Flexible Stance

By Kenneth Cline, Jack Milligan and Bill Stoneman

Looking to 2004, top retail bankers see an improving economy — and some challenges. Will Wall Street reclaim deposits?

The nation's top retail bankers don't lack for challenges going into next year, but the situation in the fall of 2003 surely is improved from two years ago, when the country was still reeling from the terrorist attacks of September 11 and grappling with a recession and a stock market plunge. Back then, when Banking Strategies published its last retail banking outlook, the emphasis was on internal tightening and coping with grave uncertainty.

As evidence of how the economic clouds have lifted since then: corporate earnings and credit quality have improved, the stock market appears headed for its first positive year since 2000 and the jobless rate has even declined, if ever so slightly. "All signs are that things are getting better," said Candace W. Bagby, senior executive vice president for consumer banking at AmSouth Bancorp, Birmingham, Ala.

As attested by the following series of interviews with 11 senior executives scattered across the country (features begin on page 30), the retail banking market has come out of its retrenchment phase and returned to full-bore competition — and what a contest it is. Even traditional commercial lenders have reawakened to the possibilities in retail banking, further pressurizing the battle to win, retain and expand customer relationships.

One positive going into next year is the potential for economic improvement to fuel more loan demand. There are gradations in the outlook, however. Competition aside, some markets will see more job recovery than others, and that will certainly affect the outlook for various regional players. "It's income that drives deposits and the willingness to borrow," said Peter Raskind, executive vice president for consumer and small business at National City Corp., Cleveland. "It's all about jobs."

Retail bankers also are keeping a close eye on consumer credit quality. One of the remarkable aspects of the retail banking market over the past few years is the way that many consumers stepped up their borrowing and spending even as the job market continued to weaken.

Concerned at least a little bit about a possible consumer credit bubble, some retail bankers are tightening up underwriting and monitoring retail loan portfolios more carefully. "It's counter- intuitive to think there won't be some day of reckoning in the future," says Patrick J. Swanick, president of the retail bank at Cleveland-based KeyCorp.

Increased competition is another issue cited by executives across the country. As the industry "rediscovered" retail banking in recent years, there has been a proliferation of free checking promotions, and institutions are also vying with each other to improve service, extend service hours, discount products and provide new, more attractive branches.

While certainly a boon to consumers, this phenomenon does increase overhead at a time when net interest margins remain pressured by low rates. "The retail banking industry is going to really suffer if that trend continues," says Kelly S. King, president of BB&T Corp., Winston-Salem, N.C.

Profit pressure will be further exacerbated if banks see a drain of deposits back to the stock markets, which explains a near-universal push to beef up investment and advisory capabilities. Cincinnati-based Fifth Third Bancorp, for example, recently unveiled a capital management account to retain what executive vice president Robert P. Niehaus calls "parked money." Along with Fifth Third, institutions as diverse as New York-based Citigroup Inc. and First Tennessee National Corp. in Memphis are hoping to capture migrating deposits with investment products such as CMAs, mutual funds, stocks and bonds.

This underscores an industry trend of institutions pursuing multi-faceted relationships with customers. While banks have long recognized the primacy of the checking account as the relationship foundation for all of the customer's other financial business, they are also putting greater emphasis on trying to cross-sell customers into other products, such as investments and insurance, earlier in the relationship.

Those institutions that can successfully carry out such a strategy are more likely to prosper whatever the interest rate or competitive environment. Given the outlook for 2004, such flexibility may be the key to success.

Mr. Cline is senior editor with Banking Strategies, Mr. Milligan is a freelance writer based in Charlottesville, Va., and Mr. Stoneman is a freelance writer based in Albany, N.Y.

Moving Market Share

By Bill Stoneman

For Kelly S. King, retail banking represents a long-term opportunity and a short-term challenge. The president of BB&T Corp. believes millions of retiring baby boomers will ensure robust growth in the years ahead, but banks must first endure a profit squeeze until the economy gets solidly back on its feet. "Financial services can't grow faster than the overall economy for long," says King, who has been running BB&T's retail operations in his current position since 1996.

