Commercial Sales Tri-County Prepared By: Pacific Northwest Title
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Strategy Analysis
Samuel Goeppinger
Kai Lübbe
Greg Tensa
Sandra van der Bilt
TABLE OF CONTENTS
Executive Summary......................................................................................................................... 3
Introduction ...................................................................................................................................... 4
Environmental Scan ........................................................................................................................ 4
Suppliers ..................................................................................................................................... 4
Customers ................................................................................................................................... 5
Rivals........................................................................................................................................... 5
New Entrants............................................................................................................................... 7
Substitutes................................................................................................................................... 7
Opportunities and Threats........................................................................................................... 8
Internal Analysis—Core Competencies and Key Strategies ........................................................... 8
VRIO Framework......................................................................................................................... 8
Product Development ............................................................................................................. 9
Product Support Suppliers .................................................................................................... 10
Marketing .............................................................................................................................. 10
Sales and Service ................................................................................................................. 11
Information Technology and Human Resources .................................................................. 11
Investment Recommendation........................................................................................................ 12
Appendix A:Tables and Figures .................................................................................................... 14
Table 1: Bank Market Share Data (1 of 3) ................................................................................ 14
Table 2: Recent Acquisitions and Mergers ............................................................................... 16
Table 3: Credit Union Statistics, Oregon 2005.......................................................................... 16
Table 4: SWOT Analysis ........................................................................................................... 17
Table 5: Performance and Condition Ratios ............................................................................. 18
Table 6: 2004 Income and Expense (Umpqua Bank) ............................................................... 18
Table 7: Income and Expense (National Competitors) ............................................................. 19
Table 8: Income and Expense (Regional and Community Competitors).................................. 20
Appendix B: References................................................................................................................ 21
Bibliography............................................................................................................................... 21
Primary Research...................................................................................................................... 21
Page 3 of 21
Executive Summary
This report provides an overview of the strategies of Umpqua Holdings Corporation, a regional bank
headquartered in Portland, Oregon. Umpqua operates in the retail banking sector, which is
characterized by a high degree of rivalry among national, regional and community players. Given the
maturity of most retail banking markets, growth is driven primarily mergers and acquisitions.
Over its 50+ year history, Umpqua Bank has developed core competencies in marketing, sales/service
and also cultural management. The organization leverages these competencies to pursue key
strategies of organic growth, unsurpassed customer service and community involvement.
Umpqua Bank’s strategy of organic growth is unique in that the firm concerns itself as much with the
degree of cultural fit as more traditional criteria such as “expense reduction, increased market power,
reduced earnings volatility and scale/scope economies”
1
. The organization safeguards its cultural
assets (namely a corporate brand renowned for innovation and superior service) by involving Human
Resources throughout the mergers and acquisitions process. This strategy of opportunistic expansion
allows the firm to move into new markets without the collateral damage to service, flexibility and
reputation that has beset many of their competitors.
Umpqua Bank’s strategy to provide customers an unsurpassed level of service is rooted in their re-
conception of themselves as an innovative retailer whose product happens to be financial services.
This retail vision pervades the organization and has led to:
a redesign of commission structures
a robust and comprehensive cultural/service training program
non-traditional branch architecture and merchandising
high-impact “handshake marketing” programs
reframing commodities such as savings and checking accounts into product families with
interrelated benefits
a corporate philosophy that drives employee empowerment down to the frontline.
The bank’s service strategy also overlaps with their strategy of community involvement. The aim here
is to serve customers by being an active member of the communities in which the bank operates. To
this end, Umpqua often partners with local non-profits to build mindshare within the community. New
branches are also host to community events, and are closely-modeled after Starbucks’ “third place”
model.
We believe that the high degree of interrelatedness between Umpqua’s disparate strategies and
competencies provides the company with a sustainable advantage over its competitors. The most
critical of these key success factors is the organization’s ability to effectively manage its culture in the
face of rapid growth, which is unique to the industry. We therefore contend—on the basis of the above
characteristics—that Umpqua Bank is well-positioned to succeed in the industry and is an attractive
investment prospect.
1
Pilloff, Steven J, and Anthony M. Santomero. “The Value Effects of Bank Mergers and Acquisitions”. Wharton. Jul
1997.
Page 4 of 21
Introduction
Umpqua Holdings Corporation participates in an extremely competitive environment. The Banking
industry is mature, so growth above the economy in general is driven primarily through mergers and
acquisitions. Banking is also highly regulated, which presents both opportunities and constraints. For
example, federal laws prohibit banks from growing to be larger than 10% of the nation’s deposits
through acquisitions.
Larger banks benefit from economies of scale in their operations and are often able to earn higher
profits from the spread in interest rates as well as offer extensive networks of branches and ATMs, but
many have reputations for poor or indifferent customer service. Smaller banks must somehow
differentiate themselves in order to attract clients, primarily by offering better rates on deposit accounts
and loans or with superior service. Like many smaller banks, Umpqua Bank competes primarily on the
basis of customer service, with added retail twists such as Umpqua-brand roast coffee and music
kiosks where customers can borrow “custom compilation CDs from local artists.”
