Stirring it Up

Once there was a small community bank in the foothills of southern Oregon. It was successful by industry standards, producing respectable numbers and never failing to make a dividend payment to the locals who were its owners. But the people who ran the bank knew it couldn’t last. Their part of the world was dependent mostly on one volatile industryu00e2u20ac”timberu00e2u20ac”and they’d seen banks just like theirs get swallowed up in no time by bigger rivals.

Those people, then, had to make a choice: succumb to the inevitable and be acquired, or become more aggressive and expand the bank outside its home territory. They chose the latter course and went out and found someone to run the bank with a vision of how that could be accomplished. That man soon turned their once-conservative bank into an edgy, almost flashy, iconu00e2u20ac”one with “stores” that served coffee and sold T-shirts and had TVs; a bank that people weren’t afraid to call “cool.” Customers, revenues, and profits all soared, and the bank grew almost exponentially, becoming the biggest homegrown bank in the state.

This, naturally, drew the attentions of other bankers. They flocked from all around to see how they might serve coffee in their branches and make their banks cool, too. But it was much more than trendy branch design that made the bank so successful. “Anyone can build a fancy store,” the boss scoffed. “You go out and hire an architect.” Indeed, that design was little more than a means to an endu00e2u20ac”one piece in a large jigsaw puzzle, which the people who ran the bank called “culture.”

The culture was made up of hundredsu00e2u20ac”maybe thousandsu00e2u20ac”of small things, and took a lot of work to create and nurture. It also required a host of rules that belied the bank’s laid-back public image. So while a few of the bank’s visitors left inspired by what they saw, most walked away shaking their heads, unable or unwilling to devote the time and resources needed to duplicate the success of the once-little bank.

By now, most bank executives and directors have had a superficial introduction to Umpqua Holdings Corp., the quirky, highly successful Oregon banking company whose coffee-shop style branches have won accolades from the trade press and other media.

Bankers from around the world, including the likes of Citigroup and London-based HSBC Holdings, have come to take pictures of Umpqua’s “stores,” sip the bank-branded coffee in front of computer screens, and flip through financial magazines with Bloomberg Financial News on the big-screen TV in the backgroundu00e2u20ac”all in the hopes that they might learn something to make their institutions more successful.

CEO Raymond Davis, chief architect of Portland-based Umpqua’s strategy, often entertains the visitors. He tells of the small-town Texas banker who stopped in one afternoon. After giving the typical branch tour, Davis walked him through some of the behind-the-scenes factors that he credits, more than branch design, for Umpqua’s ascension: the use of “universal associates”u00e2u20ac”branch personnel who all are trained at a special bank “university” in every facet of the bank and who rotate those jobs weekly; the money and effort devoted to branding; the intense measurement and competition that is part of every employee’s life; and the big black-tie awards ceremony that has become for many employees the focal point of the year.

“After we chatted a couple hours, I looked at him and said, ‘Roy, you’re not going to do any of this, are you?’ And he said, ‘Nope.’”

It’s not an uncommon response, nor is it particularly hard to understand. The company’s name, borrowed from the Umpqua tribe of Indians, means “raging water,” according to Davis. And since he arrived in 1994, life at the bank has lived up to the name. The company has undergone tremendous cultural change that has altered virtually every facet of its operations, from the way it interacts with customers and employees to its sheer size.

The board has not only been instrumental in the projectu00e2u20ac”it, too, has been substantially reworked in both structure and purpose. Directors have had to resist the impulse to micromanage day-to-day operations and, instead, focus their intellectual firepower on long-term strategy.

Early on, Davis realized he’d need a more professional board with specific skills to support his vision, and he set out on a mission to lure the right people. It wasn’t easy. In 1996, for instance, he cold-called David Frohnmayer, president of the University of Oregon and a popular former gubernatorial candidate, with his pitch. Frohnmayer initially declined. Davis convinced him to study the bank, and got several mutual friends to lobby Frohnmayer on his behalf. Eventually, the educator came around. “It was clear that the board was actively involved in building something unique,” Frohnmayer says now. “I consider myself a builder.”

With time, the board has become intimately familiar withu00e2u20ac”and invested inu00e2u20ac”what makes Umpqua tick. It’s not a simple formula, and director workloads have increased with the company’s growth. Directors hold full board and committee meetings monthly, and, as they’ve become more geographically spread, talk often by phone. They also spend 2 1/2 days each fall in a strategic planning retreat, where an outside consultant helps review the prior year’s achievements before directors and management hash out what’s next for the organization.

