But big, national competitors can’t always offer the local touch and expertise that regional clients prize.
With $187 billion in assets, SunTrust Banks of Atlanta, Georgia, is a regional bank that evolved alongside its local corporate clients, which operate in a wide range of industries and across a big swath of the US. The business model has proved resilient and extremely lucrative: Regional banks tend to enjoy returns on equity of more than 20%.
For example, looking to better serve a particular core client base—car dealerships—SunTrust has opened offices across the country over the past few years, from Boston to Chicago to Dallas, specializing in financing car dealerships. It also offers investment banking services to real estate investment trusts in Atlanta that are trying to buy commercial buildings in those cities. “We’re taking our strategy and industry and product expertise to those other markets where we have not had a corporate banking practice, historically,” explains Mark Chancy, executive vice president for wholesale banking at SunTrust.
But the model is coming under pressure from larger rivals trying to emulate the local touch and enjoy similar profitability. The competition is adding to regional banks’ challenges in the year ahead, coming on top of the recent turmoil in financial markets. Regional banks are feeling the pinch on all sides.
SunTrust is just one of dozens of small and midsize regional banks that have continued to thrive in the wake of one financial bust after another for the past century by remaining faithful to a simple business model that nationwide “money center” banks like Citibank and Bank of America are just too big to copy. Relationship managers at regional banks are experts in at least one local industry. Commerce Bank of Kansas City, Missouri, serves wheat and corn farms in the Midwest; Silicon Valley Bank nurtures tech start-ups on the left coast. An in-depth knowledge of each business gives these banks a longer view, making it less likely they’ll rein in credit lines at the first sign of trouble. Relationship managers service only about 30 clients each, and monitor loans that are far too small and too numerous for the regional office of a nationwide bank to keep track of.
Now bulge-bracket banks (the largest multinationals) are elbowing in, investing heavily in slick online commercial banking services that emulate the personal touch of a relationship manager. They’s also reaching out to remote, family-run companies that they once considered too small to bother with.
Regional banks must make hefty new investments in digital products to stay a step or two ahead of their big-city rivals on the technology front. And the bigger regional banks (those with more than $10 billion in assets) face a steep increase in the cost of regulatory compliance under Dodd-Frank.
As profits are squeezed, regional banks are scrambling to find new ways to bring in more revenue to cover their rising costs. For some banks, like SunTrust, this has meant breaking out of their comfort zone and expanding across the country to serve local clients who do business in other cities, where they might defect to local banks—or to bigger players like Wells Fargo or JPMorgan Chase, for that matter.
Silicon Valley Bank, which caters to high-tech start-ups on the West Coast that import components from Asia, is going even further, having already opened offices in the UK, China and Israel.
“Our clients are asking for efficient, multicurrency account structures to optimize liquidity, payment and collection capabilities in the countries that they do business in,” says Daniel Drancik, the Chicago-based head of global treasury and payments at Silicon Valley Bank.
Other regional banks are reorganizing. Zions Bancorporation, which has amassed $54 billion in assets by acquiring community banks in 11 states in the West and Southwest, from Arizona to Wyoming, is now working to standardize fees for services from checking to foreign exchange. James Abbott, senior vice president, investor relations at Zions, says the group is laying off “redundant” back-office staff while leaving the client-facing folks, including the relationship managers, in their jobs.
The bank hopes to cut costs by about 10%, which Abbott says should compensate for the increased cost of compliance.
We’re taking our strategy andindustry and product expertise to those other markets where we have not had a corporate banking practice, historically.
~ Mark Chancy, SunTrust
Other regional banks are growing their revenue base by acquiring smaller rivals. Christopher McGratty, a bank analyst at Keefe Bruyette & Woods, predicts that 15 banks from Boston to Grand Rapids, Michigan, most of which have assets of less than $10 billion, are likely to be snapped up this year and next by bigger regional players looking for an expanded footprint.
A strong revenue base is key to support the regulatory infrastructure needed to comply with rules that kick in once a bank passes the $10 billion regulatory threshold for closer scrutiny, according to McGratty.
“The industry will consolidate at an accelerated pace,” says McGratty. “These banks have a choice—go big, or go home.”
Clearly, the ace in the hole for small and midsize banks remains their “single point of contact” business model. Small companies are typically run by just one or two owners, who get frustrated when they are told to wait a week or two for approval from headquarters in New York or San Francisco. But a relationship manager at a regional bank would offer to get the answer overnight, if not the same day.
This time-tested model keeps commercial clients coming back for more loans. Of course, such service comes at a price.
Commercial clients pay interest rates of anywhere from 25 to 75 basis points more for this customized service than they would at JPMorgan Chase or Wells Fargo, where they might spend their days on the phone with half a dozen different relationship managers—sometimes one for each service, from cash management to payroll.
Regional banks typically issue commercial loans in amounts under $25 million. In one deal last December, Nevada State Bank hammered out a $5 million deal with a satellite television company that supplies hotels in Las Vegas with live coverage of horse races, says Dallas Haun, CEO of the bank, which has only $4 billion in assets and is owned by Zions. Big national banks can’t afford to dedicate enough bankers to the regions where smaller banks are thriving—or keep track of so many loans of such a small size.
Customized financing and broad diversification have helped regional banks survive financial crashes. For example, Commerce Bancshares of Kansas City spreads its commercial loan portfolio across a large number of industries to manage risk and avoid concentrating it on any one particular industry that might take a shellacking. It lends to health, agriculture, food-processing and commercial real estate companies.
“We have a diversified income stream,” explains Kevin Barth, the bank’s executive vice president for commercial lending. And that’s how regional banks are likely to sail through the current financial turmoil.