Although the national economy has been emerging from the recession it fell into in 2001, progress has been slow. Job growth is anemic, corporate profits are sluggish and interest rates are still hovering at 40-year lows. This puts pressure on two key sources of bank profitability — net interest margins and loan volumes.

Consumers won't be able to sustain their overall pace of spending and borrowing unless the employment picture improves, an outcome dependent on corporate earnings growth. Stabilizing rates, meanwhile, will put the brakes on mortgage refinancing activity.

Beyond that, King worries about competitive pressures. "At a time when financial service companies ought to be trying to protect profitability, there's a strong movement to offer more weekend hours, more free checking, and to give away services such as online banking and bill pay," King says. "The retail banking industry is going to really suffer if that trend continues."

King expects the economy to improve over the next year, but slowly. That means pressure on net interest margins isn't going to ease any time soon. Similarly, the pressure to give away services will abate eventually, he says, but not necessarily soon.

In the meantime, BB&T can't sustain earnings growth unless it boosts the volume of its business, and that requires taking market share from competitors. How? The Winston-Salem, N.C.-based company focuses on service quality rather than pricing or product innovation. "Our strategy emphasizes better quality relative to the price we charge, which creates better value." That formula obviously works, given BB&T's enviable track record of earnings and asset growth, and King's long-term outlook is strictly bullish. The financial services industry has many years of robust growth ahead, particularly in managing the assets of baby boomers who are still accumulating wealth, he says.

BB&T is helped by the fact that it operates both investment and insurance units. A relatively early entrant among banks into the insurance business, BB&T continues to acquire modest-sized agencies regularly. Back-office work is consolidated, thereby reducing costs, while the part of the business the public sees is left mostly alone.

The company plans to improve overall productivity by pruning its branch network from time to time, and by deploying technology that helps lenders, platform officers and tellers do their jobs more efficiently.

Ultimately, King says, BB&T will attract and retain customers on the strength of its staff and the quality of their service. As a result, he says front-line bankers have significant authority to resolve issues for customers. "Market share moves around on the basis of a number of factors," King says. "But the primary determinant is human-based."

Account Juggernaut

By Jack Milligan

Deanna Watson Oppenheimer is not immune to the economic ups and downs that have beset the financial services industry, but the retail chief of Washington Mutual Inc. is more than holding her own. Wamu gained more than 1.4 million new retail checking accounts in 2002, including its acquisition of New York-based Dime Bancorp. An additional 820,000 accounts came in during the first half of this year, all of which was organic growth, representing a 12% increase over the prior-year period.

Oppenheimer, president of Wamu's banking and financial services group since 1999, realizes that a recovering stock market will likely recapture some of the deposits that fled from Wall Street to the banking system. But she's not unduly concerned, explaining that Wamu tends to cater to middle-market consumers who are less heavily invested in the stock and bond markets than those in higher-income brackets. "The customer base values the safety of deposits and is keeping its dollars there," she says.

For 2004, Wamu is forecasting a stable interest rate environment, which Oppenheimer expects will provide a suitable foundation for growing both deposits and consumer loans.

Since Wamu is a thrift, mortgages naturally constitute its major product line. This is run as a separate line of business, producing net income of $1.48 billion through the first six months of the year, compared with $633 million for the retail arm. (Wamu's other primary operating segment, specialty finance, earned $243 million for the period). Wamu also originates residential mortgages in the branch system, and Oppenheimer expects activity to drift down to more normal levels now that the red-hot refinancing market has cooled off. Home equity loan volume — the single largest loan category — continues to be very strong.

Wamu's retail arm has also been targeting the small business sector, which Oppenheimer defines as companies with less than $5 million in annual sales in the service, wholesale, manufacturing, finance and insurance industries. "We start with consumers and work up to small business," she says. "This is an extension of our consumer strategy."

