Skeptics have often viewed banks with in-store branches as unconventional.

Still, several community banks have tested the strategy and concluded it has untapped potential. Dickinson Financial Corp. in Kansas City, Mo., and Woodforest Financial Group Inc. in Houston are among those sticking with in-store branches even as bigger competitors such as Bank of America Corp. and M&T Bank Corp., back away. As a result, the small banks are enjoying solid deposit growth.

Dan Bass, a managing director at FBR Capital Markets, said it is interesting to see small banks display such a high level of commitment to a model that relies heavily on "management and cost containment" to work.

"You need to have a more retail-type person leading it," Bass said, adding that the strategy requires "a whole different mind-set" from traditional banking.

Many banks are backpedaling from in-store branches. From July 2009 to February 2010, banks shut down 468 such outlets, with most involving large and midsize banks. Over that time, B of A closed 66 branches, and M&T shut down 30, according to SNL Financial.

Dickinson, which has several units that focus on in-store branches, reported the highest in-store deposit growth in the SNL study, at 35%. Woodforest had 4% deposit growth at its in-store branches.

A spokesman for Woodforest said the company would not comment. Calls to Dickinson were not returned.

Woodforest and Dickinson are not the only small banks interested in expansive in-store growth.

The $566 million-asset Urban Trust Bank of Orlando, Fla., has added 23 in-store branches since moving to Florida from Washington in 2007. At Dec. 31 the bank had a 21.6% total risk-based capital ratio, a net interest margin of 5.2% and nonperforming assets of just 3.6% of total assets.

"We make it our business to understand and embrace in-store community banking," Tangy Napier, Urban Trust's director of corporate marketing, said by email.

Napier said Urban Trust will keep looking at in-store locations in Florida. "Having our locations inside select Walmart Supercenters adds additional convenience for customers and affords an institution of our size the ability to have face-to-face encounters with considerable traffic," she said.

The model has its fair share of doubters, who said that successful banks are beating the odds.

"It's a tougher business to make money in today than, say, five years ago," said Jeff Davis, an analyst at Guggenheim Securities LLC.

"This is not a concept all bankers believe in," Davis said. "The break-even level has been raised" with profitability challenges tied to historically low interest rates and less value attached to deposit-gathering.

Services offered at in-store locations also tend to be rather limited, some industry observers said. Some say that to do it right a bank must be completely dedicated to the strategy.

For some banks the trade-off is a lower cost of doing business and to reach potential customers.

Jason Korstange, a spokesman for TCF Financial Corp. in Wayzata, Minn., said in-store branches cost "maybe a tenth" of what it would to build a traditional branch. TCF has 234 in-store branches across five states.

In-store branches offer the potential to "have 15,000 to 20,000 people walk by our door," Korstange said. "We'll take that any day." (TCF tries to place freestanding branches close to its in-store locations. Banks in general will use in-store branches to refer existing and potential customers seeking loans, for example, to a bigger nearby location.)

Skeptics argue that recent growth for small banks betting on the model may be a short-term blip that owes more to good luck than shifting fundamentals. If so, they said, that could pose a problem for long-term profitability, as the banks would have a perhaps disproportionate amount of their chips bet on the model.

That is a reality that the banks will concede, but they will ride the wave while they can.

In-store branches "are not as profitable because they don't get as large, but they are very profitable for their size," Korstange said. "We can't have 10,000 checking accounts" at one such branch, "but we can make money a lot faster than at the brick-and-mortar branches."

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.