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Thursday, Jun 8, 2023




Staff Reporter

Like battle-weary soldiers, Los Angeles’ small and mid-size banks are showing little fear at the bombshell news that Travelers Group and Citicorp are making plans to merge.

After years of seeing giant banks, such as Wells Fargo & Co., BankAmerica Corp. and more recently Washington Mutual Inc., gobble up the local consumer banking market, most of the smaller L.A. banks are now so niche-orientated that the presence of another so-called “financial supermarket” will have little impact on their operations, they believe.

“To be honest, these large market mergers have happened with great frequency over a number of years,” said John Getzelman, president and CEO of Pasadena-based Community Bank. “It is perhaps more astonishing for its size than the impact it will have on business here.”

The majority of L.A.’s smaller banks are now focused on serving small business, rather than the retail clients that generally are being targeted by the mega-banks.

Campbell Chaney, an analyst at Sandler O’Neill & Partners in San Francisco, asserts that Travelers Group and Citicorp will be focused on global business, leaving plenty of room for local banks to maneuver.

“I wouldn’t even make the comparison (between the merger and the smaller L.A. banks),” he said. “Community banks usually target the small-business customer.”

In addition to small business, many of L.A.’s smaller banks cater to distinct ethnic groups, particularly Asians, where their knowledge of different business customers and languages gives them a competitive advantage.

Those small local banks that are fighting for a chunk of the consumer market, meanwhile, contend that their emphasis on relationships and customer service will always attract business.

It is, however, becoming increasingly difficult to find an L.A.-based bank that still focuses on the consumer market.

The two biggest local institutions, City National Bank and Imperial Bancorp, are both effectively business banks with close ties to specialized industries such as entertainment and high tech.

“You have to take what the defense will give you,” said Larry Frampton, president and CEO of First American Bank. “Retail banking has become a commodity business, unless you can compete on price you won’t make it.”

Instead, First American focuses on the business community in and around Pasadena.

“That is where we can assign qualified people to companies and still make a profit,” he said.

The next three banks in terms of asset size, East-West Bank, Tokai Bank of California and Cathay Bancorp Inc., cater largely to the Asian communities in L.A., also with a business orientation.

It is not until you come to Southern Pacific Thrift & Loan, based in West Los Angeles, that you find a local institution that professes to serve the consumer market.

According to Southern Pacific CEO Stephen Shugerman, his bank’s strategy is to offer many of the same services as the financial supermarkets while keeping the small-bank emphasis on service.

“The technology revolution is enabling us to offer those services,” he said. Southern Pacific has fee-based contracts with mutual fund, credit card and mortgage companies enabling customers to tap those products.

He admits that the bank is unable to compete on price alone in these sectors. Instead, it also focuses on markets that the larger institutions may overlook, such as used-car loans and small commercial mortgages.

Despite their bravado, business banks are not immune to the encroaching mega-banks. The increased use of credit-based lending, in which the loan is issued based strictly on the borrower’s credit rating, has led to large banks dominating the under-$100,000 loan market because of their economies of scale.

And a $1 million-plus loan market is also ruled by the big banks, which have the resources both to research the borrower and the capital needed to serve their needs.

The smaller banks see their future as tailoring mid-size loans for small companies.

“We sweep up the crumbs that drop off the tables of the big vendors,” said Stephen Rippe, chairman of Burbank-based Highland Federal Bank, which has $550 million in assets and seven branches.

“We may charge more, but to get a loan from Bank of America you have to meet some pretty strict underwriting criteria. We, on the other hand, may look at a loan and say ‘Yes, the credit is not that good, but the cash flow may be improving,’ and structure the loan accordingly,” he said.

Geography can also give small banks a distinct tactical advantage.

First Federal Savings and Loan, based in West Covina, uses its close relationship with the various local governments, business groups and clubs in the East San Gabriel Valley in order to win more business.

“We are a community financial institution operating in independent communities,” said the bank’s president, Barrett Andersen. “In the independent cities there is a local system you can tap into and leverage your contacts.”

Not everyone is convinced.

“I don’t care what they call themselves, they are all threatened,” said Norman Creighton, vice chairman and CEO of Imperial Bancorp. “That’s why they have also been merging together.”

He pointed out that large banks are becoming increasingly interested in tapping the middle market.

In the past, large banks have resisted granting loans over $100,000 based on credit rating alone reasoning that for loans that big, a more comprehensive (and costly) background check is needed.

But anxious to win new business, larger banks will increasingly use credit rating alone for loans over $100,000, Creighton believes.

However, he does see a silver lining for small and mid-size banks: The consolidation is giving them a ready pool of highly skilled unemployed banking executives looking for work.

In fact, most of the executives interviewed were once employees of now-vanished local giants such as First Interstate, Bank of California and Security Pacific National Bank.

Creighton boasts that Imperial grows stronger each time a major bank is bought.

“Our strength is in our people, not in having a nationwide delivery system. Our strategy is to employ the most talented people available to achieve success,” he said.

Creighton also contends that because recent mergers have disrupted many long-term bank-client relationships, Imperial has been given the opportunity to jump in and steal away business.

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