Oppenheimer likes the category for another reason: banking small business owners often provides an opportunity to win their personal business as well. Indeed, cross-selling has become an important part of Wamu's retail strategy. According to Oppenheimer, 82% of Wamu's new retail customers are attracted by its free checking account, which then provides an opening to sell additional products such as loans. Wamu also cross-sells off of its mortgage product, including home equity loans, and its "Platinum" checking account, which combines money market, savings, checking and investment features.

Another growth avenue at Wamu is de novo branch expansion. The thrift opened 143 new branches in 2002 (while adding 123 more through its buyout of Dime), and another 49 through August of this year — including 32 in one day in Chicago. The goal has been to fill in gaps in some of the mature western markets while laying claim to new markets during an eastward march that has lately taken in the Chicago and New York regions. Eventually, says Oppenheimer, "We want to be in all major metropolitan markets."

Centering on Checking

By Jack Milligan

Gene Kirby has one eye on the stock market and the other on deposit levels. The SunTrust Banks Inc. executive vice president is mindful of the possibility that an economic recovery in 2004 might boost the stock market and reverse the deposit inflows that banks like his have enjoyed for the last two years. "I think that will be our biggest challenge and opportunity," says Kirby, who has been in charge of SunTrust's retail business since June 2002.

SunTrust's strategy for coping with this scenario is to expand the number of households it does business with, using a suite of checking account products as the major lure. "We believe the checking account is the product that opens the door for other product sales," Kirby says. In August 2002, the Atlanta-based bank introduced free checking in a bid to win more middle-market customers.

Kirby believes checking can even open doors with private banking prospects (liquid assets of $500,000 or more), who obviously receive a higher level of service, including being assigned relationship managers and dedicated call center support. "If all you do is get a customer's certificates of deposit and leave the transaction account with another institution, you haven't captured that household," he says.

To implement this strategy effectively, Kirby is counting on SunTrust's local, small-bank "feel." Although the company converted to a single bank charter in 2002 and has centralized all back-office functions, it still retains a decentralized management structure in the five states plus District of Columbia where it does business. Rare among major bank holding companies, SunTrust's 49 local banking units each has its own president and management team, who enjoy wide discretion in pricing loans and deposits.

The regional team even has the ability to approve rates outside the recommended band. While these pricing exceptions are tracked at the corporate level, the final decisions are made in the field. Local SunTrust bankers also have the freedom to price business loans on a case-by-case basis. "We're focused on local market ownership," Kirby says. "We don't want a big bank feel."

A similar system is applied to marketing. Like most large banks, SunTrust tries to leverage its marketing dollars through company-wide promotions. But it also allocates marketing resources to local markets, where managers can fund their own programs. For example, retail bankers in Atlanta recently negotiated an incentive program with a local wine merchant, which ended up promoting the bank on its Website. The North Florida team set up a similar incentive program with a local golf pro shop.

If Kirby's expectations of a stronger market hold true, one factor that might help SunTrust retain deposits would be the desire of many individual investors to remain more diversified than they were during the last bull market. "I think people be will be a little hesitant to jump right back into the market," he says.

On the loan side, Kirby expects the mortgage market will continue to cool off next year as rates rise and refinancing activity winds down, although he expects that home equity loan volume will remain strong. "Even in a rising rate scenario, we'll see growth there," he says.

Un-parking Deposits

By Jack Milligan

Fifth Third Bancorp is pursuing what Robert P. Niehaus calls "parked money," the funds that customers pulled from the stock markets over the last few years and stashed away in safer bank deposits. He wants to steer those funds into accounts that have a variety of deposit and investment options, thereby strengthening customer ties. And he's eliciting cooperation among all of the different product areas to make the hybrid approach work.

The focal point is a capital management account — an interest-bearing checking account that includes a debit card, a platinum credit card, a brokerage account, the availability of a home equity line of credit and access to Fifth Third's mutual funds. Customers can manage their finances in a single account with a single statement. And if they want to shift gears quickly, they can do so without having to change providers, says Niehaus, an executive vice president who has run Fifth Third's retail operations for eight years.