2
Umpqua Bank does not have a defined mission statement, but some of the key tenets of its mission can
be found in the 2004 Annual Report:
“Is it possible to stay true to our roots as a community bank as we continue to grow? Is it feasible to
improve on the highest service standards in the industry? Can we deliver financial services
products in exciting, innovative ways? Are we capable of growing quickly in new markets after a
major acquisition? The answer is yes and we can prove it.
“At Umpqua Holdings Corporation we thrive on [. . .] creativity and [. . .] steadfastly refuse to be
constrained by conventional wisdom. As a community bank, we embrace our responsibility to invest
in the well-being of the cities, towns and neighborhoods in which we do business, and we strive to
go beyond our customers’ expectations by reinventing our business everyday.
As the bank grows, the above questions are very much in line with those being raised by the
corporation’s stakeholders. Umpqua’s brand is a result of its unique history, but the company’s rapid
growth threatens the integrity of that brand. Many of Umpqua’s innovations are new to the industry, so
the question of how far Umpqua can push the envelope is certainly a valid one.
Can a sustainable advantage be achieved in the banking industry by being a leading marketer of
financial services? Will reinventing its business and going beyond customers’ expectations be
Umpqua’s true competitive advantage? Or will Umpqua’s dedication to its community bank roots
constitute its absolute competitive advantage in this industry? Let’s dig deeper.
Environmental Scan
Suppliers
Supplier analysis considers the federal government, which controls the federal discount rate, money
supply and regulatory reserve requirements, as the dominant supplier in the industry. Industry analysts
predicting near-future raises in the federal rate indicate that the adjustment and subsequent restriction
of the money supply will restrict the size of the lending market. Available mortgages will decrease and
the credit quality on adjustable rate products will fall, leading to higher loan loss provisions. Industry
performance is generally expected to fall in 2005, due to tighter commercial and mortgage loan
markets. The cumulative effect of the money supply on the industry can be considerable. Additionally
banks must comply with extensive federal reporting requirements. It is estimated that for the smallest
banks, with less than $1 billion in assets, 25% of operating expense is for complying with and reporting
2
Anderson, Mark. "Umpqua Bank enters Folsom, Antelope". Sacramento Business Journal. 7 Nov. 2005.
Page 5 of 21
Source: http://www.fdic.gov/bank/statistical/stats/2004dec/fdic.html
to regulators.
3
However, governmental control is meant to lend stability to the industry and depositors
and therefore represents only a moderate level of threat.
Suppliers of electronic banking technology have become increasingly important, as many banks have
invested heavily to expand retail services and network branches. Most banks, especially smaller
banks, purchase or outsource the software necessary to implement functions such as accepting
electronic funds transfers or to provide web-based bill paying. This allows them to gain cost efficiencies
by keeping in-house R&D spending low while benefiting from economies of scale that third party
providers have in these areas. It is difficult for banks to differentiate themselves when others own the
technology.
Customers
Retail and commercial bank customers are the principle buyers, as they utilize banks’ services in
exchange for interest and fees. Although banks strongly recommend packages of consumer banking
services, retail customers take advantage of low switching costs and shop for the best offers,
sometimes holding accounts with several banks.
4
On the whole, retail customers have basic banking
needs: 80% choose branches that offer the best service for routine activities.
5
Larger commercial
customers leverage their stronger financial positions, demand specialized service, and better interest
rates than smaller firms. By contrast, smaller firms will take on a less beneficial interest rates in
exchange for better services and more consideration in the loan process.
6
The large number of
available retail and commercial buyers poses a low threat to the industry
.
Rivals
Umpqua competes with personal and
commercial banking services in its primary
market, roughly the I-5 corridor between
Vancouver, WA and Sacramento, CA. There
are a total of 87 banks with 1,306 branches in
this area
(Table 1).
These banks include giant
national banks with assets over $40B including
U.S. Bank, Bank of America, Wells Fargo and
Washington Mutual; regional banks with assets
over $1B such as West Coast Bank and Bank of
the West; and scores of small community banks
with assets less than $1B. National banks have
economies of scale and can offer conveniences
such as comprehensive ATM networks.
However, many such firms have low customer
satisfaction ratings, especially after problematic
mergers. For example, Bank of America and
Wells Fargo customer satisfaction scores are 7-9% lower than the industry average.
7
Community
banks and credit unions must rely on superior service at the branch level and better lending and
savings rates to attract depositors.
A key indicator of industry rivalry is the extent of merger and acquisitions activity. In an environment of
heightened competition, firms are increasingly turning to M&A’s to increase market share and achieve
economies of scale. As a result, there has been a decrease in the total number of institutions over the
last 15 years
(Figure 1).
Umpqua has completed a number of significant acquisitions since 1999
(Table 2)
.
3
Mergent Report. “The North America Banking Sectors: A Company and Industry Analysis”. Apr 2005.
4
Deer, Aaron. Interview by Samuel Goeppinger. 2 Nov 2005. “Telephone Interview with Research Analyst at
RBC Capital Markets“.
5
Mergent Report
6
Deer, Aaron
7
American Customer Satisfaction Index. “Fourth Quarter Scores”. <http://www.theacsi.org/fourth_quarter.htm#all>.
