C. Fred Ball Jr. looks out his corner office window in Preston Center with its resplendent downtown view and sweeps his arm in a gesture grand enough to encompass the entirety of the city. The Chairman and CEO of Bank of Texas, readying for a long weekend in Hill Country, is mildly amused at his own confusion.
“I used to always know who was opening a new bank in Dallas,” Ball says. “But so many are coming into the market so fast—there are lots of names that I don’t know. I am not familiar with the bank name or the individual running the new bank. It’s hard for me to believe any city in the U.S. is doing better in terms of new bank openings. I have been constantly surprised the market has been so strong.”
To be sure, the Big Boys of banking—Bank of America, Citigroup, Chase, Wells Fargo, and Wachovia—are as abundant as they’ve always been, if not more so. But in case you missed it, Dallas has become a banking battleground. As those titans square off for supremacy, in-state, out-of-state, and international financial institutions of all sizes clamor for a foothold. New banks have invaded the crowded Dallas market, where locally based start-ups banks (de novo banks) have grown organically and existing banks have expanded with ease. According to the Federal Deposit Insurance Corp., which tracks all bank activity, since January 2001, 192 new bank offices have opened in Dallas County alone. Of those, 141 have opened since the start of 2003. As of press time, 54 have opened since the start of 2005.
The business pages in the last 12 months have been full of moves and countermoves by banks jockeying for position. Frost Bank’s parent company buys Fort Worth’s Summit Bank for $363.5 million in stock and cash. Compass Bank acquires Fort Worth’s TexasBank. First Bank of Missouri purchases the Richardson branch of Dallas National Bank. Prosperity Bancshares Inc. takes Grapeland Bancshares Inc. and its First State Bank subsidiary for an undisclosed sum. Spain’s Banco Bilbao Vizcaya Argentaria S.A. spends more than $2.5 billion in cash to buy State National Bank and Texas State Bank, a year after buying Laredo National Bank. Sovereign Bancshares Inc. acquires Jefferson Bank of Texas. New Orleans-based Capital One announces it will build 11 new Dallas area branches. And on and on.
Ron Steinhart, former chairman of Bank One and one who could easily wear the title banker emeritus of Dallas, says he’s never seen such interest in his nearly four-decade-long career here.
“Banks from every major financial center in the United States are looking at us as a market ripe for expansion. New York, Chicago, San Francisco, Los Angeles—all are looking to Texas. And especially Dallas and Houston,” Steinhart says. “You’re seeing it at the retail level. We’re one of the top retail markets to be in. But you’re also seeing it at the commercial banking level.”
What’s the balance sheet? Total number of new banking locations in the Dallas-Fort Worth area since the beginning of 2001 (see chart at right), including branch growth, de novo, and outside banks staking their claim: 454. And at the rate things have gone, these numbers may not even be accurate by the time this magazine hits the stands. There is a lot of room and reason to grow, too.
“Approximately half of the top 20 banks in the country don’t currently have operations here,” Ball says. “There’s a lot of interest from domestic and international institutions in the Dallas market.”
So why the push? Why the battleground? Of course, there are long-term dynamics and regulatory issues. Consolidation alone is a big driver in the number of de novo banks. Today, with more than 7,000 commercial banks nationwide, there are still only half as many banks in the United States as there were 20 years ago, and the consolidation trend hasn’t abated. As a result, many experienced bankers find themselves pink-slipped in a climate where it’s both easy and profitable to start their own de novo operation. A few years down the line they can, in turn, merge with a bigger institution at substantial profit far exceeding their deposits. So in a counterintuitive way, consolidation and acquisition among the giants spawn new banks on a weekly basis, all vying for a piece of the action.
“In the 1980s, I would say you had the big five controlling 60 percent of the market and the rest competing for the remaining share,” Steinhart says. “Today, the big five control 75 percent of the market, and there’s even more competition for that remaining 25 percent.”
More directly, changes in Texas’ banking laws allowing branch banking have opened up the market to out-of-state banks. Whether it’s a major East Coast concern or a local operation out of Smallville, Kansas, there’s money to be made in Dallas. “Everybody and their dog wants a branch in Texas. They can accelerate their growth rate by having a branch here, no matter where they are. That’s the theory,” says Jody Grant, Chairman of Texas Capital Bank.
And certainly in an industry as given to cyclical turns of fortune, players on the board get aggressive when the winds turn their way. Best time to gain market share is when there’s more market out there to be had, bankers say.