“This is the best community bank board I’ve ever come across,” says Jay Tejera, director of research for Ragen MacKenzie Inc. in Seattle, who has made several presentations to directors. “It’s a situation where the CEO works for the board, not the other way around.”

While directors often hold spirited debates over proposed acquisitions or other strategic issues, they always reach a consensus. “We’re in pretty much complete agreement about the direction we want the bank to go, and what will get us there,” says Scott Chambers, an Umpqua director and owner of a Eugene media company.

Directors have also shown a willingness to sacrifice. Most have come to view their roles on the board as special, yet when a large deal comes along, such as the 2000 acquisition of Medford-based VRB Bancorp, all are willing to tender their resignations for the betterment of the organization. Only those with the skills thought most valuable are asked to return.

“We’re in a world of permanent whitewater,” Frohnmayer says, comparing the board’s journey to a river ride. “There aren’t any sections of slow water. We’re not moving from one pool to another. We’ve had to constantly renavigate and reorient ourselves.”

The results of this ride have been enviable. Since Davis arrived, Umpqua has blossomed from a $130 million bank with four branches into the largest banking company based in Oregon, with 45 locations, $1.5 billion in assets, and a diversified portfolio of businesses, including Strand, Atkinson, Williams & York, a Portland-based wealth manager it acquired in 1999.

In the third quarter, Umpqua reported net income of $6 million and diluted earnings-per-share of 29 centsu00e2u20ac”up 71% from a year earlier. Return on equity was 16%, and investors have driven share values to a rich 23 times earnings. “We see this as a consistent 15% or 20% growth story,” Tejera says. He predicts EPS this year, before merger charges, of $1.05, and $1.21 in 2003.

Directors have, with time, become exceedingly confident in what they’ve helped build. “If our culture is working, we should be able to walk into any market and start taking market share,” says Allyn Ford, the company’s chairman. “At this point, that’s what we expect as a board.”

But there is one nagging worry: how to maintain what they’ve got in the face of rapid growth. In July, Umpqua announced a $215 million acquisition of rival Centennial Bancorp, a strong, business-oriented bank based in Eugene. The deal gives Umpqua, now at $2.3 billion in assets, new capabilities and customers, and 15 locations in Portlandu00e2u20ac”a market it planned to enter via de novo expansion.

The Centennial deal is the largest of several key acquisitions Umpqua has undertaken in building a franchise that now lines Interstate 5 from Portland to Medford. Directors wonder openly whether a bigger, more geographically spread organization can continue to do all the little things that have made it successful, and whether a formula that has worked well in rural and suburban markets will produce in a faster-paced big city.

“With this acquisition, we’re seeing the horizon. We’re moving into an urban market with a lot of competition, and we don’t have any experience there,” says Scott Chambers. Adds Davis: “The greatest risk we face isn’t the economy or interest rates or credit quality. It’s culture. That’s our number-one asset. And as we get bigger, we need to make sure that what’s made us successful isn’t lost or forgotten.”

Umpqua was founded in 1953 as the South Umpqua State Bank in Canyonville, Oregon, a lumber town so small and isolated that it had no bank branches at all. For local sawmill workers looking to cash their payroll checks before the bank opened, “your options were to either drive 30 miles up to Roseburg or cash your check at one of the seven taverns or two grocery stores in town,” recalls Lynn Herbert, an Umpqua director and timber executive whose father, Milton, was one of the bank’s founders.

For most of its first 40 years, the institution was a typical small-town community bank. It served the deposit and lending needs of the locals well, never doing anything particularly noteworthy and never casting its eyes beyond southwestern Oregon. Returns were respectable, but not all that strong. At its riskiest, loans made up just 30% of deposits.

The boardu00e2u20ac”a mix of ranchers and lumbermenu00e2u20ac”spent much time fretting over the condition of the institution’s branches or the specifics of certain loans. Local residents, who bought shares from the bank treasurer, felt a pride of ownership. “We’d have board meetings in the community hall,” says Ford, a 30-year director. “And for the annual meetings, we’d invite all the shareholders and have dinner and the whole thing.”

By 1993 Umpqua had moved its headquarters 30 miles up the road to Roseburg and had $130 million in assets and four branches. Ron Culbertson, the company’s CEO for 16 years, announced his retirement, leaving the bank at an inflection point.

Choosing a CEO is perhaps the most important job a board can do, setting the organization’s direction and tone for years to come. In this case, the easy choiceu00e2u20ac”and one that was supported by several conservative directorsu00e2u20ac”was a competent in-house candidate who pledged to maintain the status quo. But the board had been watching the industry’s evolution, engaging in some limited strategic planning exercises, and the most forward-thinking directors realized that a small community bank whose business was based almost solely on the fortunes of timber wouldn’t survive long as an independent.