Figure 1 - FDIC Insured Banking Firms
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
1
9
9
0
1
9
9
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9
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1
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Commercial Banks
Savings Institutions
Page 6 of 21
Figure 2 - Umpqua Deposit Market Share
15.8%
13.2%
13.2%
2.6%
2.0%
1.7%
1.6%
1.6%
1.4%
20.9%
14.6%
6.6%
6.4%
US Bank
Bank of America
Wells Fargo
Washington Mutual
Umpqua Bank
KeyBank
World Savings Bank
West Coast Bank
Tri Counties Bank
Bank of the West
Bank of the Cascades
Sterling Savings Bank
75 other institutions
Figure 3: Oregon Combined Bank and Credit
Union Deposit Market Share
17.7%
10.4%
10.3%
9.0%
2.5%
2.3%
1.8%
15.9%
2.2%
5.2%
13.7%
3.3%
5.7%
US Bank
Wells Fargo
Washington Mutual
Bank of America
KeyBank
Umpqua Bank
Portland Teachers CU
Sterling Savings Bank
West Coast Bank
First Technology CU
Bank of the Cascades
47 other banks
90 other credit unions
* Oregon (Benton, Clackamas, Coos, Curry, Deschutes, Douglas, Jackson, Josephine, Lane, Lincoln, Linn,
Marion, Multnomah, Washington), California (Butte, Colusa, Glenn, Humboldt, Mendocino, Napa, Placer,
Shasta, Sutter, Tehama, Trinity, Yolo, Yuba) and Washington (Clark).
Umpqua opened a branch in King County, WA. in April 2005. If included, Umpqua’s share would fall to #6
(after KeyBank), with a 3.85% market share, facing 133 competitors with a total of $103,400,153,000
market assets. Since this skewed the data from where most of Umpqua’s operations reside, we have
chosen to omit this one branch from comparisons.
Source:
http://www.ncua.gov
,
http://www.fdic.gov
Source:
http://www.ncua.gov
,
http://www.fdic.gov
In an effort to lower expenses, gain higher fees and increase profits, the industry has undergone
explosive branch activity growth, with the number of locations jumping 49% from 1994 to 2004 and over
12% from June 2003 to June 2004.
8
Although merger activity can be cyclical, growth in branches
constitutes an advantage that is likely to continue for some time.
Umpqua Bank and other regional banks fill a niche between the large national banks and small
community banks by operating a network of branches specializing in meeting the needs of residents
and businesses in the Northwest. Within its market, Umpqua has captured
6.6% of the deposits
(Figure 2)
, the
fifth-highest share after the four
largest national banks operating in
the area. They gain economies of
scale by operating 92 branches and
pool enough deposits to offer larger
loans in the Portland area, yet set
individual strategies to serve the
community in each of the branches
to compete against community
banks.
Tables 5 and 6
summarize financial
comparisons between Umpqua
Bank and its largest competitors.
Umpqua has the third-highest yield
on earning assets (6.18%) and the
fourth lowest cost of funding earning
assets (1.04%), so their net interest
margin is an impressive 5.14%.
However, their non-interest income
to assets was the second lowest (1.02%) while its non-interest expense was still relatively high (3.49%),
so their total pretax return on assets is in the middle of the pack at 2.11%. Net income for Umpqua was
1.36% of average total assets or $22.9M in 2004. Net income of their national competitors ranged from
2.08% ($3,979.6M) for U.S. Bank to 0.91% ($2,292.4M) for Washington Mutual, and regional
competitors ranged from 1.39%
($22.9M, $21.3M and $16.2M) for 3 of
their regional competitors (West
Coast, Tri-Counties, and Bank of the
West) to 1.04% ($63.2M) for Sterling
Savings.
Umpqua also faces competition for
consumer banking and lending from
community-chartered credit unions.
These firms offer varying degrees of
banking services, including securities
brokerage and life insurance, at
substantial savings to the customer.
With their exemption from state and
federal taxes, it is estimated that if a
credit union and a bank both held
$100 million in assets, in ten years the
former would have $467 million in
assets compared to the bank’s $288
8
Mergent Report
Page 7 of 21
Figure 4
New Charters and Mergers for Commercial Banks
0
100
200
300
400
500
600
700
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
N
u
m
b
e
r
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f
F
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r
m
s
New Charters
Mergers
Figure 5
New Charters and Mergers for Savings Institutions
0
20
40
60
80
100
120
140
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
N
u
m
b
e
r
o
f
F
i
r
m
s
New Charters
Mergers
Source: http://www.fdic.gov/bank/statistical/stats/2004dec/fdic.html
Source: http://www.fdic.gov/bank/statistical/stats/2004dec/fdic.html
million.
9
Serious debate surrounds this issue, as banks strongly resent credit unions’ tax exemption
and parity of service. Although banks have long lobbied strongly for legislation to level the playing field,
the federal government has yet to take decisive measures on the issue. In Oregon alone there are 92
credit unions, which claim almost 19% of the combined bank/credit union deposit market share in the
state
(Figure 3)
.
Banks that operate completely online represent another rival on the retail side. These firms have lower
cost structures due to their lack of physical assets and are thus able to offer more competitive rates
than brick and mortar competitors. This advantage is also used to lower minimum balance
requirements and offer lower service fees.
10
On-line banking is just beginning to have an
impact on the banking industry. Around 2-3%
of households currently have an account at an
on-line bank, and that share is expected to
double in the next 5 years.
11
Given the nature
of direct and indirect industry competition, the
threat of rivalry is extremely high.
