Community banker James S. "Chip" Mahan set out this year to prove that "virtual banking" is no oxymoron.

A devotee of the Internet, the chairman of $650 million-asset Cardinal Bancshares in Lexington, Ky., was not content pursuing the usual run of new business opportunities through branching or customer calls. He sees his future in cyberspace, and he travels the globe - he spent half this month in Australia and Japan - spreading the word to other bankers.

Two months ago, he opened the first U.S. bank operating solely in the virtual space of the Internet's World Wide Web. The venture, Security First Network Bank, is one of several corporate levers Mr. Mahan hopes to push to earn fame and fortune as a cyberspace banking pioneer.

He also has interests in software and data security companies that sell the means to put banks on the Web. And his formula made enough sense to attract financial backing from superregionals Huntington Bancshares and Wachovia Corp., the latter Mr. Mahan's ex-employer.

"Chip loves to think outside of the box," said Charles W. Ogilvie, director of retail banking at Cardinal Bancshares. "Eighteen months ago he probably didn't know what a computer operating system was, but he saw that this was the way the world was going and that we could be the first to do it.

"He then went out and hired the people to make it happen."

He viewed the start-up costs of the Internet bank as modest, in the neighborhood of $3 million. It was harder to convince regulators that the bank would be safe from computer hackers - a process that took about a year.

Security First, a $41 million-asset subsidiary of Cardinal, appears on computer screens in the image of a bank, complete with a president's office where customers can leave E-mail comments or complaints. It currently offers checking accounts and certificates of deposit, with the rest of the bank service gamut to follow next year.

Security First has already developed a following.

An average brick-and-mortar branch at Cardinal may get 3,100 new customers in its first year. Security First signed 1,000 accounts from 40 states in just eight weeks - with a fraction of the overhead costs associated with constructing and running a traditional branch.

The bank's Internet page ( registers 40,000 "hits" from Web surfers on an average day, Mr. Ogilvie said. By comparison, 1,500 people may pass a supermarket branch in a 24-hour period, and most may not notice the in- store banking facility.

"Maybe I'm stupid or lucky or something like that," said Mr. Mahan, 44. "But I'm not a technology buff, my brother-in-law (also his business partner, Michael McChesney) is, and he convinced me that the Internet is not a fad. I think that every bank by the year 2000 will be connected to the Internet."

Cardinal intends to spin off the virtual bank in the first quarter of 1996. Mr. Mahan and the other founders would retain a 30% interest.

Mr. Mahan idea for a "virtual bank" attracted backing from superregionals Huntington and Wachovia.

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