategies, not a marketing program. I’m trying to broaden the executives’ horizon. If I’m in charge of HR or IT, that’s what I do, but if I manage the Cultural Enhancement or Technology Advancement divisions I believe you think and manage differently with a broader perspective.
Q: In the first sentence of your letter to shareholders in Umpqua’s 2005 annual report, you comment on Umpqua’s “remarkable longevity.” Has this worked longer than you thought it would?
Davis: In a lot of ways, yes. I don’t think that any of us ever expected to be where we are today. We thought this was going to go pretty good, don’t make any mistake about that. I will admit that when it comes to the culture, which has been the fire that really has fueled this growth and all of the things we’ve done, I don’t think we sat down back in 1994, and said, “Let’s create a really cool culture.” I think we were saying, let’s really try to create value for the organization and out of that, at some point, this culture started to kick in. It was like, whoa, wait a minute, there’s something bigger going on here than we originally thought. We need to really focus on that, because if we can sustain the culture, all of the rest will come with it. So, that’s what we focus on.
Q: Out of this culture you created a cult . . .
Davis: You know, I think cult may be too strong of a word. I don’t think we have that. We have to prove ourselves every single day. When you’re part of a cult, the members don’t care what you do, they love you anyway. The only reason we’ve been able to do the things we’ve done is that we had to be very good at the basics of banking fundamentals. Let’s face it, if we were an average bank, we couldn’t pull off a lot of these strategies. We wouldn’t have the money to do it, we would have regulators on our fannies, we couldn’t do it.
Some of the very first steps we took in 1994 were to shore up infrastructure. We wanted to centralize everything. If you stop to think about it, if we were a $100 million dollar bank, we could centralize this whole bank in a weekend. We couldn’t do that today. We had to be very good at the basics of banking and we knew that, if we grew very quickly, for example, our competitors would say, “They’re making all the bad loans that we don’t want” and the regulators would say, “My God, they’re growing too fast, do they have checks and balances in place?” We were cognizant of that. So, we made sure that checks and balances were in place, and we made sure that the standards for whatever loans we made were top drawer and our performance improved.
Our strategy is let’s be very good at the fundamentals so we can add value on the outside, like a sports team. We need to make sure the blocking and tackling is in place, so we can throw the Hail Mary pass that creates, we hope, additional value.
The culture inside this company is intense, and yet, it’s fun. Everybody can see that we’ve got to nurture and keep this culture going. That’s a full-time job, it’s like raising a teenager. It really is, you know, “Where are you going? Who are you with? What’s going on? Call me.”
A lot of people who come to work for us see the foul lines as much wider than in, maybe, a traditional bank. But we never lose sight of the fact that at Umpqua Bank you have to be good at the fundamentals to widen the foul lines.
Q: What is the single measure, the single affirmation, that yours is the right way to manage a bank?
Davis: Simple. Organic growth. Out of all the things that we do, all the talk about the world’s greatest bank and all that has been written about us, can you imagine how much pressure that puts on the people in this company? Seriously. To perform? Because the expectation levels have now been driven up to here. So when I say organic growth, if we don’t have that, then everybody in America who follows us is going to question the strategy, even though it’s been operating great for 12 years.
Some people would say that talk about organic growth is odd coming from Ray’s mouth, primarily because we have completed six strategic acquisitions over the last six years. I can tell you, the only reason we’ve been successful with acquisitions is because of our culture and our strategy for internal growth. So much has been talked about culture clashes between organizations. I think that is so overblown, a cop-out. Cultures between banks are very, very close, I don’t care what kind of bank you are.
Q: So, even with Umpqua, it’s not as if you look for banks that your culture would align with?
Davis: No. Culture is not considered an issue.
Q: With everything you have — the organic growth, the experience you deliver, your brand — your stock (in late August 2006) was trading in line with the average community bank.
Davis: Shareholder value is important to us. Our market cap now is over $1.5 billion, which has grown from $18 million when we started. We have always, historically, traded at a premium or in line with our peers.
Q: Sure, and with everything extra you’re doing, wouldn’t you expect to trade at a premium?
Davis: Yes and yet over the last year, we have traded, at times, at a discount to peers. In Umpqua’s case, and I don’t know if this is true in everybody’s case, but when we announce an acquisition our stock price seems to go to deal purgatory. A lot of banks have gone through that. I think we will not outgrow this. No one expects us to buy a $10 billion bank tomorrow. They might expect us to buy a half-billion or $1 billion dollar bank tomorrow, and I think the size shouldn’t be that disruptive, because we’ve proven that we can do it. We’ve proven that we can put deals together, and most importantly, we proved that we can integrate without huge problems.
When it comes to the stock price itself, it’s going to be what it is. I’m convinced the things we are doing will impact the long-term value of the company. I’m not worrying about what happens next quarter. I’m a little more concerned about what happens two years, three years from now. I don’t think anybody would argue with that.
Q: If they don’t understand you, does that mean they don’t know how to evaluate you?
Davis: The biggest issue that I hear frequently about Umpqua Bank is, “We don’t know how to measure your success because you made these acquisitions.” That’s why, even in our earnings press releases, we always spell it out specifically. There it is, there’s the organic growth.