New Entrants
Since 1990, the banking industry has seen a
trend towards consolidation, with the number
of FDIC insured institutions falling by 46.9%
(Figure 1)
.
12
The trend is expected to
continue, but slow over the next five to ten
years. Compared to mergers and
acquisitions, growth in the number of new
charters remains very low
(Figures 4 and 5).
However, barriers to entry for small and large
firms are not high, as startup banks need only
capital and adequate leadership. Additionally,
non-banking firms are allowed to diversify their
operations to include banking due to the
Gramm-Leach-Bliley Financial Modernization
Act of 1999.
13
Although fierce competition
keeps new entrants away, other barriers to
entry are low and the overall level of threat of
entry is moderate.
Substitutes
Although substitutes for traditional
banking services have been viewed
as illegal or impractical, payroll
check cashing and cash advance
9
Stark, Eric G, “Credit Unions vs. Banks: Battle Royal”. Lancaster Newspapers. 23 Oct 2005.
10
Ambrose, Eileen. “Lower Costs Allow Higher Rates: Online banks, Minus Bricks and Mortar, Find Niche”.
Houston
Chronicle. 25 Jul 2005.
11
Kim, Jane J. “Online Banks Race To Raise Yields; Brisk Competition for Deposits Drives Up Rates, But Web-
Only Accounts May Not Click for All”. Wall Street Journal. (Eastern edition). New York, N.Y.: 20 Oct 2005. Pg.
D.1.
12
Federal Deposit Insurance Corporation. Bank Data and Statistics Databases.
<http://www.fdic.gov/bank/statistical/index.html>.
13
Federal Reserve Bank of Minneapolis. “The Financial Services Modernization Act of 1999: A Brief Summary of
Gramm-Leach-Bliley”. <http://minneapolisfed.org/pubs/region/00-03//glb-summary.cfm>.
Page 8 of 21
services have proliferated in the low end market by serving consumers that do not meet the minimum
balance and/or information requirements needed to access banking services. Both services have
existed for some time, but are now increasing efforts to capture more available market share. Payroll
check cashing services are increasing the scope of their services by offering stored value cards that
function as debit or credit cards, but operate with a rechargeable balance without the need of a bank
account. Cash advance services are positioning brick and mortar locations near bank branches to gain
customers who may not access traditional bank services. These firms serve large markets, but fall
beneath the requirements and scope of the banking industry and constitute a low amount of threat.
Following the Gramm-Leach-Bliley Act of 1999, banks were allowed to offer insurance and investment
services, and other non-banking activities.
14
This portion of a banking firms’ portfolio is subject to
intense competition. Brokerage firms offer products such as money-market accounts (not insured by
the FDIC) with check-writing privileges and credit cards that can be substitutes for some banking
activities. Here, the threat of substitution is very high, and synergies are difficult to capitalize on
between the industries. For example, in 2005, JP Morgan Chase & Co. sold its insurance and annuity
operations and Citigroup sold Travelers Life Insurance after their post-modernization act acquisitions.
15
Umpqua Holdings also owns a full service brokerage, Strand, Atkinson, Williams & York, with 5 stand-
alone offices and locations in 14 of its banking stores. Although brokerage services comprise less than
5% of Umpqua Bank’s revenues, they are able to offer a complete set of financial services to those
customers that desire them. This is especially important to large-net-worth clients served by their
private client services department.
Opportunities and Threats
The level of threat in the banking industry is quite high and can be mostly attributed to intense rivalry.
The money supply and buyer power constitute a moderate level of threat and largely define business
practices in the industry. Barriers to entry in banking, while quite low, constitute only moderate threat
because rivalry dissuades new entrants. Community chartered credit unions represent an increasing
level of threat, though the extent of this threat will be determined by future federal legislation. Due to
consolidation in the banking industry, the I-5 corridor is served mostly by large national banks and small
community banks, leaving an opening for a well-run regional bank with larger assets specializing in
meeting the needs of the area.
Internal Analysis—Core Competencies and Key Strategies
Figure 6:
VRIO Framework
Valuable
Rare Imitable
Exploited S or W Competitive
Implications
Product Development
YES
NO
YES
YES
-
Parity
Product Support
NO
NO
YES
YES
-
Parity
Marketing
YES
YES
YES
YES
S
Temporary
Advantage
Sales / Service
YES
YES
NO
YES
S
Temporary
Advantage
Human Resources as
Cultural Development
YES
YES
NO
YES
S
Sustainable
Advantage
Information Technology YES
NO
YES
YES
W
Parity
Our VRIO analysis indicates that Umpqua has core competencies in marketing, sales and also cultural
management. The organization has leveraged these competencies in order to pursue key strategies of
14
Federal Reserve Bank of Minneapolis
15
Financial Wire. “JP Morgan Insurance Unit Reportedly For Sale”. Financial Wire. 7 Nov 2005.
Page 9 of 21
Table 9: 2004 Loan Concentrations
2.2%
2.1%
1.1%
3.6%
75.5%
47.6%
5.3%
4.0%
20.2%
13.9%
Commercial and industrial
Consumer
Other
Total real estate secured:
Construction & Development
Farmland
Home equity credit lines
Single family
Multifamily
Commercial real estate
Figure 8: 2004 Sources of Income
11.4%
7.3%
4.9%
3.2%
71.3%
1.9%
Loans
Securities & other
Svc. charges on deposit accts
Brokerage commissions & fees
Mortgage banking
Other
Source: 2004 Umpqua Holdings Annual Report
Source: 2004 Umpqua Holdings Annual Report
organic growth, unsurpassed service and community involvement. These corporate strategies—and the
competencies upon which they depend—are woven throughout the organization’s value chain, which
we examine in detail below.