Niehaus says he is also encouraging Fifth Third customers to try some of the company's 35 proprietary equity and fixed-income mutual funds, which are sold in the bank's branches by licensed investment personnel.

These efforts come against a backdrop of what appears to be an improving economy, at least from Fifth Third's perspective in the nation's industrial heartland. The Cincinnati-based bank operates in Ohio, Illinois and six other states. "I would never pretend to be an economist, but it feels real good to us," Niehaus says.

The executive also sees opportunity in small business banking. Fifth Third is focusing on the retailers and small manufacturers that abound in its service area, including their personal banking business.

But deposits present a more complicated issue. With the economy seemingly on the mend, banks wonder whether they can hold on to the funds that fled from the stock market. "We would expect to see a lot of that money heading back," he says.

To retain those funds, Niehaus is asking customer reps in the branches and call centers to work more closely with reps in the investment unit. Both branch bankers and licensed brokers at Fifth Third Securities, the bank's brokerage arm, can sell the CMA product. And any of the bank's checking accounts can be converted to a CMA, which greatly simplifies the sign-up process.

This strategy has required the bank to break down internal barriers that have kept branch bankers from cooperating fully with the investment side of the house. At Fifth Third, it's simply expected that bankers and brokers — the latter also work out of the company's 942 branches — will refer customers to each other.

This ethic of cooperation is reinforced in several ways. A team of regional managers is responsible for the sale of all consumer products in their territories, so they push cooperation and cross-selling from the top down. And 77% of Fifth Third employees own the company's stock, which encourages teamwork from the bottom up.

The most important thing, Niehaus says, is to give customers options that fit their needs. "If we don't work with them, their money is at risk of leaving."

Crowded Market

By Bill Stoneman

When it comes to checking accounts, more is not always better, as Neil E. Hall experienced first hand during the first half of 2003. Chief executive for regional community banking for PNC Financial Services Group Inc., Hall managed to grow checking accounts by 2.1% — but saw an 11.8% fall in retail banking income as loan and deposit balances declined. The culprit, resurging competition, is challenging retail bankers across the country.

With the commercial lending and investment management businesses still soft, financial institutions have redoubled their focus on retail banking customers, pressurizing the market. Pittsburgh-based PNC, says Hall, "is in a hotly contested footprint where a number of our competitors have rediscovered retail," but the company is still sticking to its guns.

Overall, PNC's retail strategy revolves around customer care. The company built an extensive customer information system and has trained its reps to utilize that data, for example, alerting customers if a different checking account would be more suitable for them. "Satisfied customers will stay with you," Hall says. "Loyal customers will refer more business to you."

When possible, the effort to secure loyalty starts at account opening, when PNC bankers seek to draw out customers on the full range of their financial needs. Equipped with such information, reps can do the best job with follow-up calls to those customers, whom they contact intermittently to confirm their satisfaction and probe for additional needs.

To the maximum extent possible, PNC intends to compete for checking account business on the basis of convenience and service rather than price, according to Hall, but the difficulty of that proposition can be seen in the company's second quarter earnings report. Though total balances in service-sensitive transaction accounts rose by $677 million, to $24 billion, from June 2002 to June 2003, rate-sensitive certificate of deposit balances fell by a larger amount, $816 million.

Looking ahead to 2004, Hall sees continuing challenges in the competitive environment. With interest rates still near historic lows, there's not a lot of leeway: price too high and the net interest margin suffers; price too low and customers move their certificates of deposit to competitors. "The question always is, ÔWhat pricing do you need to protect the volume of your deposits?' " says the executive, who assumed his current position in October 2002.

As for the asset side of the retail balance sheet, everything depends on the pace of economic growth in 2004. Hall doesn't expect a big surge. He says home equity lending, which accounts for most of the company's retail loan portfolio, ought to continue growing. Small business lending perhaps will grow at an even faster pace than the retail sector as a whole, he says, as a result of PNC's focus on that market segment.

