Douglas M. Lester, chairman and chief executive of Trans Financial Bancorp, has made no secret of his ambitious plans for the Bowling Green, Ky.-based institution.

Since he joined the company in 1984, Trans Financial's assets have grown tenfold, to $1.6 billion. So far in 1994, the bank has completed three acquisitions in its Kentucky and Tennessee markets, and Mr. Lester said another announcement is likely before yearend. He has said the institution could reach $5 billion of assets within five years.

But in the early 1990s, as Mr. Lester was aggressively pursuing his game plan -- to create a one-stop financial services company by making acquisitions, growing the mortgage company, and starting a broker-dealer company and a travel agency -- costs mounted and earnings were lackluster.

From 1992 to 1993, return on average assets fell from 1.09% to 0.89%. Earnings per share during the period dipped 4.6%. And the efficiency ratio, or noninterest expense per dollar of revenue, swelled from 64.76% to 71.81%.

But Mr. Lester has no regrets. "One of the things we really feel good about as a company is that we've spent a lot of money in the last few years -- although we've been punished a little bit by the market -- to really prepare ourselves for what we think the future of banking is, not what the history of banking was," he said. "And we think we will be way ahead of the curve going forward."

In the past two years, Trans Financial has opened new data processing and mortgage servicing centers, built a satellite network to link its 54 branches, reduced headcount by about 10%, and brought in consultants to advise it on installing a customer profitability system. Mr. Lester also hired bank executives from larger institutions for key positions, including chief financial officer, controller, and the heads of mortgage, marketing, and compliance.

"When everything is fully implemented ... we will have taken out somewhere between $3.5 million and $4 million" in overhead expenses, he said.

The bank also spent "quite a few millions of dollars in the last part of last year and in 1994 in building for the future," he said. "The new people [we brought] in from multibillion-dollar organizations have a much quicker access to being able to become productive. That, combined with the consulting work, we think really positions us well for the future."

Analysts agree generally with the game plan, but are waiting to see how it will play out.

Peter Tuz, a Morgan Keegan & Co. analyst, said that a lot of the infrastructure and merger-related expenses will be off the books by the first quarter of next year. "They probably [now] have the infrastructure for a $3 billion bank. They shouldn't have to invest in these things in the future" as much as they have in the last two years. But Mr. Tuz adds, "We shall see."

"The trneds are good, but they haven't finished the job yet," said Henry J. Coffey Jr., an analyst with J.C. Bradford & Co., Nashville. He noted that the bank needs to get its efficiency ratio down to between 60% and 65%.

Analysts also are taking a wait-and-see attitude on the broker-dealer unit. "I am just wondering how their own efforts in the fund and brokerage area will go," said Mr. Tuz.

"It's a mature and volatile business," said Mr. Coffey, noting that while many banks have fromed investment companies, many have left the business.

Mr. Lester is confident, however, that the groundwork has been laid and will soon yield a big improvement in performance. Third quarter earnings were up 7% over the same period in 1993. And the efficiency ratio, excluding merger-related expenses and write-downs, stood at 68%.

"We look for a very strong fourth quarter and a very strong 1995," he said. "We think we are back on track and can outperform the market going forward."

Vince A. Berta, executive vice president and chief financial officer, said, "We're beginning to start to get back some of the investor confidence that we lost last year."

He acknowledges, however, that the stock -- like that of the industry generally -- is performing below the market in general.

Looking ahead, Mr. Lester said the bank wants to achieve 15% annual growth in earnings and a return on equity of 18%. He also set a short-term goal of reducing the efficiency ratio to 65%. "That would put us in the middle of the pack, and then look for" further improvement in 1995, he said.

Beyond that, he wants to get the ratio down to the low 60s or high 50s. But he adds, "We're never going to be in the low 50s or high 40s, for two reasons. One, we don't have the net interest margin."

The second, he said, is the cost of the higher level of service associated with super community banking.

But that approach, while more costly, provides tremendous opportunities, said Mr. Lester. He wants to continue to stay away from large metropolitan areas and instead focus on serving consumers and small and middle-market businesses in smaller communities.

"Over the next year or so, I think you're going to see the superregionals begin to withdraw from a lot of the smaller markets, and they're going to go to the metropolitan areas," he said.

And that would leave plenty of markets for Trans Financial. Mr. Lester sees growth opportunities in its existing markets in Kentucky and Tennessee and in neighboring southeastern states such as Alabama and Mississippi.

Mr. Tuz, the analyst, agrees. "If you just wanted to draw a several hundred mile circle around [Trans Financial], there are lot of community banks," he said.

As the bank expands, the goal is to provide a wider range of financial services. Toward that end, the bank opened its broker-dealer subsidiary, Trans Financial Investment Services Inc., in August.

"We had been in full-service brokerage since 1988," he said, with Invest Financial Corp. as a third-party provider.

"That was right after the downturn of the stock market in 1987. So our timing going in was not great," said Mr. Lester. As time went on, however, he came to believe that the bank needed to get a bigger part of its customers' business.

