As he prepares to hand over the reins at U.S. Bancorp, chairman and chief executive Jerry A. Grundhofer says the company he built over 13 years is well positioned to stay independent for years to come.
"We control our own destiny," he said. "It would be very hard for a company, any company, to look at U.S. Bank" as a takeover target. "It is the most efficient bank of any large bank for sure, and, No. 2, it generates capital like no one else. So those are pretty important characteristics that, unless you really foul it up, you control your own destiny."
Richard K. Davis, the Minneapolis company's president and chief operating officer, will become CEO Dec. 12. U.S. Bancorp policy requires Mr. Grundhofer to retire as CEO when he turns 62, though he will remain chairman of the board for a year.
He said he expects some changes from Mr. Davis, but nothing radical.
"He has been part of the strategy that we have put together over the last few years, so I think you'll just see more of the same," Mr. Grundhofer said in an interview this week. The company said Mr. Davis was not available to comment.
Mr. Grundhofer leaves a legacy of high shareholder returns but also some controversial acquisitions, and in recent years some Wall Street analysts have sensed the retail bank has been getting short shrift as the $217 billion-asset company invested heavily in its fee-based businesses.
To those who have criticized his retail banking strategy and a string of acquisitions that began in the late 1990s, Mr. Grundhofer says that he has not been perfect, but "the proof is in the pudding."
He points to the total shareholder return of 1,251% over the 13 years starting when he became chairman and CEO of U.S. Bancorp's predecessor, Star Banc Corp. of Cincinnati.
"You don't create what you've created by sitting there and thinking always, 'Oh, what's someone on the sidelines going to think?' " he said. "None of these people has run a bank; they've talked about them. I think the proof is in the pudding, and I'm pretty proud of what we've done."
Frederick A. Cummings, an analyst with KeyCorp's KeyBanc Capital Markets, said the stock's return during Mr. Grundhofer's tenure "is pretty impressive. That's how CEOs are judged at the end of the day."
Mr. Grundhofer became chairman and chief executive officer of Star Banc in 1993. He points out he has turned Star Banc, the country's 69th-largest bank, into the sixth largest. In 1998 Star Banc acquired Firstar Corp. of Milwaukee and took its name. It bought Mercantile Bancorp of St. Louis in 1999, and in early 2001 it acquired U.S. Bancorp, which had been headed by Mr. Grundhofer's brother, Jack Grundhofer, and took that company's name.
The stock suffered after the trio of acquisitions. Mr. Cummings noted that the company's price-to-earnings multiple declined as well, but he said Mr. Grundhofer has regained investor confidence by several measures.
In recent years U.S. Bancorp has said it would stay away from transformational deals. Mr. Grundhofer has also established an aggressive capital management plan, pledging to return 80% of excess capital to investors through dividends and share repurchases. While avoiding transformational bank deals, U.S. Bancorp has been actively building its fee-based businesses through acquisitions, and noninterest income is now just over 50% of revenue, versus 44% five years ago. But analysts said that as it has expanded its payment and processing businesses and trust businesses, it has neglected the retail bank.
"Despite the fact that they keep verbalizing that deposits are so important, the fact of the matter remains that they are not following that philosophy," Richard X. Bove of Punk, Ziegel & Co. said on Dec. 1. "They are allowing deposits to run off."
In the third quarter, U.S. Bancorp's net interest income fell almost 7% from a year earlier, to just under $1.7 billion, while noninterest income rose 11%, to $1.7 billion. The net interest margin of 3.56% fell 39 basis points from a year earlier, non-interest-bearing deposits fell 4%, to $28.2 billion, and deposits overall fell 1%, to $120 billion.
"Every bank has had margin problems," said Mr. Grundhofer, insisting he has been committed to the retail side. "If our retail bank, which we've invested billions of dollars in, does not perform, U.S. Bank has issues from the standpoint of rewarding shareholders."
The company says it is focused on the number of checking accounts, not on the dollar value of deposits. Mr. Grundhofer noted that its deposit service charges rose 9% in the third quarter from a year earlier because of higher transaction-related fees and the impact of net new checking accounts. Through the third quarter, checking accounts were up 4% from the start of the year, to 5.8 million.
U.S. Bancorp hired veteran retail banking executive Rick Hartnack from UnionBanCal Corp. in 2005 to head the retail bank and has made two small banking acquisitions this year. Mr. Hartnack has extended branch hours and increased staffing and marketing in some markets.
Mr. Cummings said that, though U.S. Bancorp has shown a renewed focus on retail banking, "The real question is can you regain some momentum, because it is so tough to have a stop and start in retail."
