MINNEAPOLIS - Philip G. Heasley insists the market is missing the point about U.S. Bancorp.

The recently appointed president and chief operating officer of the $79.5 billion-asset banking company argues that investors - who fled the stock on last week's news that fourth-quarter earnings would fall shy of expectations - are being short-sighted. What they should focus on, he said, is the company's ongoing shift away from traditional banking to a strategy that could pay off big-time in the not-too-distant future.

"The Street may give us a very hard time… but a year or so from now - I don't know how long one stays in the doghouse - I think we will be vindicated," he said.

The company warned last Monday that increased funding costs, sluggish growth in consumer loan spreads, and increased investment in technology and branch improvements would hurt quarterly results.

But Mr. Heasley said U.S. Bancorp is shifting its revenue-generating engines away from traditional retail and wholesale banking and toward the higher-growth area of payments systems and wealth management. The company also has plans to harness its formidably lean cost structure - the creation of which has kept U.S. Bancorp focused inwardly to some degree for years - to gain market share and generate revenue.

"In the last six months, we have really redefined where we think our opportunities are," Mr. Heasley said. "We are taking our internal focus on low-cost and the expertise we have developed in technology and focusing it on customers."

The 49-year-old Mr. Heasley, who started at U.S. Bancorp in 1987 as a credit card executive and who is now seen as a potential successor to chairman and chief executive John F. Grundhofer, was promoted to his post last August amid a bevy of changes aimed at sharpening the organization's focus on customer service.

"At some point, a corporation has to make the decision to right the course," he said.

Regardless, he will have to overcome a certain amount of skepticism from analysts, some of whom say that U.S. Bancorp's credibility was shot full of holes by last week's announcement.

"In mid-October they said this was going to be a breakout quarter; now we find it's a breakdown quarter," said Nancy A. Bush, an analyst with Ryan, Beck & Co. "This is a big credibility issue."

U.S. Bancorp's message of companywide change essentially was lost among worries that other negative surprises could be forthcoming, she added.

"The Street doesn't care," Ms. Bush said. "The Street will walk away, and revisit the company at some point down the road."

However, Mr. Heasley argued that the shortfall springs in part from the very reason his bank needs to change.

"We are straddled with a company that is 70% wholesale and retail and 30% payment systems and wealth management," Mr. Heasley said. "We need to export our payment systems capabilities in a much broader way."

In fact, in the next five years, U.S. Bancorp plans to move the mix to 55% traditional banking and 45% payments systems and wealth management, he said.

It will do so in two general ways: by building retail and wholesale banking more slowly, and by more carefully segmenting its traditional banking customer base, he said.

"We are disintermediating certain segments from retail into wealth management, and moving certain traditional corporate segments into segments that are served by our payment system abilities," Mr. Heasley said. "We are moving people and companies into a better way of doing business… away from what is really a 1973 way of banking."

The former First Bank System, which bought Portland, Ore.-based U.S. Bancorp and adopted its name in 1997, was already heading in the direction of deriving a significant and growing proportion of its revenue from payment systems activities before the merger, Mr. Heasley said.

However, though the old U.S. Bancorp included many attractive, fast-growing markets, it was a traditional commercial bank.

"The bad news was that it cut in half the natural impact of our high-growth payment system," Mr. Heasley said. "U.S. Bank was all bank, so we got diluted."

The new U.S. Bancorp has been recovering from the setback, though. With the constant pushing of Mr. Heasley, the banking company has continued to carve out strong positions in various parts of the payment systems world.

It has become the biggest commercial and corporate travel and entertainment bank card issuer. It also has developed PowerTrack, a patented Internet product for tracking and managing freight payments. The banking company in April signed a multiyear contract with the Department of Defense, its largest PowerTrack customer to date.

Another product, dubbed the customer automation and reporting environment, or CARE, provides corporate and purchasing card clients Internet access to their account information.

Payment systems businesses generally grow at a rate as high as 25%, so it is not surprising that U.S. Bancorp wants to expand this area, said R. Jay Tejera, an analyst with Ragen MacKenzie Inc. in Seattle.

"This is a very important business to them and they are a market leader; it's a category they pioneered," Mr. Tejera said.

The new push to harness its payments systems prowess across the bank will add to U.S. Bancorp's efficiency, said James Bradshaw, an analyst with Pacific Crest Securities in Portland, Ore.

"They want to blur the distinction between what is today considered traditional retail banking and what is considered payment systems, and enjoy the efficiencies that come with that," he said.

U.S. Bancorp is already known for its efficiency - its ratio of overhead costs to revenue is 42%, one of the lowest in the industry. Years of cost cutting and investment in processing and customer management systems have left the company with "no redundancy in terms of how we've organized our infrastructure," Mr. Heasley said.

The tight cost structure will be used as a competitive weapon in the near future, Mr. Heasley said, and the banking company is looking to its newly acquired Southern California operations as a testing ground - a way to put years of sharpening its cost structure to work.

This year, the company bought two small banks in San Diego: $456 million-asset Peninsula Bank and $638 million-asset Bank of Commerce. The bank is still filling in its franchise by building branches and installing ATMs; but once ready, U.S. Bancorp will use its high efficiency and tight cost structure to "reprice the market" - essentially offering products and services at prices below what their competitors are charging.

"It's time to get it on," he said. "We believe our competitors in California are operating their banks in the high 40s to low 50s, and doing it on a pricing schedule that is much richer than what we are used to dealing with."

Mr. Heasley said the experiment would clearly show whether or not U.S. Bancorp's new focus can be successful.

"San Diego creates a battleground - creates a laboratory - for us in which we can really look in the mirror and tell ourselves whether we made this work or not," Mr. Heasley said.

Mr. Heasley also suggested that the new focus might supplant the need to do any big bank deals.

"It is kind of nice being the little guy repricing the marketplace," he said. "We believe that there may be more value in that approach than we can get from buying and integrating large banks."

The skepticism that arose because of last week's earnings shortfall announcement will make a climb to success all the steeper. But some analysts acknowledged that the years of toil to build efficiencies and beef up technology have allowed U.S. Bancorp to, at the very least, lay a foundation for success.

"They have put the horse in front of the cart," Pacific Crest's Mr. Bradshaw said. "Now they have to make sure they get the customer in the cart."

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