In the upscale suburban Dallas community of Highland Village, four shopping centers recently opened at the intersection of Long Prairie and Justin Roads. These big-box-anchored properties offer residents all the retail conveniences they could possibly want — including, count them, six bank branches. In fact, sitting in a car at a single intersection, one can see all six: a JP Morgan Chase, a Washington Mutual, a Wells Fargo, a Bank of America, a Capital One and a regional bank.
This is certainly a sign of the times — there are now nearly 100,000 bank branches in the United States. But is it sustainable? JP Morgan recently acquired Washington Mutual. Does it need two branches facing each other? Meanwhile, Wells Fargo recently bought Wachovia meaning it too will need to examine its national network of retail bank branches and decide which ones will stay and which will have to go.
The intersection is emblematic of the race that's taken place over the past two decades during which commercial banks, community banks and credit unions have rushed to build market share and generate all-important deposit bases. Even as the number of financial institutions has decreased due to consolidation, the number of branches has increased.
Retail landlords and investors have been able to make the most of this trend. For years, banks — many with drive-throughs — could be counted on to take corner pad sites at shopping centers. In some cases it provided a reliable tenant. Now, a coming wave of consolidation triggered by the ongoing credit crunch threatens to turn the tide, leaving both landlords and investors exposed to a rise in risk.
The credit crunch has triggered a series of forced mergers, leading to overlaps in banking networks. Moreover, the industry is dealing with an increased number of outright failures. In 2008, 40 banks failed, according to the Federal Deposit Insurance Corp. (FDIC). In most cases, these were small regional banks. But the FDIC also was involved in seizing thrift Washington Mutual. In a typical bank failure, the FDIC moves in — typically over a weekend in order to minimize disruption — takes over a bank and passes the assets along to another bank so it can reopen on Monday under its new banner. Overall, 170 banks currently sit on the FDIC's watch list. In a typical year, 10 percent of the banks on the watch list fail. However, in the current credit crisis, estimates are that failures could be much higher with as many as 200 banks failing before all is said and done.
Meanwhile, regional banks are looking to restructure their leases because of the downturn in the market. That could create some pain for landlords. For non-urban new pad sites, banks might pay more than $35 per square foot for rent. For in-line or end-cap space, the rents would be between $25 per square foot and $35 per square foot.
As a result of all this, fewer banks will be looking to expand their footprint organically, says Mike Purchia, vice president of strategic market intelligence for BrandPartners, a Rochester, N.H.-based consulting firm that specializes in bank branch site selection, design and construction. Purchia says most bank consolidations result in a 5 percent to 10 percent overlap of branches, which means that sector could see at least a couple hundred bank branches go dark in 2009.
However, Purchia also believes that there remain a large number of healthy banks ready and able to backfill the empty space. For example, Morgan Stanley and Goldman Sachs, the last two remaining Wall Street investment banking titans, both converted to bank holding companies and are exploring ways — either through organic growth or acquisition — of building deposit bases. Ultimately, experts think the number of bank branches could drop in 2009, but the effects could be minimized with less than 5 percent of existing bank branches going dark for good.
Regional players are keeping their eyes open for opportunities to pick up the branches that other banks have abandoned. The other banking segment — community banks and credit unions — haven't missed a beat, Purchia says.
Miami-based Union Credit Bank is an example of a community bank that is expanding. The bank, which currently has one branch and another under construction in West Miami is looking for existing banks and branches to acquire, says president and CEO Fernando Capablanca.
Overall, between 2000 and 2008, the number of financial institutions decreased by 14 percent (from 9,904 to 8,494), while the number of bank branches increased 14 percent (from 85,492 to 97,274), according to the FDIC. Meanwhile, over the past 20 years, the number of bank branches in the U.S. has risen by roughly 40 percent, according to the Federal Reserve Bank.
The bank branch expansion mushroomed nationwide. However, states including Arizona, Florida, Nevada and Texas — those that have experienced strong population growth — saw the largest spike in the number of branches. Between 1994 and 2004, the number of bank branches increased 43 percent in Texas, 37 percent in Nevada, and 20 percent in both Arizona and Florida, according to the FDIC.
It's no accident that those states were the same ones that experienced the greatest population boosts and the highest run-up in prices during the housing bubble. For example, according to Standard & Poor's Case-Shiller Home Prices Indices, housing values in Las Vegas rose from a baseline of 100 in January 2000 to 234.78 in August 2006. (The index has since dropped to 142.57 as of October 2008, the last month for which data is available.)
The growth in commercial banks and the housing bubble are indelibly linked. The commercial banking model is based on generating deposits from customers that then can be rolled into secured and unsecured loans, credit cards and mortgage debt. The recent spike in branches coincided with the credit bubble that is now deflating. Commercial banks were a central cog in the securitization machine that has now come to a screeching halt. Growing deposit bases allows commercial banks to originate more loans — most importantly, mortgages. The race for mortgages was in part driven by Wall Street — investment banks eager to turn mortgages into tradeable securities had a voracious appetite.
Between 1989 and 2005 — roughly the same time frame in which the number of bank branches grew 40 percent — the amount of mortgage debt grew from $3.6 trillion to $12.1 trillion, according to the Economic Report of the President. Consumer revolving credit, meanwhile, grew from $211.2 billion to $826.6 billion. The percentage of household debt relative to GDP grew from 60.8 percent in 1989 to 94.0 percent in 2005. As a result, much of the growth can be tied directly to the residential housing boom and the increased amount of new retail construction, according to Mark Newman, a senior vice president with Staubach Retail in Dallas.
Very little overlap
Yet, is it as bad as all that?
Despite the coming wave of consolidations, merging banks won't necessarily lead to large numbers of bank closures, depending on the existing branch networks. For example, Wachovia and Wells Fargo, despite operating nearly 11,000 branches combined, have very little overlap, except in Texas and California, according to Bart Narter, a bank analyst with Celent, a Boston-based financial consulting firm. In California, Wells Fargo may have to deal with some antitrust issues because it will control 30 percent of the market.
Wachovia's branches are concentrated along the East Coast, with a large footprint in Florida, North Carolina, Georgia and Virginia. In contrast, Wells Fargo is concentrated in the western and southwestern U.S., and it doesn't boast any branches in Florida, Virginia or Georgia.
Across the U.S, Wells Fargo's $13.5 billion acquisition of Wachovia gives the company the most branches of any bank. The combined company will have $1.4 trillion in assets, $787 billion in deposits, 48 million customers, and 10,761 branches in 39 states and Washington, D.C., according to Wells Fargo's financial statements. Wells Fargo has not announced how many overlapping branches it plans to close.
JP Morgan Chase & Co., which acquired Washington Mutual's assets and deposits for $1.9 billion from the FDIC, has announced that it plans to complete the integration and rebranding of Washington Mutual branches by 2011. The New York City-based firm says it will close less than 10 percent of its branches in the combined network, which includes 5,400 branches in 23 states. The acquisition expands Chase's footprint into California, Idaho, Oregon and Washington, creating the nation's second-largest branch network.
A longer version of this article appears at retailtrafficmag.com/features.