Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: SUNDAY, September 5, 1993 TAG: 9403090014
SECTION: BUSINESS PAGE: D1 EDITION: METRO
SOURCE: MAG POFF STAFF WRITER
DATELINE: LENGTH: Long
\ FOR a bank, determining where to operate a branch is a million-dollar decision. Literally.
That's the minimum investment to build and equip a new office, said Charles H. Rand, executive vice president for consumer services at Crestar Bank.
The annual operating cost is another $300,000 to $700,000, depending on the location, he said.
Clark Owen, president of Salem Bank & Trust, said there used to be a general rule that a banking office was required for every 2,200 people.
The Roanoke Valley boasts 112 branch banks and a population of about 225,000, including the Botetourt suburbs. That's a bank for every 2,008 valley residents.
The greater metro region, including the New River Valley plus Bedford and Franklin counties, an area of 514,170 people, has 190 bank offices - one for every 2,707 people. First Union said it will sell its office at Smith Mountain Lake in Moneta.
Most bankers agreed with the verdict that the Roanoke Valley is over-banked, especially considering the region's slow growth and relatively stagnant economy in recent years.
There are too many banks everywhere, said Charles O. Meiburg, professor of business administration at the Darden Graduate School of Business Administration at the University of Virginia.
Despite the controversy generated this summer when First Union National Bank briefly considered - and last week rejected - closing its Ninth Street office in Southeast Roanoke, Meiburg said the main problem is ``most banks never think about closing a branch. If they have it, they keep it.''
But most banks, he said, could reduce the number of branches and make their overall network more profitable.
However, in today's banking world, money isn't everything. There's also the federal Community Reinvestment Act, which compels banks to provide service to low-income neighborhoods.
``Southeast [Roanoke] is attractive to us,'' said J. Carson Quarles, president of the southwestern region of Central Fidelity Bank. He said Central Fidelity would have considered opening there if First Union had pulled out.
The Community Reinvestment Act would have been ``a consideration but not the primary consideration'' in such a move, he said. What makes the inner-city neighborhood attractive is its high-density population - provided no competitor is in the area.
Meiburg said a branch is profitable if its net interest margin exceeds the operating cost. Net interest margin is the difference between the interest it earns on loans and the interest it pays on deposits.
But Meiburg has seen banks grab a desirable tract in what they believe to be a future growth area, then wait as long as four years for the net interest margin to exceed operating expenses.
A significant issue in banking is that each office is measured on its own, apart from the banking company's overall deposits and expenses.
Rand of Crestar said his company virtually never closes a branch, unless it acquires a competitor with nearby offices such as the former Colonial American National Bank in Roanoke.
``It is our policy not to close a branch,'' Rand said. ``It's not a good idea to leave an area without a branch.''
Crestar did close its Parkside Plaza office in Southeast Roanoke about three years ago. But Rand said it was poorly located and had little business, and Dominion Bank (now First Union) had a site nearby.
Rand said Crestar surveys each metropolitan area where it does business, looking for areas that are underserved relative to population.
If it finds such an area, he said, the bank considers whether it has potential for population growth.
An ideal site for a branch, Rand said, has favorable growth projections and few competitors.
In view of the Community Reinvestment Act, he said, Crestar pays particular attention to areas of low- or moderate-income consumers and small businesses.
Of all new Crestar branches located in Virginia since the late 1980s, about a third are in low- or moderate-income areas, according to Rand.
None of them was built in Roanoke, where Crestar stands second in market share.
``Roanoke is a very, very heavily banked market,'' Rand said. Crestar has found no neighborhood here that appears to be underserved.
Rand said Crestar has three considerations for establishing a new branch.
The primary factor is gathering deposits. The second is sales of loans, mutual funds, travelers checks and the like.
Third is access to commercial customers in the area. That's because many businesses select their banks based on the proximity of a branch. Especially for small businesses, having a bank nearby makes making deposits easier and safer.
Locating a branch, Rand said, ``is a very serious decision.''
\ When Central Fidelity Bank and Salem Bank and Trust added local branches in recent years, they went about it in very different ways.
First Union, which acquired Dominion in March, has closed branches because of what it sees as a new direction in the industry.
Six years ago, Central Fidelity had three banks - at Cave Spring, downtown Roanoke and Blue Ridge - when it embarked on an expansion program designed to make it a major player in the Roanoke Valley.
Central Fidelity took a map and searched out strategically placed locations in various parts of the valley, Quarles said. It looked for sites in areas of the highest density of people and businesses.
It wound up with 14 locations, placing new branches at Crossroads, Salem, West Salem, Towers, Plantation Road, Vinton, U.S. 220 South, U.S. 460 East and Mountain View in Troutville, Buchanan and Smith Mountain Lake.
``We covered the market pretty well,'' Quarles said. ``Our franchise system has done well. ... We don't have an unprofitable branch in the valley.''