In addition to its Pennsylvania base, PNC operates in New Jersey, Ohio, Indiana and Kentucky, and the company continues to expand its capabilities and distribution system. Small business banking and investments are priorities, along with network expansion in New Jersey, where it is buying the $3 billion-asset United National Bancorp and also opening 40 supermarket branches.

Tough in the Middle

By Jack Milligan

For Peter Raskind, life is tough in the middle. Executive vice president for consumer and small business at Cleveland-based National City Corp., he contends with the likes of Fifth Third Bancorp, Bank One Corp., KeyCorp and Charter One Financial Corp. "It's hotly competitive, across the balance sheet and also with investments and insurance," he says.

The economy isn't helping — at least not yet. Despite some positive signs nationally, Raskind is still awaiting improvement in National City's six-state franchise, which stretches from western Pennsylvania to Michigan. Unemployment, for example, remains stubbornly high. "It's income that drives deposits and the willingness to borrow," says Raskind, who assumed his current post in August 2000. "It's all about jobs."

These factors underscore the importance of a branch renewal campaign at National City, traditionally a strong commercial lender that has been working to strengthen its retail presence. For the last three years, the company has been overhauling the retail operation through technology investments, training, reorganization and new products.

A $125 million upgrade of National City's branch technology platform is past the halfway mark, for example. And Raskind says the company has made "demonstrable progress" in improving service quality in its branches, which includes a substantial investment to strengthen its branch personnel — particularly managers.

Along with hiking compensation for branch staff overall, the company has created a new career path so that managers can rise to senior levels within the bank without leaving the branch system. National City has also stepped up its recruiting efforts, focusing particularly on people with strong sales skills from outside the industry.

Improving the retail product set is another priority. A free checking account product (introduced two years ago) has helped to attract younger households, which have turned out to be heavy users of National City's highly rated home banking package. A new money market account, "Money Market Plus Guaranteed," pays customers a rate competitive with nonbank money market funds.

Like most other banks, National City reports continued growth in home equity lending. It has also targeted the small business sector for growth next year in both loans and deposits. In late 2002, the bank introduced a no-minimum-balance free checking product — modeled after a similar product for consumers — that Raskind terms "quite effective in attracting new small business families."

Questions remain with National City's deposit business, which is standing up to the competition but still faces the industry-wide issue of what happens if the stock market really jumps. Raskind says he's not seen any signs of deposit outflows to Wall Street, and he also doubts that customers will enthusiastically return to the markets after having been burned so badly in the previous three years. But the threat remains, adding to the urgency of the company's branch renewal campaign.

While Raskind isn't expecting economic conditions to get "particularly better" next year, he does say there are hidden benefits to playing in the same sand box with some of the country's toughest banks. "Some might argue that this region is the most competitive," Raskind says, "but it helps us elevate our game."

Retail Recovery

By Jack Milligan

Cece Sutton is breathing easier at Wachovia Corp. these days, knowing that a complex merger integration project is completed and also seeing strong deposit growth and new branches coming on stream "We're feeling pretty positive about how we're going to finish this year," says Wachovia's executive vice president and head of retail banking.

Like most of her peers, Sutton does worry about net interest margins. The spread between what banks pay for deposits and earn on loans has narrowed, and Wachovia will have to be "creative" in 2004 to minimize that impact, she says. Fees may have to rise, for example.

But these concerns are relatively minor compared with recent challenges. The retail business particularly was devastated by fallout from predecessor First Union Corp.'s 1998 acquisition of CoreStates Financial Corp., when a botched systems integration sent customers fleeing. When First Union and Wachovia merged under the Wachovia name, the new company proceeded much more carefully, completing the integration only last July. This time, customer runoff was contained.

The bank also enjoyed strong deposit growth in 2002, with an 11% increase in demand deposit balances. This year, Wachovia introduced free checking in all its markets, a move both predecessor companies had long resisted. Sutton says this product has exceeded expectations. Combined with growth in the bank's packaged checking accounts, it should help propel DDA balances even higher. "We think we're going to have a good deposit year," she says.

