Few banks in the country have undergone as thorough a transformation as Umpqua Bank has under Chief Executive Ray Davis.
When Davis took the helm at what was then South Umpqua State Bank in 1994, it had just $140 million of assets and five branches in southwest Oregon. Its main office was in Roseburg — population 21,181 — it was privately held, and its board was made up largely of local small-business owners with ties to the timber industry.
More than 15 acquisitions later, Umpqua — it dropped "State" in 1998 and "South" after the first merger in 2000 — is now the largest bank based in the Pacific Northwest, with more than $24 billion of assets and roughly 320 branches in Oregon, Washington, Idaho, California and Nevada. Its corporate headquarters is in Portland, its stock trades on Nasdaq and its board includes current or former high-ranking executives at such companies as Columbia Sportswear, Virgin America and Portland Gas and Electric.
Along the way, Davis established Umpqua as one of the industry's most admired brands. Recognizing that Umpqua could never compete with larger banks on price, convenience or technology, he instead differentiated it by instilling a service culture that took cues not from other banks but the likes of Nordstrom and Ritz-Carlton.
Umpqua has won numerous accolades and awards for customer satisfaction over the years and is so highly regarded by its peers that bankers from all over the world — New England, China, Australia — regularly travel to Portland to study its approach. Many of the trends in retail banking these days — from open floor plans to the universal banker model — can be traced to ideas pioneered by Umpqua.
Richard Davis, the chairman and CEO at U.S. Bancorp, said few people have had as much influence on retail banking over the past two decades as Umpqua's longtime CEO. Ray Davis' vision was to make banks approachable and for customers to feel comfortable in them, and while Umpqua's in-branch initiatives — like coffee bars, public meeting spaces and pop-up shops featuring the products of local small businesses — won't work for all banks, "these ideas are very important as we all look to change the reputation of banking," said Richard Davis, who is no relation to Ray.
"Ray did all this before it was popular, at a time when banks didn't need to be considered more familiar, more personal," he added. "He was way ahead of his time."
Ray Davis, 66, will step down as Umpqua's CEO on Jan. 1 and
Equally important to Umpqua's story is how well the bank survived the financial crisis. It had some problems, but unlike many of its peers that later failed, Umpqua was proactive in selling off underwater real estate assets at the first signs of trouble. That foresight is a big reason Umpqua was able to raise more than $530 million in capital — without ever relying on private-equity money — and ultimately emerge from the crisis as the region's breakout bank. Umpqua acquired four failed banks in 2009 and 2010, bought the equipment-financing firm Financial Pacific Leasing in 2013 and a year later it doubled its size with its blockbuster acquisition of Sterling Financial in Spokane, Wash.
In some ways, the jury is still out on that deal, as even Umpqua officials have said that melding the cultures of the two midsize banks took longer than anticipated. As acquisitive as it has been, Umpqua is taking a breather from acquisitions in part because Davis knows that the culture he has built gets harder to maintain as the company gets larger.
"The culture is the greatest asset we have, but it's also the greatest risk because, if we ever forsake it, we join the crowd," Davis said in an interview at Umpqua's Portland headquarters in September.
Still, size is important in banking these days, and the Sterling deal gave Umpqua the heft to control its own destiny. At $24 billion of assets, Umpqua can far better absorb the impact of stress tests, higher interchange fees and other regulatory costs than it could as an $11 billion-asset institution. Davis would never rule out merging Umpqua with a larger rival, but in his view the bank is now at the "perfect" size because it is large enough to take advantage of new business opportunities — like Pivotus — yet small enough to implement new ideas quickly.
"If you want to stay independent, the best defense is to have a good offense," Davis said.
The Early Years
Davis' banking career began nearly five decades ago, when he took a job at a community bank while he was a student at the University of Nevada at Reno. He held a variety of jobs at the bank, eventually working his way up to vault teller, but left after graduation to join the military and later pursued a career in accounting.
Davis lasted just three years in accounting — "too boring," he said — and in looking for his next opportunity he spotted an ad for a controller at a community bank near Lake Tahoe. It turned out that the CEO was an executive at the bank where Davis worked in college, and he was hired immediately. A few years later he was recruited away by the bank's core processor, and after three years there he landed at the Atlanta-based consultancy U.S. Banking Alliance. It was there that Davis began to develop his vision for what Umpqua would become.