Visibility is important, he said, but less so than convenience to a great many people.
Traffic flow is a major consideration in high-traffic areas such as Northern Virginia and Richmond, he said, because traffic jams can prevent people from reaching and using the branch.
People should be able to drive into the branch while traveling in either direction, Quarles said. Easy access is more important than the number of cars going by.
Of the new branches here, he said, Crossroads is the most successful because of the neighborhood's high-density residential areas and businesses.
Central Fidelity branches typically cost $750,000 to build and equip, Quarles said. They must take in at least $5 million in deposits just to break even.
Deposits were the most important goal for branches when Central Fidelity began its expansion in 1987, according to Quarles.
But now ``all banks are sitting on all the funds they need.'' In today's environment, he said, bankers look to branches to produce much-needed consumer loans.
Quarles said Central Fidelity is always looking for opportunities to expand. In the Roanoke Valley, for instance, he would like to place a branch in a retirement community.
Central Fidelity has about 250 branches statewide.
Salem Bank and Trust has five.
The company started in downtown Salem in 1978. It branched to Colorado Street in South Salem in 1981 and to West Main Street in 1985.
Recently it opened two branches in Roanoke County: in a former First Virginia branch at Oak Grove and, in July, in an old Colonial American branch at Hollins.
Owen, the president, said he looks for ``good pockets of opportunity.'' It's cheaper to convert a building that once housed another bank, for example.
Another is a lack of competition. Owen said his bank was able to serve South Salem, for instance, when no other financial institutions were in the vicinity.
``Everybody goes out to Tanglewood,'' Owen said. His bank's strategy is to find the place ``where no one had a convenient location.''
Owen also looks for a good traffic flow. But he ignores the street with 20,000 cars daily and five banks in favor of the corner with 10,000 cars and one competitor.
\ In terms of making a profit from a new branch, checking and non-interest accounts are attractive, while loans are the hardest thing to find these days.
The old rule was that a branch had to generate deposits of $5 million, but Owen said that's no longer true.
He said the office must produce $10 million in deposits and at least $8 million in loans. The need today, he said, is ``a balance of both.''
First Union, on the other hand, has been dropping some branches it acquired when it purchased Dominion Bankshares. It has 15 offices in the Roanoke Valley instead of the 22 of a year ago.
Gone to NBC Bank are all of the outlets inside area Kroger supermarkets, which First Union said generated too little business. Dominion already had closed some Kroger branches and an office at Roanoke Regional Airport.
Now First Union will sell its Smith Mountain Lake branch, consolidate its Christiansburg and Blacksburg branches into one larger office and close its branch at Pembroke in Giles County.
David Carroll, vice chairman of First Union's Virginia bank, said the consolidations reflect the latest trends in the industry. He said First Union is further along this path than most of its competitors.
The company's studies over the past five to seven years show a trend to fewer but larger banks.
Today's typical bank branch, he said, is 2,000 to 2,500 square feet, while The branch of the future will be 4,000 to 6,000 square feet.
It also will be more centrally located.
Banks never used to look at branches as what they really are, according to Carroll - retail distribution networks.
``Remember when there was a gas station on every corner?'' Carroll asked. Gas companies once put stations wherever they could find a plot of land as sort of end points in a distribution system.
Banks must think like retailers, Carroll contended. They must take into account traffic patterns, income, demographics, where people come from and where they are headed.
Where branches are outdated, he said, banks must be willing to close them. First Union develops its master plan for each community it serves by pretending it has no locations there at all. Then it studies the marketplace, determining where people go to shop, the optimum retail modes.
That plan is overlaid with the existing network. Carroll said the goal is to align the network with the master plan.
Dominion would have liked to have done this, Carroll said, but it lacked First Union's financial and other resources.
Those fewer and larger banks would be at places where people go to shop, such as supermarkets and malls.
The study in Roanoke is incomplete, but Carroll suggested a hypothetical case just to illustrate the point.
First Union, for instance, might one day take banks off Williamson Road because it is no longer a major artery and shopping center.
Instead, according to this hypothetical case, those small branches would be replaced by one large super-bank as a free-standing building beside Valley View Mall.
This type of planning is already being done around the state, Carroll said.
The problem is not just that the Roanoke Valley is over-branched, he said. Traffic and shopping patterns change, so banks must keep up with the evolving market - or wake up one day to find the traffic has moved elsewhere.
Deposits will also rise at these new, larger and more efficient branches, the company said.
Carroll said Dominion averaged $23 million in deposits at its branch offices. By that standard, the disputed branch in Southeast Roanoke was doing well; it holds $25 million in deposits.
But, through consolidations, First Union has so far pushed the Dominion branches to an average of $34 million. But that's below the rest of First Union's multistate system. In other states, First Union averages more than $40 million a branch.
But First Union looks at more than deposits. Carroll said a $25 million branch is acceptable if it sells loans, mutual funds, annuities and other financial services and products.
by CNB