1st Source Corp. has become a successful small-business lender by keeping things simple.

That means no credit scoring, no gee-whiz technology, no direct- marketing blitzkriegs. Instead, the $1.8 billion-asset banking company boasts of their personal service and experienced staff.

Although any number of small banks could make similar claims, the South Bend-based company - whose small business portfolio has increased 15% to 20% annually since 1989 - sets itself apart by linking that approach to a sales-oriented, nimble organization.

"Small business is a critical part of our past and future," said Christopher J. Murphy 3d, the bank's president. "We are a high-touch bank. We plan to continue that approach."

1st Source's goal is clear: It wants to stay independent and be a feisty, expansionist small-business lender. It's a goal that more community banks will have to pursue, to separate themselves from the pack, bankers and analysts say.

Mr. Murphy said that in order to remain independent, 1st Source intends to rack up double-digit growth and a 13% to 17% return on equity every year for the next five years. Much of the growth will come from Chesterton and from five northwest Indiana counties that the company has targeted.

The strategy began to bear fruit in 1995. After growing around 5% a year in 1993 and 1994, last year the bank grew 12%.

Joseph A. Stieven, director of financial institution research for St. Louis-based Stifel, Nicolaus & Co., said that 1st Source's track record indicates its expansion plans will succeed.

"One of their key areas is servicing small and middle-size companies," Mr. Stieven said. "They've carved a very good niche in that business. They have a high degree of customer service. I think they've proven they can do it."

The energetic and extroverted James D. Magera - who created the bank's small-business division in 1984 and directed it until June - will be developing the small-business side.

"I think it's going to be difficult," said Mr. Magera, a 45-year-old bank vice president based in a commercial district of Chesterton. "I don't think they're going to believe us at first. All I can do is try to go out and meet people and let them know me as Jim Magera. If we can get enough opportunities, we'll be able to do business."

In 1974, Mr. Magera was a twentysomething branch manager eager to impress his bosses. He started paying visits to businesses on weeknights and weekends to find out what they wanted.

"Banking is a people-to-people business," said Mr. Magera. He prefers to do it the old-fashioned way: on the golf course. This approach netted the 13-handicapper a deal four days into his new assignment.

His first prospect was the owner of a local embroidery company whom another bank had rejected by letter for a $50,000 loan. Where the other bank - Mr. Magera wouldn't identify it - saw a lemon, Mr. Magera saw an opportunity.

Mr. Magera approved a $25,000 term loan so the company could pay off its start-up credit-card debt, as well as an additional loan so the embroiderer could handle a big order. The company has shifted its checking account to 1st Source, and the owner has transferred personal business there as well.

"The moral of the story is: I would never allow anyone to turn down a loan request without visiting the customer," Mr. Magera said.

Chesterton, which has about 700 small companies, is a ripe market, Mr. Magera said. The town, just south of the Indiana Dunes State Park, is a popular weekend spot.

It could heat up more. Chesterton is becoming a bedroom community for Chicago, 45 minutes away. When Mr. Magera went house shopping, he saw that price tags were much higher than in South Bend and had been on the rise.

Mr. Magera is betting that changing demographics will make Chesterton an even better small-business market. Once more professionals start moving in, "the small businesses will follow," he said.

Mr. Magera should expect competition for that business. Though conceding that 1st Source has a proven record, Charles Welter of nearby First National Bank of Valparaiso said his institution initially will have an advantage.

"They're a good bank," said Mr. Welter, president of the $330 million- asset bank. "But right now we have a pretty substantial investment here in Porter County, and we've been here since 1889."

Mr. Magera plans to pursue the same prospecting strategy he brought to 1st Source 12 years ago.

He was hired by 1st Source in 1984 and shortly afterward was assigned to form a small-business division targeting companies with $2 million in annual sales or less.

"We had a strong small-business deposit base that needed servicing and credit," Mr. Magera said. "No one really knew how to work with these businesses."

What Mr. Magera and other 1st Source bankers did was simple, but no one else was doing it: They went out and talked to their customers to find out what they needed.

Going out into the field has paid off. Since 1989, the bank has cranked out $40 million or more in loans to small businesses every year.

1st Source hasn't relied on any high-tech equipment to build its business; Mr. Magera said he hopes the bank never scores small-business credit.

Mr. Magera said 1st Source's success lies in the use of its staff.

1st Source marshals a core group of six lenders that call on small businesses. But they are also supported by the bank's branch personnel, who are put through intensive, four-day training seminars on handling small businesses. Indeed, two of the six small-business lenders came out of the branch system.

Allan Bloomquist, senior vice president for Oxxford Information Technology, Rockville, Md., said branches receive credit for generating small-business loans and deposits, so they are motivated to sell.

Also, the bank offers a quick turnaround time on loan approvals, as small-business loan officers are given a certain level of individual authority, said Mr. Bloomquist, who used to work for 1st Source and is a friend of Mr. Magera.

Unlike some banks, 1st Source doesn't pay commissions to small-business loan officers. Mr. Magera said that method might encourage lenders to bring in questionable deals and fuel high turnover.

"It puts an awful lot of stress on people," he said.

By paying salary only, the bank also allows its lenders to spend more time with current customers, Mr. Magera said.

Mr. Magera credited a hands-on approach for keeping customers coming back. Borrowers who need help have at least two points of contact in the bank, one in the small-business division and one in the branch.

Mr. Magera is confident that the approach he used to attract small businesses in South Bend will succeed in Chesterton.

"I try to keep it real simple," he said. "All I ever did was identify a need and then try to fulfill that need."

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