Sutton traces the retail recovery at Wachovia back to 1999, when current chairman and chief executive G. Kennedy "Ken" Thompson was appointed president of First Union. From that point on, "deposits became king," says Sutton, who took over First Union's retail banking business in 2000 and continued in that role after the merger.

Small wonder that Sutton continues to eye deposit volumes carefully. The bank has seen some modest runoff lately, primarily in the form of higher-rate certificates of deposits that have been expiring this year. Sutton expects investors to begin returning some of their funds to the stock market, reversing the strong deposit inflows of the past two years.

Arguably, Wachovia is well positioned for a shift in investor sentiment since the company operates a full-service investment products operation and has installed licensed securities brokers in most of its branches.

Sutton sees further opportunity in the small business market, where Wachovia has relationships with 800,000 small companies, each with annual sales of up to $3 million. Small business deposits shot up 18% last year, helping to fuel overall deposit growth. The bank is making a big push to acquire the personal accounts of small business clients as well.

In a move to improve its deposit-gathering outreach, Wachovia has announced plans to open between 30 and 50 new branches a year for the next three years in areas where there are gaps in its coverage. One key market will be Greater New York, where the bank expects to have between eight and 12 new branches by the end of 2004. This de novo building program stands in sharp contrast to recent years, when Wachovia closed 170 offices during its post-merger integration.

Retention Play

By Bill Stoneman

Patrick J. Swanick spends a lot of time thinking about how to deepen relationships with customers. President of the retail bank at Cleveland-based KeyCorp, he wants to build a rock-solid foundation that extends relationships through the years. "If we can retain customers longer, they represent an annuity stream for us," says Swanick, who received his current assignment in 2001.

At KeyCorp, putting that strategy into action entails targeting major customer segments and offering tailored blends of banking and investment products, with the goal of supporting customers through the different stages of their lives.

Although the strategy is easily stated, implementation is difficult. Swanick says competition has intensified as rivals that previously focused more on commercial banking and capital markets have "rediscovered" the retail business. Meanwhile, loss leaders such as free checking and gift promotions have proliferated, chipping away at profits.

The difficulties KeyCorp is facing can be seen in the company's second quarter financial report. Net income in the consumer banking unit declined by $8 million from the same period a year earlier. The biggest factor was a $10 million drop in service charges on retail banking deposit accounts, reflecting lower overdraft fees and the introduction of free checking in late 2002.

On the asset side, consumers are still clearly in the mood to borrow. Swanick anticipates continued strength in home equity lending, along with some increased demand for straight installment, auto and recreational vehicle loans. However, consumers' capacity to take on additional debt is unclear.

While KeyCorp has experienced no deterioration in consumer credit quality, Swanick says he is taking little for granted given today's weak job market. "It's counter-intuitive to think that there won't be some day of reckoning in the future," he says. Just in case, KeyCorp has tightened its underwriting on loans secured by real estate, to make sure it isn't basing decisions on inflated home prices. But trying to figure out who will suddenly lose a job is more difficult, Swanick adds.

One downside to a stronger economy, and with it a stronger stock market, would likely be an outflow of deposits. To keep that money "in the family," Swanick expects to have bankers licensed to sell annuities and mutual funds in more than 80% of KeyCorp branches by the end of 2004. The bank can also refer investors to its sister brokerage company, McDonald Financial Group.

KeyCorp, which does retail business in 12 states stretching from Maine to Alaska, deploys a number of tactics, many revolving around cross selling, to retain customers and to expand relationships with them. The company also seeks to identify services worth pitching through a customer relationship management system that looks for individuals with similar profiles, compares the kinds of accounts they hold, and suggests gaps that can be filled.

But Swanick believes the best opportunity to expand relationships comes when individuals open accounts. As so many other banks have begun to do in the last few years, KeyCorp platform officers try to engage new customers in a conversation about the breadth of their financial needs, intending, of course, to show how the bank can fulfill those needs.

