Community Banks: Darkhorse Competitors to Super-Regional and National Banks
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A virus of acquisitions has enabled national and super-regional banks to bulk up over the last decade. Their smaller cousins — community banks — are often dismissed as warehouses for customer deposits and little more. Charlie Perer points out that when community banks acquire some some specialty lending platforms and pair them with deep hometown relationships, they can rival the big boys.
Community banks are getting lost in the national conversation, and that is just fine with them. The spotlight falls on the national banks vying for market share and the expanding super-regional banks. Both constituencies are overlooking what is becoming fierce competition from burgeoning community banks, which are strong, have deep roots in their respective markets and are growing.
Super-regional banks have garnered much attention over the past 10 years given their ambitious plans to grow, consolidate acquisitions and provide national platforms rivaling the nation’s leading banks. Leading regionals include BB&T and M&T on the East Coast; Fifth Third, U.S. Bank, Key Bank and BMO in the Midwest; Regions, SunTrust, Texas Capital Bank and First Tennessee in the South and Comerica, Banc of California, East West and Union Bank in the West. These banks share strong products, platforms and scale that can rival the leading national banks in their respective regions. To that end, many of these banks have succeeded wildly and, in doing so, have set a good example for the up-and-coming community banks that strive for the community experience and decision-making process but also deliver a compelling platform.
Not Just for Deposits
Community banks have long been thought of as just depositary havens with limited infrastructure and lending capabilities. They would amass enough assets (mostly real estate-related) to be an attractive acquisition candidate but, in the general view, that was about it. This is still the case for truly small, localized banks, but over the past decade, the bigger banks took note of what super regionals were doing in terms of products and infrastructure and began embarking on a new strategy.
The ambitious community bank strategy has changed to retain localized relationships and decision-making, which, make no mistake, is a massive competitive advantage. The next goal is to provide a real platform — ABL, factoring, cash flow, C&I loans or other products. What big banks provide in platform, product breadth, capital and global capabilities, they lack when it comes to serving lower middle market business or businesses that have strong community roots.
Business owners and CFOs often refer to the big bank methodology as the “Wizard of Oz” phenomenon — they don’t know who makes the decisions that control their fate. After applying for financing, they only receive an eponymous message that the credit committee made a decision, and there is no changing anyone’s mind. The client could be in one city and a credit committee could be comprised of national executives in another. Community banks typically pride themselves on transparency and strong relationships with their borrowers.
Community banks are truly tied to their respective communities. Outside the top 10 or so metropolitan areas, national banks will go through stages of being aggressive and then pulling back in any given market. Community banks, on the other hand, have a track record of supporting their clients in the long run. They fully understand the market cycle of big banks and focus on the benefit of personally knowing their customers, enabling them to have lasting relationships. Senior community executives constantly reinforce the symbiotic ties to their communities.
National and super-regional banks find it difficult to compete with a business owner’s psychological desire to have a relationship with the key decision makers who live in the same city. Community banks have figured out they need to invest in products and platforms to compete with the super-regional and national banks. Most sizeable community banks have closely studied the super regionals’ strategy of acquiring or building ABL and factoring groups, investing in capital markets and embracing partnerships with private equity groups. This ultimately makes sense. Why lose a customer because a financial buyer might be in the mix? After all, the clients will often remain with the private equity investor with an equity stake after the transaction closes, so the continued relationship is paramount.
Several community banks are either dominant market leaders or starting to morph into super regionals via expansion and acquisitions. This is not meant to be a definitive list, but rather illustrative of a select few.
Community Bank Standouts
Wintrust Bank in Chicago is a sterling example of a $30 billion community banking powerhouse that invested in products and infrastructure to compete in one the most competitive banking markets in the country. Unlike most national U.S. banks, Wintrust’s business strategy is to retain the identities of the community banks it acquires rather than rebranding them. It currently owns 15 charters comprised of approximately 70 local brands, which maintain local account officers and distinct local branding. Behind these empowered front-line executives lies an experienced ABL platform that currently has several billion in commitments. This unique structure enables the end-client to maintain the community experience while obtaining the product breadth of a national platform.