“Banking is cyclical. People tend to forget that. Business has been good for several years now and it looks like it will continue for another six to 12 months,” Ball says. “People here who saw that late-’80s and early-’90s cycle have done well. They’ve been able to grow with the economy.”
He knows that personally. His own bank, a holding of BOK Financial Corporation, entered the Dallas market in 1997. Through the acquisition of First National Bank of Park Cities and First Texas Bank, the newly flagged Bank of Texas operation started with about $350 million in assets—small in bank circles. Today, through organic growth and a few acquisitions, Bank of Texas has approximately $4 billion in assets, 24 locations in Dallas-Fort Worth, and 14 in Houston.
And then there’s the issue of pent-up demand. Grant notes that after the banking/oil/real estate crash of the late 1980s, when North Texas and Houston lost most of its major banks, there wasn’t a lot of enthusiasm for new banks through the mid-1990s, even though the economy was undergoing a rebirth. His own Texas Capital Bank was one of the first few new charters after the crash.
But ultimately, it comes down to one common denominator: the almighty dollar. Notorious 1930s bank robber Slick Willie Sutton famously remarked that he robbed banks “because that’s where the money is.” As to why Dallas has become such a competitive market for banking, the answer is much the same.
“Texas in general and Dallas in particular are viewed as good, dynamic, long-term growth opportunities,” Ball says. “It’s unquestionably one of the top financial markets in the United States.”
Grant concurs, adding, “There are two major economic centers in Texas—one is Dallas-Fort Worth and the other is Houston. We have great economic fundamentals here. You might say the economy is hitting on all cylinders. There are hardly any weak spots—except maybe the continued consolidation of telecommunications. And investors are very aware of all the wealth being created because of the Barnett Shale oil finds.” (See “The Barnett Shale Billionaires,” June 2006.)
“Those are the fundamentals. When you look at the projected growth here, this is where they want to be,” Grant says.
Banks want to be here, but in what capacity? From the banker’s perspective, there are more divides than the traditional commercial, investment, and retail banking. Grant says he see four segments of the market actively in play: the mass retail market, business banking for the Fortune 1000-type companies, middle-market commercial banking, and wealth-management banking.
The first is obvious. You can’t throw a sack of nickels from any major intersection in Dallas-Fort Worth without hitting one bank and catching another on the ricochet. And while there’s dickering to be done over incentives (Free checking! Free ATM use! Free toasters!), convenience is the watchword. Retail customers, if they are going to visit a physical bank location, want it to be as easy as finding a Starbucks. Opinions differ on how much in deposits a branch needs to be profitable, given the cost of building a standalone (from $3 million to $5 million), but mass retail branches is where much of the competition lies.
“Most see these as a good market for cheap retail deposits, but I’m not so sure,” Grant says. “I’m not so sure they’re cheap when you consider that you need $50 to $100 million in deposits to break even. But then, many larger banks can take a long-term view. I was told by the CEO of one of the largest five banks that they were willing to lose money for five years if that’s what it took to get established here. It’s not relationship-based. It’s commoditized banking.”
The high cost of standalone retail banks is also the reason for the explosion of grocery-anchored branches. They are much cheaper and only require $10 million in deposits to be operating in the black.
But is this saturation at the retail level so wise? Grant has his doubts. Exposure and branding has its place, he says, but retail customers use physical banks less and less.
“When’s the last time the average company employee used a bank itself? Companies increasingly use direct deposit, younger people are more comfortable banking online—I’m not so sure there’s that much of a need for all these retail locations,” he says.
The “carpetbagger” banks are content to let the big boys settle the retail wars. The brass ring these import banks have their eyes on is the higher-end commercial banking customer.
“Then there are those banks interested primarily in the Fortune 1000 and Fortune 2000 companies,” Grant says. “The very large companies with a lot of flexibility in terms of the banks they use—they have the credit standing to get better pricing than is available to other companies. That type of banking is primarily what the largest banks in this state are going after. All are based out of state.”
The segment Grant’s own bank is interested in is the wealth-management segment: individuals with liquid net assets of $1 million up to $75 million. Dallas has no shortage of these customers. These are people who want more individual attention than the big national banks offer, Grant says. Much of the competition here is among de novo banks and locally based mid-sized institutions.
The final front where the battle lines have been drawn and battles are fiercest is middle-market commercial customers. Grant defines them as the vast multitude of companies in Texas with borrowing needs between $500,000 and $30 million. These are companies not big enough to necessarily interest the big five because they aren’t good investment banking prospects, and who are looking for a good relationship banker.
