In 2023 the SVB crises brought Super Regional Banks into the national spotlight. Countless stories were run speculating on the viability of many, but few addressed the how and why many of these banks came to be. The rise, creation and further consolidation of Super Regionals is a story worth telling and one that will likely continue to play out in 2024 in a meaningful way.

Travel to any longstanding American city and one will see community banks lined up facing each other across the street reminiscent of soldiers in the American Revolution trading musket volleys against the British.  These longstanding banks are the heartbeat of credit for small businesses in many cities across America.  It would be an understatement to say that the bank executives know their clients personally, as it is more likely they live in the same neighborhood. Now, contrast that to the trillion-dollar banks which often  have their credit executives in a different state than the actual client. The nation’s biggest banks oversee many of their regions from centralized hubs akin to the use of drones.  Both of these forms of banking are unique and absolutely necessary as a $20 million revenue business has quite different needs than a $2 billion revenue business.  The muskets vs. drones approach works at the bookends, but leaves a large part of the market open.  These disparities, which are clearly exaggerated for the purpose of illustration, are what led to the rise and consolidation of Super Regional Banks.

These Super Regionals are able to both dip down to take on smaller businesses while at the same time flex up to compete in capital markets against the trillion-dollar banks.  What started as arguably too many regional banks has today become a group of Super-Regionals including Huntington, Key Bank, Zions, Western Alliance, Comerica, Umpqua, M&T and First Horizon, among many others who fill this large void.  The white space that exists between muskets and drones continues to be enormous and has fueled a decade-long regional consolidation trend.  Most $5-billion community banks don’t offer ABL groups or sponsor coverage cash flow groups let alone both of them.  The big banks are not going to service the lower and middle-market sponsor and business owners with companies generating EBITDA as low as $5 million. The range of products and services that are now offered rivals the nation’s biggest banks, but are targeted to a smaller set of business on average. 

Every region tells a different story based on a super-community bank morphing into a Super Regional Bank with capital markets capabilities.  Huntington has now acquired TCF, Chemical and First Merit to create a regional powerhouse with national reach that offers a full platform of services including capital markets, but still maintains the ability to service the lower middle market. Just look at the stories of Columbia and Umpqua bank in the Pacific Northwest.  These storied Pacific Northwest banks came together to create the pre-eminent Super Regional bank in the Northwest.  M&T and People’s tell a similar story in the New England and Upstate New York region, Zions tells a great story in the Mountain region and the list goes on.

Middle-market business owners want relationship banking combined with platform capabilities.  Sponsors want a bank sized for their fund, which could range from a few hundred million to a few billion. These sponsors who, on average, seek 2x+ leverage on a $10+ million EBITDA business, get better served by Super Regionals who find comfort in hold sizes of $20 million to $200 million. This is a broad swath of coverage to be able to cover sponsors buying $10 million EBITDA companies to $100+ million while at the same time continuing to serve large, family-owned businesses.  It’s easy to see why the need for Super Regionals arose and there is a fundamental need for large banks firmly ensconced in their respective regions.

From a deposit perspective, it’s easy to see why some of these banks were in a bind when going from $50 billion in deposits to say $75 billion, a 50% increase.  The asset-liability mismatch is clearly great when compared to a $100 billion increase for a trillion-dollar bank, which equates to a 10% increase.  The deposit swings both ways – up and down – were clearly faster and more violent than anticipated. Ironically, unlike most bank failures, to-date credit has not been the issue.  The saving-grace for many of these banks is their multi-state presence and retail bases comprised of many smaller depositors that are on average below the FDIC limit.  While this did not stop many large depositors from diversifying it did create a broad enough base for most of these banks to calm concerns.

The musket strategy goes back to the dawn of banking as the bedrock of a community bank is to be rooted in the community.  Town halls and cities were planned around vital functions including banks and proverbial courthouse steps.  The banking deregulation that enabled consolidation between inter-state banks created the likes of Bank of America and other trillion-dollar banks.  The 1994 Riegle-Neal Interstate Banking Act helped to create the need for drone banking due to size and need for cost-savings.  The limitations of community banks and success of the biggest banks created the middle-market and need for Super Regional Banks.  The trend of regional banks morphing into Super Regional Banks is only going to continue in part based on new impending regulation and the perceived need for more scale.  There will always be a need for community banks and their muskets, but the number of Super Regionals that can capitalize on limitations of both strategies via use of technology and in-market presence is only likely to increase.