Small L.A. banks target niche markets to survive; specialization helps banks develop long-term clients.

Several of California's large financial institutions are having one of their best years in recent memory. Small banks, on the other hand, are engaged in a struggle to survive in the extremely competitive Southern California banking market.

In the face of that competition and dwindling profits, small independent banks, and even a few large ones, are increasingly moving into niche markets to increase their profitability.

Imperial Bancorp, an Inglewood-based banking company with $3.2 billion in total assets, had always operated as a general business bank until last year, when it began focusing its efforts to serve particular industries. Specifically, Imperial has been developing services and products geared to the health care, entertainment and apparel industries, said Mike Sims, an Imperial spokesman.

The reason for Imperial's change in strategy, according to Sims, is that a general bank in today's competitive market runs a high risk of "becoming a jack of all trades and a master of none."

Specialization, on the other hand, can make banks more competitive because it enables banks to be more focused their marketing efforts and enables them to develop longer-term relationships with their clients.

Another independent financial institution, West Los Angeles-based Guaranty Bank, with just over $21 million in total assets, has also changed its focus within the last year. Formerly a general business bank, Guaranty Bank is now putting all its efforts into serving the international trade industry in Los Angeles County. By developing services and products specifically designed for international trade companies, Guaranty hopes to capture the lion's share of the trade finance market.

"International trade in Los Angeles is a lot bigger than we realize," said Guaranty President William Graham. "And it is going to continue to grow."

As if focusing only on trade isn't a narrow enough niche market, Guaranty has even more narrowly defined its niche by concentrating its efforts on funding trade ventures in the Pacific Rim region.

Robert Turicchi, president of Long Beach-based Harbor Bank, said he expects more and more local banking institutions to embrace narrowly defined niche markets in the near future. Turicchi should know. Not only is he president of a bank that specializes in small-business lending, but he is also the current president of the Community Bankers of Southern California, a trade association of small independent banks in the Southland.

"Profits are not great at this point in time for small banks," said Turicchi. "And when that happens, you have to rethink what you are going to do. So small banks have started to look around at what niches they might be able to service that are neglected by larger banks."

Another reason that small banks may find a comparative advantage in providing industry-specific banking, according to industry consultant Tom Tarter, is that small banks are more service oriented than larger banks. That service orientation can be a plus when developing special products that are geared to particular industries.

"There is an increasing number of banks that are moving into niche markets," said Tarter, managing director of Los Angeles-based Andela Group, a banking industry consulting firm. "Many larger banks are interested in high volume and are not particularly service oriented."

The small banks now moving into niche markets are following the lead of a few local institutions that have already established themselves as business banks serving specific industries.

Two such banks are First Professional Bank, which caters to the medical industry and to professionals such as lawyers and accountants, and First Business Bank, which serves mid-sized manufacturing and wholesale companies.

First Business President Joe Sanford said service has been a key to the success of his institution. For the past 13 years, First Business has focused on providing manufacturers with services, products and account officers who are equipped with special training. Most banks, he said, "simply don't have the types of services that my clients desire."

Sanford called his niche strategy "very successful." Since its inception in 1980, First Business has expanded from its original downtown location to five regional offices in Southern California.

Several industry sources agreed that dwindling profits are a major motivating factor for small banks shifting into niche markets.

And statistics compiled by the California State Banking Department tend to support that contention. The statistics show that a great disparity does indeed exist between the profits of large and small California financial institutions.

Banks with total assets of between $100 million and $500 million barely broke even in the second quarter of 1993. The average return on assets for banks of this size was 0.01 percent for the second quarter, and average return on equity was 0.13 percent.

Banks with total assets of more than $2 billion, on the other hand, fared quite a bit better. On average, these larger banks posted a 1.02 percent return on assets for the second quarter, and a 12.15 percent average return on equity, according to the California State Banking Department.