Month: July 2016

Understanding US Bancorp – 1993 10-K

By Taber Andrew Bain from Richmond, VA, USA (US Bank  Uploaded by xnatedawgx) [CC BY 2.0 (], via Wikimedia Commons

In 1993, First Bank (predecessor namesake to US Bancorp) had 181 banking locations and 24 non-banking offices in:

  • Minnesota (23% deposit share, rank #1)
  • Colorado (19% deposit share, rank #1)
  • Montana (14% deposit share, rank #1)
  • North Dakota (9% deposit share, rank #1)
  • South Dakota (5% deposit share, rank #2)
  • Wisconsin

Its Core Businesses are:

  • Retail and Community Banking (60.5% of Total Net Income from 56.12% in 1992)
  • Commercial Banking (28.1% of Total Net Income from 32.07% in 1992)
  • Trust and Investment (11.5% of Total Net Income from 11.81% in 1992)

What immediately stood out to me was the clarity of CEO John F. Grundhofer’s strategy, which  was to increase Market Share and Long Term Profitability through (in no particular order):

  • Growing Core Businesses
  • Being Disciplined in Cost Control
  • Being Disciplined in Asset Quality
  • Being Well-Capitalized
  • Being Conservative in Acquisitions Favorable in Location and Price

This seemed like taking a page from Wells Fargo’s playbook (simple banking, disciplined loan underwriting, low cost efficiency), and it’s not surprising consider John F. Grundhofer was Vice Chairman and Senior Executive Officer of Wells Fargo before being CEO of First Bank in 1990.

And taking a page from Wells Fargo’s low cost efficiency playbook really showed. In terms of Cost Control, John F. Grundhofer helped drive Cost Efficiency Ratio from nearly 80% (!!!) in 1989 to 59.8% by 1993 through:

  • Centralizing Bank Office
  • Standardizing Products
  • Investing in Technology
  • Re-Engineering Operations to Improve Productivity, Customer Service and Cross-Sell Ratio
  • Create Culture of Cost Control through Incentive System that Focuses on Relentless Cost Reduction, Strongly Encouraging Senior Management to Own 1x-5x Their Salary in Shares within 5 Years, and also Accountability of Expenses through Internal Fund Transfer Pricing System

The target set in 1993 was to reduce Cost Efficiency Ratio down to mid-50s within 2 years (1995) and eventually stay at low-50s. In comparison, 2015’s average Cost Efficiency Ratio of US Banks was 60.45% [1]. Overall, the Cost Efficiency Ratio of the different Core Businesses were:

In terms of Asset Quality, Non-Performing Assets was only 1.20% of Total Gross Loans. In comparison, 2015’s average Non-Performing Assets to Total Gross Loans of US Banks was 1.50% (as of 16th Jul 2016). To achieve this:

  • First Bank always evaluates its own credit risk through factors like evaluating composition of loan portfolio (as diversified as possible by industry classification, size and type of loan), level of allowance coverage, macroeconomic concerns (eg. level of debt in public / private sector), and effects of domestic / regional / international issues.
  • First Bank also manages credit through centralized credit policy and underwriting criteria whilst large loans or any loans that experience deterioration of credit quality is reviewed quarterly by management.
  • First Bank also has been decreasing exposure to Highly Leveraged Transactions (commercial loans involving buyout, recapitalization or acquisition of an existing business)

For Well-Capitalization, First Bank targeted and achieved Well-Capitalized status as defined by Federal Deposit Insurance Corporation of all bank subsidiaries [2]. It also had Provision for Credit Losses of 2.25%, 1.9x more than Non-Performing Assets to Total Gross Loans.

Combination of Cost Efficiency, Asset Quality and being Well-Capitalized meant that First Bank’s Net Interest Margin was 5.07%. In comparison, 1993’s average Net Interest Margin of US Banks was 4.51% [3].  At the same time, these factors helped First Bank improve its credit rating (Moody = A3 -> A2, S&P = A- -> A, Thomson Bankwatch (Fitch) = A+).

[Reference / Footnotes]

[1] (As of 16th July 2016) –

Couldn’t find data from 1992, so used 2015 as comparison

2015Q1 – 60.97%

2015 Q2 – 59.77%

2015 Q3 – 60.80%

2015 Q4 – 60.27%

[2] FDIC Well-Capitalization definition is:

  • Tier 1 Capital Ratio – >=6%
  • Total Risk-Based Capital Ratio – >=10%
  • Leverage Ratio – >=5%


1993 Q1 – 4.51%

1993 Q2 – 4.51%

1993 Q3 – 4.52%

1993 Q4 – 4.49%


I currently own US Bancorp (USB) stocks, and intend to keep increasing my position size of USB.