Citi's Supermarket

By Bill Stoneman

Whether fighting to preserve its 26% deposit share in metropolitan New York or expanding in the West, Citigroup Inc. is hustling to get maximum mileage out of its "financial services supermarket" model, and Maura Markus is leading the charge. President of Citigroup's North American retail distribution group, she is constantly seeking more venues for the company's vast array of banking, investment and insurance products.

The current advertising campaign, which goes under the slogan "Live Richly," emphasizes the company's strengths as a full-spectrum financial advisor. The message conveyed is that Citibank, the consumer banking subsidiary, can help customers achieve the good life, as painlessly as possible, by putting their financial affairs in the bank's capable hands.

The company backs up the campaign with a branch operation that emphasizes consultative selling and in-house expertise. Customers who walk in the door, for example, are often invited to complete a financial needs analysis known as "CitiPro," which provides the bank with a complete view of their personal finances. To fill unmet needs, each branch has employees with Series 7 licenses permitting them to sell equities and bonds. In addition, many platform officers hold annuity and mutual fund licenses.

Markus says revenues from investment-related products comprise a significant share of the branch system's total. Insurance sales, only in their second year, aren't as far along yet, but reps do offer a variety of life and long-term care products.

From a strategic point of view, Citigroup's retail franchise lacks geographic coverage; most of its 800 branches are concentrated in either New York or California, with a smattering in Florida, Illinois, Nevada, Maryland, Virginia and Washington, D.C. The New York-based company also owns Mexico's Grupo Financiero Banamex-Accival Banacci.

With its hometown deposit base under intense assault from newcomers as well as long-time rivals, Citigroup is looking elsewhere for growth. At a time when most other large regional banks are sitting out the M&A game, Citigroup has made recent purchases in California (Golden State Bancorp) and New York (European American Bank).

Markus expects to leverage these acquisitions on the retail side by bringing the investment/insurance sales capacity of their branches up to Citibank standards. And additional deals could materialize down the road. "We continually look at opportunities, but it has to be the right opportunity at the right price," says Markus, who has been in her current position since June 2000. As an example of an attractive market, she cites Texas, where a branch network could leverage the value of Citi's Mexican bank.

For the year ahead, Markus is expecting slow improvement in the economy, which should be sufficient to support double-digit loan growth, led by home equity but also including installment lending, mortgages and overdraft protection. She is concerned about the low-interest rate environment, which has put great pressure on the company's net interest margins. But the possibility of deposits flowing back to the stock market is not a big worry for her, since she believes Citi can capture a significant share of related investment sales commissions in that scenario.

There are, it seems, advantages to being a financial services supermarket.

Diversification Play

By Bill Stoneman

First Tennessee National Corp., like many of its peers, is scrambling to attract deposits with new branches and extended hours. But Charles G. Burkett actually sees the future of the company's retail franchise residing elsewhere. "We see more growth potential in non-bank types of products than we do in traditional banking products," says Burkett, president of First Tennessee's retail financial services as well as its Memphis area bank.

By "non-bank" products Burkett means investment management, investment sales, insurance and trust offerings. First Tennessee has spent the last few years organizing its 188 branches, all in Tennessee, to tap deep into the financial needs of customers. All these offices, for example, field representatives who are licensed to sell annuities and a small amount of property/casualty insurance. About three-quarters also have Series 6-licensed reps, who can sell mutual funds, and another one-fourth are staffed with Series 7 license holders, who are authorized to sell stocks and bonds.

These non-banking products currently produce about 18% of First Tennessee's retail revenue. Burkett, who has been in his current job since 2001, would like to drive that percentage to 25% over the next three years.

The cornerstone of this effort is free financial planning, offered in branches by certified financial planners, who are on track to generate 10,000 plans in 2003. "There is no pressure to buy any product," Burkett says, though customers often do buy after taking a look at what has been prepared for them.

Burkett says that customers who confer with these planners tend to open new investment accounts worth an average of $163,000, compared with $40,000 from new investments customers who haven't talked to a planner. Burkett says this suggests that people who consult with planners are more likely to consolidate funds from their other financial institutions at First Tennessee.

