Richard Davis is sitting at a conference-room table on the 23rd floor of U.S. Bancorp's downtown Minneapolis headquarters, doling out business cards face down in a circle, like a dealer in a high-stakes poker game. Each of the four cards he puts down represents a distinct piece of the company's 2,500-branch retail banking network, and Davis, who was anointed U.S. Bancorp's CEO last December, is explaining how each will contribute to the vision of growth he's spinning for the $223 billion-asset banking company.

One card represents roughly 500 on-site branches, in grocery stores, university campuses, hospitals and the like. They're focused mostly on convenience-starved urbanites, and with 40 or so new ones added each year, U.S. Bancorp expects them to grow revenues by eight percent annually. Another is for "community bank" branches-about 1,000 small-town operations, where managers get the lending authority to compete with smaller local banks, and are likewise expected to turn in eight percent growth. "It's 20 percent more expensive than in the cities," Davis explains, "but the margins are better, the loyalty is deeper and the pricing is more rational, because we're not dealing with as much national competition."

The third card represents eight large metro markets - St. Louis, Seattle and Denver among them - where U.S. Bancorp is a dominant player. The 700 traditional branches in those cities account for 52 percent of the company's deposits, and Davis intends to give most of them a facelift, a la Vernon Hill's Commerce Bancorp, backed by marketing oomph and other extras fitting their "PowerBank" moniker. "More of everything," he explains. "Longer hours, higher staffing levels, open on Sunday, career apparel. ...In those markets, we're reclaiming our position as the big dog." Because they're more established, a four percent growth will suffice.

The last card signifies fast-growth locales, mostly in western states, where U.S. Bancorp remains a blip on the radar screen. Davis calls these "stealth" or "predator" markets, because he aims to steal market share from rivals. In cities such as Reno and Las Vegas, "we're the young buck," he says. "We're going to have the best rates and the coolest products and edgiest branches." Think something more along the lines of trendy Umpqua, the Portland, OR, bank, with a target of 15 percent annual growth.

Running four different kinds of banks under the same roof sounds complicated-especially for a leader who preaches efficiency and simplicity as corporate virtues. But employing customized approaches in individual markets is merely one piece of a multi-pronged strategy that the high-energy Davis, 49, hopes will spur greater organic revenue and earnings growth in U.S. Bancorp's core banking business, and ultimately assure his company's survival in an increasingly cutthroat business.

In his first 10 months at the helm, Davis has introduced or upped the ante on a variety of initiatives aimed at capturing a greater share of customers' wallets. There's a state-of-the-art, almost Big-Brotherish, alert system that combines what U.S. Bancorp already knows about clients with third-party insights to generate sales leads to frontline bankers. A new "enterprise revenue office" seeks to tear down walls between operating silos and generate more selling opportunities, while another "new venture" group is meant to grease the skids for ideas that can jolt revenues in existing lines of business.

He also recently made some key wholesale banking hires and opened a commercial-lending office in New York, with the goal of capturing more big corporate-lending business from outside of its banking footprint. "With our size and scale, we should be getting more credit and non-lending business" from Fortune 500 companies, he says.

On the surface, Davis's revenue push looks like an attempt to fix something that's not broken. As the No. 6 U.S. commercial bank in both assets and market capitalization, U.S. Bancorp gets 25 percent of revenues and 22 percent of earnings from a powerhouse global payments business that increased revenues at a compounded annual growth rate of 14.9 percent between 2004 and 2006. It also ranks No. 3 in U.S. merchant acquiring, No. 4 globally in corporate cards, No. 6 in debit cards and No. 7 in retail credit cards. Another 15 percent of revenues and 14 percent of net income are derived from wealth management and securities, where U.S. Bancorp boasts a large and growing corporate-trust operation, and some $4 trillion in assets under administration. Wealth-management revenues jumped 12.8 percent in the same period.