"Working for U.S. Banking Alliance was like going to graduate school in banking," he said. "I dealt with CEOs at banks of all different sizes and I saw some ideas that were really great and I saw some others where I'd say, 'Wow, I wish I was competing against that guy.' "
Itching to get back into banking, he was excited to receive a call from a headhunter about an open CEO position at a small bank in southwest Oregon. Davis and his wife longed to get back to the West Coast after 15 years in Florida and Georgia, but when he was offered the job as South Umpqua's CEO, he wasn't entirely sure he wanted it.
During the interview process, Davis had proposed making drastic changes to the sleepy, five-branch bank, changes that he knew would cause significant disruption. "People weren't going to be happy with what I was planning," Davis said, "and I didn't want to go out there and three months into it have the board say, 'This is too much. We can't do this.'"
But, once sufficiently convinced that the board would not stand in the way of his ideas, Davis accepted the job and set out to redefine what a bank was.
Building a Brand
What Davis disliked most about banking was that it was so dull. It was the mid-1990s, when most activity still took place in the branch, and Davis could never understand why branch employees didn't engage with customers waiting in teller lines. Not sell them stuff exactly, but "talk to them, pass out lemonade, hand out keychains, anything to make it interesting for these people," he said.
A big problem was with branch design — velvet ropes, teller windows — that seemed to discourage interaction, so Davis set out to build a new type of bank branch. Importantly, he brought in a consultant who had worked not with banks but with retailers, such as Gap.
"I did not want to hire a bank consultant because a bank consultant was going to tell me what he told the last five banks he worked with," Davis said.
When the first concept "store" opened in Roseburg in 1996, "it was so different from a bank that we had a number of customers who would step in for the first time, look around, and go right back out to look at the sign on the door to make sure they were in the right place," Davis wrote in his 2007 book, "Leading for Growth."
The store was bright and open, featuring a computer café with free internet access, Umpqua-branded coffee and comfortable seating areas where customers could learn about investment and banking products. There was also a prominently placed phone that connected directly to Davis' line — a feature that still exists in Umpqua stores today.
Umpqua rolled out similar concept stores in other markets and revamped existing branches as it expanded through acquisitions. The goal was to make branches more inviting, and key to this effort was dazzling customers with service. In hiring, people skills were valued over banking experience and those who needed extra seasoning were sent to training courses offered by the likes of Ritz-Carlton.
Davis also gave store managers the freedom to come up with their own ideas for bringing in foot traffic and, as he put it, "generate buzz." There was a store that once offered free CD burning, back when that was a thing. Contests, movie nights, pet competitions and yoga classes are just some of the activities that go on inside Umpqua stores. Many stores also have public meeting and work spaces that are available to anyone in the community — not just customers — and designated areas where they display products sold by the bank's small-business customers.
"Our people know that they are empowered to make any decision they want to improve the customer experience," Davis said. "Don't pick up the phone and ask your boss — just do it."
The investments in branch design and training added up to strong organic growth for Umpqua. In the four years between opening its first concept store and closing its first acquisition, Umpqua more than doubled its deposits in its home state, according to Federal Deposit Insurance Corp. data.
Still, even though Umpqua had
"Nobody wants to walk into a bank and be inundated with pitches for products you don't want," Davis said. "It's not fun. I want a service culture that creates a customer experience that's one of a kind. If you are successful at that, you'll get all the sales you want."
Dave Martin, the founder of the consulting firm Bankmechanics.com and an expert on retail banking strategies, called Davis "a master marketer" who recognized early that for a community bank to be relevant "it can't be generic."
"Umpqua was really early to the retail game, investing in employee development and customer experience" before other banks made it a priority, Martin said. "The name of the game is to get on people's radars and get them interested in wanting to do business with you and Umpqua has done that as well as anybody."
Serial Acquirer
It was around 2000 that Umpqua also started showing up on the radar of other community banks that were looking for an exit strategy. By then it was a publicly traded company with close to $400 million of assets and Davis' success in growing the bank organically gave him the credibility to start pursuing deals, said Robert Rogowski, a longtime Seattle-area investment banker who is currently a managing director at Wedbush Securities.
The first acquisition, Valley of the Rogue Bank, came in late 2000, and over the next seven years Umpqua bought more than a dozen banks in Oregon and northern California (one of them a five-bank holding company), as well as a Portland-based broker-dealer. The bank that was once confined to Oregon's timber country now had a significant presence in California's wine country and farm-rich Central Valley, as well as new markets across Oregon, including Portland.
