Woodforest National Bank, which has more branches in Wal-Mart Inc. stores in Texas - 114 - than any other bank, is now racing into Wal-Marts in the Southeast.
The $1.8 billion-asset bank, based in The Woodlands, near Houston, has opened two dozen Wal-Mart branches in North Carolina since April and said last month that it will open nine in Virginia early next year.
In fact, it plans to plant about 100 such branches in the three states in the next 18 months, including 60 next year, said Cindi H. Stewart, its vice president of marketing, on Wednesday.
That would be the biggest expansion program by far in its 25-year history, but Julie V. Mayrant, the bank's executive vice president for retail banking, says she is "absolutely convinced" that it will succeed, and that each of the planned branches will break even within a year.
"We've been doing this a long time and we've got a good business plan," she said.
Already Woodforest leads the nation in Wal-Mart branches, with 138.
"We've learned a lot from Wal-Mart," Ms. Mayrant said. "We're open every day it is. We're retailers; we're not just a community bank sitting in a store."
And she is not worried, she said, that the retail giant's repeated attempts to get into the banking business, including its charter application for a Utah industrial bank, will bring major changes to the relationship. Wal-Mart has said it would use the Utah bank mainly to reduce interchange fees on card transactions.
The Woodforest Financial Group Inc. unit opened its first Wal-Mart branch in 1996 in Conroe, Tex., with the newly hired Ms. Mayrant as the branch manager. That was one of the two defining moments in its history, said Michael H. Richmond, its vice chairman and chief financial officer.
(The other, he said, was moving its headquarters from Houston to The Woodlands, in Montgomery County, now one of the state's wealthiest and fastest growing.)
Mr. Richmond said the appeal of in-store banking is the foot traffic. "Anytime you have 50,000 people walk by your front door, it's a growth opportunity," he said.
Wal-Mart, which has relationships with dozens of banks, also seems to be pleased with the partnership. Martin Heires, a spokesman for the retailer, said that when it went looking for a bank partner for its North Carolina and Virginia stores, it contacted Woodforest because of its success in Texas.
"We're looking for strong regional community banks to lease space in our stores, and Woodforest has had success in the past with us," he said Wednesday.
Mr. Richmond said Woodforest's worries about expanding so far from home were more than outweighed by a desire to get into less competitive markets. Many of the North Carolina branches are in small communities far from major metropolitan centers, and the Virginia branches will be in central and southern Virginia, not the Washington suburbs.
"It's always a little scary to go into another state, but Texas is probably the most competitive state in the country," Mr. Richmond said. "Everybody and their brother is here."
Like most banks with in-store branches, Woodforest does far more deposit gathering than lending at them. The main goal is to get customers to open checking accounts, Ms. Mayrant said.
The privately held company does not provide a detailed breakdown of its balance sheet, but Federal Deposit Insurance Corp. statistics show a steady increase in noninterest demand deposits since 2001, when it embarked on a major expansion of its in-store business.
In the four years through 2004 its checking deposits grew at a compound annual rate of 20.82%. In this year's first nine months they grew 24%, to $432 million on Sept. 30.
The influx of free cash has had a predictably positive effect on margin and the bottom line. At the end of September Woodforest's net interest margin stood at 4.30%, a full percentage point higher than the average for banks its size, according to the FDIC. Its nine-month profit of $36.8 million translates to a return on assets of 2.84%, also significantly higher than the peer average (1.40%).
Woodforest's margin expanded by 2 basis points through the first nine months, but Mr. Richmond said he expects that growth to accelerate next year as more in-store branches open. "The last two months have been particularly good, and that is making us more optimistic," he said Wednesday.
Woodforest can be thought of as two banks, he said: the in-store operation and a traditional, brick-and-mortar community bank operating 32-branches, largely in Harris and Montgomery counties, suburbs of Houston.
The community-bank part produces more income, since it accounts for virtually all of the $1.1 billion-asset loan portfolio, but the in-store branches - 73% of the total - "provide us with a key source of funding and future earnings growth," Mr. Richmond said.
Scott Alaniz, an analyst who covers Texas' banking scene for Sandler O'Neill & Partners LP, said Woodforest's success in gathering deposits is only half the story.
It also does an exceptionally good job of generating fee income, Mr. Alaniz said. Indeed, he said, Woodforest generates about five times as much fee income from its core deposits (excluding certificates of deposit) as other banks its size.
This year through September it took in $42.5 million of service charges on deposit accounts plus $2.4 million in fees from its automatic teller machines, according to FDIC data. That is almost as much as the net interest income it reported ($47.2 million).
Woodforest did not say how much of its service-charge revenue is derived from overdraft fees, but Ms. Stewart said the amount is considerable. One of its checking products is a "second chance" account for people who have been shut out of other banks for previous financial difficulties. Many of those customers overdraw their accounts periodically, Ms. Stewart said.
Mr. Alaniz said that Woodforest, like every large Texas community bank, is an acquisition target. Several potential buyers are probably looking at it if not courting it he said.
But there is "probably not any reason to sell," he said, because few acquirers could perform as well as Woodforest has in recent years. Its net income grew at a 20% compound annual rate in the four years through 2004.