Western Alliance Bank, headquartered in Arizona, employs a very different tactic. It acquired market-leading banks — Alliance Bank of Arizona, Bank of Nevada, Bridge Bank and Torrey Pines Bank — in the contiguous states of Arizona, Nevada and California. These banks operate autonomously in their respective regions, but Western Alliance has strongly invested in products and professionals. Alliance Bank provides full-service banking but also is expanding its private equity sponsor-backed business as a way to diversify from real estate and entrepreneur-owned businesses. Bridge Bank has a technology and capital finance group to ensure it can service all constituencies in California. The teams from both Alliance and Bridge Bank are first-rate, with many Bridge Bank folks joining from Silicon Valley Bank and many Alliance Bank folks joining from BMO.
Pacific Western Bank is similar to Western Alliance in that a community banking powerhouse acquired a seminal technology bank, Square 1, for its high level of deposits and exposure to tech companies. Pacific Western also acquired Capital Source to provide traditional asset-based lending. Historically speaking, community banks would not have the appetite to expand geographic reach or products and services outside of a core local market. These acquisitions have been truly seminal as they transformed community banks into nationally recognized platforms with two enviable assets in Square 1 and CapitalSource. The human capital that came with these acquisitions is second-to-none.
Columbia Bank in Washington is approaching $15 billion in assets and is the largest community bank in Washington state. Columbia has unique industry breadth given its range of industries, such as technology, agriculture and aerospace, among others. Columbia provides strong levels of service by understanding the industries that comprise its customers. It also has its own SBIC fund to provide deserving clients with mezzanine capital and a high-quality capital markets desk to provide financing for large scale projects in cable/media and aerospace.
UMB Bank in Kansas City is a $20 billion community banking powerhouse that continues to expand. UMB provides a great example of a community bank starting to build regional capabilities. UMB acquired Marquette to obtain a national ABL and factoring platform. This acquisition provided UMB with a full suite of client solutions, including the ability to transfer clients to ABL and factoring rather than lose them. In addition to acquiring Marquette, UMB has a traditional SBIC fund and capital markets capabilities. The clear goal is to be able to serve a wide array of customer needs from small business banking to middle market corporate in the communities in which it competes.
First Financial in Cincinnati is one of the most unique community banks in the country. The backbone of this almost $14 billion-dollar community bank is its corporate banking that maintains approximately 160 banking centers in Ohio, Kentucky and Indiana. First Financial leveraged its platform and distribution to build a growing specialty finance platform. The platform’s foundation is a traditional C&I group, which includes an ABL team comprised of key executives who joined from Fifth Third Bank. This C&I group has a number of specialties including, but not limited to, financing restaurant concepts with low closure rates and strong brand awareness. First Financial, via its acquisition of Oak Street, is also one of leading financiers of insurance agents in the country. It’s rare for a community bank to offer the customized products and sophistication, but the board has assembled a talented team via acquisitions and smart hires.
Texas-based Cadence Bank, TBK Bank and Frost Bank have strong franchise recognition. Cadence has grown to more than $9 billion in assets with a presence across the Southern states, offering a wide product suite, including commercial finance and ABL. Frost Bank, with more than $30 billion in assets, has been in Texas for well over 100 years and has developed specialty lending products, such as equipment finance, designed to support local and regional businesses. TBK, or Triumph, is much smaller, with $3.5 billion in assets, but has been expanding with acquisitions in Iowa and Colorado. TBK also is a powerhouse business bank with its factoring, equipment finance and ABL divisions. Synovus Financial, with approximately $27 billion in assets, has enjoyed a strong reputation across the Southeast with a very broad suite of business banking products.
There isn’t room in this short article for all banks that deserved to be mentioned, but First Midwest Bank, Byline Bank, Banner Bank, Berkshire Bank, Academy Bank and Enterprise Bank are also notable community banks. These banks are transforming the national landscape and growing into forces to be reckoned with.