REBECCA KUZINS

Staff Reporter

It’s no small trick to survive the consolidation that has been sweeping the banking industry, but many of L.A.’s community banks are proving that small can indeed be beautiful.

The trick is in picking and choosing your spots.

“When the bigger banks do an acquisition, they factor in that a certain number of customers will leave the bank. This runoff will be a small piece of the pie for the big banks, but it’s a large slice of business for community banks,” said Mark Fitzgibbon, an analyst with Sandler & O’Neill Partners. “If they can get one-tenth of the 5 percent of customers whom BankAmerica has lost, it is a large increase in their book of business.”

Fitzgibbon likens it to “stealing crumbs off the big boys’ plates” and chief among those “crumbs” are small-business loans, a niche in which customers typically prefer to deal with banks closely tied to the local community. Other niches include providing services to medium-size businesses, or to specific industries, such as real estate or manufacturing.

Some small banks are growing by following the example of the big boys: acquiring other banks in lucrative and rapidly expanding communities.

Fitzgibbon cited three L.A.-area banks that have been especially successful at growing their operations: Burbank-based Highland Federal Bank, El Segundo-based Hawthorne Savings and Agoura Hills-based Pacific Crest Bank.

For the year ended June 30, 1998, Highland Bank had assets of $573 million, a 14 percent increase from a year earlier. During the same period, Hawthorne’s assets rose almost 30 percent to $1.1 billion, while Pacific Crest’s assets climbed to $492 million, a 37 percent increase, according to Bauer Financial Reports, a banking-industry research firm in Coral Gables, Fla.

Pacific Crest Capital Inc., the holding company for Pacific Crest Bank, reported a 35.5 percent jump in earnings per share for 1998, its best showing in the bank’s 24-year history.

An emphasis on small-business loans is more often than not a key factor behind the success of most local community banks. “By virtue of these banks’ size, every loan is a small-business loan,” said Paul Bauer, president of Bauer Financial.

For the average California bank, small-business loans comprise 11 percent of the total commercial loan portfolio, Bauer Financial reports, but big banks typically fall well below that average.

At Bank of America, for example, small-business loans accounted for only about 6 percent of its California loan transactions, as of June 30, 1998, while such loans comprised about 8.4 percent of Washington Mutual Inc.’s California commercial portfolio.

Wells Fargo & Co. was the exception among the “big three” serving California, with loans to small business accounting for 15.9 percent of total loans.

While exceeding the state average is the exception among big banks, it is typical for smaller institutions.

At Community Bank of Pasadena, small-business loans accounted for 13.2 percent of all loan transactions; at Farmers and Merchants Bank of Long Beach, it was 14.4 percent of the total, while at Santa Monica Bank the figure was 21.3 percent.

The small-business loan market is only one of many niches that L.A.’s small and mid-size banks are exploiting to facilitate growth in the shadow of giants.

“These banks are defining themselves as they go along, and by and large they are succeeding,” said Michael K. Jones, senior vice president of the California Bankers Association.

Jones said Mellon 1st Business Bank, headquartered in downtown Los Angeles, offers a good example of niche marketing because it has effectively targeted mid-size businesses.

Southern Pacific Bank, based in West Los Angeles, specializes in commercial real estate loans, averaging about $300,000 or $400,000. “That dollar size tends to lead us to urban areas and to finance construction of smaller properties with smaller loans, like a two-unit retail store,” said CEO Stephen Shugerman.

This specialization evolved over the years and enabled Southern Pacific to differentiate itself from other financial institutions. “We’re not technically a bank,” said Shugerman. Southern Pacific, he added, has only two deposit branches, but operates 40 loan origination offices throughout the United States. Nor does the bank offer checking accounts or automatic teller services; instead, it focuses on providing certificates of deposit and passbook accounts to its customers.

Community Bank of Pasadena has traditionally concentrated on the manufacturing industry. “We have a heritage of dealing with that market sector,” said Clint Arnoldus, president and chief executive. “Manufacturers come to us for equipment financing loans, for help with real estate needs, cash management needs and working capital needs.”

Ontario-based Citizens Business Bank is strategically focused on small- to medium-size businesses within the San Gabriel Valley, North Orange County and the Inland Empire. The bank, which will be 25 years old in August, has carved out niches in agribusiness and real estate lending two major growth areas in the communities it serves, according to Linn Wiley, Citizen’s president.

The bank also has pursued an aggressive acquisition strategy that has further enabled it to grow from 12 branches with $500 million in assets six years ago to the current 24 branches with $1.5 billion in assets. Among the institutions acquired by Citizens Business Bank were Fontana First National Bank, Western Industrial National Bank of South El Monte, Pioneer Bank in Fullerton, and Citizens Commercial Trust and Savings Bank of Pasadena.

In similar fashion, Santa Monica Bank has recently expanded into lucrative areas of the Westside, San Fernando Valley and Glendale. The bank’s parent company, Western Bancorp, agreed in August to purchase West Hollywood-based Bank of Los Angeles, and has since merged that bank into Santa Monica Bank.

The resilience of community banks is no surprise to many analysts, and Bauer goes so far as to say the small banks are better positioned than their giant counterparts.

“These small and mid-size banks have always done well. They are still stronger than the big guys, who are losing their shirts,” he said. “No one has proved that this merger madness is a successful way to make money. It’s only a successful way to downsize people.”