National Commerce Bancorp. has staked its future on employees like Christopher H. Stephenson. The 25-year-old, who joined the bank just two years ago, manages a very profitable supermarket branch in a fast-growing Memphis suburb. The image of the amiable and youthful Mr. Stephenson out in supermarket aisles chatting with customers or putting his stamp of approval on consumer loans is immensely pleasing to National Commerce's chief executive, Thomas M. Garrott. You compare that to the image you've got of the way banking used to be, he said, a big, old, stuffy, arrogant guy a big shot. Mr. Garrott, a former grocery store executive who joined the Memphis-based company 11 years ago, was a pioneer in developing in-store branches. He also transformed the small Tennessee bank into a consumer banking powerhouse with a higher profile than its $3.7 billion-asset base would suggest. Its consulting subsidiary has advised more than 200 banks, including Wells Fargo & Co. and Summit Bancorp., on building and operating supermarket branches. Today, supermarket banking, which some in the industry had dismissed as a bit quirky, is being embraced by big banks across the country. Most notably, the move by Wells Fargo to operate 775 supermarket branches by the end of this year, up from just 37 less than a year and a half ago, was a stunning endorsement for the concept by a lean and highly profitable bank. Suddenly, National Commerce's seemingly sanguine estimate of 7,500 in-store facilities nationwide by 2000 or 15% of all commercial bank branches, up from 2% in just ten years sounds downright probable. As more of the nation's banks see supermarket branches as a key retail delivery strategy, National Commerce deserves a closer look. No other bank has a higher proportion of supermarket branches to traditional offices: 65 of 81 are in grocery stores. At the center of the approach, say bank executives, is the need to hire, properly train, and offer incentives to people like Mr. Stephenson, who are comfortable prospecting and selling amidst rows of breakfast cereals and bunches of bananas. Keith E. Cotham, director of training, summed up the bank's credo: We can teach people to be bankers. But you can't take a banker and train them to be a salesperson. That emphasis is in contrast to more automated retail delivery channels and systems ATMs, telephone service centers, PC banking, and even platform automation that essentially dehumanize consumer banking. At supermarket branches, where customers are rushed, staff members must be able to think on their feet. They have to be familiar with the full range of bank products to be able to steer customers the right way. At an in-store location, given the pace in which the environment moves, you will typically have four transaction areas four workstations at any given location and you don't have the luxury of tying up one of those terminals for 20 minutes opening an account, said Mr. Cotham. To get employees up to speed, sales staff are trained in the nuances of both products and sales. We're talking about getting outside your comfort zone so you can go out in the store and be in front of the customer, said Douglas W. Ferris Jr., president of the National Commerce Bank Services consulting unit. Employees are shown how to write sales pitches to broadcast over grocery store public address systems. Mr. Cotham also tells new hires about the differences between selling on Tuesdays and Fridays. Shoppers tend to be less harried earlier in the week, which allows bankers to spend more time with customers. That is something that may take anywhere from 20 to 55 minutes to open an account, he said. And I can shoot the breeze with you. And after that I know what your hobbies are, that you have a house over on the lake. On Fridays, in contrast, the store is more crowded and customers have less time. Instead of asking open-ended questions Tell me about your current checking account bankers are encouraged to ask yes-or-no questions such as, Do you currently have a checking account? The two key pieces of information I am going to need to know is what type of balance you normally keep and how many checks you write, said Mr. Cotham. From there, I am going to be able to direct you into the account that fits you best. National Commerce also insists that its bankers produce results. Branch managers like Mr. Stephenson set monthly sales goals for each product and each banker. He pencils in the progress daily. In March, his staff four full-time and five peak-time employees had to sell 26 new checking accounts and 26 new money market accounts, among other products. They know what they have to do per month per product, said Mr. Stephenson. If it doesn't come up to the window, you have to go out and get it. Retail bankers are compensated for those product sales and for overall branch performance. Mr. Ferris said that the combination of the sales culture and emphasis on results is the core of supermarket banking success. Let's say the sales are going to be so many per full-time equivalent