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“We love being five,” says Richard Davis of U.S. Bancorp. At $308 billion, the fifth-largest U.S. bank is “big enough to matter and simple enough to keep your arms around.” Read what he means by that and why he feels confident that his branches can compete with community banks.
May 13, 2011
Why Richard Davis’ $308 billion “community bank” just might be coming to a corner near you
By Steve Cocheo, Executive Editor

Analyst presentations by large banks don’t usually include quips. They generally play out rather seriously. But Richard Davis isn’t above a little kidding when he presents. Indeed, while Davis takes his job and his company quite seriously, he doesn’t necessarily take himself overly seriously. Talk with him and you discover that “stuffy banker” and “Richard Davis” don’t go into the same sentence (except this one).

An example: During his interview with ABA Banking Journal, a question was couched in terms of U.S. Bancorp, where Davis works, being the nation’s fifth-largest bank, in spite of the fact that Davis often speaks more like a community banker.

“I know, but we’re simple, right?” says Davis, one of whose corporate slogans is “big and simple.” He counts off the big-bank hierarchy on his fingers: “One, two, three, four,” pauses for effect, and then says, chuckling, “Where are you, five?” indicating the gulf between number four, Wells Fargo, and five, U.S. Bancorp, which is about one-quarter the size of Wells.

“We love being five,” says Davis. “Five is good. Five is big enough to matter. Five is simple enough to keep your arms around.”

Bearable lightness of Davis
When asked where the unusual light tone comes from, Davis, 53, immediately pops back with, “Life is way too short, baby,” to act otherwise.

Then he elaborates. Davis takes as a point of pride that he came up from the bottom of banking. He had to work his way through college, so he found a job as a bank teller. Not because he wanted to be a banker, but because the work paid enough to support him while he took night classes.

His economics major took eight years to complete. Davis says some of his irreverent wit comes from that background. “At night school you get the curriculum, but you don’t get those remarkable life-changing mentors or thought-provoking moments. I guess I wear my night school background as a badge of honor, in some circles.”

Of course, Davis is now chairman, president, and CEO at $307.8 billion-assets U.S. Bancorp, so things didn’t turn out too badly.

But there’s more. The chairman plays his next card like a showman: “Also, I was raised in Hollywood, and anybody raised in Hollywood has got to be partly cuckoo, don’t you think?”

Davis’ parents were Iowa farmers who moved to California in the 1950s with the idea of making Davis’ older sister a child star. In time, she did become a child actress, but Davis didn’t follow suit. During dance practices, auditions, and casting calls, “I was the little brother just waiting in the back room doing my homework, or hanging out.”

Performing against headwinds
Doing his homework has clearly been something Davis has done throughout his career. In spite of beginning banking just to have a job, Davis stuck with it, rising through the ranks and through mergers and acquisitions—Star Banc Corp., Firstar Corp., U.S. Bancorp—into the top management ranks. He became CEO in 2006 and steered the big bank through the financial crisis—deftly, in the view of most observers—after which the bank hit the ground running.

U.S. Bancorp came into 2011 off a strong 2010, which placed it #13 on the ABA Banking Journal Top 25 scoreboard for institutions over $3 billion. The company had record-setting net revenue of $18.1 billion, “a point of pride for us,” says Davis. ROA and ROE were also up substantially from 2009. The company finished the year with more deposits than assets, reflecting both respect for the bank as a safe haven and, on the asset side, a continuing conservatism that marks much of U.S. Bancorp’s lending.

Fourth quarter lending was the highest seen since the fourth quarter of 2008, and Davis had expected the pace to pick up in 2011. In the first quarter, total lending increased from the fourth quarter (though not as strongly as Davis had hoped) and commercial lending was up by 1.9%, excluding acquisitions. First quarter net revenue set a corporate record.

At the end of 2010, U.S. Bancorp’s revenue mix came from the following sources: Consumer and small business banking, including mortgage lending, 43%; payment services provided domestically and internationally, both on the corporate and retail sides, 28%; wholesale banking and commercial real estate, 20%; and wealth management, trust, and securities services, 9%.

Notice something missing? U.S. Bancorp isn’t involved in insurance nor in investment banking.

“We don’t understand insurance, and I’ve seen that insurance companies have lower P/Es than banks, so I’m not sure why you’d do it,” says Davis. In the case of investment banking, Piper Jaffray was part of the corporation for about four years, and was spun off to shareholders in 2003.

“We are intentionally simple,” says Davis. While the company handles payments internationally, “you will not find us making loans, taking deposits, overseas.” A U.S. customer with international business can borrow for it, but must do so domestically.

“I’m worried about whether there was a tornado in Kansas last night,” explains Davis, “not whether or not there was a disruption of Brazilian politics.” A Davis mantra is “CPR—consistent, predictable, repeatable.” By this, he means that he likes to invest in businesses that will return year in, year out.

