Everyone in the banking industry these days talks about how much things have changed in the last 15 years. If you want to see the transformation of community banking during that period, there may be no better place to look than Indiana, Pa.

The town of about 15,000, located in coal country 60 miles east of Pittsburgh, claims actor Jimmy Stewart as its favorite son. Indiana is also home to $1.3 billion-asset S&T Bancorp, among the highest performing and most efficient banks of its size in the nation.

But chairman and chief executive Robert D. Duggan recalls that when he arrived 14 years ago it was like many other $150 million banks located in small towns.

"It was a different culture," he said. "Some of these small banks never really knew how to deal with employees," said Mr. Duggan, who previously had served as senior vice president at the Pittsburgh branch of the Federal Reserve Bank of Cleveland.

In the intervening years, Mr. Duggan, 61, has assembled a team of managers with experience at larger banks, including the major Pittsburgh- based institutions PNC Bank Corp., Mellon Bank Corp., and Integra Financial Corp.

Under Mr. Duggan, S&T has stuck to the nuts-and-bolts of community banking: reliable and responsive customer service, deep market knowledge, and building relationships with consumers and small businesses. In Indiana County and parts of neighboring counties, S&T's share of deposits exceeds 40%.

It probably doesn't hurt to have some real Americana on its home turf. The main branch stands on the very site where Jimmy Stewart's father ran a hardware store. And there are three offices in Punxsutawney, home of Punxsutawney Phil, the well-meaning but fallible groundhog.

Further, S&T has followed an industry trend by expanding its range of products and services. It operates a subsidiary, S&T Investment Co., and owns a half interest in Commonwealth Trust Credit Life Insurance Co.

The familiar formula has produced an enviable record of growth and performance. S&T's return on average assets last year was 1.49%, up from 1.43% a year earlier. The ratio of nonperforming loans to total loans was just 0.21%, down from 0.35% in 1993.

The efficiency ratio, at a lean 49.78% in 1994, is one of the lowest not only in the peer group but among all U.S. commercial banks. Further, the ratio of noninterest expense per dollar of revenue has been hovering around 50% for years.

"There are so many good things about S&T," said Ross A. Demmerle, an analyst with McDonald & Company Investments in Cleveland.

But as S&T looks ahead, it faces numerous challenges. The economy in its core market around Indiana has never fully recovered from the declining fortunes of the coal industry. Growth has been static. The dominant demographic factor - the aging of the customer base - does not bode well for the future.

Flat deposit growth has also begun to make S&T concerned about its ability to fund loans. And, of course, there is increasing pressure on the net interest margin.

While these sobering facts aren't expected to harm earnings growth in the near future, they have prompted management to step up efforts to move into greener pastures - the suburbs around Pittsburgh.

"It's very important to us," said Mr. Duggan. "We know the growth rate and the economies are not as strong as they are in the closer, nearby Pittsburgh areas. . . . The potential there is significantly greater in terms of the numbers of people, the income levels, just the general (level of) commerce."

The push can be traced to the early 1990s. In 1991, S&T made two government-assisted purchases that gave the bank a presence in the Pittsburgh orbit. And in 1992 the bank put a new emphasis on building commercial business in the area. That year, the bank's top lending officer, David L. Krieger, was in a Pittsburgh hospital for back surgery.

"I got hooked up with some doctors and others," recalled Mr. Krieger. "I talked to them about doing some business. And one thing led to another."

Direct and indirect referrals from the doctors - whose bedside manner apparently didn't preclude talking about money - has produced an estimated $100 million in business for S&T, said Mr. Krieger. Much of that business is with Pittsburgh-area doctors, lawyers, accountants, and other professionals.

More recently, the bank has been working to instill a sales culture throughout its network of 34 branches. Edward C. Hauck, the senior vice president responsible for technology and retail banking, said S&T spent heavily last year on systems and on employee training to create a more sales-oriented organization.

"If you wanted to allocate training time, you easily reach the half million dollar mark," said Mr. Hauck.

"It's creating a real culture and mindset around two issues, the customer and profitability," he continued. "I think we've been pretty successful with that."

Last year's investment included $100,000 for a platform system, Sales Partner, from M&I Data Services Inc., the outsourcer the bank converted to in 1994. Previously, the bank had installed a system from Interactive Planning Systems Inc., Norcross, Ga. The software, called Summit Organizational Profitability System, is a tool to track profits by line of business, department, and branch.

But much of the recent push has been on getting branch personnel to focus more on developing relationships with customers.

James C. Miller, president and chief operating officer, said, "Rather than simply sit here and wait for the people to come in and tell us what they want, we need to do a better job of profiling those customers."

The bank's goal is to ask customers who enter a branch a consistent set of questions. S&T wants to know more about them so it can identify their financial needs.

"It's not robotic and it's not out of a box," said Mr. Hauck. "But we'd like to know that people ask the right questions and go through the process."

The emphasis on sales is a key part of S&T's strategy to move into the area directly west of Pittsburgh, where it has little market share or name recognition.

Already, the bank reports, loan volume has exceeded expectations at the single supermarket branch it operates in Kittanning. A second in-store branch, in a WalMart superstore, is slated to open this summer in Indiana.