Figure 7:
Product Development
Umpqua Bank has three primary product offerings: personal banking, commercial banking and
investment services. Commercial banking is the largest of these, comprising 70% of the bank’s
portfolio. The bank has reframed its
products into “blends” (product bundles)
tailored to customer needs. Commercial
blends are segmented by business size and
feature a combination of accounts, credit
cards, lines of credit, merchant services and
cash/investment management services.
Personal banking blends are segmented by
customer age and include services such as
checking and savings accounts, credit
cards, and free investment advice. Its
investment division, Strand, Atkinson,
Williams & York, rounds out its portfolio of
assets and complements the needs of its
business and individual customers. For a
breakdown of income sources and loan
concentrations see
Figures 8 and 9
.
Though Umpqua bank
is not unique in bundling
its products; the way
these products are
presented is different.
Umpqua’s
Go
,
Reach
,
Savor
and
Cruise
blends are much more
“tangible and real”
16
than traditional banking
products.
Products within each of these blends are also cross-discounted; insulating them from rate shoppers that
would otherwise cherry pick the loss leaders. This bundling/discounting tactic makes it more difficult to
16
Hayward, Lani. Interview by Samuel Goeppinger, Kai Lübbe and Sandra van der Bilt. 9 Nov 2005. “Telephone
Interview with the Vice President of Creative Strategies at Umpqua Bank”.
Page 10 of 21
compare Umpqua’s products to those of other institutions and generally increases switching costs for
existing customers.
17
Competitors have pursued similar marketing strategies (eg. Wells Fargo’s
“different stages of life” complemented by their “stage coach” logo), but offer standard/unbundled
products to customers with discounts for additional services, or higher interest rates for a portfolio of
products placed by a customer at the bank.
Product Support Suppliers
Umpqua Bank leverages and backs up its products with hedging instruments in order to maintain a
stable financial base. This involves in-house development of a diversified portfolio, market analysis of
deposit versus lending activities as well as the purchase of risk-hedging tools to back its lending
products.
18
A number of Umpqua’s product support services are outsourced, which is typical of the industry.
Umpqua suppliers include payment processors that handle transactions/clearing/settlement, statement
processing, and manufacturers and distributors of plastic cards, as well as architecture and design
firms, PR, and marketing firms. Other parts of its product services such as electronic funds transfer and
web-based bill pay technologies are also outsourced to specialists.
19
Outsourcing these functions
presents the bank with some limitations: for example, the bank cannot control much more than the fonts
and colors of their bill-paying software
20
. It is axiomatic that those functions that Umpqua has chosen to
outsource cannot provide the bank a sustainable competitive advantage.
Marketing
Umpqua Bank has differentiated itself within the crowded field of commercial banking through its
marketing and brand-building efforts, steadfastly emphasizing customer service and also reframing
theirs as a retail organization. Although none of these is unique in banking, the extent to which the
organization applies them certainly is.
Umpqua Bank has established a brand strongly identified with the Northwest. It recently revamped its fir
tree logo to strengthen this connection and reaffirm its origins. Over the past decade, Umpqua Bank
has invested heavily in developing a brand that is reflective of its culture and that connects with the
community. Umpqua promotes itself as an “innovative, customer friendly retailer of financial products
and services” whose aim is “to connect with the public on an individual level”
21
. They have pursued this
strategy through a combination of “handshake marketing” and more traditional (TV, radio and billboard)
campaigns. For example, when Umpqua Bank moves into a new location, they send an ice cream
truck emblazoned with their logo to give away free treats. They have even staged impromptu street
theater, orchestrated performance art and sponsored giveaways at neighboring retailers to seed local
awareness of the organization. These promotions fall far from the staid rate brochures and heavy-
handed sponsorship traditionally used by the banking industry, falling more in line with retailers and
even radio stations.
Umpqua has worked with architects and brand marketers to reformulate their ideal branch. The bank
has converted its branches into community spaces where customers can sit, browse, drink coffee or
hold meetings. Tellers no longer operate from within boxed-in cubbies, but rather accompany
customers through the lobby in order to establish a personal connection before ever reaching the
counter.
17
Levis, Kay. Interview by Kai Lübbe and Sandra van der Bilt. 10 Nov 2005. “In-Person Interview and Branch
Tour with the Assistant Vice President / Manager of the Pearl Store of Umpqua Bank”.
18
Sullivan, Dan. Interview by Samuel Goeppinger, Greg Tensa and Sandra van der Bilt. 16 Nov 2005. “In-Person
Interview with the Executive Vice President and Chief Financial Officer at Umpqua Bank”.
19
Sullivan, Dan
20
Schaeffer, Laura. Interview by Kai Lübbe and Greg Tensa. 17 Nov 2005. “In-Person Interview with the Senior
Vice President and Manager of Product Strategies at Umpqua Bank”. Meeting of the Portland, Oregon Chapter
of the Product Development and Management Association.