Not advice. No offer. Do not rely. May lose value. Risky. Conflicts hidden/obscured. (Borrowed from Terrence Yang‘s Disclaimer on Quora)


Catching Up with Friends Project

By NASA/JPL-Caltech/University of Arizona (NASA Image of the Day) [Public domain], via Wikimedia Commons

So I’ve actually been on a secret project for a few weeks now where I’ve been filtering out my friends based on two criteria:

  • Is that person willing to meet up with me once a year if we’re geographically nearby?
  • Am I willing to meet up with that person once a year if we’re geographically nearby?

If any “friend” didn’t meet either criteria, I’d unfriend on Facebook.

The objective was to leave behind only real friends so that anytime I go through my Facebook timeline, every update was related to someone I really cared about.

This to me is the purpose of social media, which is a medium to let me better keep in touch with my friends.

And the learnings from this project have been quite profound:

  • I’m surprised by how many real friends I still have
    • I was half expecting my friends number to drop from 550+ to around 100-200, but right now I’ve drop to 361 (as of Jul 16th 2016) and the pace of unfriending has dropped significantly
  • It’s been a quite heart breaking experience too
    • There were quite a lot of friends when I glanced at their names and realized that we were quite tight before. Now quite a few of them had become quite distant due to my procrastination. Newton’s law of an object in motion stays in motion really applies in this situation when you the word replace “object” with “relationship”.
  • “If it’s to be, it’s up to me”
    • You can really filter out who really gives a damn about your relationship with them when you try to get an appointment with them. People who really want to see me maybe too busy at this moment of time, but they would always proactively propose future dates that might work out. People who don’t want to see you would either not reply you or just say something to the extent of “oh I’m busy”
  • I have OCD with people replying me within 48 hours
    • I’m not sure if it’s because I’m really self centered (people should respond to me!), I’m impatient (I want things to happen now!) or my professional habits spilling over to my personal life (48 hours is standard business etiquette! Oh wait, this is a personal interaction…), but it REALLY GETS INTO my nerves when people don’t reply me within 48 hours (actually I already start getting irritated if it doesn’t happen within 24 hours…). I’m really unsure if it’s just good etiquette to reply people within 48 hours unless your physically unable (dead, seriously ill, no internet connection etc.) or if I’m just being a dick (could simply be that I’m just a dick). But anyways, I do see a strong correlation with unfriending and people not replying me within 48 hours.
  • Many friends are actually going through tough times
    • But at the same time, it’s hard to discern if someone’s not replying you within 48 hours because they are physically unable, or if they’re going through a tough time. One thing that surprised me most was how many of my friends were going through tough times simultaneously. If it weren’t for me reaching out because of this secret project and really following up on people who weren’t responding, I really wonder how many friends have I overlooked or ignored when I could’ve lent emotional support? Or to put it more bluntly, how much of a friend am I?
  • I find myself to be very boring
    • Like boring for other people. I love investing and anything related to investing (psychology, history, sociology, economics, finance, engineering, maths etc.), and I’m always reading, thinking or learning about it, so it’s really exciting for me to talk about these topics, but I sometimes catch myself just always talking about the same topics over and over again. I had deja vu just now when a friend of mine kept talking about the same topic over and over again on the phone just now, which absolutely drove me a bit nuts. I’m surprised how many of my friends haven’t flipped their tables on me yet (Or maybe they have psychologically and are proactively avoiding me, which probably is why people don’t reply me within 48 hours :/).
  • I burn people out, like literally
    • I sometimes question if I’m too hardcore when it comes to relationships. I take every conversation quite seriously (unless it’s just a joke), so I’m always diligently replying or following up and always putting serious thought behind what I’m about to say. One example of burning someone out with my intensity was the girl I’ve been seeing, where she told me that she really tried to adopt this intense method of communication with me but ended up just burning out because of me and along with other things going on in her life. Thankfully we’re still friends, but any progression beyond friendship is definitely out of play.
  • I have a hard time being very close to people
    • Follow-up to my previous point, my intensity either makes people burn out or make people feel uncomfortable. Either way, reflecting upon my whole life so far, I’ve realized I’ve never had a “best friend” by conventional definition since I would always never hang out with the same people out of school / work. I’ve always just been too intense, which is why I end up needing personal time and my friends ending up burnt out.
  • It really sucks when people don’t reciprocate
    • This should’ve been a given, considering my aforementioned point, but it still stung. Each time. I still remember today where there was a friend who was going to Bangkok and very happily shared his / her boarding pass on Facebook. Seeing that the barcodes were explicitly shown (it actually contains a lot of information about you), I gently reminded him / her about the security risk of doing so and wished him / her a safe trip. He / she promptly covered up the barcodes with images and deleted my comment. I promptly unfriended him / her as well. Although this was an extreme case (1st case where not responding = unfriend), I just got pissed off how my suggestion was adopted, discarded and not thanked for.
  • It’s starting to get hard to keep in touch with people
    • Basically for any meet up I’ve had with friends in past few weeks, I’ve basically scheduled to meet up on a more regular basis. The good side is it meant I was consistently seeing friends I wanted to see, but the downside is that time and energy is just not on my side. As much as I love to socialize, I’m an introvert by nature, so I realized that at most I can only have 3 appointments every week lest I start burning out. And if I have 361 friends (maybe around 150 after taking out colleagues whom I see everyday and people who aren’t geographically nearby) and there’s 52 weeks in a year and my objective is to see my friends that are geographically close at least once a year, then my weekends have to be packed full since I will be overlapping with existing recurring appointments whom I would see more than once per year. So far I’m managing, but I need to really figure out a system to deal with this
  • Starting to compete with life’s other priorities
    • Related to the above point, but in terms of time and energy, being a good friend has meant that it’s been competing with health and work and giving up on family. Spending so much time going through annual reports and 10-Ks as part of my investing hobby is almost like a second job in a sense, which leaves so much less time to cultivate other interests or organize / join socializing activities. Also every time I have an appointment during the week, it absolutely wrecks that night’s sleep and possibly 2-3 more days of sleep as I just always get sleep deprived on the same night due to appointments always lasting until 9-10 pm. It starts making me question where I want my priorities to be.