But S&T managers concede developing a sales culture is not easy: Some employees have difficulty making the change.

"We've had cases already where people have said, 'I understand what you are trying to do but this just isn't for me,' " said Mr. Miller.

But managers insist that they will not undertake any wholesale layoffs to make room for more aggressive salespeople. "We've tried to find other alternatives for" those who can't adapt, he said. "In some cases we've had people elect early retirement. But we've not had any layoffs because of this process."

While the bank has had some success moving into greater Pittsburgh, particularly on the commercial side, Mr. Duggan said it will need to have a more visible presence there.

"Management wants to expand. But they don't want to dilute current shareholders' earnings per share either," said Mr. Demmerle, the McDonald & Co. analyst. "So they are trying to find a deal that will be profitable for them."

A good acquisition, he said, would be a community bank with a relatively low loan-to-deposit ratio.

"We are certainly always interested in what is going to be best for the shareholders in terms of how much dilution we can accept and how soon can we work it off," said Mr. Duggan. "There are certainly a number that we have a relationship with and keep talking to. When the time is right for them, I think they will think of us."

Still, Mr. Duggan said acquisitions alone will not produce the kind of expansion S&T wants. "Our goal is to expand both de novo and through acquisition."

But doesn't building brick and mortar fly in the face of the trend toward electronic banking and paring down expensive branch networks?

"The trend hasn't been proven yet," said Mr. Duggan. "We'll see what's right."

"I don't think people will totally bank by telephone or totally bank through ATMs," he continued. "I think you are still going to have spouses and others living in neighborhoods stopping by the bank."

Mr. Hauck added, "If you are in an area where you truly want to develop a significant market share, to think you will do that through the alternative delivery systems everybody's talking about is extremely difficult."

Mr. Duggan suggested that a new branch may be built this year. The bank has targeted for growth Westmoreland County, an area just west of Pittsburgh where it already has a toehold.

"We could easily expand into that area," he said.

But S&T managers insist they are not ignoring other delivery channels. The bank recently expanded customer options at its 24-hour-a-day call center - where the phones are answered by people, not automatic voice response units.

Later this year, S&T plans to pilot an M&I service allowing customers to pay bills by phone.

Customers can also apply for loans by phone. A faster turn-around time on loans - both consumer and commercial - is an advantage the bank said it has over larger competitors.

"You close a deal when you say you are going to close it," said Mr. Krieger. "Quite frankly, some of the competition can't keep pace with what we've done."

The question of the competition also raises another issue: Isn't a $1.3 billion-asset bank near a major city a likely takeover candidate?

"It's on people's minds. It's something that the management talks about, that the board of directors have talked about," said Mr. Duggan. "But our focus and philosophy is not to sell as long as we can do a good job for the shareholders and increase earnings per share and maintain a healthy stock."

"If you look at the rewards that shareholders have gotten over the last five years - increased earnings per share, increased dividends, and increases in the market value of their stock - we've done well for them," said Mr. Duggan. "Certainly in the last few years better than most of our peers."

Mr. Demmerle further noted that many larger banks look to reap cost savings when they make acquisitions. "There isn't much fat to trim at S&T," he said. "Any big acquirer looking at S&T wouldn't see a whole lot in the way of cost savings."

There may be even fewer opportunities as the bank pursues initiatives to further reduce costs. Last year, for example, when it converted to M&I, data processing costs fell 29%. Mr. Duggan also sees savings opportunities in the branches, where more than a third S&T's employees work. He hopes to achieve savings by using more part-timers.

S&T also has a task force to examine work flow within the organization. The goal is to continually look at streamlining and centralizing tasks to free branch personnel from paper handling and operational tasks.

If that sounds like reengineering, it is, but of a more modest variety than that practiced at some larger institutions. Still, S&T did explore the idea of a major restructuring.

"I think we were probably under the spell. All the other banks were doing the large-scale, macro type of reengineering," said Robert Rout, senior vice president and chief operating officer. "And we went through the process of interviewing some outside consultants, and really taking a hard look at whether we should be doing something differnt."

The result? "I think we came to the conclusion that we were pretty much doing reengineering or continuous improvement on an ongoing basis," said Mr. Rout.

Executives are candid about the need for improvement in other areas. While the bank has good information on business unit profitability, it wants better data on product and customer profitability.

More important, S&T wants to boost fee income. "I think we maybe haven't been as successful as others getting more of our profitability from noninterest income," said James Barone, senior vice president. "But we're going to have to going forward. Because we're not sure how long we can keep the margin at 4.75%."

Much of that revenue growth is expected to come in the trust area. "We have high expectations for the fiduciary side," said Mr. Barone. "The trust department is $350 million. A lot of banks our size have a $1 billion trust operation. I think there are opportunities there to take advantage of leveraging relationships. That area could grow at 20% to 25% a year."

The bank also is developing an asset-based lending division. According to Mr. Duggan, S&T is targeting "companies that are growing very rapidly and have need for asset-based financing on their receivables."

Despite the challenges, analysts say S&T is well positioned to meet them. And so is Mr. Duggan. "It's changing, it should change, and will continue to change," he said. "That's something that we constantly work on.

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