21
Hayward, Lani
Page 11 of 21
Figure 11 – Umpqua Holdings Historical Interest Income
-
50,000
100,000
150,000
200,000
2000
2001
2002
2003
2004
Net interest income
Income before taxes and discontinued operations
Net income
Figure 10 – Umpqua Holdings Asset Composition and Growth
-
1,000,000
2,000,000
3,000,000
4,000,000
5,000,000
6,000,000
1999
2000
2001
2002
2003
2004
($000)
Assets
Earning assets
Loans
Deposits
Source: 2004 Umpqua Holdings Annual Report
Source: 2004 Umpqua Holdings Annual Report
Branch architecture is perhaps the least innovative of these solutions in that internet cafés and the de-
emphasis of teller stations have been used in the industry since at least the late nineties
22
. What is
different about what Umpqua has done with their space is that it is open for community events
during/after hours. The bank hosts home association meetings, knitting clubs, art exhibits and movie-
nights for the local community. The company has even installed a listening station with local music, as
well as branded merchandise on displays at their flagship Pearl branch. Umpqua’s strategy is to reach
out to customers that would otherwise have little reason to enter the bank.
23
Though an imitable model,
Umpqua Bank is making a bold statement and taking a comprehensive approach to its branding and
service by integrating its culture into its marketing strategy.
Sales and Service
Service is a critical differentiator for a community bank because most financial products are
homogeneous. It therefore makes sense that Umpqua has made unsurpassed service a key strategy
company-wide. Umpqua established a Return on Quality (ROQ) program towards this goal. The ROQ
program evaluates sales and service on a variety of dimensions and includes mystery shoppers and
customer surveys to gauge customers’ satisfaction with the shopping experience. These techniques are
integral to the bank’s retail strategy, and are widely employed by consumer retailers to gauge service
effectiveness. Much like Umpqua’s efforts at creating a community atmosphere, this strategy could be
easily replicated by other banks. Here Umpqua is afforded at least a temporary advantage, as none of
its competitors employ such a strategy.
Information Technology and Human Resources
Human Resource Development (HR) and Information Technology (IT) are two underlying segments of
Umpqua’s value chain that support all their other lines of business. For its part, IT’s strategic relevance
is limited by the simple fact that most
banking platforms are acquired from
third-parties due to their huge
development and support costs. These
platforms tend to constrain service
because they are geared more towards
security and stability—for obvious
reasons—than flexibility. IT is therefore
generally a threat to Umpqua’s quest to
provide innovative banking solutions.
HR, on the other hand, is a strategic
asset that Umpqua continually employs
to support their unique service culture.
Given that over three-fourths of their
asset growth from 1999 to 2003 has
come from acquisitions
(Figures 10 and
11)
, HR’s efforts to maintain Umpqua’s
cultural standards for service have been
vital. HR has successfully managed the
organization’s culture via a variety of
methods: a balanced, organization-wide
rewards system, ongoing employee
development/training programs, astute
hiring practices, and integration into the
mergers and acquisitions process.
22
Bay Federal Credit Union opened similar “tech-flavored” Scotts Valley and River Street branches in Santa Cruz
County in 1997 and 1999.
23
Levis, Kay
Page 12 of 21
Two aspects of HR’s rewards system are worth noting. The first is that 3 of its 6 variables measure
qualitative, rather than quantitative measures. This explicitly demonstrates the value that management
places on service
24
. A second aspect is the fact that rewards are distributed on both an individual and
group level. This rewards outstanding employees, but also encourages them to support team members
that may not be as successful.
The aim of HR employee development/training is to develop a “Universal Associate” whose level of
knowledge and dedication to service is standardized across the organization. Umpqua’s service culture
is inculcated into employees within their first six months at a series of courses at the “World’s Greatest
Bank University” in Roseburg. HR reinforces this with a policy of job rotation among frontline staff,
which disperses knowledge and best practices throughout the organization.
Yet another way in which Umpqua’s HR function protects their service culture is by engineering hiring
practices in support of it. HR mandates that stores assist in selection of prospective employees.
Branch managers have ultimate hiring authority, but are required to submit their choices to a series of
peer-to-peer interviews. This is a labor-intensive hiring process, but it helps ensure that candidates are
culturally well-suited to the organization.
It is also important to recognize the wide-ranging effects of Umpqua’s integration of HR into the core of
their mergers and acquisitions (M&A) process
25
. The bank takes an opportunistic approach to M&A
that privileges cultural fit over other considerations
26
. Evidence of this can be seen in the fact that
Umpqua has turned down three times as many mergers as it has approved. This strategy of organic
growth has allowed the bank to expand without eroding their service culture.
Investment Recommendation
Umpqua has leveraged their core competencies in marketing, sales and also cultural management to
pursue strategies of organic growth, unsurpassed service and community involvement. What is
particularly interesting about the company is the ways in which even imitable competencies are
buttressed by others such that the whole is greater—and more unique—than the sum of its parts.
Perhaps the most vital competency for Umpqua’s continued success is their aptitude for cultural
management, which supports their efforts in marketing, sales, organic growth, customer service and
community involvement. This competence has underpinned the organization’s rapid and successful
expansion into new markets while maintaining its community focus, which is incredibly rare and
valuable.
