How 1 Regional Bank Crushed Its Competitors

With earnings season under way, US Bancorp (NYSE: USB  ) , PNC (NYSE: PNC  ) , and Regions Financial (NYSE: RF  )  have all announced second-quarter results. A dive through the earnings reveals one way in which Warren Buffett favorite US Bancorp once again crushed its peers.

Source: Flickr / taberandrew.

The impressive business
Regional banks -- or super-regionals, like the three banks I've mentioned here -- are often less complex institutions than the biggest banks are. Principally, they make their money by issuing loans to individuals through their consumer operations and to companies in the commercial operations.

While that's a bit of a simple overview -- there are, of course, other avenues of income for the banks -- it still provides a helpful bit of context to help gauge the results of the banks against one another. And relative to its peers, the commercial banking operations of US Bancorp delivered impressive results over the past year.

Substantial growth
One of the first things that caught my attention from the commercial operations of US Bancorp relative to peers PNC and Regions Financial was the sizable growth in its loan portfolio over the past year:


Source: Company investor relations.

US Bancorp nearly doubled the growth rate of PNC, and in total it added more commercial loans than both PNC and Regions Financial combined.

Source: Company investor relations.

While it must be noted this could partially be attributable to its charging a lower rate than both PNC and Regions Financial do (see the chart to the right), that may not necessarily be a bad thing.

First, it could indicate that US Bancorp is dealing with less risky companies that deserve a lower rate because they have greater creditworthiness. Lower risk to the bank indicates lower risk to the shareholders.

Although it's too early to tell the risk of loans issued -- remember, as Buffett likes to say, "You only learn who has been swimming naked when the tide goes out" -- the long history of conservative management and success at US Bancorp is a reason to not be concerned.

Second, with all the competition in the banking industry, it may also be the case that US Bancorp intentionally offered loans at rates lower than its competitors -- like PNC and Regions Financial -- in an effort to draw in more business. While this may be a short-term limitation to its profits, it may also lead to much greater success in the future as it draws in new clients.

All of this is to say that while the low rate presents lessened short-term income possibilities, it could ultimately lead to less risk and higher returns in the long run.

The key takeaway
When US Bancorp CEO Richard Davis spoke to the impressive commercial loan growth in the earnings announcement, he said it "highlights our company's ability to deepen and grow customer relationships, as well as gain new customers and market share."

At times we can think banks like US Bancorp lack possible opportunities for growth, but this is one clear example of how there could be massive potential for expansion ahead of it.

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