Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: SUNDAY, June 13, 1993 TAG: 9306110066
SECTION: BUSINESS PAGE: F-1 EDITION: METRO
SOURCE: MAG POFF STAFF WRITER
DATELINE: LENGTH: Long
The company's officers believe they will have at least one large factor in their favor. Southwest Virginia is the only financial institution still headquartered in the city.
"It is a help," said President Bill Rakes. "It's a help that we're a local financial institution."
New depositors often mention that fact, he said, in an era when mergers have absorbed such local names as Dominion and Sovran banks into ever larger banks based outside the area.
Southwest Virginia, with only $57 million in assets and ranking only 38th among Virginia's 44 thrifts, believes it can compete with the big boys who count their assets in billions.
Rakes said Southwest Virginia will stick with community banking. He would rather be community oriented, limiting its customers to consumers and small businesses in the Roanoke Valley, than be large.
Courtney Hoge, an insurance agent and vice chairman of Southwest Virginia's board, agreed.
"Years ago, they said only large associations would survive," Hoge observed. "But you do not have to be a giant to give good service."
Southwest Virginia is a survivor, having come through the nation's savings and loan crisis with a strong cash position. It greatly exceeds the government's standards of capital strength.
"We haven't had any loan losses," Rakes explained.
But, like many other thrifts, its earnings are low because of the erosion of real estate values in the last decade.
At the end of April, its return on assets -- the usual measure of profitability of a business -- was 0.866 percent.
That means Southwest Virginia was more profitable than the S&L industry as a whole, whose return was 0.76 percent at the end of 1992. But it's short of the desirable standard of 1 percent.
That 1 percent figure, Rakes said, is the goal Southwest Virginia hopes to meet as the economy recovers and loan business increases. But it is a standard that Southwest Virginia has never met.
Founded in 1927 as Southwest Building and Loan Association, it changed its name to "savings and loan association" in the 1950s. Like most thrifts, it converted in August 1990 to the title of "savings bank." In the wake of the S&L crisis, many solvent thrifts wanted to eliminate the tainted words from their names.
It was slower than most banks to expand beyond its home office in downtown Roanoke.
It's first branch, in Vinton, opened in 1965. Rakes, the branch's former manager, recently moved the operation from the Vinton commercial district to Virginia 24 and Hardy Road. It's new location was formerly an office of CorEast, a defunct S&L.
The growth spurt continued through new branch openings at Oak Grove in 1977, Crossroads shopping center in 1979 and Salem in 1981.
In the 1970s, Rakes observed, "it was hard to make a bad loan."
That's because inflation was driving up property values rapidly, he recalled. Real estate, if it had to be foreclosed when a borrower defaulted, was worth at least the original value of the mortgage -- and usually much more. That protected the savings and loan from losing money when it sold repossessed property.
That protection ended when the government wrung inflation from the economy by pushing interest rates up into double digits.
Thrifts found themselves caught between the high rates they paid customers for their savings and the much-lower fixed interest they received for old long-term mortgages.
That situation, Rakes said, "started eating up a lot of capital."
While many thrifts nationwide responded by taking on riskier investments, Southwest Virginia retrenched.
Rakes said Southwest Virginia decided not to meet the competition of rates paid to depositors by other thrifts.
Nor did it venture into lending in high-flying areas in other parts of the country, such as Texas.
"We did not venture beyond our local community," Rakes said. Southwest Virginia made loans only to local families that were "good, solid credit risks."
The strategy was a gamble. Holding down interest rates encouraged depositors to withdraw money and move to institutions that paid more for savings.
Many of them did. Deposits dropped from a high of $56.9 million in December 1985 to $51.1 million today.
But other depositors stayed with Southwest Virginia, even though it usually paid 1 to 1 1/2 percentage points less than other thrifts on certificates of deposit.
Rakes recalls that at one time, for about six months, Southwest Virginia paid no more than 15 percent to 16 percent, while competitors rose as high as 18 percent.
Southwest Virginia's other step then was to limit CD maturities to 30 months or 2 1/2 years. Some other institutions were accepting long-term deposits, locking in certificates at high rates for six or eight years.
