Needham Bank in Massachusetts is facing an unusual predicament — too many loans, not enough deposits and too few branches.

The $1.4 billion-asset mutual is looking to nearly double its branch network to increase deposits and have better coverage in markets where it makes loans. Needham's new branches will feature some of the latest technology, including virtual tellers to help customers after hours.

"Foot traffic used to be unbelievable and those days are gone," says Jack McGeorge, Needham's chairman and chief executive. "Branches will always be necessary. It's where significant financial decisions are made."

Needham's moves run counter to industry trends; many banks are drowning in liquidity and a number of institutions are closing branches. In Needham's case, it makes sense for a bank with strong loan demand to expand, industry observers say.

"Branches are still the best way to get deposits," says Mark Fitzgibbon, an analyst at Sandler O'Neill. "Mobile banking is a long-term threat to branches but you still need a place to open accounts, deal with problems and close loans."

Needham had a roughly $1.2 billion loan portfolio at March 31, up roughly 28% from a year earlier, according to data from the Federal Deposit Insurance Corp. Much of its growth came from mortgages, commercial real estate and multifamily residential real estate.

The mutual also remained committed to construction lending during the financial crisis when many banks shied away.

Needham has benefited from the strength of the New England economy, Fitzgibbon says. While construction lending proved difficult in some parts of the country, New England's banks have generally fared well in this category, he says. Construction lending in the region tends to be more stable and less speculative compared to states such as California and Nevada.

"New England came through the last recession better than any other region, except for Texas," Fitzgibbon says. "There's also a fairly large amount of capital in those markets so we're starting to see some really aggressive pricing competition."

Needham's loan growth has also been aided by the hiring of strong lenders, McGeorge says. The mutual ensures it has experienced C&I lenders; it refrains from trying to retrain lenders from different fields, he says.

Needham's approach is important for C&I, a high-touch area that requires strong communication between a bank and borrower. Needham also has some superstars, including a senior residential lender who is "highly recognized in the field of hybrid lending for the portfolio and secondary market," McGeorge says.

As a result, Needham must consider expanding its branches to make sure that it can bring in enough low-cost deposits to support its loan growth.

Needham's ratio of net loans and leases to deposits was roughly 118% at March 31, up from 102% a year earlier, according to FDIC data. In comparison, banks with $1 billion to $2 billion in assets had an overall loan-to-deposit ratio of 77% at March 31.

"Loan growth has moved a little faster than what we would have thought five years ago," McGeorge says. "It's really because of our people. Anybody can be a superstar during the good years but it takes a great lender to still be great during the bad times."

Despite the rise of online and mobile banking technology, branches can still help a bank collect deposits, something that will be especially important as interest rates rise, says Steven Reider, president of Bancography.

Though larger banks have been cutting branches, it is less common for smaller community banks, industry experts say. Opening branches to sustain growth makes sense for a mutual, which has greater difficulties expanding with acquisitions, Reider says.

"With branching, it tends to be beneficial to either go big or get out of an area," Reider says. "Expanding can reinforce positive perceptions with customers and the magnitude of Needham's expansion shows the confidence it has in itself."

Needham will open four branches in the Boston area in the next 18 months, adding to the five it already has. Plans aren't finalized for branch designs, but the spaces will include the capability for video tellers. This technology, which has become increasingly popular, should extend the hours that customers can be served by a person.

Community banks should be careful implementing virtual tellers to ensure it doesn't negatively affect customer service, Reider says. Customer service is usually an area that smaller banks rely on to compete against bigger banks. Still, using virtual tellers to extend hours could work because "a bank isn't falling short of an expectation but rather exceeding it," Reider says.

Needham has always tried to stay ahead with technology to make sure new clients do not feel like "they are taking a step back on technology or service," says McGeorge, who plans to retire next year. Instead, Needham has worked to make the process of transferring accounts as seamless as possible.

"A number of years ago I told the operations people to take all of the 'buts' out of why people don't bank with us," McGeorge says. "I used to hear, 'Jack, I'll come bank with you but...' It's amazing how you can develop strategic plans by figuring out the reasons why people aren't banking with you and reverse that. It has been an interesting evolution."

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