“We were very concerned about our isolation, and we understood that we needed to grow or we would be acquired,” Ford says. After some lively debate, “we decided that we were going to grow. And if we were going to do that, we needed a very strong CEO to lead the change.”

When Umpqua’s headhunter contacted Davis, he was running the U.S. Banking Alliance, an Atlanta consulting firm that provided services, research, and other resources to dues-paying banks. As a consultant, Davis got a chance to see what worked and what didn’t, and he felt an itch to apply those lessons to running his own bank.

Over the course of the next two months, Davis and the board met several times in person and held frequent phone conversations, seeking to allay each others’ fears. Davis cautioned that his ideas for growing the institution would entail “wholesale change and some pain” and worried about the board’s stomach for commitment. For their part, directors saw Davis as a “very risky choice,” recalls Ford. “He had a lot of energy and some very innovative ideas, but no track record as a bank CEO.”

Early in his tenure, Davis told the bank’s 65 employees that the chief challenge facing Umpqua was differentiation: Bank products are commodities, branches look pretty much alike, and everyone claims that they’re committed to service. Big banks have more resources and can beat a little guy on rates and offerings any time.

There were, however, a couple of things he thought could distinguish a small bank like Umpqua: A unique delivery systemu00e2u20ac”hence the branch designu00e2u20ac”and coming up with a valid measure of service quality. “Every bank says they have great service, but when you ask them to prove it, they have no idea of what you’re talking about,” he explains. “We set out to prove it.”

At Umpqua, there’s a near-constant awareness of the things that make the organization special. Frohnmayer, who considers himself “a student of organizational culture,” says culture can be defined simply as “how we do things around here.” Healthy or not, every organization has one.

Culture is transmitted in myriad ways: the stories and legends of an organization, how employees are treated, company heroes, the events that are celebrated, the shared challenges and how they’ve been overcome, the rules. Reward and promotion systems can reinforce those notions, and “cultural carriers”u00e2u20ac”leaders within the organizationu00e2u20ac”can help ensure its perpetuation and growth. But mostly it comes down to what is intrinsically valued, not what’s laid out on an organizational chart. “An organization can’t fake values,” Frohnmayer says. “Values are in what you do every day, your behavior.”

Davis says Umpqua’s culture constantly challenges employees to exceed their most recent achievements. He believes that everyone has a figurative “rubber band” attaching their backsides to a wall. “As long as the rubber band is loose, you’re comfortable,” he explains. “When I pull you away from the wall, the rubber band begins to pull back and get uncomfortable, and you’ll try to go back.”

The goal is to constantly stretch the rubberband, and make it less elastic. Individuals are encouraged to take the initiative, and are rewarded for it. Nicole Bennett used to work for both Bank of America and Wells Fargo & Co., but says she prefers the latitude she’s afforded as a store manager in Roseburg. “There’s more of an ability to make decisions without having to go to a higher power,” she says.

Stories reinforce the message of empowerment. There’s the tale of the employee who, inspired by something he read in a book, put up a hand-lettered “World’s Greatest Bank” sign in his branch. “A more staid organization would have ripped the sign down,” Frohnmayer says. “Our reaction was, ‘That’s right. Name one that’s better.’” Today, all Umpqua branches have “World’s Greatest Bank” permanently mounted on the wall.

This attitude becomes contagious. Another favorite Davis story is about the woman employee whose friend worked for a bank across the street. When the friend expressed a desire to work for Umpqua, the employee said, “That’s great. But you have to be really good to work for us. Are you?”

A competitive fervor permeates the internal operations. Every branch and back-office operation regularly is assigned a “return on quality” score to measure service quality. The ROQ, as it’s known in-house, is based on, among other things, the results of customer and employee surveys, mystery and telephone shopper scores, customer-retention and cross-selling figures, and success in achieving predetermined growth goals. Those and other figures are weighted and combined to create a number, which is then stack-ranked every month and distributed to all employees. “Everyone knows who’s first, and who’s last,” Tejera says.

To the winners go the spoils: a permanent plaque, along with the awarding of a five-foot-high etched trophy on a large oak pedestal, presented in person by a senior manager, that sits in the branch lobby that month. “It’s a huge source of pride,” says Steve May, Umpqua’s executive vice president for cultural enhancement. Those near the bottom are prodded to do better, or look for another job.