Thanks mostly to those two units, 53 percent of the company's total revenue comes from fees. Beyond that, U.S. Bancorp has a well-earned reputation for efficiency (its second-quarter efficiency ratio was 46.8 percent, the best among big banks) and conservative loan underwriting. Its policy of returning 80 percent of earnings to shareholders in the form of buybacks and dividends (the dividend yield hovers in the 4.8 percent range) is popular among investors, as is the way the company consistently ranks among the most profitable of the big banks.

In a tough first half of the year, U.S. Bancorp earned $1.27 per-share-down slightly from $1.29 in 2006, with an ROE of 22.7 percent and ROA of 2.09 percent. While U.S. Bancorp's net interest margin dropped 24 basis points over the year, to 3.44 percent, from 3.68 percent, a conservative underwriting approach-just 3.2 percent of total loans were subprime-kept net charge offs to just 0.57 percent of loans. "Investors really appreciate the consistency of their story-the efficiency, the low-risk profile, the focus on the payments and securities businesses," says Scott Siefers, an analyst with Sandler O'Neill & Partners. "To the extent U.S. Bank has already generated a model that people like and understand, the idea of 'no change' is good."

Davis could stand pat. But with an enviable 24-state footprint across the western two-thirds of the country-including top-three branch networks in such boom states as Oregon, Colorado, Washington and Utah-he doesn't think it's unreasonable for U.S. Bancorp to generate faster growth in a core banking business that still accounts for 60 percent of revenues.

There's a risk: Vying too aggressively for revenues in a hypercompetitive marketplace could threaten the pricing and cost discipline that has defined the company's performance for much of this decade. In the worst case, Davis could lose those differentiating strengths, and still not achieve his revenue ambitions. If that happens, the company could stumble and lose its independence to an expansion-minded East Coast giant, such as Citi or JPMorgan Chase, or maybe a big foreign acquirer, such as Royal Bank of Scotland or BNP Paribas.

"It's a very tricky balancing act," acknowledges Warren Staley, former chairman of food giant Cargill, and a U.S. Bancorp board member since 1999. While the board has charged Davis with raising revenues, he adds, "We've advised him to be cautious. The risk-reward might not be there to expand as fast as we'd like."

Even so, Davis doesn't really have much choice, because the times-and investor expectations-have changed. Like many big regional banks, U.S. Bancorp is an amalgamation of several large acquisitions made during the M&A boom of the late 1990s. Back then, value was found in scale efficiencies, and no management team did a better job of finding cost savings than the one led by former CEO Jerry Grundhofer and his protégé, Davis. Starting in 1993 with then-tiny Star Banc in Cincinnati, the duo barnstormed the Midwest, rolling up such well-known regional names as Mercantile in St. Louis and Milwaukee's Firstar, before acquiring U.S. Bancorp in 2001, taking both its name and its Minneapolis headquarters.

Today, big deals are out of fashion. Indeed, U.S. Bancorp, which encountered some integration and credit issues in the wake of those acquisitions, was stuck in the investor doghouse for several years, for fear Grundhofer would do another large one. And while smaller deals are still viable - U.S. Bancorp has done $4 billion of them since 2002, mostly in payments and wealth management - it's tough for a megabank to move the needle much that way.

What's in vogue now is organic growth. And on that front, U.S. Bancorp's banking franchise has been lagging. In the first half of the year, the retail-banking business saw just a 1.3 percent gain, while wholesale banking for larger corporations saw revenues decline 3.2 percent. The yield curve gets part of the blame-U.S. Bancorp's margin declined 24 basis points, to 3.44 percent, in the fiscal year ended in June. But the problems go deeper than that, rooted in a drive to keep a lid on costs, which has inspired a lack of investment in the banking franchise.

In recent years, figures from the Federal Deposit Insurance Corp. show U.S. Bancorp has lost deposit market share in several key growth states, such as Oregon, California and Colorado. Industry studies, meanwhile, indicate that the company is well below average in generating sales of banking products in its branches. As a result, overall U.S. Bancorp revenues grew just 3.3 percent in the 2004-2006 time frame-despite the good performance of payments and wealth management. "The age-old question with U.S. Bank is: Have they pinched too many paper clips controlling costs, and not invested enough in growing the banking franchise?" asks John McDonald, an analyst with Banc of America Securities in New York.