Rogowski said a 2002 deal for the $870 million-asset Centennial Bank in Eugene, Ore., was particularly pivotal because it gave Umpqua meaningful market share in the state's two largest business centers.
"Centennial was in Eugene, so it put Umpqua on the map there, but it also had been building up in Portland, and the deal gave Umpqua momentum there," Rogowski said. The deal vaulted Umpqua over the $2 billion-asset mark, giving it the size and currency to pursue even larger deals, Rogowski said.
By 2006, Umpqua had more than $7 billion of assets and the No. 5 market share in its home state, trailing only U.S. Bank, Wells Fargo, Bank of America and Washington Mutual. It was around that time that Davis and his team began to worry about the housing bubble bursting and took steps to minimize the damage.
The bank had just closed a deal in the Sacramento area and, driving up Interstate 5 on the city's outskirts, Davis was struck by the explosion of new home construction. "I looked to my left and to my right and all I saw were roofs, thousands and thousands of them," Davis said. "My first thought was that if the housing market ever crashes, we're going to have some problems."
When Davis returned to Portland, he ordered a full review of Umpqua's residential construction loan portfolio and did not like what he saw: a $680 million loan book that was already starting to show some cracks. The bank essentially halted its residential construction lending and not long after that, at the urging of its then-chief credit officer Brad Copeland, took a $6 million loss on a loan for a high-end condominium project in Bend, Ore.
"That number was sizable, greater than half the loan balance, and we didn't bat an eye," said Ron Farnsworth, Umpqua's chief financial officer. "We were able to come through the recession stronger than many of our competitors because we weren't afraid to take the loss. So many other banks seemed to be burying their heads in the sand."
Six Oregon banks failed during the crisis, as did 17 in Washington. Umpqua itself lost $109 million in 2009, mostly on soured real estate loans, but it was healthy enough in the eyes of regulators to gobble up four of the failures, including three in Washington, where it previously had just one branch.
"We're not holding ourselves up as the poster child," Davis said. "We had problems and we wrote off a lot of loans. But we came out of it OK."
Passing the Torch
If there's one knock on Umpqua, it's that performance in recent years has lagged its peers. While its margins are higher and its credit quality is better, its returns on asset and equity are below the average for banks with $10 billion of assets or more, according to FDIC data. Meanwhile, its stock has declined slightly since it acquired Sterling in April 2014, while the Keefe, Bruyette & Woods index of regional bank stocks is up about 15% during that time.
Those issues can be traced in part to the costs associated with digesting Sterling, but mostly they are a function of the rate environment. Low interest rates are hard on all banks, but analysts say they have weighed more heavily on banks with high levels of core deposits, like Umpqua. "The cost of wholesale funds is not much more than the cost of running a branch network, and that's weighing down on overall profitability ratios," said Jared Shaw, an analyst at Wells Fargo Securities. "This is a platform that does better when rates are higher."
While Umpqua's loan portfolio is largely commercial, its deposit base leans more toward retail. Aaron James Deer, an analyst at Sandler O'Neill, said he believes a stronger focus on commercial deposits would improve the bank's performance.
Davis' successor, Cort O'Haver, has a commercial background "and that's the side of the bank I would hope to see Umpqua focus on" under O'Haver, Deer said. "Not to the detriment of the retail side, but I think they can do more with the commercial side of this bank."
Davis, for his part, said a new leader is good for Umpqua and its shareholders, and though he will stay involved as executive chairman, he has no intention of meddling in day-to-day activities. "I will stay at 50,000 feet," he said.
Most of Davis' attention will be focused on running Pivotus, the innovation studio Umpqua formed two years ago to develop new technologies for the bank and the broader industry.
While Pivotus has yet to roll out any new products, Davis said its technologists are working on a range of initiatives around using tech to drive more traffic to branches and helping banks adopt new technology more quickly than they can currently because "they are being held captive by their data processing firms."
Earlier this year, Davis brought in the British bank Nationwide Building Society as a partner in the venture and he continues to look for new partners inside and outside of banking to provide capital and talent. An avid golfer, Davis intends to retire for good eventually, but his goal now is to get Pivotus to the point "where it is meaningful" and could even be spun off into its own company.
"I think this has the potential to be bigger than the bank," he said.