Questions on US Bancorp

By David Shankbone (Own work) [CC BY 3.0 (], via Wikimedia Commons

In my last post I mentioned that US Bancorp is arguably the best run US bank in terms of metrics, beating the golden standard Wells Fargo in ROA, ROE, and Efficiency Ratio.

What has eluded my comprehension is why US Bancorp can have such a low cost efficiency ratio.

Fitch thinks that US Bancorps’ low cost efficiency stems from two sources:

  • Low-cost deposit base
  • Corporate culture focused on operating expense management

The natural follow-up questions that confuse me right now are:

  • Why is US Bancorp’s deposit base lower cost than its peers?
  • What does it mean to have a corporate culture focused on operating expense management?

Let’s start off with my first confusion, which is “Why is US Bancorp’s deposit base lower cost than its peers?”

It’s definitely not because of having deposits making up a huge part of total assets, since for the top 20 banks in asset size, the average deposit to total asset % is 73.2% compared to US Bancorp’s 74.5% [1].

It’s not really because of size because all of the top 20 banks in asset size have past the threshold of $1 billion in assets, which marks the threshold where anymore assets doesn’t really contribute to cost efficiency.

It’s also not really unit-level economy of scale (which is supposedly another aspect that drives higher operational efficiency). There does seem to be a correlation (but not very strong) between deposits / branch versus cost efficiency (as seen in graph below) when looking at the top 20 banks in # of bank branches, but considering there are a total of 10 banks with higher deposits / branch but still possessing higher cost efficiency ratio than US Bancorp in this group [2], unit-level economy of scale isn’t a sufficient explanation.

Correlation Between Deposit per Branch to Cost Efficiency.png

What’s left is the illusive concept of culture being the source of lower cost deposit base, which I find to be extremely hard to judge, which is why I ask the question “What does it mean to have a corporate culture focused on operating expense management?”

And why is culture hard to judge? Well I’ve went through US Bancorp’s annual reports from 2000-2015, and all of them describe how cost efficient US Bancorp is and how cost efficiency is a key focus for US Bancorp, but none of the annual reports delve into details of how they do it.

The closest thing I have to gauging US Bancorp’s culture of focusing on operating expense management is US Bancorp:

But I don’t know enough about other banks to know if this already constitutes a culture of focusing on operating expense management that’s much more superior to peers, because in my mind, what US Bancorp can do with the aforementioned initiatives, its peers can also copy. The questions thus becomes:

  • Are US Bancorp’s peers cost cutting in the same way, same degree and same effectiveness?
  • If not, what’s stopping US Bancorp’s peers from following suit?