One industry observer, who's familiar with U.S. Bancorp and asks not to be identified, portrays the company as a victim of its own cost-cutting success. Investors recognize that there's a limit to how much can be derived from efficiency alone. But they've also come to expect high earnings and stellar returns on equity out of U.S. Bancorp. That explains why the company's shares trade at a so-so 12 times 2008 earnings estimates. "The market is screaming, 'You have no revenue momentum,'" he says.

Trying to make a smooth switch to revenue generator without raising costs too much and slashing returns is a tall task. This unnamed observer argues that Grundhofer, 62, might have felt boxed in, and left the job early because of it. "If you're going to reduce earnings to invest in revenue growth, there's a bridge you have to cross [to get] shareholders and the board to believe it's worth that sacrifice," he says. "Jerry didn't have it in him to take them across that bridge." Grundhofer was not available for comment, but board member Staley calls the assertion that Grundhofer was unable to cross that bridge "a bit of an overstatement." He says the former CEO had signaled his desire to leave ahead of schedule several years ago.

Either way, McDonald says the big question now is: "Can they continue to earn high returns while investing in these growth initiatives?" Davis is betting he can, because efficiency and lending conservatism are too deeply ingrained in the culture to easily lose. "We aren't changing the credit culture or the focus on shareholders," he explains. "We're just adding something to the recipe in revenue growth that's going to make things taste better."

It won't be easy. To succeed, Davis must get a 50,000-plus workforce that has been schooled in cost controls to think and act more like salespeople. "When you're trying to get your sales force to behave in a way that delivers more revenue, you have to give them training, incentive systems and case studies, and the what-to-say-in-this-situation help to make it work," says Jim McCormick, president of First Manhattan Consulting Group.

Already, Davis is investing more in products, sales tools and processes, and the physical infrastructure. He's launched new training and mentoring programs, and an outreach effort to make U.S. Bancorp alums more visible supporters in the community. He also has begun measuring employee engagement, reckoning that in a relationship business like banking, satisfied workers will sell more products. "This has never been a company that's cited for investment in the time and talents of its employees," Davis says, referring to Grundhofer's tenure. "If we invest more in the employees, we will unwittingly affect the customer experience, and that will be good for shareholders."

Some initiatives already are bearing fruit. The PowerBank concept, with branch remodelings, longer hours and a marketing image that screams "convenience," has been piloted in St. Louis for 18 months. Company officials say it already is generating greater customer loyalty and strong enough sales to offset implementation costs. The sales-alert system-which mines "out-of-pattern" customer behavior and combines it with outside information, such as construction activity in a customer's neighborhood, to identify potential needs-is highly proprietary, but "continues to meet expectations in terms of incremental net new business," says Richard Hartnack, vice chairman and head of consumer banking.

Other projects sound intriguing. A new senior-management group aims to short-circuit the annual budgeting process by quickly approving, say, the addition of 35 new people to a business where revenues are ripe for the picking. Next year, the company will begin tapping top salespeople to come up with ideas for creating new revenues. Those producers stand to earn a percentage of the profits successful ideas generate.

Davis is well aware of the potential downsides of these investments. In the second quarter, U.S. Bancorp's vaunted efficiency ratio jumped two ticks, to 46.8 percent, from 44.4 percent a year earlier. "A lot of people would say, 'You just gave up part of what made you great,'" Davis concedes when asked about the jump. "But my calibration was to spend a bit of those investable dollars in the near-term" to pursue revenue-generating opportunities.

"The DNA of this company is not counter-cyclical to investing and having higher revenue," he adds, emphatically thrusting his hand to make the point. "I'm telling you right now that in a couple of years, this company will still be known for its high levels of profitability, efficiency and operating leverage. What will be different is that they'll finally start calling us good revenue growers, too. When you throw that into the mix, then you're really talking about something special."