In addition to strong core competencies that
the organization leverages well to pursue its
strategies, Umpqua Bank has a solid financial
backbone, as can be compared in Tables 5, 6,
7 and 8. Umpqua Bank has a yield on earning
assets of 6.18% and a net interest margin of
5.14%, higher than its larger competitors and
some of its smaller competitors. Its Return on
Assets is 1.36%, close to the industry average.
Umpqua Bank is still folding recently acquired
branches into its new retail concept network
and as this happens it is likely this percentage
24
Rewards systems in the banking industry are almost exclusively based on sales, whose effects are more direct
and therefore easier to measure.
25
Baker, Barbara, Senior Vice President of Cultural Enhancement and Member of the Executive Committee, was
hired in part for her experience in M&A.
26
Sullivan, Dan
Figure 12: Stock price
SOURCE:
http://finance.yahoo.com/q/bc?s=UMPQ&t=5y&l=off&z=m&q=l&c=
Page 13 of 21
will go up. Historically Umpqua Bank has had quite a boost with each merger and acquisition it has
undertaken, increasing earning assets, loans and deposits proportionately, with a slightly higher growth
in overall assets at an average annual growth rate of 36% compounded annually. Likewise its net
interest income has grown at an average 32% per year compounded annually over the last five years.
Spikes are seen in years in which mergers have taken place, with average organic growth averaging
15% over the last five years. Investors are favoring Umpqua Bank stock, showing a steady growth trend
as can be seen in Figure 12. Umpqua Bank's stock has a year to date return of 4.02%, while the rest of
the diversified banking industry is lagging at a negative 5.3% market return year to date, a testament to
Umpqua’s strong position.
The challenge will be for management to resist the temptation to expand faster and further than their
infrastructure for cultural management can handle. This may be increasingly difficult to do, given the
pressures upon executives to deliver short-term profit to shareholders. Another concern is that IT may
constrain Umpqua’s ability to innovate. The significance of these constraints should not be
underestimated, although we still contend that the company is strategically well-positioned to succeed.
The competitive advantage that their cultural acumen affords the company makes Umpqua an attractive
prospect for investment.
Page 14 of 21
Appendix A:Tables and Figures
Table 1: Bank Market Share Data (1 of 3)
Outside of Market
Inside of Market
State
No. of
Deposits
No. of
Deposits
Market
Institution Name
(as of 6/30/2005)
(Hqtrd)
Offices
($000)
Offices
($000)
Share
Asset
Concentration
27
Type
28
U S Bank National Assn
OH
2,282
107,966,057
204
9,472,771
15.83% general
National
Bank of America NA
NC
5,782
568,211,767
127
8,750,379
14.62% commercial
National
Wells Fargo Bank NA
SD
2,978
247,588,723
163
7,912,277
13.22% commercial
National
Washington Mutual Bank
CA
1,837
177,816,814
130
7,896,885
13.20% mortgage
National
Umpqua Bank
OR
1
14,304
92
3,967,406
6.63% commercial Regional
Keybank National Assn
OH
891
49,382,441
65
2,945,429
4.92% commercial
National
World Savings Bank FSB
CA
275
56,870,183
7
1,534,330
2.56% mortgage
National
West Coast Bank
OR
13
367,991
42
1,199,233
2.00% commercial
Regional
Tri Counties Bank
CA
20
397,687
29
1,004,973
1.68% commercial
Regional
Bank of the West
CA
440
24,483,733
36
946,616
1.58% general
Regional
Bank of the Cascades
OR
1
42,618
19
924,829
1.55% commercial
Community
Sterling Savings Bank
WA
103
3,411,409
36
809,572
1.35% commercial
Regional
Washington FS&LA
WA
99
4,112,614
22
703,952
1.18% mortgage
Regional
Premier West Bank
OR
9
102,860
23
631,316
1.06% commercial
Community
North Valley Bank
CA
1
31,620
19
604,780
1.01% commercial
Community
Svg Bank of Mendocino County
CA
1
34,229
8
575,444
0.96% commercial
Community
First Independent Bank
WA
5
43,677
20
560,518
0.94% commercial
Community
Libertybank
OR
0
0
13
522,547
0.87% commercial
Community
Placer Sierra Bank
CA
28
1,077,448
13
509,823
0.85% commercial
Regional
Riverview Community Bank
WA
4
102,920
12
481,417
0.80% commercial
Community
Pacific Continental Bank
OR
0
0
11
451,454
0.75% commercial
Community
Westamerica Bank
CA
76
3,416,468
13
424,609
0.71% commercial
Regional
Butte Community Bank
CA
0
0
12
419,412
0.70% commercial
Community
Vintage Bank
CA
4
130,636
6
383,935
0.64% commercial
Community
Union Bank of California NA
CA
330
40,727,005
7
378,055
0.63% commercial
Regional
Redding Bank of Commerce
CA
1
26,670
3
344,088
0.58% commercial
Community
First Northern Bank of Dixon
CA
7
235,482
8
323,765
0.54% commercial
Community
Evergreen FS&LA
OR
0
0
7
282,975
0.47% commercial
Community
Citizens Bank
OR
2
14,039
9
238,338
0.40% commercial
Community
Siuslaw Bank
OR
0
0
10
229,417
0.38% commercial
Community
Bank of Clark County
WA
0
0
1
213,615
0.36% commercial
Community
Citibank West FSB
CA
389
38,187,767
4
195,463
0.33% mortgage
National
Pioneer Trust Bank NA
OR
0
0
2
187,035
0.31% commercial
Community
27
Commercial Lending Specialization – Institutions with commercial and industrial loans, plus real estate construction and
development loans, plus loans secured by commercial real estate properties in excess of 25 percent of total assets.
