Small Banks Buck Trend By Sprouting Branches

As many in the banking industry scramble to reduce their reliance on brick and mortar, Vernon Hill 2d is thinking about where his next branch should be.

Mr. Hill, chief executive officer of Commerce Bancorp in Cherry Hill, N.J., aims to open a new branch every month, to bring the $2.7 billion bank's total to 100 branches by 2000.

"You need to have a community bank location in the community you serve," said Mr. Hill. To community banks, "branches are the key."

Mr. Hill's philosophy goes against conventional wisdom in an industry that is trying to replace the human teller with modern technology. But he's not alone in the community bank world, where the branch continues to be the mainstay of the business.

Though the larger banks are busy closing branches, many community banks are opening them - often in unconventional places. At the same time, start-up community banks keep popping up in markets where mass consolidation has taken its toll.

The nation's smallest banks are trying to fill the voids that can be left when larger institutions close branches.

"For the community banks, especially to the customer, the branch represents the institution," said Les Dinkin, principal of NBW Consulting Group in Westport, Conn. "The community bank tends to be focused on the branch."

Still, branches continue to be favorite targets of cost cutters, who claim younger generations prefer to bank by telephone, automated teller machines, and the personal computer.

Over time, consultants said, the number of consumers who rely heavily on the branch is likely to wane.

"If you're under 40 you think, 'What is a branch?' " said Marilyn Seymann, president and chief executive officer of M One Inc., a bank consulting firm in Phoenix. "If you think of a branch, you think of a tree."

A study by Tower Group, a Newton, Mass.-based research firm, predicts teller transactions at U.S. community banks will drop from 4.5 billion this year to 3.5 billion in 2001, and that branches operated by such banks will drop from 43,000 to 40,000.

Robert Landry, Tower Group research analyst, said surviving community banks will keep their branches open, but they might be smaller branches, such as supermarket branches.

Charles J. Hamm, president and chief executive officer of Independence Bancorp in Brooklyn, said his bank is a prime example of why the branch is still thriving.

"I think it's critical," Mr. Hamm said. "We're committed to a branch system. People like to come in and interface with people."

Like Mr. Hill, Mr. Hamm is looking to expand his branch network. To add to Independence's 33 offices, he plans to acquire some branches and build others from scratch.

One reason for the expansion plans: Many of Independence's customers do not speak English as a first language.

By hiring branch personnel who speak their languages, Mr. Hamm said, his bank becomes an important part of the community.

Independence has opened five branches in the past six years, and Mr. Hamm said they have exceeded his expectations, averaging about $100 million in deposits.

Mr. Hamm acknowledges that his branches have had to keep up with the changing times. Independence has remodeled its offices and upgraded its branch technology, adding automated teller machines and, in the back office, new data processing systems.

Such upgrades have become a must for the community bank wishing to compete with superregionals, said Anita Gentle Newcomb, managing director of Professional Bank Services Inc., a consulting firm in Washington.

Ms. Newcomb said that the hottest trend in community bank branching is adding a "retail perspective."

A typical change: Lowering teller windows so customers feel they are getting more personal attention from tellers. Another is remodeling branches so customers pass automated kiosks and booths offering investment products or other services.

Gary L. Webb, chief operating officer of Extraco Bankshares in Waco, Tex., said his $500 million-asset bank is grappling with how to please two types of customers.

On one hand, the bank is maintaining a traditional bank feel by trying to offer personal service. Extraco, a three-bank holding company, also is trying to attract younger customers who want the conveniences that larger banks offer.

Extraco plans to introduce in its branches next year self-service kiosks at which customers can do their banking.

"Do we want to be Nordstrom's or do we want to be Wal-Mart?" Mr. Webb mused. "I think we're both."

Baltimore-based Carrollton Bank, with $265 million of assets, is trying to lure new customers and transaction fees by installing ATMs in 23 Wal-Marts throughout the Baltimore-Washington area.

Carrollton, which has 11 traditional branches, also became one of the first banks to install an ATM in a McDonald's restaurant.

Now the bank has gained the exclusive rights to install ATMs in 21 Target stores being built in Maryland and Northern Virginia.

David L. Costello 3d, chief financial officer of Carrollton, said the convenience of ATMs is crucial to his bank's growth.

Carrollton has managed to beat out some of the larger banks in securing the ATM locations. The little bank is also getting ready to open its first full-service supermarket branch, an area where community banks seem to be taking the lead.

International Banking Technologies Inc., which helps banks install supermarket branches, has 350 clients with more than 1,200 in-store branches. About 75% of these are community banks, said John Garnett, president of the Norcross bank consulting firm.

"It's a less expensive way for them to expand and for them to defend themselves against the larger banks coming into their territories," Mr. Garnett said. "And there are no advertising costs - they can piggyback off supermarket advertising."

IBT is an offshoot of Heritage Bank, a former Atlanta bank that had three branches in 1983. The bank formed IBT to take charge in putting bank branches in 21 Kroger supermarkets in the Atlanta area.

Heritage Bank grew from $50 million of assets to $325 million of assets on the strength of supermarket deposits. A NationsBank predecessor, Bank South Corp., took over Heritage in 1985, and IBT spun off on its own.

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