Branch launches are rare these days, so First Union Corp.'s recent announcement that it would build three new offices in or near Nashville appears worthy of note.

Top executives at First Union, like many bankers around the country, had previously expressed skeptism about the long-term viability of traditional bank branches. So why build three of them this year at a cost of $4 million?

"It relates to our market distribution specifically here in Nashville," said Bob Reid, chairman and CEO of First Union National Bank of Tennessee, a subsidiary of Charlotte, N.C.-based First Union.

Mr. Reid himself remains "a fundamental believer that we do have too many branches, in general, in this industry."

But he said First Union will build new ones in special circumstances. In Nashville, the bank just needed more critical mass in a few high-growth areas where competitors had a greater presence.

Also, one of the three branches - in suburban Brentwood, Tenn. - is actually a replacement for an existing office.

Outside of Nashville, First Union plans to build three more branches this year, in Lexington, S.C., and the neighboring Florida communities of St. Lucie and Fort Pierce. A third new Florida branch, in Fort Lauderdale, is on the drawing board for 1996.

Last year, First Union opened four, in Atlanta, Orlando, Washington, and Cary, N.C. - not exactly robust growth for a bank with $77 billion of assets.

Federal statistics show that the total number of FDIC-insured commercial bank branches in the U.S. grew slightly last year, to 51,700 from 51,250 in 1993.

However, a recent study by the Bank Administration Institute estimates that 20% of these branches will disappear by decade's end as consumers increasingly turn to cash machines, home banking, and other electronic delivery systems.

Large banks, particularly, have spent the last few years downsizing their networks in order to extract the operating efficiencies much praised by Wall Street.

But there are limits to how much branch expenses can be cut. Many customers, for whatever reason, like to visit their neighborhood bank office and are not content to conduct their banking business via the telephone or personal computer.

"If you're consolidating in a big merger, like Bank of America and Security Pacific, you can get away with it. But if you're closing branches and expecting people to go to the next town, they won't do it," said David M. Partridge, director of the financial institutions practice at Towers Perrin in San Francisco.

In the face of this customer resistance, banks are redesigning their branches to resemble retail stores more than traditional bank offices. Mr. Reid uses the phrase "branch of the future" to describe the structures First Union is putting up in Nashville.

In addition to the traditional teller lines and drive-through lanes, the new offices will feature segregated areas where customers can meet with specialists to talk about mutual funds, trust products, mortgage loans and other services.

Mr. Reid said First Union based its Nashville site decisions on careful demographic research that examined loan, deposit, and investment trends in each market.

Anita Newcomb, a managing director with Professional Bank Services in Washington, described this process as "rationalizing" bank delivery systems.

She said banks are building branches in areas where people are more likely to desire brick and mortar - smaller communities, for example, or those with high concentrations of older customers.

"Banks are more carefully looking at their customer base and trying to determine what is the best configuration for their delivery system," Ms. Newcomb said.

If banks can attract additional customers to the redesigned branches, they can also grow deposits faster. "What they're doing is trying to get to a branch size that is profitable," said David Lazar, managing director with Berwind Financial in Philadelphia.

"You're not going to be profitable if you've got $10 million to $15 million in deposits in a branch. But you're going to be very profitable if you have $150 million in a branch. That's where it's heading."

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.