Mortgage Lending Specialization – Institutions with residential mortgage loans, plus mortgage-backed securities, in excess of
50 percent of total assets.
Agricultural Specialization – Banks with agricultural production loans plus real estate loans secured by farmland in excess of 25
percent of total loans and leases.
General – Institutions that do not meet any of the definitions above, they have significant lending activity with no identified asset
concentrations.
28
Types: Community Banks (generally assets up to $750M - $1B)
Regional Banks (localized, assets generally > $1B)
National Banks (many states, assets generally > $40B)
Page 15 of 21
Table 1: Bank Market Share Data (2 of 3)
Outside of Market
Inside of Market
State
No. of
Deposits
No. of
Deposits
Market
Institution Name
(as of 6/30/2005)
(Hqtrd)
Offices
($000)
Offices
($000)
Share
Asset
Concentration
Type
Columbia River Bank
OR
15
499,822
7
169,911
0.28% commercial
Community
Mbank
OR
0
0
5
169,479
0.28% commercial
Community
First Bank
MO
168
7,082,824
3
155,856
0.26% commercial
Regional
River City Bank
CA
7
492,707
6
152,947
0.26% commercial
Community
Mechanics Bank
CA
24
2,000,534
4
148,639
0.25% commercial
Regional
Home Valley Bank
OR
0
0
4
143,352
0.24% commercial
Community
Clackamas County Bank
OR
0
0
4
140,923
0.24% commercial
Community
Bank of Salem
OR
0
0
3
137,189
0.23% commercial
Community
Banner Bank
WA
53
2,059,100
3
131,729
0.22% commercial
Regional
Oregon Pacific Banking Co
OR
0
0
5
120,812
0.20% commercial
Community
South Valley Bank & Trust
OR
5
322,578
6
115,089
0.19% commercial
Community
Gold Country Bank NA
CA
0
0
5
114,694
0.19% agricultural
Community
Western Sierra National Bank
CA
9
375,854
3
113,046
0.19% commercial
Community
Five Star Bank
CA
1
79,587
1
106,756
0.18% commercial
Community
Columbia Community Bank
OR
0
0
4
106,115
0.18% commercial
Community
Homestreet Bank
WA
15
1,084,826
4
99,458
0.17% commercial
Regional
Bank of Willits
CA
0
0
2
95,089
0.16% general
Community
Albina Community Bank
OR
0
0
4
90,674
0.15% commercial
Community
Granite Community Bank N A
CA
0
0
2
89,195
0.15% commercial
Community
Auburn Community Bank
CA
0
0
3
88,330
0.15% commercial
Community
Mid-Valley Bank
OR
0
0
4
84,333
0.14% commercial
Community
Nvb Business Bank
CA
2
12,859
3
83,532
0.14% commercial
Community
Town Center Bank
OR
0
0
5
81,443
0.14% commercial
Community
American River Bank
CA
10
439,879
1
71,353
0.12% commercial
Community
Napa Community Bank
CA
0
0
1
66,987
0.11% commercial
Community
Scott Valley Bank
CA
8
240,030
3
65,895
0.11% commercial
Community
Downey Savings&Loan Assn FA
CA
170
11,051,558
2
62,271
0.10% mortgage
Regional
Oregon Coast Bank
OR
0
0
1
62,193
0.10% commercial
Community
Peoples Bank of Commerce
OR
0
0
1
59,825
0.10% commercial
Community
Silver Falls Bank
OR
0
0
2
57,931
0.10% commercial
Community
Redwood Capital Bank
CA
0
0
1
55,953
0.09%
commercial
Community
Pinnacle Bank
OR
0
0
1
50,465
0.08%
commercial
Community
Willamette Valley Bank
OR
0
0
2
49,504
0.08%
commercial
Community
Capital Pacific Bank
OR
0
0
1
44,140
0.07%
commercial
Community
Community First Bank
OR
2
69,327
3
42,471
0.07%
commercial
Community
Cowlitz Bank
WA
5
215,776
2
37,799
0.06%
commercial
Community
Plumas Bank
CA
10
358,200
3
35,818
0.06%
commercial
Community
Silicon Valley Bank
CA
4
4,353,955
1
34,368
0.06%
commercial
Community
Fireside Bank
CA
26
975,436
2
32,120
0.05%
consumer
Regional
California Savings Bank
CA
17
704,571
1
29,655
0.05%
commercial
Community
Summit Bank
OR
0
0
1
28,799
0.05%
commercial
Community
Century Bank
OR
0
0
1
26,723
0.04%
commercial
Community
Stockmans Bank
CA
3
266,414
1
26,256
0.04%
commercial
Community
U S Trust Co National Assn
CT
21
2,108,100
1
25,153
0.04%
general
National
Willamette Community Bank
OR
0
0
1
21,973
0.04%
commercial
Community
Page 16 of 21
Table 1: Bank Market Share Data (3 of 3)
Outside of Market
Inside of Market
State
No. of
Deposits
No. of
Deposits