As a chief architect of the company's existing DNA, observers say Davis is the person best-positioned to tinker with it. An articulate visionary with a wiry frame and a penchant for using big words, the Los Angeles native comes across as so smart and analytical that it's natural to pigeonhole him as a brainy technocrat. But there's a down-to-earth feeling to his approach - a sense of soul and openness, rooted in life experience-that defies appearances and makes building connections easy.

The son of a truck-driver dad and secretary mom, Davis spent eight years working his way through college as a teller for Security Pacific Bank. His work ethic and intelligence impressed higher-ups, who put him in a management-training program after he graduated with an economics degree from Cal State Fullerton. In short order, he was climbing the corporate ladder, with Grundhofer - who arrived in 1987 to run SecPac's retail bank - as his mentor.

In 1993, Grundhofer landed as CEO of troubled Star Banc, and quickly recruited Davis to be his lieutenant. The duo fixed Star in short order, and used it as a platform for growth. Along the way, they created a culture that has always talked a lot about sales and service, but is recognized most for its focus on accountability and the numbers. Branch managers, for instance, are given the latitude to run their businesses as entrepreneurs, but must meet goals. To aid in the task, they receive weekly updates, with metrics sliced and diced in various ways.

"The management of information is very robust and well thought-out," says Hartnack, who arrived in 2005 from San Francisco's Union Bank. "Whether you're a product manager or a branch or relationship manager, you get the information you need to manage your business. People are treated like grown-ups. There's a culture of letting you figure out how [to achieve an objective]."

Insiders say that Davis is more rah-rah than Grundhofer, and more eager to celebrate employee accomplishments. Hartnack, who has known Davis for more than a decade, says his teller background provides a "genuine appreciation" for the efforts of frontline bankers, while his 14-year tenure running areas as diverse as middle-market and branch banking, investment and insurance sales, marketing and retail payments has provided management breadth. "Richard has a 360-degree view of the company, because he's managed virtually every business," Hartnack says. "If he's not the best strategist in this industry, he's certainly sitting at the table with the others."

Naturally curious, Davis has emerged as an industry leader. As a board member of the Consumer Bankers Association-and CBA chairman in 2004-Davis's voice was among the strongest in discussing such issues as how to cement small-business banking relationships or the need for better mortgage disclosure. "He's exceptionally intelligent, ahead of the curve on substance, and yet very self-effacing," says CBA President Joe Belew, who has known Davis for 20 years. "There's no artifice in what he says. It's very, very real. .... He's got a big fan club."

That club stretches all the way to the White House. Davis has been a visible supporter of various charities, including the National Underground Railroad Freedom Center and the local YMCA, and was recognized in October by President Bush with a Lifetime Volunteer Service Award for heading up The Financial Services Roundtable's "Community Build Day," which sponsored employees from 76 institutions in the building or repair of nearly 200 houses.

Davis is taking that openness to the investor community. Before he took the helm, U.S. Bancorp was among a few remaining banks that prerecorded quarterly conference calls; today, those calls are live. In September, U.S. Bancorp hosted its first analyst day in six years, leaving attendees impressed with the transparency. At that meeting, CFO Andy Cecere laid out the company's exposure to the subprime market, even though it wasn't required. "None of this required an 8K," Davis says. "But there's value in the investor community knowing the facts. ...We didn't want them guessing."

Among those seemingly won over by U.S. Bancorp's story is Warren Buffett's Berkshire Hathaway, which has been buying shares since early 2006. As of September, the firm owned more than 37 million bank shares, or 2.15 percent of the total outstanding, valued at more than $1.2 billion. Buffett was unavailable for comment, but Staley says he has encountered the investor in non-U.S. Bancorp-related forums, and Buffett has "volunteered that he likes the management and philosophy of the bank." It's a good start. If Davis can convince more investors to sign on, his foray into the CEO suite could be more than he-or they-had hoped. (c) 2007 U.S. Banker and SourceMedia, Inc. All Rights Reserved. http://www.us-banker.com http://www.sourcemedia.com

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