National Commerce Financial Corp.'s recent expansion in the competitive Atlanta market is off to an unusually good start, thanks to its tried and trusted in-store branch approach.
The success is more noteworthy than past efforts because of circumstances surrounding the company's partnership with Kroger Inc. grocery stores.
For one thing, Bank of America Corp. has slowed its pace in selecting supermarket branch locations in Atlanta, where it also has a relationship with Kroger - a situation that heightens the competition with National Commerce.
Also, some retail analysts on Wall Street wonder about the near-term prospects for the supermarket industry as customers shop at grocery chains less frequently.
For now, however, National Commerce says all indications are that its initiative is working. Since April 28 the Memphis company has opened 13 full-service branches in Kroger stores, and those branches have amassed $105 million of deposits, thanks in part to an aggressive marketing campaign and the above-market rates it is paying on certificates of deposit and money market accounts.
In addition to the Kroger branches, the $21 billion-asset company has two traditional branches north of Atlanta and nine at Wal-Mart stores in the metropolitan area. That gives it $275 million of deposits in that market, or a share of less than 1%, and puts it in the top 20 there.
Within five years it wants to have 5% of Atlanta's estimated $60 billion of deposits - a goal that William R. Reed, the company's chief operating officer, admits is ambitious.
Bank of America's contract with the Cincinnati-based Kroger gives it first right of refusal on branches in newly opened stores in Atlanta. It has 60 Kroger branches and $11 billion of consumer deposits in the region.
Officials at the $647 billion-asset banking company say they remain committed to in-store banking, but so far this year it has passed up chances to open branches in new Kroger stores and has closed branches in some existing stores - while National Commerce has seized the opportunity to grow.
National Commerce has managed to gather an average of $8 million of deposits per Atlanta branch in just four months - a much faster pace than it has amassed in its other markets.
"Normally, we're looking at $12 million per branch at the end of 12 months, and we're clearly going to blow that away," Mr. Reed said in a telephone interview this week.
Jefferson Harralson, an analyst at Keefe, Bruyette & Woods Inc. in New York, said that National Commerce's success so far in Atlanta is likely the result of its aggressive pricing, a tactic it uses in all its new markets. It has been offering free checking and paying interest rates 25 to 100 basis points above the market average on CDs, money market savings accounts, and interest checking accounts.
However, its experience at in-store banking may also be a factor in its Atlanta growth, he said. "I think National Commerce has gotten very good at in-store banking. … They just do it better. It works."
To accomplish its goals, the company must also contend with what one analyst says are structural issues that food retailers are struggling with.
"Customer trips to supermarkets have declined" because more alternative stores are stocking groceries, Stephen C. Chick, an analyst with J.P. Morgan Securities Inc., wrote in a report issued Thursday.
The average customer visited a supermarket about 75 times last year, down from 87 in 1997, according to Mr. Chick, who downgraded Kroger to "market performer" from "buy."
Mr. Reed said that even though visits to chain groceries such as Kroger may be declining, and may affect the grocers' financial results, the change is less important for in-store bank branches. Those 75 customer visits a year still translate into nearly 1.5 visits a week, far more than the monthly visits that most customers make to traditional bank branches, he said.
Also, when National Commerce plans in-store branches, it ignores the 30% of customers who are infrequent supermarket shoppers and focuses instead on the 70% he calls "primary customers," who visit an average of twice a week.
Even if most customers actually visit less frequently than that, the company would prefer to "be in a place where we have a chance of seeing people," rather than waiting for them to come into a traditional branch, he said.
As in its other markets, National Commerce plans to use a hub-and-spoke model in Atlanta, which matches one traditional branch with three to five in-store branches. It plans to open branches in six more Atlanta-area Kroger stores, plus a traditional hub branch, by yearend and hopes to have at least 30 branches there by the end of next year, Mr. Reed said.
"It's going to take us years to build out the hub-and-spoke network across the Atlanta area," he said.
National Commerce opened its first in-store branches in Memphis in 1985; now about one-third of its 450 branches across the Southeast are in stores. It also operates a consulting arm that advises other firms on in-store banking.
The company will be up against serious competition. Wachovia Corp. of Charlotte has about 25% of the deposits in the Atlanta area, according to Federal Deposit Insurance Corp. figures from mid-2001, the most recent available. Bank of America has about 15%, as does SunTrust Banks Inc. of Atlanta.
The Seattle-based thrift Washington Mutual Inc., another aggressive newcomer, plans to open as many as 80 nontraditional retail-style "Occasio" branches in Atlanta in the next five years. SunTrust has its own in-store strategy in the area, where 67 of its branches are in Publix grocery stores.
National Commerce was formed two years ago when National Bank of Commerce and CCB Financial Inc. of Durham, N.C., completed a merger of equals. Atlanta links the company's Tennessee and north Georgia markets with the Carolinas, where in the past year it has bought SouthBank Shares Inc. of Anderson, S.C., as well as 37 branches from First Union Corp. and the old Wachovia Corp.
Atlanta was a target because, "not only is it a big deposit base, but it's growing," Mr. Reed said.
The 5% market share target, which would give National Commerce about $3 billion of Atlanta-area deposits, is reachable, he said. The company would prefer to expand by opening branches, because "it's a lot cheaper than buying a bank," he said, though he would not rule out making small acquisitions.
For now the company is content to peg its growth to in-store locations that Bank of America is leaving on the table, as well as a handful of stand-alone branches.
Neither Bank of America nor Kroger officials would discuss the B of A's contracts with Kroger.
Brad Dinsmore, the Charlotte company's consumer executive for the Mid-South region, said in an interview that the Atlanta in-store branches "are really an important part of our overall strategy." Nearly one-third of Bank of America's 189 Atlanta-area branches are in 60 stores, and the company continues to evaluate in-store locations as it seeks new branch sites, he said.
The channel will remain important next year, when Bank of America expects to open 100 to 150 more branches than it closes nationwide. That would be its first net gain in branches in several years, Mr. Dinsmore said.
