Few banks have been as vociferous about staying independent as Central Fidelity Banks Inc., which touts itself as "Virginia's bank."

But proclaiming this go-it-alone strategy and generating earnings powerful enough to sustain it are two different matters.

The Richmond-based bank ranks among the nation's most efficient in controlling expenses, but its revenue generation - especially fee income - has been less inspiring, analysts say.

"We realize we've got to be better," chairman and CEO Lewis N. Miller Jr. said, seated in his 2d-floor office in downtown Richmond. "We're focused today less on controlling expenses than we are on generating additional fee income and loan volume."

To boost revenues - and to keep Central Fidelity out of the clutches of an acquirer - the bank has revved up its loan growth in the last two years and has launched programs to boost fee income.

These include terminating an outsourcing relationship and moving brokerage and mutual fund sales in-house, selling title insurance through the bank's mortgage corporation, starting up a commercial mortgage brokerage operation, acquiring residential mortgage servicing portfolios, and raising service charges in line with competitors' fees.

"There are no home runs," Mr. Miller said in his typically understated way, "but a little bit here and there - it all adds up."

Mr. Miller accepts that the company's fate depends on its continuing financial strength and improved earnings. "As long as you don't want to be had, you're not going to be had - unless you're a damaged bank," he said.

The distance Central Fidelity still needs to travel to reach the level of its high-performing peers was apparent in the second quarter, when the bank posted a return on assets of 1.11% and return on equity of 14.29%. This compares with an average 1.32% and 16.17% respectively for 35 southern regionals followed by Keefe, Bruyette & Woods Inc.

"Central Fidelity has not yet developed any particular niche on the fee revenue side," said Sheri Ptashek of Salomon Brothers. "That has made them exceptionally dependent on net interest revenues, and it exacerbates the fact that they have had a high concentration of lower-yielding assets and a higher-cost deposit base."

The low-yield asset base dates from earlier in the decade when Central Fidelity built up its bond portfolio to 51% of earning assets in the face of weak demand for loans. Rising interest rates in late 1994 forced the bank to take a $29 million loss on bond sales in the fourth quarter, ruining Central Fidelity's 19-year streak of consecutive annual earnings gains.

Since then, the bank has been gradually realigning its balance sheet to boost loans at the expense of securities. Loans in the second quarter constituted 65% of earning assets, compared with 62% a year ago and only 49% in mid-1993. The company's goal is to have loans reach 75% of earning assets by the end of 1997.

The realignment helped improve the bank's net interest margin by 27 basis points during the past year, to 3.86%. But mid-Atlantic banks followed by Davenport & Co. posted an average margin of 4.32% during the second quarter, analyst David West said.

Central Fidelity, with $10.5 billion of assets, "has been on a steady course of improved earnings," said Mr. West. "But it's certainly not spectacular in the context of bank earnings these days, so there's some room for improvement there."

Mr. Miller said Central Fidelity expects to get its margin above 4% by the fourth quarter as loans continue to replace securities and the bank sheds some high-cost certificates of deposit. Consumer lending has been driving the loan growth, particularly installment loans, credit cards, and home equity lines.

By implementing these strategies, Mr. Miller, 52, is beginning to put his stamp on the company he inherited from Carroll L. Saine, who died of lung cancer in August 1994.

A dominant force in the company for two decades, Mr. Saine was known for his relentless boosterism on behalf of Central Fidelity and his willingness to bet on interest rates.

Mr. Saine's buildup of the bond portfolio paid off handsomely in the early 1990s, when Central Fidelity used its securities income to mask losses on commercial real estate. But the strategy also left the bank uncomfortably exposed to the sudden spike in rates that occurred in 1994.

Considered more collegial in his management style, Mr. Miller has also been more open to developing alternative sources of revenue.

"Lewis is looking more at the value-added banking lines of business, whether it's lending or fee income," said Robinson-Humphrey Co. analyst John Coffey.

Central Fidelity's slow-but-steady improvement since the end of 1994 may have put the bank beyond an acquirer's reach, at least temporarily. This year, when analysts look at Virginia's four independent banks, Signet Banking Corp. is the one that stands out as vulnerable in the wake of a highly publicized fraud case and slower-than-expected earnings growth.

"That's the one Virginia institution that I believe could very well be sold," said Vernon C. Plack, an analyst with Scott & Stringfellow Inc.

Central Fidelity, with a third-ranked 13% deposit market share in Virginia, unquestionably remains an attractive acquisition candidate. But the bank's loyal, 65% retail shareholder base helps keep the stock valuation at a strong level, even without a takeover premium.

"Their takeover defense would be the kind of takeover defense your shareholders want - that is, a nice valuation," Mr. West said.

Central Fidelity has enjoyed smooth sailing so far this year, except for a 212% surge in credit card chargeoffs in the second quarter. But its overall bank card chargeoff ratio, 3.95%, remains well within industry norms.

Mr. Miller said Central Fidelity believes its card problems have peaked. Although the bank virtually halted credit card growth this year, suspending all pre-approved mail solicitations, the bank card growth can be made up in other categories, such as home equity and auto loans, he said.

Central Fidelity's $791 million card portfolio currently constitutes 12% of its loans.

Because Central Fidelity confines its loan-generating efforts almost entirely to its home state, continued growth depends partly on wresting market share away from local competitors. The bank is aided in this effort by an efficiency ratio - 51.96% in the second quarter - that ranks among the best in the country due to a heavy reliance on in-store branches (15% of the total network) and strict expense controls.

Running lean and mean allows Central Fidelity to pay up for deposits and offer more attractive loan rates, establishing the company's image as the Wal-Mart of Virginia banks. "It allows us to be the price leader when it makes sense for us," said Deborah J. Brooks, corporate executive vice president and retail banking manager.

Typical of Central Fidelity's approach was last year's offer to beat any consumer loan rate in the state by a quarter of a percentage point. This year, Central Fidelity is offering free vacation packages to customers who take out car loans for more than $10,000, and free checking accounts until 2000.

"They'll compete with anyone on price, whether it's on the asset side or liability side, and they're pretty aggressive," Mr. Plack said.

By maintaining its position as Virginia's low-cost provider of financial services and improving loan growth and fee income, Central Fidelity may yet prevail in its drive to stay independent.

Mr. Miller said: "We really feel we're Virginia's bank. And that does play well in Virginia."

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.