“Our shareholders don’t deserve to have us take a blip that we can’t repeat and they can’t predict,” says Davis. Years ago he worked for the old Security Pacific—“the best branch system in the country”—and management there got the bank into very complicated commercial activities overseas that brought the bank down. “All I knew was, one day the greatest branch system went away because of something ‘over there’,” says Davis with regret.

As large as the company is, Davis still wants to feel like he can get his arms around it. The way management is organized reflects that. “I don’t know everyone in every branch, but of the top 1,000 people in this company, I’ll bet I know 994 of them,” he says.

Traditionally untraditional
As chief of the nation’s fourth-largest branch network, talk of the demise of the branch almost makes Davis laugh. Back in 1985 he was district manager for a group of bank branches in California. Call centers were coming in, and between those and ATMs, teller transactions began dropping.

“Very smart people were saying by 2000 branch banking would be gone,” says Davis. “And between 1985 and 2000, branches grew something like 41%.”

“We’re not at the place yet where even the 21-year-olds are ready to go lock, stock, and barrel and drop the branches, saying they have no use for them,” says Davis. “So, for as long as the generations ahead are still using, and going to use branches for certain behaviors, they’ll continue to exist.”

Davis acknowledges that the routine transactional side of branch banking will continue to erode. “But it won’t be at a speed any faster than heretofore,” he insists, “which has actually been like a glacier.”

On the other hand, he foresees more, not less, important transactions taking place in branches. “Let’s say you and your wife come into a fairly large amount of money,” he tells his interviewer. “You’re probably not going to pick up the phone. You’re going to go somewhere to look someone in the eye and say, ‘Give me your best advice’.”

“There’s a nuance here,” he explains. “It’s location, location, location. If you want to be where people need you to be, and to attract them to your company, it matters that you have a physical location. You’ve got to have it there as an entry point, a portal for new relationships.”

He sees the company building between 60-100 new branches annually.

“Branches are not dead, and we are not shrinking them,” Davis emphasizes. When necessary, they may be moved, he adds, but they won’t be eliminated.

Mobile? Definitely
Despite the branch emphasis, Davis is a big believer in mobile banking, and U.S. Bank is making major commitments to that channel. He doesn’t use it himself, however. To keep up with what’s hot there and of interest generally to Generation Y, he relies on two sources.

His three children are one.

“My kids have taught me everything I know about mobile,” says Davis. “My 25-year-old and I were at an NCAA game the other day in Denver, and I wanted to check the score on another game. By the time I got to just requesting the information on my mobile, he had already downloaded all the scores and started reading them to me.”

Davis would merely be one more flummoxed father being educated in tech by his Gen Y progeny (another son is 29 and his daughter is 22) were it not for this: “I’m smart enough to know I’m a lost ball in high weeds. So instead of me having to know it all, I’m going to find people who do.”

Davis thinks too many generalizations have been made about Gen Y that he doesn’t feel bear up to examination. Supposedly they are all about mobile devices, he points out. “They’re not all necessarily technologically exclusive,” says Davis. “Yes, they like online banking, they like mobile banking, they like using their cell to make purchases. But they’re not against coming into the bank to get a loan. They may well get a loan in a different way than their parents did, perhaps communicating with us through a video chat. But it won’t be altogether as different as predicted.” And they’re not against going to the bank or an ATM to get cash if they need it.”

In fact, Gen Y is part of the reason that about 1,000 of U.S. Bank’s 3,069 branches are where they are—in nontraditional locations such as grocery stores, Best Buy electronics stores, airports, and more. (U.S. Bank is #1 in in-store branches.)

“One of the ways to reach them is for us to come to them so they don’t have to find us in the old traditional kinds of ways. But they’re not as different as you might want to make them out to be. They’re just users of our services across the whole spectrum of channels.”

The Dynamic Dozen
Don’t get the idea that the future of a megabank is being directed by three Gen Yers—we said Davis has two sources. Besides his own family, and the customer research that every large bank conducts, Davis has another technique at work.

The 12 executives directly reporting to Davis each select, from their area, a Gen Yer who becomes, for a time, part of a group called “The Dynamic Dozen.” Each person, generally in their late 20s and with a few years in at U.S. Bancorp, receives access to information about future plans. Management looks to them for their generation’s viewpoint.

“Our employee benefits programs were rewritten by the Dynamic Dozen,” says Davis. “They said, “Gosh, you’re writing this for an audience that’s 55 years old. But when you talk to us, ‘long-term’ means ‘next month,’ not the next 25 years.”