“Most are private enterprises, many times family businesses, or at least they started as family businesses with private shareholders,” Grant says. “They like to do all banking business in one place and are inclined to concentrate with one bank.”
This past May, Texas Stone and Tile Company splintered off from a larger conglomeration. Fred Miller, president of the $20 million company, remembers the search for a new bank.
“At the time, we were with Bank One,” he says. “We didn’t have anything against pursuing a continuing relationship there. Before, we were part of a much larger organization. We were a little hesitant that we would get the service from such a large bank that we felt like we’d just be a very small player, so we felt we needed to look at smaller banks.”
After looking closely at three or four banks, Texas Stone and Tile found one—and a good fit, at that—with Bank of Texas. “We got a relaxed and comfortable feeling with those folks. There was a mesh,” Miller says. “It’s not just absolutely the lowest rates out there.”
Every kettle has its lid, and, seemingly, every company can find a bank—big or small—to accommodate its specific needs. Yet still more banks come. The Dallas area has a market awash in money, rife with pent-up demand, ripe for banking, with strong fundamentals and a lot more competitors who haven’t yet tested the waters.
What will this mean for the bank customer? And if the market gets too saturated, what will it mean for all the banks already here? Some battles are won and lost because of larger forces than anticipated (cf. Napoleon v. General Winter). In this case, banks ride the tide of the overall economy. At the current rate of growth, things look marvelous, but with oil at record highs and the Fed continuing to hint at interest rate increases, it doesn’t take much for that tide to turn.
“For any accomplished company, it’s a great time to borrow money and expand. It’s going to be easier to get good deals done today than, say, 12 to 18 months from now,” Ball says. “If I were a CEO running a company, I’d look for a bank where I could have a true relationship with people I like and respect who would work with me through times both good and bad. That’s extremely important. Anyone on the other side of the table managing a good company will have a number of banks to go with. They can beat the prices down. This will only change if we see an economic slowdown—then you won’t see banks as eager to make these loans with the same pricing.”
For Steinhart, “accomplished” doesn’t even seem to come into play. “If you’re half-alive and have a coherent business plan, you can get a loan, and the terms right now are flexible and cheap,” he says. “I can’t say how long this will continue, but this is the time to take that risk or make that expansion.”
Grant says he sees this competition as a double-edged sword for bank customers. While there are more choices, it’s less personal.
“Banks now are highly commoditized and highly competitive. In the old days you’d walk into your bank and everyone would know you. It’s necessarily impersonal. But you can get the deal you want in most banks,” Grant says. But, he warns, the market may be reaching a saturation point, and should the economy slow down, commercial customers with a relationship banker may be in for a surprise. That bank so eager to get your business might not be so quick to work with a business having a bad spell.
“I’m not predicting any disasters, but I do think there will be a slowdown within the next 18 months,” Ball adds. “A lot of new banks have come into this market—we don’t know how they’ll react when economic conditions get tougher. We don’t know if these are true relationship banks or transactional bankers. If I’m a business owner, I want to do business with a bank where if I do have a hiccup they’ll work with me. That’s very important.”
Market saturation itself isn’t so much of a problem—market forces will likely correct that problem, bankers agree. And while sounding a little like he was trying to scare off outside banks looking at Dallas, Ball inadvertently echoed the famous Yogi Berra line about how no one goes there anymore, it’s too crowded.
“I think there will be continued long-term consolidation that will take care of the saturation issue. However, it’s hard to imagine there’s enough money and growth to support such a high level of new banks in the near term,” he says. “In general, I think this is a difficult time to come into this market or start a new bank. Having said that, there is one exception. There will always be room for a well-managed bank staffed with good bankers that have a loyal customer following.
“I believe you’ll continue to see a large number of acquisitions in the future. The current acquisition market is very active, and prices are extremely high. When the economy slows down, the deals should continue because a number of banking organizations will say, ‘Hey, we’re getting a good price, let’s sell,’” Ball adds. Which, in addition to opening new branches, is part of Bank of Texas’ strategy to continue its own expansion within the Dallas and Houston markets.
All this competition in Dallas? It’s just part of the top of the cycle, bankers say. Their advice? Same as any time. Get the best deal you can with the most trusted banker you can find. In good times anyone can find a banker. In bad times, you’re going to need a friend.