staff. Then we are going to build a balance sheet and income statement, he said. And then we know . . . what our returns are going to be. At National Commerce, the returns have been stellar. Return on assets has topped 1.46% for five years. Return on equity has exceeded 18% since 1987. The efficiency ratio has steadily dropped from 61% in 1986 to 51.21% last year. The rate of loan growth has exceeded competitors in its markets. And while the bank has an aggressive sales culture, asset quality hasn't suffered. Last year at National Commerce, they didn't have bad loans, they had a single bad loan, worth $30,000. This is bank nirvana, said Kay C. Lister, an analyst with Keefe, Bruyette & Woods Inc. in New York. You have the tremendous revenue generation, you have the diversified revenue stream, you've got the great costs, and you've got terrific asset quality. National Commerce has achieved this growth its asset base has nearly tripled from $1.3 billion in 1986 virtually without acquisitions. Its only purchase was a small Mississippi thrift, whose charter the bank needed to expand into Virginia and North Carolina. We've gotten geographical diversification because we've been able to get into another half a dozen markets with this low-cost entry, said Mr. Garrott. The bank now operates across Tennessee, in Roanoke, Va., and in Durham and Raleigh, N.C. It also has new plans to further expand into North Carolina directly on the home turf of Wachovia Corp. in Winston-Salem. One of the things I wanted to do in going into North Carolina . . . is going up against what arguably could be some of the best banks in the country, said Mr. Garrott. There would probably be easier places. But the point is if we do it there we can do it anywhere. Now, Mr. Garrott is on the lookout for a major acquisition, perhaps in Virginia, the Carolinas, or Alabama. I think that opportunity will present itself at some point, he said. National Commerce also offers some cautionary words for bankers pursuing supermarket branches. Mr. Garrott recalls that between 1988 and 1991, the bank opened only three new branches. Kroger, which was our principal partner in Tennessee, had a leveraged buyout. They had no capital, they had no store growth, and we were limited to their growth, he said. We came to the realization that we needed not be dependent on just Kroger in one state. While Kroger emerged from its financial difficulties and continued to grow, the bank says it negotiates contracts carefully. If a supermarket partner were to go bankrupt or sell to another chain, the bank's right to that store location continues for the life of the lease, which typically run 20 years at fixed rates. If it's a good location, somebody is going to operate it, said Mr. Garrott. What we've learned is that the name doesn't make any difference. The bank also has an option to move if a store relocates to a newer, better location. So assuming that people are going to be in the retail business and continue to sell things whether it be a food store or a Wal-Mart our rights will continue, he said. That's awfully important because things change. The former grocer noted that the life cycle of a supermarket has historically been just seven years. There will at least two or three changes over the length of the lease, so you need to plan for it. National Commerce also notes the importance of economies of scale. Operating a full-service branch profitably usually means a store of at least 35,000 square feet with 20,000 to 30,000 shoppers each week. You've got to have large numbers to make a little bit of money off of all these people, said Mr. Garrott. The bank also tries to open in-store branches in increments of seven or eight about the number needed to justify advertising and marketing expenses. That's also how many branches a regional manager oversees. While National Commerce is bullish on supermarket banking, executives see it as one of many delivery strategies. It says its traditional branches are important to business customers. The bank is also working with Alltel Information Services, Little Rock, to build a state-of-the-art call center, which it will make available to small and medium-size bank customers of the consulting subsidiary. It's also going to be the facilitator for our on-line banking, said Mr. Garrott. And newer branch designs, some as small as 40 square feet, include ATMs and loan kiosks. But the chief executive is confident that electronic banking won't eclipse his supermarket branches anytime soon. Electronic banking will be more evolutionary and generational . . . whereas in-store banking has been revolutionary. It shows no signs of diminishing, said Mr. Garrott. I personally don't think it's going to equal the business we do through in-store banking for quite a while. With personable employees on his side like Mr. Stephenson, who started his banking career at a traditional branch, Mr. Garrott just may be right. The potential for sales out here has tripled, said Mr. Stephenson.

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