Davis believes that experience should be respected, but shouldn’t be the only factor in decisionmaking. “By virtue of time you earn your stripes to be a senior leader in any company,” says Davis. “But that doesn’t mean that your voice should be stronger. The Dynamic Dozen has a kind of accelerated voice in the way we run U.S. Bancorp. Otherwise it would take 20 years for them to be heard.” (To read an interview with part of the "Dynamic Dozen" team, click. )

Looking for depth, not breadth
While U.S. Bancorp has expanded to 25 contiguous states, Davis says he feels no need to add more, absent some good reason. “Depth, not breadth” is his mantra here.

Scale for the sake of efficiency is important to U.S. Bancorp, “but we are not focusing on getting bigger to get better—we just want to get better,” says Davis. “I’d rather double- down in 25 states than extend to 50.”
Davis believes customers see depth as part of an institution’s quality, and planting more flags in more states doesn’t produce depth.

“It’s a little overrated to have a national footprint,” he adds.

The bank’s efficiency ratio came in at 51.5% in 2010. “The ratio would have been 45%, if we hadn’t invested for growth,” says Davis.

Some in the analyst community think Davis is under pressure to do mergers, but he waves that off.
Davis says he won’t miss a good opportunity, but adds, “We don’t have M&A as one of our strategic pillars with the board or the management team.”

Who’s a community banker?
Something that sets U.S. Bancorp apart from other large banks is how it handles credit in the company’s community branches—the 1,000 or so offices in smaller markets. “In those locations, we have a higher cost of doing business because I have more staff there,” says Davis. “I have people who have underwriting authority and time built into their staffing model to study the loan, rather than electronically send it off to head office for an answer.”

In the company’s big-city offices, however, “sending it off” is exactly what happens, and Davis says that works fine, there.

But in the smaller markets, local authority is critical, even though it costs 10%-15% more to operate that way. “If you’re going to compete with the ‘First National Bank’ of that city, you darn well better be as local as you can be, and yet get the benefits of being a big company,” says Davis.

In spite of higher costs, profitability in community branches comes in higher because the customer base is more stable, says Davis.

For years community bankers have had their own mantra. It goes like this: “I’ll beat the pants off any big bank in my market because I’m local. My people coach sports and see folks in church. And they know the big bank’s branch manager is just waiting to get a better job by transfer in a year or so. He can’t wait to blow town.”

“Nice try, but not even close,” retorts Davis when he hears this. “Our employees live in the community too. They’re at Rotary and Kiwanis. Our folks are not likely to rotate through, nor look for something else. They’re all-in, in that community.”

To do otherwise “wouldn’t be a very good community strategy because communities will smell an outlier in a heartbeat,” says Davis,  “and then they’ll just ignore you.”

He says U.S. Bancorp stuck it out with the community strategy because he felt it would pay off, and he believes it has. Yes, policies are set at headquarters, as is pricing. But the bank has more than 100 market-level advisory boards, peopled by local leaders and business figures.

“They all wear the lapel pin, have a business card, and are asked to support the company,” says Davis.

In addition, he says, “I have more market presidents in community markets than I do in large cities.”

“We waited it out long enough to get some respect in the communities we serve,” says Davis. He knows of no other large bank he competes with that made the same bet, and he says that now “being big, for the first time, isn’t necessarily bad.”

And Davis says the bank continues to commit to this strategy. “I would tell community bankers, ‘We’re here and we’re not leaving’,” he says.

That said, Davis adds that many U.S. Bancorp services are sold on a white-label basis to community banks. “I would rather outsource my bank’s skills and make the pie bigger,” Davis explains.

Washington focus
Richard Davis has served on ABA’s board, and has also headed the large-company Financial Services Roundtable. We asked him about a remark made by FDIC’s Sheila Bair at ABA’s Government Relations Summit to the effect that she couldn’t see how one association could represent the interests of banks both large and small.

“I don’t think that’s necessarily true,” says Davis. He believes that more narrowly focused groups like the Roundtable serve a purpose for members. But on some issues, a group like ABA is more powerful. “Take the Durbin Amendment,” says Davis. “The big banks’ voice is less powerful than the ABA’s voice because to hear from a community banker that what you’re about to do is going to hurt banking has more credibility. There’s a general cynicism that large banks are less likely to do what’s right than small banks.”

“That’s not true, by the way,” he adds.

Big and small, Davis believes, “have overlaps.”

For example, take the public debate over regulators attempting to legislate. And the flip-side argument, that Congress, especially in Dodd-Frank, crossed the line into regulating.

These are both of concern to Davis, as they are to many community bankers.

In the end, says Davis, “we have a voice that we can all share. I think a trade association can represent all of us and do it quite well.” •

The electronic version of this article available at: http://www.nxtbook.com/nxtbooks/sb/ababj0511/index.php?startid=26
You can read a companion interview with U.S. Bancorp Vice-Chairman Richard Hartnack here
You can read an in-depth article about "The Dynamic Dozen" here
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