The second part of Burkett's diversification program involves mortgage products, and here the focus is outside the branch system. First Tennessee, a big player nationally in home mortgages, currently operates 230 mortgage offices in 39 states under the First Horizon Home Loan label. In late 2001, the $25-billion-asset company began offering, with some success, home equity loans, credit cards and even deposit accounts to First Horizon mortgage customers. Deposit accounts are funded through automated clearinghouse transactions.

More recently, wealth management teams were deployed in nine of these mortgage offices to court upscale customers. The teams consist of mortgage officers, investment and insurance specialists and certified financial planners.

First Tennessee already commands a leading share of deposits in most of its major markets — 36.2% in its headquarters city of Memphis, for example. So essentially there's not much room for First Tennessee to pry away accounts from competitors except in Nashville, where its share is only 4.4%.

Growth prospects for retail lending appear brighter, with Burkett anticipating close to 10% growth in consumer loans next year due to an improving economy, compared with between 4% and 6% for deposits. Although he expects first mortgages to fall off, due to rising interest rates, Burkett thinks home equity lending will remain strong and that straight installment lending will pick up.

Selective Approach

By Bill Stoneman

Candace W. Bagby is visibly moving her company's retail operations beyond basic banking, but she sees no need to go to extremes in diversifying the product set. Head of retail banking at AmSouth Bancorp, she has taken a selective approach, rolling out offerings that will make a difference and fit with AmSouth's overall approach to the customer. Now she is bearing down to make sure that her careful moves will pay off in terms of relationship retention and expansion.

"Our objective is not to be the one-stop shop that can do everything for everybody," says Bagby, AmSouth's senior executive vice president for consumer banking since 1995. "It is to have more customers and meet their needs as fully as possible."

Eschewing the concept of the financial supermarket, Birmingham, Ala.-based AmSouth traditionally stuck to a few basic products such as checking accounts and home equity loans. That started to change in early 2002 when the company began training its branch officers to take first mortgage applications. AmSouth is on track this year to book twice the $3 billion in originations it did in 2002, with most of the increase coming from the bank's 600 branches.

More recently, the push has been on to sell mutual funds; about 500 branch employees will have Series 6 securities licenses by the end of this year and many more will get licensed in 2004.

Bagby is particularly hopeful that the mutual funds initiative will help the company retain a larger portion of customer funds that flowed into bank deposits in the past two years and that will be at risk of returning to the stock market as the economy recovers. She believes consumers have gradually gotten used to the idea of buying investment products from banks as institutions have bolstered their capabilities. "People are receptive to well-trained, well-prepared representatives who understand their needs," she says.

Despite these extras, AmSouth remains traditional in its basic approach. It does prime lending only, for example, and views the checking account as the foundation for cross-selling efforts. To win more accounts, AmSouth began offering free checking in 1998. Bagby says free checking doesn't deserve its reputation as a loss leader, noting that the average account holds well over $1,000 in balances and that free checking customers buy checks and are avid users of ancillary products such as debit cards.

To reach more potential customers, AmSouth has joined the de novo branch-building craze. The company is on track to open 30 new offices this year, mostly in Florida, but also in suburbs of Birmingham and Nashville, and it plans to open at least 30 more in 2004. AmSouth's six-state franchise includes Mississippi, Alabama, Tennessee and parts of northern Florida. "People want to do business with people and branch locations are important to our future," she says.

As for the economy, Bagby says, "All signs are that things are getting better." Although low rates have squeezed net interest margins and consumer credit quality remains something of a question mark, the past two years have been very good for retail banking, both for deposit and loan growth. Bagby expects more of the same in 2004.

Mr. Cline is senior editor with Banking Strategies, Mr. Milligan is a freelance writer based in Charlottesville, Va., and Mr. Stoneman is a freelance writer based in Albany, N.Y.

Copyright © 2003 by Banking Strategies, published by BAI.

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