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A Big Advantage for Not-So-Big Banks


'I'm convinced we have a huge opportunity. Wall Street may not appreciate the fact that we're not in Des Moines but in Southern California, the strongest economy on the planet," says Russell Goldsmith, chairman of City National Bank.

Improbably, City National, a 45-year-old medium-sized institution with $6 billion in assets, is now the largest bank headquartered in this region, after the departure of the home offices of bigger institutions.

But that doesn't mean Southern California has become a barren desert for small businesses seeking loans. Nor does it mean that Goldsmith's bank lacks competition.

On the contrary, Southern California is the hottest banking market in the country with money flowing from banks and financial companies eager to get in on the action. U.S. Bancorp, a Minneapolis-based bank holding company with $76 billion in assets, agreed last week to pay $900 million for Newport Beach-based Western Bancorp, owner of Santa Monica Bank and Southern California Bank.

Pittsburgh-based Mellon Bank has expanded its Southern California presence to 2,000 employees. J.P. Morgan Co., headquartered in New York, is expanding in Los Angeles. BankBoston, a longtime movie financier, has expanded locally and is bankrolling a steel mill in Fontana.

Banks that once focused on ethnic communities are spreading out to all parts of the business landscape. Major brokerage firms last year bought control of East-West Bank from Indonesian Chinese owners and have made it a public company. Union Bank of California is lending aggressively to small and medium-sized companies with hearty support from its parent, the giant Bank of Tokyo-Mitsubishi. China Trust, a major Taiwan-based bank, has moved its U.S. head office from New York to Torrance because it sees more local and Asia-related business here.

And the true giants, Bank of America, at more than $600 billion in assets worldwide, and Wells Fargo, at more than $200 billion, are making relatively tiny loans to small companies using direct-mail and credit card techniques.

The message is that this region, which was dealt repeated body blows for most of the 1990s as head offices of aerospace-defense, oil, banking and thrift industries left the scene, is better off now than ever--even if many people are still uncertain of that fact.

It is home to more small to mid-size companies, more women-owned businesses and more minority-owned companies than any other place in the world. The diversity of their industries is matched by the diversity of finance available to them.

City National, as it happens, reflects the region's comeback because it suffered the region's setbacks. The bank was one of the nation's most profitable years ago, when it acted as a family bank to the entertainment industry. City National rushed to lend Frank Sinatra a quarter-million dollars in 1963 to ransom his kidnapped son.

But the bank barely survived losses on real estate loans in the early '90s. So now it is diversifying the industries it lends to and is expanding by acquiring banks and opening offices in San Diego, Irvine, Riverside, San Bernardino and Ventura counties.

Like many companies in the local economy, City National has benefited from assets left behind by departing businesses. A swimwear manufacturer named Tyr Sports in Long Beach was a First Interstate Bank customer but came to City National after Wells Fargo took over First Interstate.

The old Wells Fargo, before its own 1998 takeover by Norwest, restructured First Interstate after acquiring it in 1995. That left employees and whole categories of customers angry and resentful. City National was able to hire First Interstate's team of lenders to the wholesale food business and its foreign-exchange traders.

As a result, City National has new customers and the region's small companies have a new and steady source of financing.

And City National, though only 86th among U.S. banks in asset size, is back among the 20 most profitable U.S. banks with a 1.7% return on assets.

What lies ahead? Can City National, which is growing rapidly, become a regional giant? Maybe not. The bank is on a roll now, focusing on specific industries, catering to small companies whose compensating deposits give City National an enviably low cost of capital.

But big players are drawn to Southern California's growing economy. U.S. Bancorp, for example, is headed by Chairman John F. Grundhofer, a Los Angeles native and onetime Wells Fargo executive who still owns a home in this region. Grundhofer, who tried to acquire First Interstate in 1995, may see City National as an attractive acquisition.

"It may be impossible to build a really big organization today," says a local banker. "The competition is too great, the options open to borrowers too many."

What the banker, who spoke on condition of anonymity, is confirming is that Southern California is a great place for small-business borrowers--just because it's a competitive market for bankers.

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