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CHARLOTTE, NC-Monday's merger of locally-based Wachovia Corp. with New York City-based Citigroup Inc. could go a lot more smoothly in markets where both banks don't have large volumes of redundancy, particularly in the Southeast, according to commercial real estate observers. Wachovia is a dominant name on bank branches and office buildings in many markets where Citigroup has only a minimal presence.

"I don't think there is a tremendous amount of overlap," Nicholas Schorsch, chairman and CEO of American Realty Capital Trust Inc., tells GlobeSt.com. Schorsch, whose firm divests excess single-tenant properties such as bank branches, adds that the expanded network will put Citigroup in a better position to rival the nation's largest banks from a customer service standpoint.

Wachovia and Citigroup were combined Monday in a $2.2-billion deal orchestrated by the Federal Deposit Insurance Corp. to prevent another potential big-bank failure. "This action was necessary to maintain confidence in the banking industry given current financial market conditions," FDIC Chairman Sheila Bair said in a prepared statement.

Under normal circumstances, the merger would have put numerous floors of office tower space and thousands of freestanding bank branches into play, mainly along the East Coast where Wachovia and Citigroup are both major players. But Schorsch says that isn't likely to happen in areas where Wachovia is heavily branched but Citigroup is not. In Florida, for example, Wachovia has an abundance of branches while Citigroup mainly operates ATMs in storefronts such as 7-Eleven convenience stores and Publix supermarkets.

It remains to be seen how back-office operations between Wachovia and Citigroup will be affected, particularly in places like Tampa where Wachovia has its name atop one of the largest urban office buildings and Citigroup also has a large suburban operations center. "Their house is in good order on the branch side, but the operations side is anybody's bet," Schorsch says.

Wachovia has 3,400 retail offices in 21 states, stretching from Florida to Connecticut and west to Texas and California. It also has 3,700 brokerage locations nationwide, some of which were absorbed through its acquisition of St. Louis-based A.G. Edwards & Sons that was completed at the start of this year.

Before the merger, Wachovia was already selling off excess branches, making a $53-million deal in August with New York City-based American Realty Capital for 39 bank offices in six states over the next two years. Schorsch says those locations are from prior bank mergers and likely to be purchased or leased by other banks and financial institutions.

Central to Monday's merger is Citigroup's agreement to absorb up to $42 billion of losses on a $312-billion pool of Wachovia loans. Wachovia's most recent annual report states that the bank had minimal exposure to subprime loans, totaling $6.7 billion, while its exposure to commercial mortgage-backed securities amounted to $11.5 billion in 2007.

Wachovia had been a major buyer of other banks throughout this decade, starting with First Union Corp. (also based in Charlotte) and including Oakland, CA-based Golden West Financial Corp. and Birmingham, AL-based SouthTrust Corp. But analysts point out that the bank became vulnerable to the housing market downturn, particularly after inheriting Golden West's risky ARM program called Pick A Payment that gave customers the option of skipping monthly mortgage payments.

The last straw appears to be the FDIC's seizure of Washington Mutual Inc. last week, after which Wachovia was mentioned among a growing number of banks that would tumble next. The Citigroup buyout is intended to stave off such a massive failure that would instantly affect 122,000 bank employees and many more customers.

"For Wachovia customers, today's action will ensure seamless continuity of service from their bank and full protection for all of their deposits," Bair stated. "There will be no interruption in services and bank customers should expect business as usual."

Reports over the weekend stated that Wachovia did not face any liquidity problems, with the bank's executives offering their own assurances of future existence. "We're going to do what's right for shareholders, I can promise you that," Wachovia CEO Robert Steele told CNBC in a televised interview earlier this month.

Instant Insights /

Wachovia-Citigroup Merger May Go Smoothly

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