Q: When we interviewed strategist B. Joseph Pine, we asked what banks would most resist when it comes to providing an experience for their customers (see "The Impact of the Customer Experience"). He said it would be the investment required.
Davis: I always tell people that there are only two doors to go through, I don’t care what kind of business you’re in. Either you build it or you kill it, so which one do you want? There’s none of this “I’m just going to stay the same” stuff.
What people don’t understand sometimes is that the cost for us to do this is probably less than most banks have pursuing a traditional plan. Because if you look at the efficiency ratio of the bank by itself, it’s 52%, which is good. The average bank our size is around 57%, so we do pretty well.
Q: What’s Umpqua’s vulnerability?
Davis: The vulnerability is if we don’t commit to the culture, if we ignore it or take it for granted or we assume it will just do whatever we want it to do. If we don’t hold people accountable. Our company is fun, and the culture does create empowerment. With Umpqua you’re going to be a decision-maker and therefore you have to be good.
Q: So, you’re the world’s greatest bank. What does the world’s greatest bank do tomorrow?
Davis: One thing I have to correct. Understand that the “world’s greatest bank” is not a marketing slogan. It is not an advertising piece for our bank. You will never see it on our marketing materials.
Q: But, that’s how you answer the phone . . .
Davis: Being the world’s greatest bank for us is our state of mind, the way we operate our company. It is the expectation that we have of our people. I always tell people, being the world’s greatest bank is easy when things go well. Everybody will tell you you’re the world’s greatest bank when it goes well. The challenge for us is proving that we really are that good. I want people to talk about: “You won’t believe what they did to fix this problem.” That’s what the world’s greatest bank does.
Now, what do we do next? Well, the name of the game is constantly trying to re-invent. What can we do to continue to advance the culture and yet, at the same time, continue to grow organically, even in tough times?
We announced our neighborhood store concept a few months ago. Our strategy is that we have to build these for under $400,000 and they have to be completed within eight weeks. They’re going to have a Discover Wall, which will provide a tactile presentation of our products and truly give them animation and life.
If you are interested in our mortgage loan, you go to our Discover Wall, pick up an information piece, and all of a sudden this RFID [Radio Frequency Identification] technology comes on and interacts with you. If you want to personalize it, you just pick up the tablet in front of you. No one else can see what you’re doing but you can see what would be involved if you wanted to borrow $100,000 for a house.
There was a survey done once of people who walk by the stores in a strip mall, and when there’s a bank, they walk faster to get by it. True story. Isn’t that amazing? We’re trying to get people to slow down just a little bit, and to see what’s going on.
If these neighborhood stores work like we think they will then the way we roll out these stores could be pretty damn radical.
Also, we’re still working on the music program [a music-on-demand project and online music store]. We’ve got a long way to go at that. We’re hooking people into the stores. The bottom line is that we’re trying to make the store relevant.
Q: You have 12 years on other banks that may just now be focusing on the customer experience. What have you learned?
Davis: Strategist Gary Hamel believes in competitive gaps, but he also says that competitive gaps, over a period of time, shrink because they grow old or lose their sex appeal. So the game plan in recreating the competitive gap is you only have two choices. You can do it incrementally, which means tweak it, or you can do it radically, and the radical steps are the hard ones. When we came out with our first concept store in Roseberg, it was radical. When we generated the next concept store here in the Pearl District [of Portland], it was incremental, even though it was a big difference, a really unique store and very successful.
I probably would have done it all a little bit more quickly. I think we went slow at the beginning, and we did it right, but now as I look back, it’s easy to see that we could have gone more quickly.
Q: We’ve talked exclusively about the physical stores. But, there’s another channel. What is your view of online banking? How difficult is it to create that gap you’ve created in the physical world between your Web site and other bank Web sites?
Davis: The game plan for us, and it’s an ongoing challenge, is how we take who we are and put it on the Web. That’s the challenge. It’s not three dimensional, in the traditional way. Looking at it when you’re on the Web, it’s a screen. So, you’ve got to create things uniquely and differently, but it’s an ongoing challenge. It’s difficult, it truly is, but do I believe in it? Absolutely, it’s very important to us.
Q: Is it important to your deposit growth as well?
Davis: Absolutely, it sure is.
Q: What do you think of the banking business?
Davis: When I first came to this job, I had a great deal of excitement and passion about what I wanted to do. I tell them, look, I’ve got as much passion for this position as I ever had, in fact, I have more passion for it than I ever have had, so I’m not going anywhere. I’m here for the long haul and we’re going to do fun things and create more value.
When I retire, the greatest legacy I could leave for this organization is for the brand to continue. That’s the bottom line and that’s what I’m trying to perpetuate, but who knows what happens in the future? So, for me the business is still fun.
I do think, though, that in the industry, it’s too bad what’s happened on the regulatory front, and we probably have no one to blame but ourselves for that. I want you to understand that I believe in checks and balances as much as anybody. But, what has happened is that so many of the decisions have been taken off the CEO’s desk or the CFO’s.I think that’s too bad, but I understand why it’s done. And I understand that, unfortunately, when bad things happen in business, the pendulum swings very strong to the right, be-fore it eventually comes back and settles in the middle. But, the business is still fun and there’s still great opportunity.
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