A parallel competition occurs among back-office units. But an even bigger deal is the company’s annual “Celebration of Excellence,” an elaborate Academy Awards-style gathering. Each February, all of Umpqua’s employees and their spouses don formal attire and come together at Seven Feathers Casino in southern Oregon, to celebrate the things that make Umpqua special.

Everyone in the organization casts votes on the nominees. Those are tallied and combined with management assessments. After a video of the past year’s accomplishments, nominees in various categories are read. A hush ensues as spotlights circle the hall, and when the winner is announced, the crowdu00e2u20ac”today it numbers nearly 1,000u00e2u20ac”erupts as the employee walks up a red-carpeted aisle to accept an award statue.

Chambers went to the ceremony shortly after joining the board, and admits that he was still “a little skeptical” about the culture. “I left that night thinking I had made a good decision,” he recalls. “You had all these employees all dressed up and fired up. The sense of pride and buy-in was tremendous.”

The pride ultimately comes from their roles in a successful, well-regarded organization. Umpqua was among many Oregon banks that conducted initial public offerings during the salad days of the mid-1990s. They all had growth plans, “but the shop that was able to deploy that capital most profitably was Umpqua,” Tejera says.

Davis, a CPA by training, keeps a constant eye on earnings. So, too, does the board. Directors get operational and financial updates monthly, and watch performance closely for signs of trouble. “This is an organization that manages the financial side with an incredible amount of mathematical precision,” Frohnmayer says. “The cultural factors generate the most attention, but they couldn’t be done without the foundation strong fundamentals provide.”

About a year after he arrived, with earnings already on the rise, Davis began plotting how his stores would operate and developing the branding image Umpqua would present to the public. Employees were bused 200 miles up Interstate 5 to Portland for the weekend, and told to observe what employees at the Gap, Nordstrom, and other retailers did. “What they’d say is that the workers would clock in, greet everyone who came in, fold the sweatshirts, and cash everyone out at the register,” Davis recalls. “I said, ‘Great. That’s what we’re going to do, too. The only thing I want employees in my stores doing are things that serve the customer.’”

Such proclamations raised questions among the staff: Who would balance the ATMs or process the bad checks and loan applications? Some employees left, uncomfortable with the new sales-based philosophy. But most bought into a program that left front-line workers free to concentrate on sales and service.

Today, all loans are underwritten at centralized loan centers located in Umpqua’s major cities. Customers that walk into a store can fill out their paperwork and get instant preapprovals. While this runs counter to the traditional community bank strength of putting decision makers close to the customer, the location of those centers, combined with the efficiencies and service benefits of removing nonsales functions from the branch, has worked, Tejera says.

In 1996, Davis convinced the board to allow him to launch an “experimental store” in Roseburg to reflect his vision. He hired a marketing specialist to help design branches that look like retail establishments, and conducted impromptu staffing interviews with dozens of employees himself. The final six-person staff then spent six weeks in off-site training to become “universal associates,” learning all of the bank’s front-line roles.

Davis says the universal associate concept is the linchpin of Umpqua’s success. It differs sharply from the practice at most banks, where tellers and platform bankers have distinct roles, and some bankers question the idea of not always having the best salespeople in the new accounts role all the time. But May, a former U.S. Bancorp executive, says the benefits are reflected in the satisfaction levels of both customers and employees.

If a person responsible for new accounts is busy, for instance, a teller can pick up the slack. “No matter who a customer approaches, they can get an answer,” Bennett says. For employees in an incentive-driven system, there are fewer divisions or resentments, because earning abilities are more equal. “And we have six people in that store who can do it all. So if we lose someone, we don’t have a big void to fill,” May says.

The formula jells at Bennett’s Roseburg store, one of the bank’s showcase branches. The outer lobby features a 24-hour ATM and a self-service U.S. Postal Service center. Inside the main doors, a visitor is greeted by a crisp, clean openness, flooded with natural light. A rounded wooden service center, resembling a hotel front desk, faces the entrance, manned by two employees ready to answer questions.

Against the left wall, several teller stations stand underneath a “Welcome to the World’s Greatest Bank” sign. Nearby, a computer terminal, where customers are encouraged to log onto the Internet, shares a table with various awards the branch has won.

To the right, and a bookcase-style stand beckons with fresh-brewed coffee, as well as T-shirts, bags of coffee, and other bank-branded paraphernalia for sale. Behind that, sofas and a table full of financial periodicals sit in front of a big-screen TV that quietly churns out the latest financial news. This is the investment center, branded under the Strand Atkinson name, in hopes of generating cross-sale opportunities with the wealth manager.

The impression is decidedly unbanklike. A handful of small offices stand behind wooden partitions, but they’re not intended for much customer use, and there are no office cubicles or desks cluttered with paperwork.