Is he worried about going it alone? "Not only did I feel we needed to go it alone, but I intend to sell this as a service to other financial institutions," he said.

And, like other banks seeking to become less dependent on net interest margins, he views the new business as a way to boost noninterest income.

"Currently, noninterest revenues are about 22% of [total] revenue. We think that number has got to get into the 30% to 50% range on a relatively quick basis," he said. "It's got to be achieved in less than five years."

Trans Financial has also chosen a third-party vendor for insurance products and has opened up travel agency.

The bank is also working on building its mortgage company -- which now services about $1.5 billion in mortgage loans -- through internal growth as well as acquisitions.

"We could probably reach $2 billion before the end of the year," he said. "We just closed another $330 million in mortgages the first of November, and we have a fairly large deal pending right now."

Mr. Lester is not troubled that the refinancing boom, which provided such a boon to the industry, has dramatically slowed as interest rates rose.

"Now's the time to be doing this, when the cycle is going in the opposite direction," he said. "There was such an explosion of new mortgage companies and new mortgage providers over the last three or four years because the market was so hot. A lot of these companies are looking at repositioning or getting out of the business. So we now have the size to go in and take advantage of these opportunities."

To be a more efficient player in the fiercely competitive business, Trans Financial recently opened a new mortgage processing center in Tennessee. Already this year, productivity has improved 30%, said Mr. Berta. And Trans Financial expects to boost productivity further by moving to a new system next year.

The bank has been moving to rein in costs and improve efficiencies in other areas as well. For example, a new data center has been opened in Bowling Green.

And consultants from KPMG Peat Marwick were invited in to suggest other areas for improvement.

"They ended up doing three things for us," said Mr. Berta, who came to the bank from PNC Bank Corp. "The first is they helped us implement a teller staffing model."

Now the bank employs peak-time staffing to get the most out of its branch employees.

The Peat Marwick consultants also looked at work flow within the organization. "They go through and watch how the paper flows," he said. While Trans Financial didn't find any major cost savings here, Mr. Berta said it resulted in many changes that saved $1,000 to $1,500. "It ended up being a large number, put together," he said.

Peat Marwick is also helping the bank install a system to track customer and product profitability.

"That is the most important thing we need to deliver to the organization," said Mr. Berta. "We know some products aren't profitable. What you want to do is get the total customer relationship to be profitable."

The system is expected to be rolled out through the entire bank early next year.

Mr. Berta is trying to squeeze out expenses in other areas. He wants, for example, to renegotiate contracts with vendors. "We're going back to all 50 vendors and ask for price decreases," he said. "We need to flex our muscle every once in a while, and we're beginning to do that."

He noted that Trans Financial recently began to use one check vendor instead of three, a move that saved $250,000.

Mr. Lester, said however, "There is only so much you can take out of the expense side of the equation. Part of the [improvement in efficiency] is going to have to come out of the income enhancement side."

And that's where Trans Financial believes its technology investments will pay off. "You can either have the foundation in place before you grow -- or scurry at the end to build it," said Mr. Berta. "We've tried to put it in place before."

"We're going to double the size of the organization and probably have fewer people than we have today, or only minor growth," said Mr. Lester.

In addition to the new operations centers, the bank installed a satellite network from Avdata Systems Inc., which eliminated the need for longdistance lease lines linking branches.

Trans Financial has also begun to send out imaged check statements. Customers at the Bowling Green bank are already receiving the statements, and the other affiliates are to be on-line by early next year. "Check imaging is wonderful," said Mr. Berta. "Our customer acceptance is in the high 90% range."

The bank is also planning to buy about 25 laptop computers to allow mortgage loan officers to take applications in the field.

"From a technology standpoint, we've always tried to stay on the front end of it," said Mr. Lester. He noted that in a document called Trans Financial 2000 the bank has recently been plotting its technology strategy into the next century.

"We're trying to develop in our mind how much the branch system is going to play a part in the future," he said. "We really feel the delivery of services is going to change dramatically, and the traditional branch delivery system will not be a major factor as it is known today."

Mr. Lester suggested that Trans Financial would begin to experiment with "reconfiguring" its existing branch network next year, although he was vague about the details.

By the end of 1995, he said, "I think you can expect to see one center and maybe multiple centers with a new type of configuration."

In the long run, he said, "We really think we will go into 24-hour, seven-day-a-week staffed telephonic and computer-operated centers.

"I would say some would be kiosks, some will be reconfigurations of existing locations, some will be electronic hookups" with employees at a central location, he added.

And as Mr. Lester works toward building his bank, he's considering another change: Dropping the word "Bancorp" from the company's name. "That is another way of sending a message to the staff that we are a total financial services provider."

At a Glance TRANS FINANCIAL BANCORP

Headquarters Bowling Green

Assets $1.6 billion

Employees 720

Return on

average assets

(*)1994 0.87%

1993 0.89%

Return on

Average equity

(*)1994 12.36%

1993 12.77%

Efficiency Ratio

(*)1994 72.16%

1993 71.81%

(*)Nine months ended Sept. 30.

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