In Looking for Niches, Bank Found Success

The 34-year history of Imperial Bancorp demonstrates how successful small businesses can be in Southern California. And the present expansion of Imperial and other banks in this region reflects the revival of Southern California’s economy and how attractive it has become to investors from throughout the nation and the world.

Founded in 1963 by a couple of shopping center developers who put together initial capital of $1.25 million from family and friends, Imperial today is worth more than $850 million.

Imperial Bank, Bancorp’s largest division, has grown to $4 billion in assets making loans to carefully targeted niches within the changing industrial mix of California.

For example, the bank makes roughly $95 million, or 5% of its loans, to start-up high-tech companies that are backed by venture capital firms. “These companies are not yet profitable,” explains Vice Chairman Norman Creighton, “but they have a lot of cash. So we make accounts-receivable and equipment loans to them. There’s not as much risk as with many types of loans because venture capital firms monitor their managements.” And deposits from high-tech companies add to Imperial’s profitability in lending to them.

Imperial lends to some 70 movie projects a year but avoids box-office risk because it makes bridge loans that are repaid on completion of the film.

It raises deposits innovatively from title and escrow companies, which have a steady stream of down-payment and earnest money to put in the bank.

“At one point we made insurance premium loans,” explains George Graziadio, co-founder and chairman. “An entrepreneur wants to open a factory but needs insurance. We would lend the premium.

“We built that business up and sold it for $44 million,” he says.

Carefully working such niches, Imperial operated for years under the radar screen of more prestigious big banks. “Imperial was always regarded as schlocky,” says a former top executive at one of Southern California’s now-vanished large banks. He means that developers Graziadio and George Eltinge, who died three years ago at age 76, didn’t participate in the big transactions.

The developers thought more about business than image. “I’d prefer to make 10 $10,000 loans than one $100,000 loan,” says Graziadio today. “That way you have 10 customers who go tell 10 other business people about you.”

And just because they thought that way, Imperial survived where the bigger banks often came to grief or merged into even larger institutions. Imperial remains one of the largest banks still headquartered in Southern California, along with Beverly Hills-based City National and smaller banking companies such as Commerce Security of Huntington Beach and CVB Financial of Ontario.

Yet--a major lesson for small business today--Imperial didn’t grow and survive only by thinking small and regionally. If it had, losses on commercial real estate loans in the early ‘90s, which stalled earnings for four years, might have inflicted greater harm.

But Imperial had also chosen some customers for their national and international spread and had expanded outside Southern California. “The movie industry’s, market is the world, not just California,” says Creighton. “High-technology companies sell to the world; so do garment manufactures.” Profits from lending to those industries helped offset the real estate losses.

Now Imperial is out of commercial real estate and expanding in high technology. It has had a loan production office in Menlo Park, Calif., for years and has recently opened offices in Boston; Austin, Texas; and Seattle. The bank also plans high-tech-oriented loan offices in Orange and San Diego counties, where things are hopping.

But Southern California’s market is bustling once again and Imperial is not alone in spotting growth areas. Among local banks, City National has proposed acquiring Harbor Bank to increase its presence in Orange County. And banks from across the world--Mellon Bank of Pittsburgh, Nationsbank from North Carolina and banks from Taiwan and elsewhere in Asia--are eagerly increasing their operations in the revived Southern California economy.

Also, institutional investors have put together pools of up to $100 million for equity backing of this region’s growing small companies.

In fact, there are more sources of loans and equity financing available to small business today than when Graziadio and Eltinge started Imperial 34 years ago.

That’s great for small companies and entrepreneurs in this region but poses a definite competitive threat to Imperial. Its profitable niches will get more crowded.

The upshot is that a time of reckoning is imminent for the bank--and its share price reflects that. Imperial stock hit a new high of $33.12 on Tuesday and has doubled in the last year.

“Investors are anticipating that Imperial will spin off some finance businesses at the end of this year and then be acquired by another bank,” says analyst Charlotte Chamberlain of Jefferies & Co. of Los Angeles.

Asked about selling, Graziadio, who turned 78 in July, responds first with a quip in Italian, the language of his grandparents: “Eta una stati di mentali,” he says. “Age is a state of mind.”

But then, more thoughtfully, Graziadio, who came to California in 1940 from Connecticut, responds in the language of many family business owners: “One of the things disturbing to me is that my family owns more than 20% of the stock. If I’m gone, we have a heavy concentration in one security--more than $160 million at today’s valuation. Maybe that doesn’t make sense,” he says. “Also, our officers own 10%, and our employees, through profit-sharing, own 8%.”

The message clearly is that Graziadio will be open to talk the next time Comerica Inc. or some other large bank makes an offer. Entrepreneurial Imperial Bank will become part of a larger organization.

But other small banks and businesses will continue to spring up in Southern California. Because Imperial’s greatest lesson for small business is that its success is still possible for somebody starting out today. “Yes sir! Absolutely!,” says Graziadio. “There’s always room in this environment for another venture just like ours.”