That policy paid off when interest rates began their retreat. Rakes said Southwest Virginia's cost of deposits fell more rapidly than its competitors' did.
He said he doesn't blame customers who chose to take their CDs and run with them to seek the highest rate for the longest period of time. He expected it to happen.
Some of those people have come back to Southwest Virginia in recent times, he said.
The run-off of funds, however, impacted earnings long term.
Southwest Virginia had, at the time of the S&L crisis, recently built its four branches with an eye towards growth. Assets then stood at $68 million compared to today's $57 million.
Branches are expensive, but they are needed for growth, to lure new depositors as well as borrowers. Over those years, though, Southwest Virginia chose to shrink -- so its branches cost more to operate compared to each dollar of deposits.
As a result of that shrinking, Rakes said, Southwest Virginia survived the crisis in a strong capital position. But the pace of its earnings dropped as reflected by its return on assets.
That's why Rakes intends to grow the thrift in what he believes is an expanding economy.
The upturn should increase the demand for loans and mortgages, which was low during the recession.
About 75 percent of Southwest Virginia's assets are home mortgages, even though most are resold to other lenders and investors on the secondary mortgage market. The thrift keeps loans -- those at adjustable rates -- when they don't qualify for resale because, for example, the house is on a private road instead of a public street.
The other 25 percent of assets are loans to consumers, some small businesses and a few small subdivisions, along with securities investments.
Southwest Virginia opened a loan office in the South Park office complex on Starkey Road in March 1991 to originate and sell mortgages.
This office primarily has handled refinancings, but Rakes said home sales have picked up in the last 90 days.
Southwest Virginia, however, has no plans to venture outside the valley to place loans.
What the thrift does plan now is more advertising and promotions to gain business. And starting at the end of this month it will offer free checking accounts to attract depositors.
Rakes hopes that will produce about 500 new accounts -- although they will have low balances, no more than a collective $250,000. Customers with higher balances would use an interest checking account with a $500 minimum balance.
But Rakes expects the new depositors will also become borrowers.
Rakes acknowledged that Southwest Virginia is competing with mutual funds and other types of investments that have thrived while interest on bank accounts dove. Still, he has no plans to sell anything more than the annuities it has offered for the last few years.
What a thrift like Southwest Virginia has to offer the public, he said, is "a pleasant atmosphere" in which to apply for money to buy homes, cars and refrigerators.
But even with that conservative approach, Southwest Virginia faces serious competition.
Says Steve Whitley, senior vice president for retail banking at Virginia First Savings Bank, "We have positioned ourselves as a community bank," even in Roanoke.
That profitable thrift is based in Petersburg but has several branches in the valley.
"We have positioned ourselves up against the big banks," Whitley said. "We're touchy feely."
Virginia First also has kicked off a promotion in the form of picnics for customers. It entertained about 700 people at its Tanglewood branch June 4. Whitley said the approach is a way of reaching into the community.
He has no illusions, however, of overtaking NationsBank or First Union Corp.
"Big banks are there for us to go after and erode," Whitley said. Smaller thrifts are "slowly pecking away."
Hoge, the Southwest vice chairman, said he believes the Roanoke thrift has an opportunity to grow through its valley branches.
Because Southwest Virginia is locally owned, Hoge said, it can make decisions quickly when people apply for mortgages.
"You can get an answer in a reasonable time," Hoge said of mortgages and consumer loans.
To attract deposits, Hoge said, Southwest Virginia can devote "personal service that larger institutions are not able to give."
"We've got the capital to handle growth," said board chairman John Hart. He said Southwest Virginia expects to expand as the economy takes off.
Rakes, who has spent the last year as chairman of the Virginia League of Savings Institutions, said 93 percent of the industry is profitable today. His term expires next weekend.
In Virginia, he said, only one or two of the 44 thrifts are unprofitable.
Like most bankers, he would like to see less regulation of the industry by the government.
Current micromanagement by the government and a tax to support deposit insurance are a burden on the sound thrifts, he said.
These costs are cutting into profits in the industry, Rakes said.
Even so, he said, Virginia thrifts earned $55.1 million last year in contrast with losses of $64.4 million in 1991. That represented a turnaround of $119.5 million, Rakes pointed out.
Keywords:
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by CNB