[1] As of Jul 9th 2016 ( + (

Ranking by Asset Size – Bank – Cost Efficiency Ratio (%)

  1. JPMorgan Chase – 62.10
  2. Wells Fargo – 55.39
  3. Bank of America – 59.68
  4. Citigroup – 55.68
  5. U.S. Bancorp – 54.32
  6. Capital One Financial – 57.63
  7. PNC Bank – 65.15
  8. Bank of New York Mellon – 70.32
  9. Toronto-Dominion Bank – 72.26
  10. State Street Bank – 80.08
  11. Branch Banking and Trust – 61.60
  12. HSBC Holdings – 71.15
  13. SunTrust Bank – 59.29
  14. Morgan Stanley – 21.45
  15. Charles Schwab Bank – 16.98
  16. Citizens Financial Group – 65.15
  17. Goldman Sachs – 33.14
  18. Fifth Third Bank – 59.47
  19. M&T Bank Corp – 58.63
  20. Regions Bank – 60.26

Above Average Cost Efficient Bank- Deposit % of Total Assets – Deposits ($) / Assets ($)

  • Wells Fargo – (75.87%) – 1,285,439,000,000 / 1,694,163,387,000
  • Citigroup – (70.53%) – 947,446,000,000 / 1,343,346,509,000
  • U.S. Bancorp – (74.48%) – 315,187,684,000 / 423,203,763,000
  • Morgan Stanley -(66.48%) – 119,548,000,000 / 179,838,000,000
  • Charles Schwab Bank – (92.32%) – 135,753,000,000 / 147,039,000,000
  • Citizens Financial Group – (52.67%) – 77,780,394,000 / 145,687,025,000
  • Goldman Sachs – (64.71%) – 92,800,000,000 / 143,403,000,000

Below Average Cost Efficient Bank- Deposit % of Total Assets – Deposits ($) / Assets ($)

  • JPMorgan Chase – (64.47%) – 1,391,743,000,000 / 2,158,702,851,000
  • Bank of America – (77.39%) – 1,297,680,000,000 / 1,676,743,000,000
  • Capital One Financial – (56.33%) – 208,821,499,000 / 370,739,538,000
  • PNC Bank – (72.46%) – 254,089,464,000 / 350,643,006,000
  • Bank of New York Mellon – (77.03%) – 249,861,000,000 / 324,382,710,000
  • Toronto – Dominion Bank – (78.13%) – 213,629,023,000 / 273,414,002,000
  • State Street Bank – (79.77%) – 190,872,030,000 / 239,277,838,000
  • Branch Banking and Trust – (76.40%) – 158,050,500,000 / 206,874,891,000
  • HSBC Holdings – (72.84%) – 144,846,147,000 / 198,852,159,000
  • SunTrust Bank – (81.53%) – 154,833,252,000 / 189,907,589,000
  • Fifth Third Bank – (75.58%) – 105,781,664,000 / 139,966,392,000
  • M&T Banking Corp – (75.40%) – 95,316,346,000 / 126,407,811,000
  • Regions Bank – (79.95%) – 99,645,528,000 / 124,637,433,000

[2] As of Jul 9th 2016 ( + ( + (

Ranking by # of Branches – Bank – Cost Efficiency Ratio (%) – Deposit $ / Branch

  1. Wells Fargo – 55.39 – 205,440,147
  2. JPMorgan Chase – 62.10 – 251,217,148
  3. Bank of America – 59.68 – 270,350,000
  4. U.S. Bancorp – 54.32 – 97,672,043
  5. PNC Bank – 65.15 – 91,202,248
  6. Branch Banking and Trust – 61.60 – 69,198,993
  7. Regions Bank – 60.26 – 60,870,817
  8. SunTrust Bank – 59.29 – 105,257,139
  9. Toronto-Dominion Bank – 72.26 – 160,865,228
  10. Fifth Third Bank – 59.47 – 82,706,539
  11. KeyBank – 63.74 – 75,790,871
  12. The Huntington National Bank – 61.50 – 60,283,489
  13. M&T Bank Corp – 58.63 – 110,192,308
  14. Citizens Financial Group – 65.15 – 90,653,140
  15. Capital One Financial – 57.63 – 252,810,531
  16. Citigroup – 55.68 – 1,174,034,696
  17. Woodforest National Bank – N/A – 5,886,650
  18. Santander Bank, N.A – 88.47 – 91,801,086
  19. Compass Bank – 72.06 – 102,387,717
  20. BMO Harris Bank – 72.74 – 127,469,966


I currently own US Bancorp (USB) stocks, and intend to keep increasing my position size of USB.


