Understanding US Bancorp – 1993 10-K

By Taber Andrew Bain from Richmond, VA, USA (US Bank  Uploaded by xnatedawgx) [CC BY 2.0 (http://creativecommons.org/licenses/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) – http://www.bankregdata.com/allIEmet.asp?met=EFF

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%

[3] https://fred.stlouisfed.org/series/USNIM

1993 Q1 – 4.51%

1993 Q2 – 4.51%

1993 Q3 – 4.52%

1993 Q4 – 4.49%

[Disclosure]

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

[Disclaimer]

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

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