The goal of all this, as unlikely as it might sound, is to encourage customers to hang out at the bank, in the theory that it will build relationships and sales. One recent morning, two womenu00e2u20ac””regulars,” Bennett saysu00e2u20ac”sat on the couches for two hours, sipping coffee and chatting about the stock market and life in general.

The branch design has become part of a larger branding image. More than one customer has referred to Umpqua as the “coffee-shop bank,” and every page on the company’s website has the phrase, “Let’s talk … over a cup of our coffee,” emblazoned across the top.

Umpqua management works hard to maintain the bank’s image. The company’s advertising is regularly noted for its edginess, and one television spot was named in 2000 as one of the industry’s best by a national trade magazine. Closer to home, it sponsors myriad local events, “but the logo has to be displayed just the way we want, or it can’t be used,” May says.

That’s just one of many detail-oriented rules that underlie the laid-back fau00c3u00a7ade. Managers like Bennett are considered, in many ways, their own bosses. They’re given sales and growth objectives, and incentives to match, and much latitude in pursuing them. But managers also must adhere to an abundance of dictates aimed at ensuring consistency.

Bennett, for instance, is responsible for making sure her store is ready every morning, and there’s a lengthy list of guidelines to follow: “Is the Muzak at the right level? Is the TV on the right channel, with the right sound levels? Are your financial periodicals, which are identical from one store to the next, arranged neatly? Is the coffee brewed and ready?” May says, laying out some of the requirements.

Dress codes are strictly enforced, to ensure a uniform appearance. And just before the store opens, Bennett, like every other manager, pulls employees together for a “motivational moment,” during which she’ll read something inspirational or ask employees to talk about an occurrence from the previous day. “If, as a manager, you don’t hold a motivational moment, it’s grounds for immediate dismissal,” says Davis, who’s been known to randomly call a store and ask about the message of that day.

The attention to detail is almost legendary. Officials have been known to fret over moving a sign six inches one way or the other. And the in-store Muzak plays different tunesu00e2u20ac”at a different volumeu00e2u20ac”near the teller stations than it does by the investment center.

Buy-in is required, and all employees must submit. All new hires are placed on a 90-day probationary period, during which time their belief in the system is assessed. There’s little room for dissent, and Davis and his lieutenantsu00e2u20ac”cognizant that some naysayers might view their vision as hokeyu00e2u20ac”are vigilent for those who might somehow undermine the system.

Umpqua’s formula is undeniably successful. The big question is, can it be maintained as the company continues to grow? Davis and most directors are intent on eventually stretching the franchiseu00e2u20ac”to Seattle in the north, and as far south as Sacramento. Tejera says that past deals have demonstrated Umpqua’s ability to quickly integrate acquirees into the system, and notes that the Northwest contains hundreds of smaller potential acquirees. “This could be a $20 billion company within five years,” he says.

When the board sits down to consider an acquisition, “the first question out of someone’s mouth is always, ‘Is it accretive?’” Herbert says. But the second, less easily defined, concern is whether Umpqua’s unique culture could somehow be lost or compromised. Last year it shot down a deal, largely because the cultures were viewed as incompatible.

Directors also have made a “pact,” Herbert says, to stay independent. “We’ve told each other that we’ll only make deals where we’re the surviving entity.” But as the board continues to evolve with the company, there’s no guarantee that newcomers will feel the same allegiances to the things that have made Umpqua a success.

The Centennial deal should be a good test case. Only days after the deal was announced, teams from both banks began meeting to plot the integration. The board monitored the progress closely, and at one recent meeting, the key question was, “Is it still ‘we’ and ‘them,’ or is it ‘us’?” May recalls. “It’s already ‘us,’ for the most part,” he adds.

The deal will bring Umpqua for the first time into Portland, and Chambers frets that what’s made the bank a hit in smaller towns won’t fly with harried urbanites. Tejera agrees. Umpqua’s kitschiness “could be a colossal hit in Portland,” he says, “or it could be a yawner.”

Already, a new city-oriented branch design has been launched. And Umpqua will steal a few pages from Centennial’s book, as well as a few directors: As part of the acquisition, all Umpqua directors once again offered their resignations.

The new board will include seven current Umpqua directors, four from Centennial, and two new participants. Already the unease is palpable. “I have a pride of ownership here,” says Herbert, whose father launched the bank. His family remains a large shareholder. “It would be very painful to leave.”

How such issues are resolved will help determine the next chapter of Umpqua’s story. Challenges loom, but if the past is any indication, the prospects look bright.

Coffee anyone?

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