Not advice. No offer. Do not rely. May lose value. Risky. Conflicts hidden/obscured. (Borrowed from Terrence Yang‘s Disclaimer on Quora)

Questions About Banks

By Noël Zia Lee (Flickr: Big Pink) [CC BY 2.0 (], via Wikimedia Commons

There’s no answers or explanations, just a few questions that I haven’t finished thinking through:

  • What is it about Wells Fargo that Warren Buffett and Charlie Munger love so much about than US Bancorp? (Wells Fargo have much bigger position sizes than US Bancorp for both their portfolios (As of Jul 6th 2016, Warren Buffett – 18.04% Wells Fargo vs 2.69% US Bancorp; Charlie Munger – 67.4% Wells Fargo vs 4.98% US Bancorp) yet US Bancorp beats Wells Fargo in ROA, ROE, and Efficiency Ratio)? Isn’t US Bancorp a better run bank in general? Or is purely a valuation matter?
  • What does Warren Buffett and Charlie Munger’s position sizing in respective portfolios of US Bancorp reveal / hint to anyone’s appropriate position sizing for US Bancorp in their portfolio (eg. Is it a 90% position size stock? Is it a 33% position size stock? Or is it just one of many stocks like 5-10% position size?)
  • How do I know if a bank I now own stocks on is no longer as prudent as it should be? At what moment do you go “screw it, I’m leaving this stock”? (Wells Fargo is now entering Investment Banking, an area that’s fraught with much bigger dangers than just sticking to simple retail banking)
  • How strong are the moats of Canadian and Australian Big Banks? The Big 6 Banks in Canada have similar cost efficiency ratio (57.9%) as well run US banks like Wells Fargo (52.6%) and US Bancorp (52.1%), while the Big 4 Banks in Australia have an even more ridiculous low cost efficiency ratio of 45.9%. The questions I have in mind are:
    • Why are these banks so cost efficient on aggregate? (US Banks’ cost efficiency on aggregate is 70.8%…)
    • What’s the differentiation between the Big 6 in Canada and Big 4 in Australia? (I see not much)
    • How are the Big 6 and Big 4 able to keep a highly profitable oligopoly when differentiation is low between the banks? (What’s stopping them from one day going nuts and price war the crap out of each other?)
    • How well would the Big 6 and Big 4 fare if politicians suddenly changed their minds and banned all regulations that currently favor such domestic bank protectionism?
    • Is a moat that has a significant chunk of it upheld just because of favorable regulations really a moat? Or does the catastrophe risk inherent in it make it a great pillar to have but not something to entirely rely on?


I currently own US Bancorp (USB) stocks, and intend to keep increasing my position size of USB.


Not advice. No offer. Do not rely. May lose value. Risky. Conflicts hidden/obscured. (Borrowed from Terrence Yang‘s Disclaimer on Quora)

Treat Yourself As a US Technology Company

By Heiti Paves (Own work) [CC BY-SA 3.0 (], via Wikimedia Commons

Going into the US stock markets on Jun 24th after Brexit was confirmed made me confront the issue of how much cash to retain for emergency reserves, which then determines how much cash I can deploy to take advantage of the correction.

And I realized as a person who’s income is mainly from one source (employment) and would be completely obliterated in the event of a lay-off, I displayed characteristics like a typical US technology company – Once a disruption happens (technological disruption such as digital cameras for technology companies like Kodak, or economic recession after 1929’s Black Thursday that had 19% unemployment for people like me), income sharply drops to zero.

One could even argue, anyone who relies heavily on employment as their source of income displays characteristics of a typical US technology company on steroids. Any technology company that gets disrupted has their income sharply drop to zero, but it doesn’t drop to zero over night. For people like me, the income goes to zero over night once I’m laid off and receive my severance payment.

And that’s terrifying. Conventional advice for emergency reserves has always been around 6 months of cash. Let’s be generous and double it, but for the emergency reserves to work it assumes you can find a job within 12 months. Under normal economic conditions, the search for a new job could easily take 24 months, let alone during bad economic conditions where the economy was the reason that you got laid off and the reason why the job search gets prolonged.

So if the top 10 cash hoarding companies (IT and pharmaceuticals) have an average current ratio of 3[1] (which means if they had zero income they could survive for 3 years), and they have multiple lines of products / services that reduce the probability of all sources of income going to zero, shouldn’t employees like me who rely almost exclusively on employment for my source of income hold even more cash?

After all,wasn’t the book name of Intel’s Co-Founders Andrew Grove called “Only the Paranoid Survive“?


[1] As of Jul 1st 2016, the current ratio of the following companies:

Apple – 1.28

Microsoft – 2.90

Alphabet – 5.14

Cisco – 3.27

Oracle – 3.74

Pfizer – 1.44

Johnson & Johnson – 2.83

Amgen – 4.95

Intel – 1.56

Qualcomm – 2.87