New Jersey's Covenant Bank, headquartered in an 1828 townhouse, has a lobby with a decidedly upscale ambience: hardwood floors, Oriental rugs, and a grandfather clock.

The setting reflects the values of the wealthy customers Covenant was formed to serve. But the young bank was not growing strongly enough to suit the directors, so in 1991 they hired Philip W. Koebig 3d to take charge.

Since then, Mr. Koebig has set the stage for rapid expansion. While he intends to keep the $110 million-asset institution a "bank for achievers," he also plans to start serving less affluent customers.

Indeed, the effort is shaping up as a case study of a small bank trying to crack a new market.

Burned by Unsecured Loans

After it opened in 1988, the bank earned a reputation for personal service among doctors, lawyers, merchants, and small manufacturers. But almost all the loans it issued were unsecured, and Covenant's ensuing asset problems were severe, Mr. Koebig said.

About 13% of total assets were nonperforming at the time of his arrival, but the former president of Marine National Bank in Pleasantville, N.J., has worked them down to less than 1% of assets. And he put an end to unsecured lending.

At the same time, he was searching for a bank to buy, but he "saw very few that fit our business direction," Mr. Koebig said. "That's when I started toying with the idea of adding a new dimension to the bank."

New Branch in Rich Suburb

Covenant is based in Haddonfield, N.J., a wealthy suburb of Philadelphia in Camden Country. To position itself for growth in neighboring Burlington County, the state's largest, Covenant opened a branch last year in Moorestown - also in restored historic house.

That move looks promising. Currently, the Burlington County Economic Development is reporting strong growth in retailing and many more inquiries about distribution and manufacturing space. The agency is also seeing similar growth in housing starts.

"New Jersey's latest residential permit report shows we had the most permits issued anywhere in the state, but we've been a very strong growth area for the last six to eight years," said Tom Jaggerd, a planning engineer for the council. "We have a lot of open space in the Pinelands, we're near Philadelphia, and land is relatively inexpensive."

Having positioned itself in Burlington County, Covenant is about to open a branch farther east in Camden, near the Burlington border, and south of Camden in Gloucester County.

Signs of Growth

Mr. Jaggerd says Gloucester and eastern Camden will eventually enjoy growth as strong as Burlington's because its land prices are even less expensive. Mr. Koebig says the signs are already there, with strip malls springing up along formerly rural stretches of Route 30.

The two branches, along with a third outside Haddonfield, were acquired after Covenant took over the troubled New Jersey Savings and Loan Association.

Hoping to win the business of merchants and young families in the new towns, Mr. Koebig plans to market the same personal service offered in Haddonfield. The bank will also market improved or all-new products tailored for midscale as well as upwardly mobile customers.

"Achievement Checking" provides unlimited withdrawal from automated teller machines, and the "Flex CD" pays higher rates to customers in an any of numerous "Achiever" accounts, which offer special benefits for minimum deposits.

"Golden Achiever" checking offers free services to people aged 55 or older. The "Holiday/ Vacation" account provides an automatic debit as a way of saving money for holidays.

"We will pitch these products aggressively and, at the branches where retailing will have its strongest emphasis, we will have extended and Saturdays hours."

That's quite a departure for Covenant, where 90% of the bank's business was picked up through referrals.

But Mr. Koebig, who expanded Marine's $200 million of assets by $600 million in six years, will need strong marketing to reach his goals. He would like to see Covenant at $350 million within three years, and he feels it's possible to reach $500 million in that time.

Bread-and-Butter Clients

Equally important t Mr. Koebig's plans are the bank's small-business mainstays. They represent nearly half of all deposits and more than half of commercial loans.

"Some business, obviously, needs sums that are too large for us now. But what we're doing is trying to open accounts with the CEOs so we have a relationship in place when we're large enough for their business."

One analyst worries that as Covenant develops its new markets, those CEOs might get lost in the shuffle.

"There's a danger when you redefine your target market," said Kevin Tynan, president of Tynan Marketing Inc., a Chicago consulting firm. "When banks add markets, they often do it for opportunity instead of strategy- and that often leads to long-term problems."

Skepticism About Change

The problems stem from a failure to persuade the new market that the bank is there to serve needs different from those it had previously advertised.

But Mr. Koebig said, "I think bankers have to be opportunistic, nowadays."

The approach taken by Mr. Koebig who also has opened branches in midscale towns in Atlantic and Cape May counties, appears to be paying off. Profitability is increasing, with Covenant turning in a 1992 return on assets of 0.3%, and a 1993 pace that will put the bank at 0.7% Mr. Koebig's goal is 1.25%.

In addition, deposits are growing strongly. "At the end of May, we had $105 million in deposits, our highest ever, and we were aiming at $125 million by the end of the year-even without the savings and loan takover."

Mr. Koebig intends to keep all the new branches, like the existing offices, free of teller windows. He wants all his customers to feel as comfortable as those who, entering the main office the back way, along a brick walk, lined with flowers, past a fountain.

"It's our own little world back there."

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